Simmons First National Corp (SFNC) 2008 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 second 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.

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 second quarter earnings teleconference and Webcast.

Joining 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.

All 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 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 second quarter conference call.

In our press release issued earlier today, Simmons First reported June 30th, 2008 total assets of $2.9 billion and stockholders' equity of $278 million.

Our equity to asset ratio was 9.5% and our tangible equity ratio was 7.5%.

Book value at June 30, '08 was $19.94 per share, and tangible book value was $15.38.

Obviously, our Company remains well-positioned with strong capital.

Simmons First reported second quarter 2008 earnings of $6 million, or $0.42 diluted earnings per share, compared to $0.49 diluted EPS in Q2 '07.

This decrease is primarily attributable to an increase in the provision for loan losses and a decrease in the premiums from the sale of student loans.

We will discuss both of these items in more detail in a moment.

For the six month period ended June 30, 2008, net income was $14.8 million, or $1.05 diluted earnings per share, compared to $13.7 million, or $0.95 per share for the same period in 2007, an increase of $0.10 or 10.5%.

As we discussed in previous conference calls, during Q1 '08 we recorded earnings of $0.18 per share for non-reoccurring items related to Visa, Inc.'s IPO.

Excluding these non-reoccurring items, core earnings for the first six months of 2008 were $0.87 per share.

Net interest income for Q2 '08 increased $305,000, or 1.3%, compared to the same period last year.

Net interest margin for Q2 '08 declined 29 basis points to 3.67% when compared to the same period last year.

On a linked quarter basis, net interest margin declined 13 basis points.

The decrease in margin was primarily the result of a significant repricing of earning assets due to declining interest rates during the first half of the year and our concentrated effort to grow core deposits.

Based on our current pricing model with rates remaining constant, we anticipate a relatively flat margin 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 year-to-date has generated approximately $95 million in new money and $38 million in transfers from higher costing time deposits.

Overall, on a quarter-over-quarter basis, our core deposits grew $290 million and our time deposits decreased by $107 million.

Second, 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 impacted margin, we have been able to reduce our dependence on more costly time deposits, increase our liquidity, and develop approximately 600 new customer relationships.

Non-interest income for Q2 '08 was $11.7 million compared to $11.3 million for the same period last year, a 3.4% increase.

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

First, credit card fees increased by $455,000 or 15% in Q2 '08 compared to last -- same period last year.

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 we have discussed in previous conference calls.

Second, the overall increase was somewhat mitigated by a decrease of $234,000 in premiums on the sale of student loans.

This decrease was primarily the result of fewer loans being sold to avoid consolidation lenders in Q2 '08 versus Q2 '07.

Let me give you an update on this line of business.

As you are probably aware, the liquidity of the student loan secondary market has effectively disappeared.

At this time, we do not expect to be able to sell student loans at a premium during the second half of the year.

Obviously, the lack of a secondary market will create major obstacles for the private sector to continue providing educational access.

However, at a minimum, our plans are to continue to fund our commitments to our customers through the 2008-2009 school year.

By not overreacting we hope that reasonableness will prevail and the private sector will ultimately be rewarded appropriately and we will be able to continue providing the same exceptional service as we have since 1965.

Our role as an originator/servicer might ultimately change.

But it is too early to tell as the landscape is still being defined.

As such, for the immediate future, it is our intention, and we have the liquidity, to hold loans that we normally would sell into the secondary market.

At worst, the loans originated over the next 12-month period could be sold during Q3 '09 into a government program which was formed to create temporary stability in the student loan market.

Obviously, the profits on those sales could be less than we historically receive.

However, since we are not likely to sell loans in the secondary market during the balance of 2008, the estimated net pretax impact on earnings for the balance of '08 is a reduction of $400,000 compared to the same period in 2007.

Specifically, we estimate a reduction of some $700,000 in premium income, partially offset by a $300,000 increase in net interest income due to an increase in volume.

