Simmons First National Corp (SFNC) 2008 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Simmons first 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.

Mr.

Gardner, you may begin your conference.

Thank you.

Good afternoon.

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

We want to welcome you to our first quarter earnings teleconference and webcast, pardon me.

Here with me today are Tommy May, our Chief Executive Officer; David Bartlett, our Chief Operating Officer; and Bob Fehlman, our 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 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 welcome everyone to our first quarter conference call.

In our press release issued earlier today, Simmons First reported total assets of $2.9 billion and stockholder's equity of $281 million at March 31, 2008.

Our equity to asset was 9.8%, and our tangible equity ratio was 7.8%, while our book value at March 31, 2008 was $20.14 per share, compared to $8.54 at March 31, 2007.

Obviously our company is well positioned with strong capital.

Simmons First also reported first quarter 2008 earnings of $8.8 million, or $0.63 diluted earnings per share, an increase of $2.2 million or $0.17 diluted earnings per share over Q1 '07.

This is a 37% increase in diluted EPS.

Needless to say, our first quarter earnings represent record levels which require further explanation.

There were three significant events that positively impacted our company, each related to our membership in Visa, Inc.

First, as expected, during the first quarter, we recorded a non-recurring $0.05 increase in earnings per share related to the reversal of the $1.2 million contingent liability established during the fourth quarter of 2007.

As discussed in our last earnings conference, this contingent liability represented the Company's pro rata portion of Visa, Inc.'s litigation liabilities which was satisfied in conjunction with Visa's March IPO.

The second issue, also as a result of the IPO, Simmons First received cash proceeds of $3 million on the mandatory partial redemption of its equity interest in Visa, benefiting our Q1 '08 results by $1.8 million after tax, or $0.13 per share.

Lastly, associated with our membership in Visa, we received 110,308 class B shares of Visa.

The class B shares have a restricted holding period, and the Company will not recognize any gain until such time the shares are redeemed for cash.

Excluding both the Visa litigation reversal and the mandatory stock redemption gain, the Company's Q1 '08 operating earnings were $6.3 million, or $0.45 diluted operating EPS, a $0.01 decrease from the same period in 2007.

Net interest income for Q1 '08 increased $561,000, or 2.5%, compared to Q1 '07.

Net interest margin for Q1 '08 declined eight basis points to 3.8% when compared to the same period last year.

On a linked quarter basis, net interest margin declined 20 basis points, due to the seasonal nature of our loan portfolio, significant repricing of earning assets due to the declining interest rates during the past 90 days, and our concentrated effort to increase liquidity.

Due to the uncertainty of future rate movements and the continued impact of recent rate movements, we anticipate further margin compression for the remainder of 2008.

During Q1 '08, we introduced two new initiatives to enhance the liquidity of the Company.

First, we introduced a high yield investment account which generated approximately $50 million in new core deposits.

Secondly, we made a strategic decision to secure about $55 million in long-term funding from Federal Home Loan Bank borrowings.

Through this process, while we slightly negatively impact margin, we were able to reduce our dependency on the more costly CD deposits, increase our liquidity, and at the same time develop 700 new customer relationships.

Non-interest income for Q1 '08 was $15 million compared to $11.5 million for the same period last year, a 31% increase.

Included in non-interest income is the $3 million Visa gain discussed earlier.

Excluding this gain, non-interest income increased $565,000, or almost 5%.

Let me take a minute to discuss some of the other items that impacted our non-interest income.

Credit card fees increased by $524,000, or 19.8% in Q1 '08 compared to Q1 '07.

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

The higher credit card transaction volume is a direct result of the initiatives that we have discussed in previous conference calls.

The second item, income on investment banking; i.e.

dealer bank operations, increased by $299,000 for the quarter when compared to the same period last year.

This improvement was due to additional sales volume driven by the interest rate environment, called securities, and customer liquidity.

The third item, these improvements in non-interest income were somewhat mitigated by a decrease of $258,000 in premiums on sale of student loans.

This decrease was primarily the result of fewer loans being sold to avoid consolidation lenders in Q1 '08 versus Q1 '07.

Let me take a minute and move to the expense category.

Non-interest expense for Q1 '08 was $23.1 million, a decrease of $84,000, or 0.4 of 1% from the same period in 2007.

Included in the non-interest expense is the previously mentioned $1.2 million pretax nonrecurring item related to the reversal of the Company's portion of the Visa contingent litigation liability that was established in Q4 '07.

Excluding this non-recurring item, normalized non-interest expense for Q1 '08 was $24.4 million, an increase of $1.1 million, or 4.9% over Q1 '07.

