Simmons First National Corp (SFNC) 0 Q0 法說會逐字稿

Good afternoon.

My name is Kenya and I will be your conference operator today.

At this time, I would like to welcome everyone to the Simmons First third quarter earnings conference call.

All lines have been placed to 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.

Good afternoon.

I'm David Garner, Investor Relations officer of Simmons First National Corporation.

We want to welcome you to our third quarter earnings teleconference and web cast.

Here with me today are Tommy May, Chief Executive 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.

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 risk, 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 of our press release and in our Form 10-K.

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

Thank you, David, and I hope everybody is having a great day.

In our press release issued earlier today, we reported total assets of $2.7 billion and stockholders equity of $268 million at September 30 '07.

Our equity to asset ratio is 9.83% and we closed the quarter with a book value of $19.20.

In addition, Simmons First reported record third quarter 2007 earnings of $7.5 million, or $0.53 diluted earnings per share, which is an increase of 3.9% over the same period last year.

For the nine-month period ended September 30, net income was a $21.2 million, or $1.48 diluted EPS, an increase of 3.5% over the same period last year.

Net interest margin for the third quarter of 2007 improved 5 basis points to 4.01% on a linked-quarter basis.

When compared to the same period last year, net interest margin increased 10 basis points.

Net interest income for Q3 '07 increased $1.2 million, or 5.3% compared to the same period last year due to reasonably good growth in our loan portfolio and an improved yield in our securities portfolio.

The margin increase over the previous quarter was the third consecutive linked-quarter improvement in net interest margin following seven successive quarterly margin declines.

As noted in our previous conference calls, significant maturities and securities repricing have improved our investment yield throughout the year.

We have also seen a slowdown in the rising cost of deposits, especially in the second and third quarters.

The recent drop in the Fed funds rate occurred too late in the quarter to have any impact on the margin.

However, our model does reflect a slight margin compression for a 60-day period before turning positive.

Due to the uncertainty of future rate movements and the current yield curve, at this time we anticipate a flat to slightly declining margin for the balance of 2007.

Non-interest income for Q3 '07 was $11.4 million compared to $11 million for the same period last year, a 3.2% increase.

Let me take a minute to discuss three areas that impacted our non-interest income.

First, other service charges and fees increased by $102,000, or 17.1% compared to third quarter of '06.

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

The second item, credit card fees increased by $360,000 or 13.1% in Q3 '07 compared to Q3 '06.

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

In a moment, we will take a few minutes to talk about the trend that we continue to see in our credit card portfolio, and it is a very positive trend.

The third comment that I would make would be that the increases to non-interest income were partially mitigated by a decline of some $214,000 in service charges on deposit accounts due primarily to reduced income on NSF charges.

Now let me move to the expense category.

Our non-interest expense for the third quarter was $23.2 million, an increase of $1.1 million, or 4.9% from the same period in 2006.

Included in Q3 '07 are the expenses associated with the Company's three new financial centers that were opened after Q2 '06.

Excluding the impact of the new branches, non-interest expense increased by 4.1%.

Later in this discussion, we will update you on our expansion progress, but now let's take a look at three non-interest expense items that warrant some discussion.

First, as we discussed in our previous teleconferences, the Federal Student Loan Program is phasing out origination fees over the next three years.

Most of the national market has begun waiving and observing the fees themselves during the phase-out period.

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

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

In Q3 '07, we expensed $113,000 of student loan origination fees compared to $35,000 in Q3 '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 to 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 lives of the portfolio.

The EPS impact for the first nine months of '07 was $0.02.

We project the EPS impact for the entire year of '07 to be $0.03, and $0.03 to $0.04 in 2008.

The second item would be professional service expense, which increased by $272,000 in Q3 '07 compared to the same period last year, and this was primarily related to audit, legal and consulting fees.

The third expense item would be our credit card expenses, which increased by $214,000 in Q3 '07 compared to Q3 '06.

As the number of credit card and debit accounts and transactions increases, there is obviously a corresponding increase in expenses related to credit card applications, credit card creation and interchange.