We will continue to evaluate the profitability and viability of this strategic business unit going forward.

Currently, there are way too many uncertainties concerning the roles of government, secondary market and the private sector to make long-term decisions.

Moving on to the expense category, non-interest expense for Q2 '08 was $24.2 million, an increase of $1.2 million or 5.2% from the same period in 2007.

Included in Q2 '08 are the expenses associated with the Company's five new financial centers that were opened after the first quarter of 2007.

Excluding the impact of these new branches, non-interest expense increased by only 3%.

We're all pleased with this modest increase; however, there are a couple of items I would like to discuss.

Credit card expense increased by $191,000 in Q2 '08 compared to Q2 '07 primarily due to the increased volume in credit card applications, card creations, interchange and other related expenses resulting from initiatives the Company has taken to stabilize and grow the credit card portfolio.

A new accounting pronouncement, EITF 6-4, required a change in the method of accounting for post retirement benefits related to bank-owned life insurance effective January 1, 2008.

In Q2 '08 we recorded a $72,000 expense due to the accounting change compared to no expense in Q1 '07.

As of June 30, 2008, we reported total loans of $1.9 billion, an increase of $87 million or 4.8% compared to the same period last year.

The growth was primarily attributable to a 17.7% increase in commercial loans, a 3.8% increase in single family residential and commercial real estate loans, and a 15.5% increase in our credit card portfolio.

Overall, loan growth was somewhat mitigated by a 7.7% reduction in real estate construction and development loans due to permanent financing of completed projects and a 3.3% decrease in other consumer loans.

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

Considering the challenges in the economy, it is important to note that we have no significant concentrations in our portfolio mix.

Our construction and development loans only represent 12.9% of our consolidated portfolio, and we have no subprime assets in either our loan or investment portfolio.

Now let me give a brief update on credit cards, a line of business that we continue to be pleased with.

Our credit card portfolio balance increased in Q2 '08 by $21.8 million or 15.5% compared to the second quarter last year.

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

The increase in 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 new initiatives that reversed the trend and, in fact, added nearly 15,000 net new accounts in 2007.

Although the account growth is slowing, the positive trend has continued into 2008 with the addition of over 3,500 net new accounts in the first six months of the year.

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

In fact, we continue to enjoy good asset quality in all the other regions of Arkansas.

At June 30, 2008, the allowance for loan losses equaled 1.35% of total loans and 178% of non-performing loans.

Non-performing assets as a percent of total assets were 0.61%, up 10 basis points on a linked quarter basis.

Non-performing loans as a percent of total loans were 0.76%, an increase of 16 basis points.

Both of these increases were driven by a $3.4 million increase in non-performing loans.

This increase can be primarily attributed to two credits in the Northwest Arkansas market.

Both of these loans migrated from the 30 to 89 day past due category last quarter.

On another positive note, the 30 day past due ratio excluding non-accrual loans was 0.48% which is down 59 basis points from the previous quarter.

The annualized net charge-off ratio for Q2 '08 was 0.40 or 40 basis points compared to 30 basis points for the first quarter.

Excluding credit cards, the annualized net charge-off ratio was 0.27% compared to 0.19% for the first quarter.

Annualized net credit card charge-offs were 1.83%, an increase of 36 basis points from the previous quarter, but still more than 350 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%.

During Q2 '08, the provision for loan losses was $2.2 million, an increase of $1.4 million from the same quarter in 2007.

This increase includes a $700,000 special provision for Northwest Arkansas region.

The remaining $1.5 million provision represents a return to a more normalized level based on recent asset quality trends.

This 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.

Because of the uncertainty in the overall economy, we will continue to be aggressive relative to the adequacy of our loan loss reserve, specifically in the Northwest Arkansas region.

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

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

Let me take a minute to reiterate what we have previously said and what we continue to see in Northwest Arkansas region.