Also included in the first quarter of '08 are the expenses associated with the Company's five new financial centers that we opened in 2007 and in the first quarter of 2008.

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

As of March 31, 2008, we reported total loans of $1.8 billion, an increase of $44 million or 2.4% compared to the same period a year ago.

The growth was primarily attributable to the increase in our credit card portfolio, a 3.1% increase in single-family residential and commercial real estate loans, and an 8.6% increase in commercial loans.

Overall loan growth was somewhat mitigated by a 6.9% reduction in real-estate development loans.

Also, that was certainly related to a slowdown in the industry that we have seen throughout the state, and a 4.2% decrease in other consumer loans.

Like the rest of our industry, our portfolio pipeline is relatively soft.

Now let me give a brief update on credit cards.

Certainly this is a line of business that we are very proud of, and especially what we've accomplished in the last 12 months or so.

Our credit card portfolio balance increased in Q1 '08 by $25.2 million or 19% compared to the first quarter last year.

This continues the trend set in 2007 as we have now seen quarter-over-quarter growth in credit card balances for six consecutive quarters.

The increased balances can be mostly attributed to the increase in new accounts.

As we have discussed in detail in previous conference calls, after several years of net new account losses, we introduced a number of initiatives that reversed the trend and in fact added nearly 15,000 net new accounts in 2007.

The positive trend has continued into 2008 with the addition of over 2,400 net new accounts in the first quarter.

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

As of March 31, 2008, the Company's non-performing loans to total loans were 60 basis points, unchanged from year end.

The non-performing asset ratio was 79 basis points, up four basis points from year end; and at quarter end, the allowance for loan losses equaled 1.38% of total loans and 229% of non-performing loans.

Annualized net charge-offs to total loans for Q1 '08 were 30 basis points.

Excluding credit cards, annualized net charge-offs to total loans were 19 basis points.

For the first quarter 2008 credit card net charge-offs as a percent of credit card portfolio was 1.47%, slightly up from 1.41% in Q1 '07; but still more than 400 basis points below the most recently published credit card charge-off industry average.

We continue to expect that credit card charge-offs will gradually return to more historic levels in excess of 2%; however the trend continues to be slower than anticipated.

During Q1 '08, the provision for loan losses increased $716,000 on a quarter-over-quarter basis, returning to a more normalized level.

More specifically, the Q1 '08 provision equates to approximately a 32 basis points annual rate, of which 20 basis points are allocated to the general portfolio, and 12 basis points to the credit card portfolio.

On a linked quarter basis, the decrease in the provision of 282,000 is related to the Q4 '07 special provision for the Northwest Arkansas region.

Because of the uncertainty in the overall economy, we will continue to be proactive relative to the adequacy of our loan loss reserves, specifically in that region.

It is probable that the provision for loan losses will continue at a more historical level throughout 2008 and throughout our company.

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

Let me take a minute to expand on what we see in the 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, at the current time there is a general belief that there may be some return to normalcy by the latter part of 2009.

Obviously, that can change.

On a positive note, Washington and Benton counties continue to have population growth; thus, absorption rates are likely to improve since new developments and constructions have slowed significantly.

Now, concerning our company, as stated previously, we have one of our most seasoned management teams in that 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, we fully recognize that the challenges remain in this economy and there is likely to be further deterioration in this region before a return to normalcy.

The Company's current stock repurchase program authorizes the repurchase of up to 700,000 shares of class A common stock or approximately 5% of the outstanding common stock, with 667,000 shares remaining available.

During 2008, we have repurchased approximately 23,500 shares with a weighted average repurchase price of $26.65 per share or $626,000.

While we continue to be active in the stock repurchase, we anticipate a lower level of repurchases in 2008 than in 2007.

I would like to update you on the latest additions in our de novo branch expansion plan which began in 2005 and is in its final stages.

In February we began operating the new regional headquarters in Rogers for Our Northwest Arkansas affiliate.

Then in March we opened a new financial center in Little Rock, midtown near War Memorial Stadium and UAMS, and that is our eight financial center in Little Rock.

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 reasonable loan growth of 2.5%.

The margin compression of eight basis points was anticipated.

Good asset quality in the midst of challenges.

A continuation of low credit card charge-offs at 1.47% and the overall positive trend in the credit card portfolio remains very good.

Like the rest of the industry, we expect the balance of 2008 to be a challenge relative to meeting our normal growth expectations; however, Simmons First is well positioned based on the strength of our capital, asset quality, and liquidity to deal with the challenges and the opportunities that we may face in the balance of 2008.

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.

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

Let me ask the operator to come back on the line and, once again, explain how to queue in for questions.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time.