Now let me discuss our credit card line of business.

We're very pleased to report an increase in Q3 '07 of $15.6 million, or 11.7% in our credit card portfolio balance, 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 and we began seeing some improvement in Q4 '06 as our balances increased slightly from the previous year.

We have now seen progressive improvement in credit card balances each quarter of 2007.

As we reported in previous quarters, after five consecutive years of net decreases in the number of credit card accounts, we saw an addition of 1650 net new accounts in '06.

This year, through September 30, we have already added over 11,000 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 '06 has resulted in the increase in application volume and approved new accounts.

Now while we remain cautiously optimistic about our credit card portfolio growth, we fully realize the significant competitive pressures in the industry.

Thus, we cannot be absolutely assured that a sustained growth trend has yet been established, but we are optimistic.

As of September 30, 2007, we reported total loans of $1.9 billion, an increase of $87 million, or almost 5% compared to the same period last year.

The growth was primarily attributable to an increase of 11.7% in our credit card portfolio, a 4.4% increase in the real estate loan portfolio, primarily commercial real estate, and 14.4% in commercial loans.

As discussed in previous conference calls, overall loan growth was somewhat mitigated by 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 the loan demand is stable to somewhat softening.

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

As of September 30, '07, our non-performing loans to total loans were 53 basis points and our non-performing asset ratio was 62 basis points.

At quarter end, the allowance for loan losses equaled 1.34% of total loans and 251% of non-performing loans.

Annualized net charge-offs to total loans for Q3 '07 were 20 basis points.

Excluding credit cards, annualized net charge-offs to total loans were 13 basis points.

For the third quarter of '07, credit card net charge-offs as a percent of credit card portfolio were 1.02%, actually down from 1.10% in Q3 '06 and more than 400 basis points below the most recently published credit card charge-off industry average of 5.06%.

Year-to-date credit card charge-offs were 1.16% compared to 1.06% for the first nine months of '06.

As we have 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 Q3 '07, the provision for loan losses increased $248,000, on a quarter-over-quarter basis and $19,000 on a linked-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, we have seen some increase in our commercial real estate delinquencies in northwest region, thus the increase in our provision.

Likewise, because of the uncertainty in the overall economy, we will continue to be proactive relative to the adequacy of our loan loss reserve.

While our credit card charge-offs remain significantly better than anticipated, it is probable that the provision for loan losses will increase slightly for Q4 '07 and return to historic levels in 2008.

Obviously, this depends on credit card charge-offs, loan growth and overall asset quality trends.

The Company's current stock repurchase program authorizes the repurchase of up to 5% of the outstanding common stock, or 730,000 shares, with 46,000 shares remaining available.

During 2007, we have repurchased approximately 295,000 shares with a weighted average repurchase price of $26.79 per share, or $7.9 million.

Finally, let me update you on our current de novo branch expansion plans which began in 2005 and is focused on the growth markets in Arkansas.

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

We opened two new financial centers in 2006 and have made our initial increase into Beebe and North Little Rock in 2007.

As a part of our continuing effort to manage our branching locations, we have closed an in-store financial center in Fayetteville and closed a branch facility in Kensett in 2007.

Currently, we have locations under construction in Paragould, our first presence in that market, scheduled to open before the end of the year, and in Little Rock midtown near War Memorial Stadium and UAMS that will open for business in the first half of 2008.

Lastly, in Q1 2008, we plan to open a new regional headquarters in Rogers for the Northwest Arkansas affiliate.

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

So the bottom line -- we experienced better-than-expected loan growth, 5%; margin improvement, 10 basis points, and that was as anticipated; a continuation of excellent asset quality of excellent asset quality as reflected in our provision; low credit card charge-offs, 1.02%, a bit better than expected; and the overall positive trend in the credit card portfolio.

All of the above resulted in a 3.9% increase in earnings per share.

And while the third quarter numbers exceeded our expectations, we expect margin pressures to be greater in the fourth quarter based on rate movement in the slowing loan pipeline.