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

Obviously, that can change.

And on a positive note, Washington and Benton Counties continue to have population growth, thus absorption rates are likely to improve since new developments in construction have slowed significantly.

Concerning our Company, as stated previously, 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 that region.

Accordingly, we have made the previously mentioned special provision.

We fully recognize that challenges remain in this economy and there's likely to be further deterioration in this region before a return to normalcy.

To put things in perspective, the total loans originated in the northwest region only represent 13.6% of our total consolidated portfolio.

One final thought.

We do believe that the northwest Arkansas economy will work through the challenges related to an overbuilt real estate market and will, once again, be one of Arkansas's most attractive markets.

Remember, the influence of Wal-Mart, Tyson, JB Hunt and the University of Arkansas remains a powerful attraction for new job growth.

The Company's current stock repurchase program authorizes repurchase of up to 700,000 shares of Class A common stock or approximately 5% of the outstanding common stock with 646,000 shares remaining available.

During 2008, we have repurchased approximately 45,000 shares, with a weighted average repurchase price of $28.38 per share or $1.3 million.

Effective July 1, we made a strategic decision to temporarily stop our stock repurchases.

This decision was made to preserve capital and cash at the parent company, both of which may be needed in potential future acquisitions.

I would like to give you a final update on our de novo branch expansion plan which began in 2005.

In Q1 '08 we opened the last two financial centers, completing the original plan.

We currently have no plans for additional de novo financial centers.

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 good loan growth, 4.8%, margin compression, 29 basis points, increased provision expenses, good asset quality compared to the industry, a continuation of relatively low credit card charge-offs at 1.83%, and an overall positive trend in the credit card portfolio, and strong growth in core deposits.

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 opportunities that we face for the remainder of 2008.

We continue to believe that the Arkansas economy will better sustain the economic challenges because as primarily a rural state we have not and likely will not experience the same highs and lows that will challenge much of our nation.

We remind our listeners that Simmons First experiences seasonality and 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.

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

(OPERATOR INSTRUCTIONS).

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

Your first question comes from the line of Matt Olney from Stephens.

Hello, Matt.

Great quarter.

How you guys doing?

Good.

Tommy, you gave some good details on the student loan issues out there and how the fee income may be down, partially offset by some interest income.

I didn't get all that written down.

Could you go over those details one more time?

Yeah, I think I can.

What we said is the net impact is about $400,000 for the balance of 2008.

700,000 of that would be in the area of non-interest income from the sale, and then that would be offset by a positive impact of about $300,000 on the carrying of additional loans in our portfolio for that period of time.

And Matt--this is Bob.

If you look at our income statement, you'll see that premium on sale of student loans in the non-interest income category.

What we had in the third quarter and the fourth quarter of '07, that income will basically go away because of the liquidity in the student loan market, and that's what Mr.

May said.

But yet our portfolio will increase and there will be a spread on that, so we think, again, the difference will be about $400,000.

And that's for both the third quarter and the fourth quarter combined, is that right?

That's correct.

Okay.

Let's see.

You also provided some details on the expenses, Tommy.

I think you mentioned the credit card applications were up, the new BOLI accounting rule.

I didn't see anything in there that was unusual in the sense that it would drop out in the back half of the year.

Is that fair to say?

I believe what we said is that the expenses, the non-interest expense, was up about -- what was it, 5.5%, Bob?

Yeah, it's about 5%.

And you if normalize it, on a quarter-over-quarter basis for the branches, it would be about 3%.

But, Matt, if you look at the second quarter, I think you've got a pretty good run rate going forward with our branches fully loaded.

And then that BOLI we talked about, the 72,000 or so, that's going to carry forward going for the next few years.

Okay.

We said second quarter is pretty good run rate and then we also noted, as Mr.

May said earlier, that our de novo branches were at the end of that process right now.

We're continuing to evaluate where we are.

So we should have second quarter fully loaded for the branches in there.