Operator?

Yes.

You might try that again.

Your first question comes from the line of David Scharf.

Thank you.

Hello.

Hello, David.

How are you all?

Good.

I was wondering if could you go over some of the dynamics that affected the interest margin this quarter and maybe kind of give me some color on potentially where you see it going.

I know it's a very difficult environment to manage through it, but I would assume that funding costs are coming in pretty reasonably, and that there should be some up side, is that a fair assessment?

Let me just start, and I'll get to the go-forward in just a second.

When you look at our quarter-over-quarter, and we were down eight basis points, we've, of course, been talking about that all year with the rapid decrease in interest rates; but then on the linked quarter basis, we were down 20 basis points.

And I think the big issue there that we need to remind ourselves starts with seasonality, trying to compare margin or anything else on the fourth quarter and the first quarter will create some challenges there for the seasonality.

In fact, a big portion of that 20 basis points would be associated with that.

I think the second thing is and you can see that in the balance sheet that we have been very aggressive in attempting to grow our liquidity; and as a result of that, we've introduced what we call a high-yield investment account which we created about $50 to $55 million in new money on a temporary basis until some of that money goes into the seasonality pool.

It is being invested in overnight assets, which would be putting some pressure on the earning asset side.

So I think it's a combination of two or three things, David.

None of it was unexpected.

I think going forward, as you said, with the headwinds that we are seeing right now, it's pretty hard to know where this margin is going to go.

I would say from our perspective, that until we feel that the fed has stopped dropping interest rates, then we would anticipate a little bit more compression over the next 90 days.

Okay.

Remembering that we have a pretty large percent of our credit card that are also variable rate; but we would say that that would probably just simply be over the next 90 days, and we'd have to reevaluate from there.

I'd also just simply reiterate that we still have the 3.8% margin which obviously is pretty good.

Yes, no question.

David, also, on our balance sheet, we're about 105% on the 90-day gap.

So as Mr.

May said, a little more asset sensitive on the short term when rates change.

So when rates move so quickly like they do, our earning assets reprice a little faster than our liability and it takes us a little longer to catch up on that.

Okay, and then with regard to the new branches and the regional center, is that pretty much--all those hires rolled into the personal expense item which saw kind of a meaningful linked quarter increase?

Yes, I think that, number one, we've completed all the new branch expansion, and most of the hires we're doing actually--

End of fourth quarter, to the first quarter.

Yes, first quarter.

What you're seeing first quarter should be fully loaded going forward on the de novo branches but you also obviously see the quarter-over-quarter.

That's where a pretty big increase is.

We'll have a little bit on the--some of the operating expenses that will start rolling in probably in April might be in depreciation and operations but the headcount is all in there.

Okay.

And at this point, like I say, we have completed our branch expansion for the time being.

We have acquired another piece of property in Little Rock, but we have no plans to begin a new branch at this time.

And with the share price and the currency it certainly performed a lot better than many of your peers, you do have a great deal of capital, too.

What are your thoughts with regards to going ahead, and you've spoken about it before, but going ahead and making that transaction into the contiguous states?

Is it accelerated, or are you still evaluating it, could you give me a bit of color there?

I think that's a good observation.

As we have said probably since mid-year last year, is that we do believe that it's time to consider extending our models beyond the borders of Arkansas.

I don't know that I can say we have accelerated the process for any particular reason, but I--what I can say is that our management team is well into the process of not only developing the overall strategy, but obviously looking at certain markets that have the growth potential larger than the markets that we are currently in.

We have identified those.

Likewise, we have not only identified the markets, we have identified various locations, but we have not gone any further than that.

Would you continue to do it on the decentralized model and build from there?

Yes, we would.

Okay.

We know that the decentralized model is expensive, but we believe it best works for us likewise, we think we're much more apt to bring the right partner to the table.

It's all about culture.

Once you identify the location, we have to find a partner that has our culture, and the best way to do that is for them to not only see they're getting the good return, but they're able to continue to do banking the way they have always done it, so that's a long answer to a short question, but, yes, the decentralized model will continue.

Okay, well, I'll pop off for right now and give anybody else a chance to jump in, but thank you very much for your time.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time.

Hello?

Barry?

Hello?

Could you guys hear me?

We can.

This is David again, I guess it's just me.

One more follow-up.

What are your thoughts with the loan loss reserve?

Asset quality has held up pretty well considering.

Are you getting any pressure from your accountants to kind of loosen up the reserve a little?

Well, if you'll look on a quarter-over-quarter basis, we've had some deterioration in our asset quality, primarily in Northwest Arkansas, as we've mentioned before, and realizing that the first quarter '07 was probably the best asset quality numbers that we could ever have, we have increased our provision accordingly; and, no, we have not received any pressure to change.

