Simmons First National Corp (SFNC) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

At this time I would like to welcome everyone to the Simmons First National 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) At this time, it is my pleasure to turn the conference over to David Garner.

Please go ahead, sir.

(inaudible) Relations Officer of Simmons First National Corporation.

We want to welcome you to our fourth 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 paragraph 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 fourth quarter conference call.

In our press release issued earlier today, Simmons First reported fourth quarter 2008 earnings of $5.6 million or $0.40 diluted EPS compared to $0.44 diluted EPS in Q4 '07.

As anticipated, the decrease was primarily attributable to a decrease in margin, an increase in the provision for loan losses in Northwest Arkansas, and a decrease in the premiums from the sale of student loans.

We will discuss all of these items in more detail later in the presentation.

For the year ended December 31st, 2008, net income was $26.9 million or $1.91 diluted earnings per share compared to $27.4 million or $1.92 per share for the same period in 2007.

Now while the national economy continues to be under considerable stress, the Arkansas economy has fared much better to date due to the fact that we simply do not have the same highs and lows as seen in many other regions of our country.

Considering the challenges in the economy, we are very pleased with our 2008 results.

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

Excluding these nonreoccurring items, core earnings were $1.73 per share for 2008.

On December 31st, 2008 total assets were $2.9 billion and stockholders equity was $289 million.

Our equity to asset ratio was a strong 9.9% and our tangible equity ratio was 7.9%.

The regulatory tier 1 capital ratio increased to 13.2% and the total risk-based capital ratio increased to 14.5%.

Both ratios remained significantly above the well capitalized levels of 6% and 10% respectively.

Needless to say, our company remains well positioned with strong capital.

As you already know, Simmons First was one of the first banks to apply and be approved for the US Treasury capital purchase program.

While we have a very strong capital base, we also believe that during turbulent times, opportunities present themselves, and we want to be prepared to capitalize on such opportunities.

As such, in October, we applied for and were approved for $40 million and we have subsequently requested and received approval up to the maximum of $60 million.

Under Arkansas law, we are required to provide our shareholders 60 days notice.

Thus our shareholders meeting and subsequent funding will be approximately February 27th.

As we have said publicly, our decision to draw down the approved capital will be based on the terms of usage being the same as originally set forth by the US Treasury.

Net interest income for Q4 '08 increased $259,000 or 1.1% compared to Q4 '07.

Net interest margin for Q4 '08 declined 30 basis points to 3.70% when compared to the same period last year.

The decrease in margin was primarily the result of a significant repricing of earning assets due to declining interest rates and our concentrated effort to grow core deposits, resulting in a significant increase in liquidity.

When compared to the previous quarter, net interest margin decreased 14 basis points due to the declining interest rates and the seasonality of our loan portfolio.

Based on the recent rate reductions, we now anticipate additional margin compression during 2009.

As previously mentioned, one of the early objectives this year was to enhance the liquidity in each of our [eight] banks.

Retrospectively we have been very successful in this effort.

On a quarter-over-quarter basis, our non-time core deposits have grown $290 million or 27%, while our time deposits increased by $137 million.

First, in February, we introduced a high yield investment account which during 2008 generated approximately $146 million in new money.

In addition, by design, we have moved some of the more volatile expense of CD dollars into this account.

The second strategic move toward building liquidity was 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 dependency on more costly time and public fund deposits, increase our liquidity, and develop some new relationships.

Noninterest income for Q4 '08 was $11.3 million, down approximately $500,000 compared to the same period last year.

Let me take a minute to discuss some of the items that impacted noninterest income.

Service charges on deposit accounts increased by $131,000 or 3.4% in Q4 '08 compared to Q4 '07 due primarily to an improvement in our fee structure and core deposit growth.

Noninterest income was also negatively impacted by three items.

First, as might be expected, due to the current economic conditions, income on the sale of mortgage loans decreased by $114,000.

The second item is other service charges and fees decreased by $159,000.

Commission revenue from a third party official check vendor decreased by $64,000 as a result of contract expiration and a change in business related to Check 21.

