Simmons First National Corp (SFNC) 2007 Q4 法說會逐字稿

Good afternoon.

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

At this time I'd like to welcome everyone to the Simmons First fourth quarter earnings conference call.

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.

David Garner, you may begin your conference.

Thank you, and good afternoon.

I am David Garner, Investor Relations Officer of Simmons First National Corporation.

We want to welcome you to our fourth 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 call 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 of our press release and in our Form 10K.

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

Thank you, David, and welcome, everyone.

We appreciate your being here with us today for our fourth quarter conference call.

In our press release, issued earlier today, Simmons First did report total assets of $2.7 billion and stockholders equity of $272 million at December 31st, 2007.

Our equity-to-asset ratio was 10.12% compared to 9.77% a year ago while our book value at December 31st, '07, was $19.57 per share compared to $18.24 at the end of 2006.

Simmons First also reported fourth quarter 2007 earnings of $ 6.2 million or $0.44 diluted earnings per share.

The 12-month earnings of $27.4 million or $1.92 diluted EPS.

Further, the release noted a $1.2 million pre-tax or $0.05 diluted EPS nonreoccurring expense in Q4 '07, in order to recognize the company's pro rata portion of Visa Inc.'s litigation liabilities which we will discuss when we get to the noninterest expense section.

However, considering the size of this nonreoccurring expense, it is important to note when normalized, Q4 '07 operating earnings were $6.9 million or $0.49 diluted operating EPS, an increase of approximately 4.3% over the same period last year.

For the year 2007, operating earnings were $28.1 million or $ 1.97 diluted operating EPS.

Net interest margin for the fourth quarter 2007 improved 14 basis points to 4% when compared to the same period last year.

Net interest income for Q4 '07 increased by $1.2 million or 5.6% compared to Q4 '06, due to a better than expected growth in our loan portfolio and a continued improvement in the securities portfolio yield.

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

As anticipated, on a linked quarter basis, net interest margin declined slightly, but only by one basis point.

While recent cuts in the Fed funds rate have decreased the cost of deposits, our loan yields have been similarly impacted, holding our margin at previous quarter levels.

Due to the uncertainty of future rate movements and the seasonality of our loan portfolio, we anticipate some margin compression in Q1 '08.

Noninterest income for Q4 '07 was $11.8 million compared to $10.8 million for the same period last year, a 9.7% increase.

Let me take a minute to discuss three areas that impacted our noninterest income.

First would be our credit card fees.

They increased by $598,000 or 21.1% in Q4 '07 compared to Q4 '06.

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

In a moment, we will spend a little bit of time discussing the positive trends we continue to see in our credit card portfolio.

The second area would be our other service charges and fees, which increased by $103,000 or 14.4% compared to the fourth quarter of 2006.

This increase was due to the growth in ATM and debit card income, which was primarily driven by a PIN-based debit card volume.

The third and final area for discussion would be the income on the Investment Banking, which increased by $141,000 or 158% for the quarter, when compared to last year.

Now, this improvement was due to additional sales volume driven by the current yield curve and customers' expectations of future interest rate decreases.

Now, let me spend a few minutes and move over to the expense category if I could.

Noninterest expense for the fourth quarter was $24.8 million, an increase of $2.2 million or 10% from the same period in 2006.

This increase is primarily the result of the previously mentioned $1.2 million pre-tax nonreoccurring expense to recognize the company's pro rata portion of Visa, Inc.'s litigation liabilities.

In October 2007, Simmons First, as a member of Visa USA, received shares of restricted stock in Visa, Inc.

as a result of its preparation for an initial public offering.

In accordance with the guidance from Visa and the SEC, Visa member banks were encouraged to consider the creation of a contingent liability based on the member banks' current pro rata ownership of Visa to reserve for the potential funding of the litigation settlements.

As such, Simmons First filed two 8Ks in December related to Visa's litigation.

The first 8K was filed on December 17th and it reported that Simmons First recorded a $928,000 or $0.04 EPS charge related to Visa's settlement of a lawsuit with American Express.

We filed another 8K on December 28th to report an additional charge of $292,000 or $0.01 EPS related to our pro rata portion of Visa's estimated contingent liability to the Discover Card lawsuit.

Now, while Visa has not settled with Discover, Visa was able to estimate its potential loss with some degree of certainty.

Thus, according to accounting rules, and the previously mentioned guidance, Simmons First recorded the estimated liability.