Okay.

Very good.

And also, great to see a good C&I loan growth in 2Q.

Could you provide any more details as to what markets some of this loan growth was in in terms of the C&I?

Was it one or two sizable loans or several smaller loans?

I think on the C&I, first of all, it would be generally in all the markets.

We did have a significant funding under a large line of credit that we have in the company that would help drive that.

But otherwise, I think it was in all the regions.

Looking across the regions, there was pretty good growth across the regions, as Mr.

May said.

Okay.

And as far as the credit card portfolio, could you remind us what your policy is regarding charge-offs on outstanding balances?

Is it a set rule of 90 days?

120 days?

Or is it more of a case by case issue, how you guys look at that?

Well, we do have a policy that says that it will not go beyond a certain point and then it's a case by case prior to that.

And I think that -- is it 120 days or 180 days?

120 days for sure.

I don't know the exact details, but I think about 120 days.

But I think that same policy also says that there are circumstances that would cause us to charge it off prior to that.

And that policy is fairly consistent with the credit card policies that you would see in most banks throughout the country, and certainly one that has been agreed to by the regulators.

Okay.

That's helpful.

It sounds like the credit card balance continues to perform pretty well with your different offerings out there on your credit cards.

Does the number of new applications continue to increase as well over the last few months?

I know there's a lot of worry out there with the consumers but in terms of applications, are you still seeing quite a few new ones come in the door?

I think the number of applications have increased but they've increased at a slower rate.

In fact, if you look at the net new accounts that we have in the credit cards for the first six months of '08, they would probably be about 60% -- 50 to 60% of the same level that they were in '07.

That is obviously not a big surprise and we continue to have very tough underwriting standards as our portfolio, the quality of our portfolio reflects.

And my last question, just remind us of -- on the credit card portfolio, the customers -- or maybe the balance, do you have a percent of the balance that's in Arkansas, kind of in-state, or your core markets, or maybe a percent of your core customers.

About 55% of the total loan portfolio is from Arkansas.

The other 45% is spread out throughout the United States, with no major concentrations in any area, including the California, Florida, New York, Midwest area.

There are no concentrations there.

Probably outside of Arkansas, 4% or 5% would be the highest in any one market and that would be in a rare case.

Okay guys, thanks for your help.

Thanks, Matt.

Matt, thank you.

Your next question comes from David Scharf from FTN Midwest.

Hi, guys, how you doing?

Hey, David.

How's everyone doing?

Great, how are you?

Great.

I just wanted to follow up sort of where -- if we could go on sort of the net interest margin.

Tommy, you mentioned that the numbers certainly reflect that but considerable momentum in the core funding.

Could you give me some yield analysis with that as far as what you're offering on the money market relative to some of the higher costs, CDs that have rolled off, and also some of the longer term debt that you put on?

Yes, let me -- first of all, I'll start with the longer term debt and that was the $50 million, is that right, Bob?

Yes.

$55 million.

$55 million with Federal Home Loan Bank.

That was done in two tranches.

One was two years, one was at three years.

The average cost of that borrowing was -- what was that, Bob?

Two --

Just above two--210.

About 210 or 215.

In addition, in addition to that borrowing, we introduced a new transaction account, what we call our high yield investment account, and that high yield investment account has generated somewhere close to $90 million.

The current rate on that high yield investment account is 2.55%.

The other positive part of that high yield investment is that we were able to move some money from our CD accounts that were maturing during that offering period, about, I'm going to guess, somewhere close to $150 million.

Bob, you'll have to correct me if that's wrong, but about $150 million, and those rates, when they were maturing, they were at about 415 to 4 --

425.

415 to 425.

So we accomplished several things through that, and again, it was our intentions to do so.

Obviously one was to build liquidity because we felt like that was consistent with our strategy as we were moving through these turbulent times of having strength in capital, asset quality and liquidity.