The remainder was a result of lower revenues from the other commissions and fees.

Finally, the last item, the premiums on the sale of student loans decreased by almost $300,000.

As discussed in previous calls, the current liquidity of the student loan secondary market has virtually disappeared.

At this time, we are unable to sell student loans at a premium.

However, we have committed to continue to serve the student loans of the Arkansas market by continuing to fund new loans with the expectations of holding them until Q3 '09.

At that time we expect to sell loans originated and fully funded during the '08, '09 school year.

Under the previously announced federal student loan program, these loans can be sold to the government at PAR plus reimbursement of 1% lender fee and a premium of $75 per loan.

As a matter of information, while we will be increasing our student loan portfolio by an estimated $50 million during the carrying period, we have the option of creating liquidity by selling participation loans to the federal student loan program.

At this point in time we do not anticipate the need to do so.

The estimated net pretax impact on earnings from student loans for Q1 '09 is a reduction of $385,000 compared to the same period in 2008.

Specifically, we estimate a reduction of $625,000 in premium income partially offset by $240,000 increase in net interest income due to the increase in student loan outstanding balances during the carrying period.

First quarter earnings estimates should be adjusted to reflect this reduction.

Looking forward to the remainder of 2009, we anticipate the entire premium on the sale of student loans currently estimated at $1.6 million to be recorded in Q3.

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

Currently, there remains 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, noninterest expense for Q4 '08 was $24.6 million, which was a decrease of $170,000 or 7 basis points from the same period in 2007.

If you will remember, during Q4 '07, we recorded $1.2 million in nonreoccurring expenses related to the contingent liability of the litigation that resulted from the Visa Inc IPO which was reversed out in Q1 '08 at the time of the IPO.

Included in Q4 '08 are the expenses associated with the company's three new financial centers that were opened after Q3 '07.

Excluding the impact of these new branches and the nonrecurring item, noninterest expense increased by a normalized 2.7%.

Although we continue to be pleased with our modest increase in normalized noninterest expense, there are a few items I would like to discuss.

First, the deposit insurance expense increased by $217,000 or 201% in Q4 '08 compared to Q4 '07.

During 2007, the FDIC issued credits based on historical deposit levels to be used in offsetting deposit insurance assessments, and Simmons First received $1.8 million of these credits.

During Q3 '08, the majority of these credits were exhausted.

Based on the recent FDIC insurance assessment projections, we estimate a $1.8 million negative impact in 2009 versus 2008.

The second item, new accounting pronouncement EITF 6-4 required a change in the method of accounting for the postretirement benefits related to bank-owned life insurance.

Effective January 1, 2008, in Q4 '08 we recorded a $70,000 expense due to the accounting change compared to no expense in Q4 '07.

As of December 31st, 2008, we reported total loans of $1.9 billion, an increase of $83 million or 4.5% compared to the same period a year ago.

The growth was primarily attributable to a 10.4% increase in consumer loan portfolio and a 2.8% increase in the real estate portfolio.

The growth in consumer loans was primarily in the student loan portfolio.

The growth in the real estate was entirely in the single family residential and commercial real estate loans.

Overall, loan growth was somewhat mitigated by a 13.8% reduction in real estate construction and development loans due to permanent financing and completed projects.

Like the rest of the industry, our loan pipeline remains 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 represent only 11.6% of consolidated portfolio and we have no subprime assets either in the loan or investment portfolio.

Now let me give a brief update on credit cards.

The portfolio's outstanding balance increased in Q4 '08 by $3.6 million or 2.2% compared to the fourth quarter last year.

This continues the trend set in 2007, as we have now seen quarter-over-quarter growth in credit card balances for nine 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 new initiatives that reversed the trend.

Although the account growth has slowed during 2008, the positive trend has continued with the addition of over 5,000 net new accounts in 2008.

Although the general state of the national economy remains volatile 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 of the other regions of Arkansas.

At December 31st, 2008, the allowance for loan loss equaled 1.34% of total loans and 161% of nonperforming loans.