Now, these two contingent liabilities total $1.2 million or $0.05 EPS and negatively impact reported net income for 2007, but are excluded from operating earnings since they are nonreoccurring items.

As reported in the 8Ks as well as in Visa's 8K filed on November 7th, if Visa's IPO is successful, which is expected in Q1 2008, Visa will establish an escrow account to fund the litigation liability.

As such, we expect to reverse the $1.2 million liability in the first quarter of 2008, resulting in a nonoperating benefit of $0.05 EPS, thus neutral to the shareholder.

Continuing our discussion of noninterest expense, during the fourth quarter as a part of our ongoing efforts to manage our branching operations, we identified an underperforming financial center that will be closed during the first half of 2008.

As a result, we expensed $113,000 of lease-hold improvements related to this financial center.

Needless to say, we expect the cost to be more than offset from the expense savings during the first full year.

Additionally, credit card expenses increased by $209,000 on a quarter-over-quarter basis.

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

Also included in the Q4 '07 are the expenses associated with the company's four new financial centers that were opened since Q3 '06.

Excluding the impact of the new branches, the writedown of lease hold improvements and the nonreoccurring expense, noninterest expense increased by only 2.9%.

Now, let's switch gears and spend some time discussing our credit card line of business.

We're very pleased to report an increase in Q4 '07 of $22.7 million or 15.8% in our credit card portfolio balance compared to the same quarter last year.

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

We began seeing some improvement in Q4 '06 as our balances increased slightly from the previous year.

We have now seen progressive improvement in quarter-over-quarter credit card balances each quarter in 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 1,650 net new accounts in 2006.

Over the course of 2007, we added nearly 15,000 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 2006, resulted in the increase in application volume and approved new accounts.

While we remain cautiously optimistic about our credit card portfolio growth, we fully realize the significant competitive pressures in the industry and uncertainty in the economy.

Thus, we cannot be assured that the growth trend has been or will be sustained.

Further, we are approaching the upper end of the target range that we established for this portfolio.

As of December 31, 2007, we reported total loans of $1.9 billion, an increase of $67 million or 3.8% compared to the same period a year ago.

The growth was primarily attributable to the increase in our credit card portfolio, a 2.7% increase in the real estate loan portfolio, primarily commercial real estate, and 11.8% in commercial loans.

Overall loan growth was somewhat mitigated by a 6% reduction in real estate development and construction loans due to the slowdown in the industry.

As discussed in the previous conference calls, student loan balances also declined due to early sales to avoid consolidation lenders.

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

Although the general state of the national economy is somewhat turbulent and despite our own challenges in the northwest Arkansas region, we continue to have strong asset quality.

As of December 31st, 2007, the company's nonperforming loans to total loans were 60 basis points and the nonperforming asset ratio was 75 basis points.

At quarter end, the allowance for loan losses equaled 1.37% of total loans and 226% of nonperforming loans.

Annualized net charge-offs-to-total loans for Q4 '07 were 33 basis points.

Excluding credit cards, annualized net charge-offs-to-total loans were 26 basis points.

For the fourth quarter of 2007, credit card net charge-offs as a percent of credit card portfolio were 1.12%, slightly up from 1.05% in Q4 '06, but still approximately 300 basis points below the most recently published credit card charge-off industry averages.

Credit card charge-offs for the entire year were 1.14% compared to 1.06% for 2006.

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 Q4 '07, the provision for loan losses increased $1.1 million on a quarter-over-quarter basis and $900,000 on a linked quarter basis, returning to more normalized levels.

While we have sustained a low rate of credit card net charge-offs, we have seen an increase in our residential development and construction loan delinquencies and nonperformings in Northwest Arkansas region, resulting in an increase in net charge-offs and 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, specifically in that region.

It is probable that the provision for loan losses will continue at a more historical levels in 2008 throughout the Company.

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

Let me take a minute to expand on what we see in northwest Arkansas region.

While we continue to see bankruptcy and foreclosure filings associated with the residential real estate market in that region, and while we believe there are likely more to follow, there is a general belief that there may be a return to normalcy by the latter part of 2009.

Washington and Benton counties continue to have population growth, thus absorption rates are likely to improve since new developments and construction have slowed significantly.

Concerning our Company, we have one of our most seasoned management teams in this market.

We have been proactive in the identification and resolution of problem assets and we have significantly increased the loan loss reserve based on the challenges of the region; however, it is important to note that our asset quality in this region remains very manageable, and in fact, those nonperforming loans represent a relatively small percent of the company's total portfolio.

