Simmons First National Corp (SFNC) 2007 Q2 法說會逐字稿

Good afternoon.

My name is Cassandra, and I will be your conference Operator today.

At this time, I would like to welcome everyone to the Simmons First National Corporation's second quarter Earnings Release Teleconference.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Garner, you may begin your conference.

Thank you, Cassandra.

Good afternoon.

I'm David Garner, Investor Relation Officer for Simmons First National Corporation.

We want to welcome you to our second quarter earnings teleconference and webcast.

Here with me today are Tommy May, our Chief Executive Officer, David Bartlett, our Chief Operating Officer and Bob Fehlman, Chief Financial Officer.

The purpose of this call is to discuss the information and data provided by the Company in our quarterly Earnings Release issued this morning.

We will begin our discussion with prepared comments and then we will entertain questions.

We have invited the analysts from the investment firms that provide research on our Company to participate in the question and answer session.

Our other guests in this conference are in a listen only mode.

I would remind you of the special cautionary notice regarding forward-looking statements and that certain matters discussed in this presentation may constitute forward-looking statements and may involve certain known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different from our current expectations, performance, or achievements.

Additional information concerning these factors can be found in the closing paragraphs by our Press Release and in our form 10K.

With that said I will turn the call over to Tommy May.

Thank you, David.

I hope everybody is having a great day.

In our Press Release issued earlier this morning, Simmons First National Corporation reported second quarter 2007 earnings of $7 million or $0.49 diluted EPS.

For the six-month period ended June 30, net income was $13.7 million or $0.95 diluted EPS which is an increase of 3.3% over the same period in 2006.

Net interest margin for the second quarter of '07 improved some 8 basis points to 3.96% on a link quarter basis.

When compared to the same period last year, our net interest margin decreased 5 basis points.

Now, despite a reduction in our margin on a quarter-over-quarter basis, net interest income for the second quarter of 2007 did increase $600,000 or 2.7% compared to the same quarter last year due to reasonably good growth in our loan portfolio and improved yield in our securities portfolio.

The margin increase over the previous quarter was the second consecutive link quarter improvement in net interest margin followed -- or following seven successive quarterly margin declines.

As noted in our previous conference call, significant maturities and repricing in Q1 '07 increased our investment yield by 33 basis points compared to the previous quarter.

Investment yields increased another 9 basis points during the second quarter due to additional repricing opportunities.

While the rate of increase in our average cost of deposits slowed during the first quarter, we saw a more rapid slowdown in the climbing cost of deposits in our second quarter.

Due to the current yield curve, the competitive deposit market and the recent uncertainty relative to inflationary pressures, we anticipate a slightly improving margin for the balance of 2007.

Non-interest income for Q2 '07 was $11.3 million compared to $11.5 million for the same period last year, which is a 1.6% decrease.

However, Q2 '06 included some $263,000 in one-time income from the mark-to-market of an equity investment and other income related to Visa DPS conversion.

Excluding the one-time items, non-interest income was up $84,000.

Let me take a minute to discuss four areas that did impact non-interest income.

First, our trust income increased by $181,000 or 14% compared to the same period last year.

Now this increase was primarily attributable to new accounts and an improvement in our fee structure.

The second issue would be other service charges and fees which increased by $100,000, almost 17% compared to the second quarter of '06.

This increase was primarily due to an increase in ATM income driven by an increase in PIN-based debit card volume and an improvement in fee structure.

Thirdly, credit card fees increased by $326,000 or 12.1% in Q2 '07 compared to Q2 '06.

Most of this increase was due to the higher volume of credit and debit card transactions.

In a moment we will discuss the exciting trend we see in our credit card portfolio.

The fourth item, premiums on the sale of student loans increased by $82,000 or 12.4% over the same period last year , mainly due to early sales to avoid losing the premium to consolidation lenders.

As discussed in previous conference calls, however it should be noted that this is primarily a timing issue.

The last item I'd like to discuss, the aforementioned increases to the non-interest income were mitigated by decline of $553,000 in service charge on deposit accounts due entirely to reduced income on NSF charges.