Nonperforming assets as a percent of total assets were 65 basis points, up only 2 basis points from the previous quarter.

Nonperforming loans as a percent of total loans were 0.83%.

The annualized net chargeoff ratio for Q4 '08 was 50 basis points, flat when compared to the third quarter.

Excluding credit cards, the annualized net chargeoff ratio was 36 basis points compared to 38 basis points for the third quarter.

The preponderance of the chargeoffs are associated with the challenges in Northwest Arkansas, which will be discussed later in the presentation.

Q4 '08 annualized net credit card chargeoffs were 2.02%, an increase in 22 basis points over the previous quarter, and still more than 400 basis points below the most recently published credit card chargeoff industry average.

As you will remember from previous conference calls, we expected that the credit card chargeoffs would gradually return to a more historic level in excess of 2%.

During Q4 '08, the provision for loan losses was $2.8 million, an increase of $1 million from the same period in '07.

The increase is the result of a special provision for the Northwest Arkansas region.

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.

While there remains some uncertainty relative to that region's market recovery, and the statewide impact from the national recession, we currently anticipate that the 2009 provision for loan losses will approximate the same level as in 2008 excluding the Q4 special provision.

Obviously this depends on credit card chargeoffs, 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 the Northwest Arkansas region.

While bankruptcy and foreclosure filings associated with the residential real estate market in that region continue to be a challenge 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 toward normalcy by the latter part of 2009 or early 2010.

Obviously, that can change, but it is what we see at this point in time.

On a positive note, 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, as we have 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 the region.

Accordingly, as previously mentioned, we have made another special provision to the loan loss reserve.

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.

To put things in perspective, the total loans originated in the Northwest Arkansas region represent only 10.5% of our 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.

We must all remember that the influence of Wal-Mart, Tyson's, JB Hunt and the U of A remains a powerful attraction for new job growth.

Bottom line, quarter-over-quarter we experienced moderate loan growth of 4.5%; margin compression of 30 basis points; increased provision expense in Northwest Arkansas, but good asset quality corporatewide compared to the industry; a continuation of relatively low credit card chargeoffs at 2.02%; excellent growth in our core deposits of 21%; and most importantly, strong capital of 9.9% equity to assets which will even get stronger.

Like the rest of the industry, we expect that 2009 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 through 2009.

Our conservative culture has enabled us to engage in banking for 105 years.

To reiterate, Simmons First does not have any subprime loans in our loan portfolio, nor do we have any subprime assets in our securities portfolio, with mortgage backed securities making up less than 0.5% of 1% of our total securities portfolio.

We rank in the upper quartile of our national peer group relative to capital, asset quality, and liquidity.

There has never been a greater time to have these strengths.

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

However, we will not be lulled in sleep, since there is always some concern relative to the lag effect that might occur in a major economic downturn.

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

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

(Operator Instructions) We will take our first question today from Matt Olney with Stephens Incorporated.

Good afternoon, gentlemen.

Hello, Matt.

Hey, Matt.

Mr.

May, you gave a lot of good details on the credit quality, especially with Northwest Arkansas and the credit cards.

Can you give us more color on the credit trends in Arkansas outside those two things and maybe specify the agri loans as well?

Yes, thank you very much, Matt.

I would tell you first of all that just looking at it from our perspective, which would be our rate bank.

We have already talked about the Northwest Arkansas region and the challenges there, you know that.

But I will be glad to answer any other questions there that you might want.

Beyond the Northwest Arkansas region, when we look at the northeast, we look at the central, we look at the western part of the state and central part of the state and then the south central, the southeast -- we believe the asset quality numbers in our particular institution is still holding up very well.

While we are seeing some challenges, they are very minor in nature compared to the national economy.

So, that is very much a positive.

In looking beyond the regions or drilling down into types of loans, let me address the issue or the question of the agri industry.

In our company, when we have three regions where we have agri lending -- northeast and south central and southeast.

The portfolios in aggregate relative to row crop would probably be a little bit north of $100 million.

So for a $3 billion holding company, you realize we do not have a lot of concentrations there.