We've got, we think, a very good methodology in justifying our reserve where it is.

It is--it is a little bit higher than maybe some institutions, but when you take into consideration our credit card portfolio and those type things, we think we do a pretty good job of justifying it where it is.

And then would you mind kind of going over what right now is comprising the NPLs as far as product type and ALSO the various stages of where you are on the OREO if some contracts, and we can expect some movement out of there?

Okay, you were saying the non-performing assets, right?

Yes, sir.

Our total non-performing assets which you see $14.667 million, of which $3.5 million is in OREO, and then $11.1 million would be in the non-accruals.

The OREO, the bulk of that is in Northwest Arkansas; and most of that OREO is--I know there's one--there's one piece of property that was recently taken back in the form of a deed in lieu of about $1 million.

We believe that we may have somebody that is interested in that piece of property.

I think most of the rest of the OREO is in that one to four family, at least in Northwest Arkansas, most of which, if not all, is completed.

There may be some work to be done on one or two of them but most of it is completed.

And what sort of entry level homes or what sort of homes are those?

Are these entry, mid-level?

I don't know.

Outside of that--outside of Northwest Arkansas in OREO, we have 500 in Central Arkansas, maybe a little bit more than that, but 500 or 600 in Central Arkansas, which is one to four; and then in Northeast Arkansas we've got one piece of property that is one to four, and in Western Arkansas I think we've got two pieces of property one to four.

And so nothing out of the ordinary in all the other areas--in all the other banks.

In the area of the non-accruals, out of the $11.1 million, once again, about $3 million of that is in the Northwest Arkansas region, and outside of--and I'm not even sure, probably there's two or three properties that make up that; again this would be construction and--yes, I think all of this would be construction.

And then in Central Arkansas we have about $3 million in non-performing there, which is made up of two properties, and those are unrelated to the real estate market.

Okay.

So that's more C&I?

Yes, more C&I, and again, as far as the totals, not outside of norm relative to the size of the particular bank.

How is the traffic, how would you characterize the traffic with the one to four's?

People coming in and making bids, or is it just sort of slow going?

No, it's slow going.

Certainly in Northwest Arkansas.

Again, I would reiterate what I said in the text, in Northwest Arkansas.

It is an issue of overbuilt market.

The good part about it is, there's obviously been a significant slowdown relative to lots being developed and then relative to developments--new housing starts, and yet you're still having growth in both Washington and Benton county.

So ultimately that absorption is going to catch up with you, we hope.

Now there's certainly I think be some--still some downside before we see the light at the end of the tunnel.

And did you all get a chance to check out the article in the Fayetteville shale on the Arkansas Democrat today?

I didn't see it today.

It was actually April 16th, yesterday.

Okay, well, there's--McClelland said he's expecting about 75 to $100 billion of investment from the gas companies.

What are your thoughts on the Fayetteville shale, and how real is it?

If you could give me some color on that.

I could tell you that basically the numbers you just--you talk about, as far as the capital investment of $75 million--I think it's about 75 million--

Billion, with a B.

You're talking about capital investment?

Yes, it's--I'll forward this article to you.

Maybe we'll just do this off-line, if you want.

I'll forward you this article and see what you guys think.

You have some information I don't have.

That's good.

It's something.

It seems like a crazy number, though, the University is talking about $18 billion, and this guy comes out with 75.

It's a big number.

That is a number that I have not heard, nor is it a number that I know of.

What I do know is that in 2007, the economic impact was $2.6 billion, the--got 10,000 new jobs and I know the capital expansion by Southwestern Energy and Chesapeake continues, at least the same level in '08 as it was in '07, and I think accelerated.

And we know that what they're projecting is a benefit for the five-year period was $22 billion, and I think what they might have had in the paper yesterday, they might have been going out 10 to 15 years.

That benefit of $75 billion over 10 to 15 years.

Yes, I think that's right, Bob.

But the next five years, University of Arkansas, their group has projected about $22 billion.

What they projected a couple of years ago was only, I believe it was $5 to $8 billion, and what actually happened in '07 from their projection was they were very conservative in their projections.

Okay.

And that 22 billion economic impact is through 2012.

Right, and I think the other one goes on another five to ten years.

Also, the addition of the natural gas price increasing has an impact to cause the total impact to go up.

And are you starting to see some of that benefit work into your balance sheets?

Yes, I think one of the things that we've said is that the rising tide impact is where we will best see the results, and I think we are in royalties in the deposit side, and I think maybe a little bit in the wealth management trust side.