During the fourth quarter, the Company announced the substantial completion of the existing stock repurchase program and the adoption by the Board of Directors of a new repurchase program.

The new program authorizes the repurchase of up to 700,000 shares of class A common stock or approximately 5% of the outstanding common stock.

During 2007, the Company repurchased approximately 321,000 shares under the current and previous plans with a weighted average repurchase price of $26.75 per share or $8.6 million.

Finally, let me update you on our current de novo branch expansion plan, which we began in 2005 and is 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.

During 2007 we made our initial entries into BB, North Little Rock and Paragould, which opened during December.

As a part of our continuing effort to manage our branching locations, we have closed financial centers in [Fayetteville and Kensett] in 2007 as well as identified a financial center to be closed during 2008.

Currently under construction and scheduled to open in early 2008 are a new financial center in Little Rock, midtown, near the War Memorial Stadium and UAMS, and a new regional headquarters in Rogers for our Northwest Arkansas affiliate.

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

Bottom line, quarter-over-quarter, we experienced: better than expected loan growth, 4%, margin improvement, 14 basis points as anticipated, strong asset quality in the midst of challenges, a continuation of low credit card charge-offs, 1.12%, and the overall positive trend in the credit card portfolio.

All of the above resulted in a 4.3% increase in operating EPS.

We enter 2008 with the premise that the banking industry will likely see some asset quality challenges, a slowing of loan demand, and margin compression.

In addition, Simmons First will be somewhat negatively impacted by regulatory changes related to student loans and we are in the final stages of our de novo expansion plan.

On the other hand, as mentioned earlier, we are very pleased with the growth of our credit card operations.

Like the rest of the industry, we expect 2008 to be a year of challenge relative to meeting our normal growth expectations; however, as we enter 2008, we're obviously pleased with the strength of our capital and asset quality.

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 this seasonality.

Now, this concludes our prepared comments.

And we would like to now open the phone lines for questions from our analysts.

So let me ask the Operator to come back on the line and, once again, explain how to queue in for the

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

Your first question comes from the line of Barry McCarver with Stephens, Inc.

Hello, Barry.

Good afternoon, guys, good quarter.

Thank you.

A couple questions here, Mr.

May, I guess to start off with following your comments a second ago about the industry and asset quality.

Could you comment on any of the markets in Arkansas you're still looking at closely?

And how you expect nonperformers and charge-offs minus the credit card portfolio could roll out this year for Simmons?

Well, that's a good question and still a lot of uncertainty there.

I think on the national front with the I guess what we call the headwinds that we're seeing with the national economy, a lot of that still has to unfold, but I think that we start the year with good numbers.

And certainly until the national part [unplays], we're not going to know exactly where that's going to go, but we would be I guess somewhat naive to believe that Arkansas still will not be affected in general.

In particular, because so much of the challenges that we're hearing about and seeing in the national economy deal with the residential side, obviously the northwest region of Arkansas is feeling the brunt of the heat associated with some asset quality challenges.

And as I've mentioned in the text, we have seen a continuation of some foreclosure and bankruptcy filings in that particular area.

So really, at this point, I think overall, Arkansas has just not seen a lot of the challenges, but there's still some to be had, except for the northwest Arkansas region.

And we feel like in the Northwest Arkansas area that there is some light at the end of the tunnel.

If we look at the market just in general, I think what we are seeing is the most positive thing is that the two counties, Washington and Benton county, continue to have growth.

We're also seeing, as one would expect, not many new permits coming about, not a new -- not a lot of lot development and certainly not a lot of construction of new homes, thus the absorption rate we hope will continue to look a little bit better.

So, I guess the bottom line would be is that we still feel very good about Arkansas.

We still are very concerned about the northwest Arkansas region, in general.

But as we have gone through and looked at our particular institution, while we are going to be affected like everybody else with the rising tide impact, I think our group is very proactive.

I think we've done a good job of identifying and quantifying, and I think we will weather the storm as good as it can be weathered up there.

Okay.

This is David Bartlett.

I'd like to add to what Mr.

May just said.

Looking at the data that we're seeing in northwest Arkansas, as Mr.

May already pointed out, we're seeing somewhere around 500 new jobs created a month, 900 to 950 people moving into the community a month.

Relatively speaking, that's not too bad.

When we hone it down and start looking particularly at the housing market, the time on the market is still staying well below 90 days.