The bulk of our lending on the agri side is in fact row crop lending.

This last year, the challenges that we would have had would primarily have come from the input costs, number one.

Number two would have been from the hurricanes.

If we look at it right now retrospectively, I think you will see that all of our farmers or most of our farmers will have paid out -- most of them would have had a year in '08 equal to or slightly less than '07 with the exception of possibly the cotton farmers.

As we move into '09, we still see that that the biggest challenge, the input costs are obviously lower.

We are seeing some -- the prices in the grains and so forth at a level that there could be some good profits if they could book their profits, and that hedging process is still going to be a little bit of a challenge with the grain elevators.

They obviously can do it in the futures market that requires lots of capital.

So going into '09, I think they go into it at least with the net worth they started '08 with.

We look for it to be a good year.

Matt, David Bartlett here.

Thanks for that question.

One of the things that our banks in the ag market are talking about with these farmers is that with the good crop yields and cash they generated from the crops in 2008, quite frankly, they're probably looking at a slower borrowing uptick and using their own cash first going into the 2009 cycle.

We feel pretty strong about the ag industry and the customers we are dealing with in that particular area.

We have some catfish farmers and certainly that's an area we are continuing to monitor.

They've had three good years, but certainly that could be a challenge for us, or not for us as much as for the farmers.

And we think that will be okay also.

I guess moving over to the next area, Matt, if you'd like, we can talk a little bit about the credit card piece.

That would be great, Tommy.

On the credit card piece, as you know, as we have mentioned in the press release and in our conversation that our loss ratio -- we have gone from 1.8% to 2.02%, and you will remember from our previous discussions that we have expected to see that increase, again to move north.

Quite honestly, it did not for a good period of time, and with our portfolio of $165 million, that is nationwide, we fully expected this to happen.

In fact, we are reserving at a level of about 2.4%.

As we have gone in and we have tested the portfolio -- meaning when we have a bankruptcy, when we have a loss and we have gone in and we have tested that -- what we have determined is the metrics that we have been using are still very sound, still very solid and we think that our underwriting standards will hold us in good stead even through this period of turbulent waters and the recession.

We are certainly not burying our head relative to that portfolio, but I would remind you which I know I don't need to do that you know about it -- but we have been in this business since the mid 1960s.

The reason we have been able to maintain the loss ratio we believe in the low to mid 2s over a period of historical times is because that we don't just credit score, we in fact do underwrite.

And that has been a big part of our success.

Now I guess from there, I talked about the regions.

I have talked about the two niche pieces of the portfolio.

I would stop to see if you have anything else you would like us to expound on.

You provided good detail, but I want to transition that over to another comment you made in your prepared remarks regarding the provision in 2009.

I believe you said we should expect a provision in 2009 similar to the provision in 2008 excluding the special provision allocated to Northwest Arkansas in 2008.

Did I hear that correctly?

I think you heard it all, except I think the part that I may have mentioned is that if you were trying to anticipate what that provision might be in 2009, that in all likelihood you could take that 2008 number minus the special provision that took place in the fourth quarter of 2008 and that would be a number to look at.

Okay.

And that includes an assumption made by you guys that chargeoffs in the credit card portfolio will continue to increase throughout 2009; is that correct?

Will continue to what?

To increase in 2009 from current levels.

I think that the assumption would be that the provision would have taken into consideration that the credit card chargeoffs could move up as high as 2.2% to 2.4% from where they are right now at 2.02%.

Does that make sense?

Yes, that does.

Okay.

And if I could transition over to a little TARP discussion.

I believe you mentioned in your prepared remarks you will continue, you plan on taking the TARP capital, assuming that you can use that funds for M&A purposes.

Based on your discussions, is that still an assumption that you feel is fairly accurate -- that once you are eligible to receive the capital from your shareholders that that is something that you will take?

That's right, Matt.

I think we -- and we have certainly said publicly even in the news media that our plans relative to the use of funds for TARP would -- a big part of that would be believing that there would be some merger and acquisition opportunities along the way and that we want to position ourselves to be able to take a good hard look at that.