We believe the decrease is partially associated with an increase in consumer use of debit cards and internet banking , which appears to be a nationwide trend.

We, like most of the industry, have experienced a significant increase in debit card transactions along with a decrease in paper transactions.

In fact, our debit card transaction volume for the six months of '07 increased 28% on the same period last year.

In addition, we believe the volatility in NSF fees represent a change in consumer behavior coupled with the normal bell shaped curve that has been experienced in the industry.

Let me move to the expense category.

Our non-interest expense for the second quarter was $23.2 million which is an increase of $710,000 or 3.2%.

Included in Q2 '07 are the expenses associated with the Company's two new financial centers that were open after the first quarter of 2006.

Excluding the impact of the new branches, non-interest expense increased by only 2.7%.

We're very pleased with this modest increase; however, there are a couple of items that warrant discussion.

The first is we have discussed in our previous teleconferences the Federal Student Loan Program Is phasing out origination fees over the next three year period.

Most of the national market has begun weighting and absorbing the fees themselves during the phase out period.

Therefore as a leader in Arkansas student loan market, we decided to do the same in order to prevent putting ourselves at a competitive disadvantage.

Proper accounting for these fees requires us to amortize them over the life of the student loan.

In Q2 '07, we expensed $115,000 of student loan origination fees compared to no expense in Q2 '06.

As we continue to originate loans with waived fees, we anticipate this expense to increase each quarter through Q1 '08, then to gradually decline each quarter through the end of the three year phase out period which is Q2 '09.

Thereafter, we will simply amortize the expense of the existing portfolio over the remaining life of the portfolio.

The EPS impact for the first half of this year was $0.01 and we project the impact for the balance of '07 to be about $0.02 to $0.03 on an EPS.

Second, our credit card expenses increased by $201,000 in Q2 '07 compared to Q2 '06, as the number of credit cards and debit card accounts and transaction increases, there is a corresponding increase in expenses related to the credit card application, card creation and interchange.

Now, let me take a moment to update you on our credit card line of business.

We're very pleased with the direction our credit card portfolio is going.

In Q4 '06 we reported a slight quarter-over-quarter increase in credit card balances of $300,000.

In Q1 '07 we reported a quarter-over-quarter increase of $3.7 million or 2.8%.

In the second quarter of 2007, our credit card portfolio balance increased by $7.9 million, almost 6% compared to the same quarter last year.

As we have pointed out in earlier teleconferences, this improvement is significant when you consider that our credit card portfolio balance had declined by $10 to $12 million each year for the previous three years.

As we reported last year, after five consecutive years of net decreases in the number of credit card accounts, we saw an addition of 1650 net new accounts in 2006.

This year, through June 30, we have already added over 6,400 net new accounts.

We believe the initiatives discussed in previous teleconferences were instrumental in the slowing of the number of accounts closed and with the introduction of our 7.25% fixed rate card in July of 2006 resulted in the increase in application volume and approved number of accounts.

Once again, two of our credit card products were recognized by the National Media.

In the July issue of Money Magazine, Simmons First Classic Card was ranked Number 3 in America in the category of no fee cards with lowest rates, while our fixed rate platinum card was ranked Number 1 in America in the category of premium cards with the lowest rate.

Obviously, this is great recognition for our Company and an integral part of our strategy to market our product on a nationwide basis.

Now we remain cautiously optimistic about our credit card portfolio growth; however, because of the significant competitive pressures in the industry, we cannot yet be assured that a sustained growth trend has yet been established.

As of June 30, 2007, we reported total loans of $1.8 billion , an increase of $83 million or 4.8% compared to the same period a year ago.

The growth was primarily attributable to an increase of almost 6% in our credit card portfolio and an 8.6% increase in the Real Estate Loan portfolio.

We saw nice growth in construction in single family residential loans with the strongest growth in commercial Real Estate Loans.

As discussed in previous conference calls, overall loan growth was somewhat mitigated by a $15 million Q3 '06 payoff of a bank stock loan in our correspondent banking area and a reduction in student loan balances due to early sales to avoid consolidation lenders.

Like the rest of the industry, our pipeline would lead us to believe that loan demand is stable to somewhat softened.