The prices in both existing home sales and new home sales are close to 97% to 98% of their asking price.

Prices are still hanging in in the $95 to $100 a square foot range on both the existing and new construction.

So, yes, we've seen a downturn, but relatively speaking, the cleansing process and everything else, we feel like that there's still some problems ahead, but, overall, the market seems to be holding on okay.

And as Mr.

May said before, the leadership of our management staff up here is giving us a lot of additional comfort.

Barry, let me take another piece of that portfolio, which obviously, other than the region in northwest Arkansas that we have to pay lots of attention to, and that is our credit card portfolio.

And we've been in this business for a long time, and as you look at an economy like we're looking at, the thing you have to be concerned about, or at least have your eyes wide open about is, what happens if we move closer and closer to recessionary challenges and you have people that have loss of jobs and so forth.

So we haven't buried our head in the sand and just assumed because everything has always been good that it will continue to be.

I think we have proven that we have done a very good job of underwriting, but, again, you do get the rising tide impact.

So, nationally, we could be affected more so on the credit card side.

And while we have -- the way we have acknowledged that is through the increase in provision, as we think that we'll continue to see at least a return to closer to normalcy in our charge-offs there.

We just have been, it's been very, very good in our charge-offs that are about [$114 million] up from [$105 million], still much better than where we would project that it would be at this point in time, but we're going to be proactive there and jump our provision up in anticipation of some challenges on that -- in that particular arena.

All right.

I follow you there.

You started in on my second question too about the loan loss provision.

Could you give us just a little bit more detail on how we got to the $1.7 million to make sure we've got it modeled right going forward?

Yes, I think there's two things.

I think first of all, the quarter number of $1.7 million is probably a little bit higher than our projection for 2008, just based on as we are modeling the things we just talked about.

Not only the northwest Arkansas region, but the credit card, that number is probably closer to the historic ranges of $1,500 -- I'm sorry, $1.5 million, is the numbers we would look at per quarter.

Okay.

And again that's just using our modeling for those two particular areas.

Now, as you well know, only time is going to tell whether or not we have to make adjustments in those numbers.

The fourth quarter is a little bit higher because we did make some special provisions in northwest Arkansas, as David said, that our team there has been very proactive in wanting to be on the front end of the process.

Okay, that's good.

And just lastly, I didn't catch all of your comments about the growth in the credit card portfolio in the fourth quarter.

Could you give me the drivers there again and kind of your thoughts going forward?

The total dollar in the quarter was about $22 million if I --

And on a quarter-over-quarter basis you have 22.

Yes, quarter-over-quarter basis, which is about 15%.

And as I've mentioned in the text, you'll remember last year, there was about -- after we had kind of turned the trend from three years of loss in accounts with the initiatives that we've put in place, '06, it was about 1,600 new accounts, and then of course in '07, with the introduction in late '06 or actually July of '06 of the 7.75% -- 7.25%, no frills, fixed rate card, we started to see the results of that and I think you've seen it, not only here, but correspondingly 15,000 new accounts.

So about a 15% increase in total dollars.

You'll remember one of the things that we've said is that we wanted to try to stabilize that credit card portfolio somewhere in the north of $140 million, after it had actually dropped to about $125 million.

Yes.

And in fact, we are north of the $140 million range, and we ended the year somewhere around $164 million on a seasonality basis.

So we've accomplished what we want to do, and if you take that seasonal impact out of it, it will probably come back into that $150 million range.

So we're sort of approaching the upper end of the range that we want to see there, which I think is very much a positive, because we don't expect competition to go away in that particular arena, and if we're able to continue to grow it then that gives us other opportunities of how to manage that, which might impact and create some noninterest income.

And Barry, keep in mind our seasonality in the first quarter, our seasonality in credit card is $10 million to $12 million for the Christmas card season.

Yes.

And that will drop in the first quarter and also our agri loans we'll continue to pay off through the first quarter and then second quarter is when they come back on.

Okay.

All right, guys, good quarter.

Thanks a lot.

Thank you, Barry.

Your next question comes from the line of David Scharf with FTN Midwest.

Hi, David.

Hi, guys, how are you?

Great, good.

Great.

Good quarter minus the Visa, but you couldn't help that, could you?

Couldn't do a thing about it, but thank you.

I just wanted to touch on a little more if you're seeing some deposit pricing coming in, and presumably the Fed is going to cut, and just sort of your thoughts on how it's going to work through the cost of funds side, and also on your ability to keep the loan yields up.