Okay.

Well, once again, guys, thanks so much for your time.

Well, thank you, David.

Your next question comes from the line of Barry McCarver.

Hey, guys.

I tell you what, I didn't think she was going to let me ask a question.

I queued up about 15 times.

Glad to have you.

Thank you.

The article he's referring to is quotes by the CEO of Chesapeake, and I think he is suggesting 75 to 100 million over ten years and he acknowledges that fact that that is a multiplier higher than the U of A study.

For what it's worth.

That would be very positive.

Certainly would be.

You've got most of my questions now.

I just had a couple of follow-up, a little bit more color.

Looking at that time credit card portfolio and obviously that thing fluctuates seasonally, but even still very strong, even seasonally adjusted, and I'm curious as to your overall thoughts on the credit quality of that portfolio.

How much of this growth is coming from new accounts versus just increases in existing accounts, and does that play into the--your thoughts about credit quality?

Good question.

I think first of all we are seeing across the board increased volume in the credit card area both on the credit side, being the credit card side, and on the debit card side and we're benefiting from that as you can see on the non-interest income.

I do believe that the fact that we have 15,000 net new accounts quarter-over-quarter and about 2,400 I think, or 2,500 in the first quarter would tell us that most of the growth is coming from the new accounts.

Also, if you go and you look at the average debt per account, average owing per account, it's somewhere around--in 2007, or right now it's somewhere around $2,000, and that just has not grown very much at all.

So we're staying I think with our same underwriting standards and have not--still are pretty restrictive on the level that we will grant on a new account.

The big driver obviously is the 7.25% fixed rate credit card.

Now, a lot of the application volume that we had in 2007 came through internet applications, and that has slowed.

We don't know exactly why it slowed, there's obviously a couple reasons.

One, rates have dropped so much, and we have held at the 7.25% on that fixed rate card, even though it's still one of the best in the country; and there are some other competitive cards out there that may be getting a little bit more play, but we're still getting good positive growth, and we're not really willing to come much off of where we are on the fixed rate card.

Okay.

Also, Barry, on the charge-offs you saw, 1.47% for 2008, first quarter is a little bit higher usually.

Last year it was 1.4%.

You'll see it tick up from the fourth quarter to the first quarter, but still very favorable and much lower than our historical 2 to 2.25 range we'd say, and we still think some day it's going move back to that level but continues to be a lot slower than we first thought.

Did you mention that it's 400 basis points below?

Yes, we said in your script, 400 some basis points better than the national average still.

Barry, obviously in a "recessionary environment" with an unsecured portfolio it gives you a little bit of heartburn.

It gives us a little bit of heartburn, except three things you must consider.

First is diversification, geographic diversification.

We're in all 50 states.

50% of it is in Arkansas, and as we've said, Arkansas doesn't have the peaks and the valleys when you go through some economic challenges, and that turns out to be very much a positive.

Also, when we look at our concentration and we look at Florida, California, Michigan, Ohio, and Illinois, and where some of the pockets of challenges are in New York, our numbers there are not excessive; and then last but not least, when you look at the $2,000 per account.

So even though it's unsecured, and even though you would think unsecured portfolio would be most challenged in a recessionary period where you lose jobs, what we have found when we shock it back to previous recessions '90, I mean 2000 and '90 is that people want to keep their credit card.

And as long as they're not taking bankruptcy, they quit paying a lot of things before they quit paying their credit card because of the immediate availability of funds.

All right.

Just two quick ones; and I can't recall what you said last quarter, but in terms of the new branching for the rest of the year, do I hear that we're pretty much done?

Done.

Yes, sir.

And--

I think we were done anyway with where we--our de novo strategy.

If not, there might have been two or three others that we were looking at in the Little Rock market, but I think right now until the clouds lift a little bit, I think we're pretty well complete.

Okay, and then I noticed, back to David's question about capital, I noticed you repurchased some shares in the quarter with an average price $26 and change, with the stock at $30 and change.

Should we expect any at all?

I think you should expect probably a significant slow down, like we've already done.

But similar to the first quarter.

But similar to the first quarter.

We're going to stay in it.

We're going to be methodical, but we're, quite honestly, we're going to--just like we have built liquidity, we're going to look at capital retention.

It's all driven right now by just deciding to keep our capital at this point, but still be in the market on a systematic basis, but at a lower level than last year.

Okay.

And remember, we were at an accelerated level last year also.

All right, guys.

Thanks a lot.

Thank you, Barry.

Thanks, David.

Appreciate it.

Thanks, everybody for being here.

This concludes today's conference call.

You may now disconnect.