Moving to another loan related topic, we continue to be pleased with our asset quality.

As of June 30, '07 non-performing loans to total loans were 58 basis points and the non-performing asset ratio was 67 basis points.

At quarter end the allowance for loan losses equaled 1.38% of total loans and 237% of non-performing loans.

Annualized net charge-offs to total loans for Q2 '07 were 17 basis points.

Excluding credit cards, annualized net charge off to total loans were 10 basis points.

For the second quarter of '07, credit card net charge-offs as a percent of credit card portfolio was 1.04% down from 1.41% in Q1 '07 and more than 400 basis points below the most recently published credit card charge off industry average which is 5.06%.

Year-to-date, credit card charge-offs were 1.23% compared to 1.04% for the six months of 2006.

As we discussed in previous teleconferences, we expected credit card charge-offs to increase somewhat from 2006 levels, gradually returning to more historic levels in excess of 2%.

We still expect credit card charge-offs to increase; however , the trend continues to be slower than anticipated.

During Q2 '07, the provision for loan losses increased $42,000 on the quarter-over-quarter basis.

The provision increase by 80,000 on a link quarter basis.

Strong asset quality and the sustained low rate of credit card net charge-offs have kept our provision at historically low levels; however, it is probable that the provision for loan losses will continue to increase on a link quarter basis for the balance of 2007, depending on credit card charge-offs, loan growth, and overall asset quality.

Before leaving our discussion of asset quality, I would like to briefly touch on subprime mortgage lending again this quarter.

As stated in our last earnings teleconference, Simmons First does not own any CMO's or other securities that are backed by subprime mortgage assets.

Also, we do not have any mortgage loan products that target subprime borrowers.

Therefore, we do not believe that our future financial results will be directly affected by any changes in the subprime mortgage market.

The Company's current stock repurchase program authorizes the repurchase of up to 5% of the outstanding Common Stock or 730,000 shares, with 180,000 shares remaining available.

During 2007, we have repurchased approximately 161,000 shares with a weighted average repurchase price of $27.92 per share or $4.5 million.

Finally, let me update you on our current De Novo Branch Expansion Plan which remains focused on the growth markets of Arkansas.

In 2005, we opened five new financial centers, closed four, and relocated another.

We opened two new financial centers in 2006 and began doing business in our first location in Beebe this January.

We plan to open new financial centers in Paragould, North Little Rock - McCain and North Little Rock - Sherwood during 2007.

We're excited about our initial entry into the new markets of North Little Rock in August and Paragould during the fourth quarter this year.

In addition, in early 2008, a new financial center will be opened in Little Rock - Midtown, near War Memorial Stadium and UAMS and a new regional headquarters in Rogers for the Northwest Arkansas affiliate.

During the second quarter, we closed an in store financial center in Fayetteville and recently announced the planned closure of a branch facility in Kensett effective on August 1st.

We continue our process of evaluating all of our financial centers relative to their efficiency, profitability, and growth potential.

Bottom line, diluted EPS decreased by $0.02 quarter-over-quarter due to one-time income items in Q2 '06 and the decline in NSF income.

The results are very close to our expectations with the only disappointment being the volatility of NSF income.

Otherwise, we are pleased with the link quarter margin improvement 8 basis points.

Good expense controls normalized at 2.7%, excellent asset quality as reflected in our provision, low credit card charge-offs, 1.04%, and the overall positive trend in the credit card portfolio.

We remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agricultural lending and credit card portfolios and quarterly estimates should always reflect the seasonality.

This concludes our prepared comments and we would like to now open the phone lines for questions from our analysts.

Let me ask Cassandra to come back on the line and once again , explain how to

(OPERATOR iNSTRUCTIONS) We'll pause for just a moment to compile the Q & A roster.

Your first question comes from Barry McCarver.

Hello, Barry.

Hey, Barry.

Good afternoon, gentlemen.

Good quarter.

Thank you very much.

Tommy, I was wondering if you could give us a little update on some of the recent branching that you've done over really the course of the last 6 to 9 months and how those new locations are doing.

Okay, well, thank you.