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

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

And let me ask Kenya to come back on the line and once again explain how to queue in for questions.

(OPERATOR INSTRUCTIONS).

Barry McCarver.

Good afternoon, gentlemen, great quarter.

Mr.

May, I guess starting off with following up on your comment on the margin and the seasonality, in your beginning, you began your remarks talking about expectations for a little bit of margin pressure in the fourth quarter.

Obviously with your seasonality, we tend to already expect a not insignificant drop in margin in the fourth quarter.

How much beyond seasonality are you really talking about here?

I don't know that I can define how much beyond seasonality, but I think again as I said, it will be during a 60-day period we expect margin compression.

Much of that because of the level of credit card, the variable rate credit cards, that we will be repricing and that basically we get the catch-up after 60 days.

So that from a quarter standpoint, it should be only a flat to a slight impact.

I would like to hear your thoughts after this 50 basis point cut from the Fed, what you are seeing on the deposit side in your markets across the state?

We are seeing -- I think a general statement would say that we have seen markets begin to show some decreases.

I think we're probably looking at 475, 480 range, and probably 60 days ago, 45 to 60 days ago, they would've been up in the 5 to 505, 510 range.

So we have seen the market begin to move as a result of that cut.

I cannot say that is the case that -- in every market, but I think generally speaking across this state, we have seen that kind of reduction.

Obviously those deposit rates are going to move a little bit slower, and they always do.

But we think we will continue to see that for at least a short period of time.

Okay, just secondly, you talked about loan growth in some of the bigger product lines.

In the press release, you commented on some surprising loan growth.

Any particular product that was surprisingly strong during the quarter?

Any color there?

I think probably two would be -- first of all, as I mentioned, I think the pipeline has certainly slowed.

I think the credit card segment of it by loan type has been very, very positive.

And certainly, I think from the commercial C&I loan side, that has been positive, and that has primarily been driven by a borrowing under a line of credit that we have had in place for many, many years, a very large customer.

It was not funded at this level the same quarter last year.

Well --.

So really, the commercial site and I think the credit card side has been the surprise, not that both weren't expected, but possibly to a level a little bit more than expected.

And, we still have some reasonably good growth in our commercial real estate.

The bulk of that, Barry, has been in the -- what I would call the Central Arkansas region.

Obviously, it has slowed in the Northwest region.

Okay.

And just lastly on the share buyback, certainly quite a bit more shares than we were anticipating, and I also happened to notice that the average price during the third quarter was lower than it had been the previous couple of quarters.

Anything to read into that volume, and are you going to continue to be active there this quarter?

We're going to continue to be active, but my guess is, not that the same level that we certainly were in the third quarter.

So far in fact through September 30, our stock repurchase dollars were about $7.8 million, almost $8 million.

So a little bit ahead of where we had expected them to be.

And while we have a systematic repurchase program, we also look or opportunities that occasionally might present themselves.

And obviously in the third quarter, that did happen.

Okay, very good.

Thanks, guys.

Barry, one follow-up on that.

In the text where I talked about the number of shares that were authorized and the number of shares that were left, I think very clearly one would expect that we will reinitiate our stock repurchase programs to similar levels.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

Barry McCarver.

I just thought of one more question, guys.

I didn't ask it, just on the -- just your perception of overall asset quality in the state, did you see any change at all in the third quarter versus the second quarter?

It's so hard to say.

From our standpoint, again, our asset quality numbers are very well.

I think we have seen some increase and some migration in past dues.

We have seen probably by region some increase in challenges.

But, overall, our numbers still remain very good.

My belief is, Arkansas is probably the same thing.

You have some regional pockets to where there are some challenges.

But even with those challenges, assuming a bank is diversified like we are, the asset quality numbers are still very, very good.

There are no further questions at this time.

Do you have any closing remarks?

I do not.

Thank you, everybody, for being here and I look forward to visiting with you next quarter.

Have a good day.

This concludes today's conference call.

You may now disconnect.