The second thing was to change our mix in our resources from less reliance on the CDs and to increase the transaction side where we could get new customer relationships and obviously cross sales, non-interest income services, too.

So I think we're very, very pleased with that, based on where we are today.

It's definitely a great trend to see.

What would you say or the ability of CDs that are repricing over the next quarter or two, that you may have the ability to move over also into that higher yield account?

David, we have about 300-and?

$340 million.

$350 million, what did you say, Bob?

$340 million?

Yes, $340 million in the next 90 days.

$340 million at a 3.85 -- 3.89% interest rate.

And obviously, depending on what happens with interest rates between now and then, we're going to get some pick-up there.

Obviously, we would like to move some of them into the transaction account but the challenge there will be we're starting to see some of our competition to begin to price a little bit more aggressively in trying to move dollars into the longer term CDs.

So we'll just sort of have to wait and see but we're in a pretty good position, number one with the CDs maturing, number two with our costs there at 389.

David, let me give you another number.

We did see our April, May and June, our margin improving each month in that period, so we were at the low end in April and it improved in May and improved in June.

So we did see some good things for the quarter, towards the end of the quarter in margin.

How you're looking at the sort of towards the end of the year with the guidance of the net interest margin to be flat or maybe come in just a bit but is that assuming the Fed starts to tighten, or, excuse me, raise rates a little bit?

How are you -- you know, could you give me some thoughts on how that was sort of gauged?

I think in the text, what we said, that based on a flat interest rate environment, or rates relatively unchanged, that we would see that margin to remain relatively unchanged for the balance of the year.

Okay.

However, all that says is that we're not projecting -- it's not that we don't believe there will be some tightening.

The fact is that we seem to do better with our portfolio mix in a flat interest rate environment.

So it is very possible that while we've said that we expect that margin to be flat, it is very possible that we will get some pick-up, based on our mix, based on our -- the earning assets that we have -- I mean the liabilities that we have that are going to be repricing.

If we start moving into a rising interest rate environment, because we are asset sensitive -- and that's obviously one of the reasons that we had the 13 basis point decrease is because our corporation is asset sensitive.

If rates start moving up and they move up in a relatively slow process, then we also could get some pick-up in the margin.

But again, we have no crystal ball there so we've opted not to.

Sure.

Sure.

And then just a final question.

Is there any level of how much student loans you'll keep on your balance sheet as far as the total portfolio?

Well, that's a very good question.

In the text, what we have said is that since the secondary market has virtually disappeared, but based on not trying to crystal ball, but based on what we believe will ultimately happen in the market, and the fact that we do know that we can sell these loans to the government in July through September of next year, we believe that we can add another $100 million -- up to $100 million -- in our portfolio and not only serve our existing relationships with the existing universities that we have, but possibly take on a little bit more where others will not.

And again, we think that can be very much a positive for us long-term.

If we miss, meaning the secondary market does not return or we cannot find a structure that we're comfortable with, then we're going to be able to sell those loans in July and September, and we're going to sell them at par, plus reimbursement of a 1% commitment fee, plus $75 per loan.

And that will be worth the investment in the strategic decision to do this.

Is the universities giving you all any concessions because you're standing by them?

Is there any chatter now that you should get preferential spots, whether it be ATMs or advertising or anything like that?

I don't think we've had that discussion but certainly I think every university already knows or will know, and certainly most of them do know that we are the one bank that's been in the student loan business since the '60s, have not dropped out, and have done just exactly what you have said, have stood by them.

So I believe, while there's no promises, I believe that it will improve our relationship with them.

Okay.

Well, thanks so much for your time.

It was appreciated.

Thanks, David.

Thanks, David.

There are no further questions.

Okay.

Well, thank you very much and thank all of you for being here today and hope you have a great rest of the summer and we'll see you next quarter.

Thanks, Cassandra.

You're welcome.

This concludes today's conference call.

You may now disconnect.