As I mentioned in 2005, we had four De Novos and one acquisition, and all of our focus has been in growth markets.

That was in Little Rock, Conway, Van Buren, Bentonville and Little Rock, and those were opened primarily in Q3 and Q4 of '05.

One of those was acquired in Q4 '05.

We have said before that our goal would be that we achieve a break even in 24 months.

We would love to make it 18 months but realistically, we're seeing them more along the lines of 36 months, especially with the challenges that we have out there right now with the De Novo branches that we're seeing all over the state, and if you take those particular markets of Northwest Arkansas and central Arkansas, there's lots of saturation issues there, so I guess the answer for the '05 openings which was the latter part of '05, they are probably certainly not on target for our 24 month break even but hopefully progressing to the 36 month.

We opened three locations, Barry, in 2006, one in Little Rock Heights area which is very exciting to us and that was in Q1 '06 and we're seeing some good progress there and I'd say that that is we're optimistic that we will meet our objectives there.

We added a location in El Dorado which was more along the lines of filling in the footprint and then Beebe, the new location we actually opened in the very last of the fourth quarter of '06, so it's too early to tell on that.

So those 8 locations, I would say we're on target if we said target was between the 24 and 36 month break even mode.

Okay.

Probably all but one of them we feel pretty good about the progress we made.

And then we have, as you've already know, we got two, we have - actually five scheduled to come on relative to three of those in Q3 and Q4 of '07 and then two locations in Q1 '08.

Okay.

And I know I ask you this question every quarter but I still think we need to address credit quality coming out of Northwest Arkansas.

I know you got a great lending team there.

Are there any loans that as you look over the portfolio from Northwest Arkansas that you might be concerned about?

Well let me kind of approach Northwest Arkansas two ways and first from a macro standpoint.

Again, we continue to monitor the discussions of the bubble and there's been some publications relative to the -- a couple of major foreclosures in the commercial Real Estate area.

Obviously, we were not a part of any of that.

We still think that from a macro standpoint that the growth of Northwest Arkansas of new people moving into that market still has some very positive things about our future up there and it's going to be, the absorption rate is much slower on the residential side than it has been.

The absorption will continue to be a challenge for a period, but we are not really really concerned relative to our portfolio there.

We've done a pretty thorough analysis there and we feel relatively good.

We have had two loans that have become a challenge up there, but neither one of them are a significant issue to the overall size of that portfolio.

In fact, basically, the increase in our non-performings from Q1 to Q2, two-thirds of that were related to Northwest Arkansas and a third of that was related to another bank.

Of the two in Northwest Arkansas, our analysis of our borrower, our collateral is very good.

Barry, I might add a point to that and we talk about this internally as well.

Our leadership in our Northwest Arkansas bank is one of our most seasoned leaderships in all of our organization and that leadership continues to monitor not only our portfolio but the impact that other borrowers might have on our portfolio, or at other banks, so as Mr.

May has already pointed out there's been public disclosure of some foreclosures.

We recognize there's the potential for a ripple effect, and they are an aggressive group of lenders, I'm sorry, a conservative group of lenders but very quick to recognize a problem and get on top of it.

So some of the non-accruals Mr.

May has already mentioned was due to Northwest Arkansas but we also feel that it was a very quick reaction to a potential problem that they identified and they are taking care of it very quickly.

Our outside sources for review from both examiners and our internal source of loan review continued to support the strong asset portfolio base that we feel we have there.

And I think there's very little exposure as far as our internal loan review to those two loans that they have been very aggressive with, which they should be.

Okay.

And then just last question and I'll let somebody else get on.

You've talked about more recently potentially expanding into some new markets, potentially out of state.

Any update on that front you would care to share with us?

Well, what I have said in the past is that it will be our slow go, slow grow strategy, that we believe that our model will lend itself to some markets in contiguous states.

We're really excited about that.

Mr.

Bartlett, our Chief Operating Officer is the executive in charge of doing our analysis on that and trying to look at the opportunities and so, David, I'll let you comment briefly on that.

Well I think you've covered exactly what I'd want to say as well.

We're continuing to do our homework on it.