Good question.

And I wish I had a good answer to the deposit pricing side.

Let me start with that though, and simply say that, if you look at our cost of funds, we have had some reduction in the cost of funds, but not a lot of that has come from the CD side.

What -- I think what we're seeing is that certainly we're starting to see some backing off, but when you look at the last two, I guess, reductions in the federal funds rate, we didn't see just a whole lot of deep freezes relative to the CD pricing.

My expectations is -- or our expectations would be that we're going to see some adjustments probably going forward if one was to assume that the Federal Reserve decides to drop again on the 29th or the 30th.

Right now, as we look forward into the first quarter, we have quite a bit of deposit repricing opportunities, and certainly, we're hoping to see some opportunities to reprice those down, but I don't think we're expecting to see a lot of that.

Okay.

And what portion of your portfolio is fixed right now, your loan portfolio?

I'm sorry, I didn't hear that.

The fixed portion of the loan portfolio?

I don't -- David, I don't know exactly what that answer would -- I guess I could back into it.

If you look at the -- there's two floating rate parts that we have obviously is the commercial floating rates and then our credit card floating rates, and then the fixed rates would be the same, but I'm going to guess that probably over 40% of that loan would be fixed, either in the credit card side and/or the commercial side.

But our fixing is relatively short.

We, generally speaking, try to stay in that three-to-five year range.

And then relative to the --

That's not an exact.

That's just -- that's sort of a guess based on -- I think my folks are advising me that that's pretty close, that it's 47%.

Okay, and then --

Remember, that's factoring in the credit card fixed rate card also, and it's saying that those fixed are probably primarily in the -- somewhere between three-and-five year average.

Okay.

And how many, what's the amount of CD's rolling out this quarter?

Well, in the CD's, corporate-wide, in the quarter, we have about $70 million that are going to be repriced in a special campaign that we had out there that averaged about 4.45%.

And then total, we're going to have about $350 million to $400 million that are going to be repricing, and I'm going to say that's in a 90-day period and it still falls in that $430 million to $450 million range.

Okay.

So clearly some momentum there?

Oh, yes.

Yes, and then just a follow-up on Barry's question.

If you guys could give us a little more clarity, granularity on the NPA portfolio, what's comprising the NPLs, as far as loan composition?

I didn't hear the question.

Oh, in the nonperforming loans?

Yes, sir.

Well, one thing I guess you'd notice that in that $9 million, I think it is, total in nonperforming loans, actually, I think it's $9.9 million, it's up about $1 million from where it was last year.

And probably about -- a big portion of that I think, all of that would basically be coming out of northwest Arkansas.

About $7 million of that total, $7.3 million of that total is in real estate, [$8883,000] in commercial and about $1.6 million, $1.7 million in the consumer side.

In that real estate, $7.3 million,.

I don't know what portion of that would be commercial real estate, but I can tell you out of the total $10 million in nonaccruals, about a little over $3 million of that is in northwest Arkansas.

Okay.

So that would generally be the mix.

And as far as working through the OREOs, how is that process going?

I think again, if you look at the regions of Arkansas, and you look at the OREOs we got, we've only got $2.6 million in total OREO property throughout the Corporation, and so we've managed that very, very well, and we continue to manage it very well.

Obviously, again in northwest Arkansas, I think we've tried to be -- while we've tried to be proactive in the identification and the resolution of it, I think, likewise, once we move it into OREO, we've tried to be proactive and yet prudent in moving that property, and I think these numbers probably show that we've been successful there.

Is it fair to say that real estate values are somewhat stabilizing in that portion of the state?

Yes.

I'm going to, David let me try to attempt to answer that, and I'm going to tell you, again, the ripple effect of the foreclosures, I'm not sure we've seen the end of that.

As banks [get it], they're not going to keep that property on their books long, and that's going to continue to depress the market.

But just based on the sales numbers that we saw at the end of the fourth quarter last year, in northwest Arkansas, they're hitting still in the high 90% on asking price -- so 90% range of asking price.

So has it stabilized?

There's probably still some weakness in it.

Has it deteriorated greatly?

No.

Okay.

Okay, well great.

Thanks so much for your time, guys.

Thank you, David.

Good questions, thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Well, thank you very much, and thank everyone for being here, and we look forward to talking to you again soon.

Have a great day.

This concludes today's conference call.

You may now disconnect.