People is the name of the banking business too, Mr.

Barry, as you well know, and as we continue to look into these markets we're doing our best to identify bankers that we feel like would fit into the Simmons culture, whether it's inside the State of Arkansas or outside on contiguous states, so it's proceeding very slowly but with due diligence.

Barry, we believe that our model, when I said that is very key to us, as you know it's a community banking philosophy and mergers and acquisition is a big part of how we built that even though there are other options open to us.

Mr.

Bartlett said it exactly right when he said bottom line, it's all about people.

We're not interested adding assets.

We're interested adding a market with the right people that can -- that we will be able to retain and be a part of our culture, so culture is going to be a big issue, so we have a big challenge in front of us, finding the market opportunity, making sure that you got reasonable saturation, because there is saturation it seems like everywhere, and then making sure that we've got the right people that fit our culture.

Sounds like motherhood, apple pie and Chevrolet, but again the truth of the matter is that that's what we can do.

We don't -- We're not going to force the issue.

We're going to let it fit like we have all of our other acquisitions over the last ten years.

Okay, guys.

That's a great answer.

Thank you very much for taking my questions.

Thank you.

(OPERATOR INSTRUCTIONS) The next question comes from David Scharf.

Hi, David.

My question was geared towards a Capital Management and how you guys want to use the buy back.

Sounds like the loan pipeline, if it is stable or softening, you're definitely going to have some more excess capital to possibly use to accelerate the buy backs even higher than the 90,000 run rate.

Is that an option you'd be willing to go ahead and do?

I think it certainly if we see that the growth is going to slow, based on our current capital ratio.

Okay.

And also based on the availability of what we have left in our repurchase plan, we would accelerate that.

Right now, that plan will take us out through about our next -- probably to early '08 and I think that we certainly will be aggressive in that area as far as alternatives for capital yields.

And then related to the net interest margin, how much of that is stable to increasing margin is driven by the credit cards staying at about 140 million or even increasing?

Well, probably a relatively small amount but as you know, that is the largest yielding asset that we've had in our portfolio and we have in our portfolio, and while we're very proud of the trend change relative to its dollars, $8 million relative to the total portfolio, it's not going to impact it that much.

The most positive thing I'd see is that we've seen a slowing on the cost side both Q1 and Q2, and we've had some repricing opportunities on our investment portfolio, not to cause a change in yield curve but just simply because of the maturing process.

Okay.

David, this is Bob.

Hey, Bob.

I would say also that on the credit card, those, the bulk of those are going in at the lower 725 yield, so the margin pick up is not that large, but how we look at credit card also is not just 725 yield.

It's the other fees associated with it and our gross yield even on that smaller 725 yield, we're probably at the 9.5%, 10 % or higher after credit losses, so we're putting it on but the only part going into margin is the 725.

The other would be going into the non-interest income.

But David, I think certainly your point is well taken from the standpoint, if we can move that credit -- or continue to move that credit card average balance north instead of south, we're going to see some positive pick up in that process, margin wise.

Okay.

Could you also give just a little bit of greater detail on the cost of funds side or the CD funding as far as pricing?

I know that the smaller players really have been driving the majority of the competition, but what are you seeing in the different parts of the State as far as pricing?

Well, I think that we think in terms of just simply saying CD, pricing, marginal cost of funds, I think the numbers are probably just a little bit south of 550 and maybe in the 520 -- 520 level for the six-month category and that is -- that is a decrease from where they were Q4 '06.

And that's a positive from our standpoint, but when you look at the yield curve and you look at a one year treasury and you say 485 or --

Yes.

or 490, what it says to us is that if our pipeline is slowing, obviously we're going to be very cognizant, we're going to continue our efforts to redistribute or change our deposit mix with less reliance on those CD deposits.

But again, probably in most of the markets, I would say, I guess south of 525.

Okay, great.

Well, thank you, gentlemen.

I'll let somebody else jump on here.

Thanks, David.

Thank you.

Good day.

You have no further questions at this time.

Well, we thank all of you and hope you have a great day.

Thanks.

This concludes today's teleconference.

You may now disconnect.