And we have provided the 60 day notice.

February 27th is the day that we would have our special meeting.

If that was approved, we would be able to draw down the TARP money and what we would like -- we don't like to say TARP, we like to say the CPP money, the capital purchase plan -- we would be able to draw that down, I think sometime between 7 and 10 days.

We think as early as a week.

After that.

So that would put it in the say the first week of March.

Now obviously, one of the things that we realize or we know in this process is that we do not have to draw it down, and probably the only thing that would keep us from drawing all of it down would be if there is some change relative to how you can use those dollars.

We are pretty comfortable and pretty confident that we will be okay in that respect.

I would also say that if we take those dollars down and we do not find an M&A opportunity, we feel like we another big piece of that is obviously having high levels of capital that we can continue to do what we have done very, very well, and that's continue to loan money.

One of the things those TARP dollars will allow us to do is continue to serve students throughout Arkansas.

As you know, we underwrite $50 million in student loans every year, and right now, our plans are to sell those to the government in September of next year.

But again, you having those TARP dollars gives you opportunities to -- if you wanted to do something with those would be to expand those activities, which I think is very, very important.

So M&A is a big part of it.

Certainly expanding and meeting loan demands in different areas including the student loans would also be an important use of it.

Okay.

That was helpful.

And as far as the margin outlook, you mentioned in your prepared remarks near term pressure.

Can you give us an idea of the rates of the CD that are maturing and rolling off of your books, and maybe the newer rates that you have out there right now being renewed?

And also the Federal Home Loan Bank or other forms of the funding, what their rates are of a security like that?

Well, the CDs that are maturing right now are probably in the 3.25% to 3.50% range -- the CDs that are currently maturing in our portfolio.

The problem on the deposit side is that outside of those CDs, when you look at the other deposits, I mean the other deposit accounts that we have, those are pretty much priced down to the floor that the market will allow, not only in our bank but probably most of the banks around.

And then on the CD side, while there is more of a rational -- there is more of a return to rational pricing -- that rational pricing still could range from 2.25% up to 3.25% depending on whether it is a community bank or a regional bank doing business here.

So the cost side is still pretty expensive when you can only invest your excess liquidity at a 50 basis points or so.

From the margin standpoint and the squeeze we are talking about, I think it can be summed up this way.

I think from the standpoint of the loan pipeline, while we are projecting a loan pipeline to approximate the same level as last year, a large portion of that comes into the student loan piece of that, which carries a lower net yield.

I think also, as with interest rates being at -- I can't even remember how many year lows but certainly beyond 50 years -- what we are also on the good side is we have got a floor on our floating rate loans, which is about 35% of our loans.

We have got a floor on the floating rate loans and I think about the bulk of everything has already gone as low as it is going to go there.

So on the loan side it is not as challenged as it is the security portfolio side, and in the securities portfolio, it is not the normal maturities that would be the calls.

If we have a significant level of called securities and then we start having to reinvest those, then those securities are coming off the books.

You can see our investment portfolio yield is about 5%.

But if they're coming off of that 5% or 4.5% and -- but based on calls and having to be reinvested, you are looking at [1.65 to 1.70] with a three month call.

That's not very exciting.

So that is where we see the real compression.

The calls may not all take place and it might work out a little bit better than we have projected.

So, we do see margin compression for that reason as far out as we can see in 2009.

But certainly we don't necessarily see that being at the same level of the Q4 '07 -- the Q4 '08 over Q4 '07, somewhere probably south of there.

Okay.

And my --

Would be a guess.

My final question, and I will hop off.

The student loans in 3Q '09 -- you still expect those to be sold -- are we still thinking about $130 million?

We would not sell that much.

We will have about -- Matt, we keep about $90 million in the portfolio.

We are holding over $50 million.

So we will end up somewhere between $130 million and $140 million in the portfolio.

But we will only be selling about $60 million of that.

The rest we will continue to hold because it has not gone into a payout.

The only thing that we can really sell are the things that we originated in '08 and '09.

We typically, Matt, originate about $50 million to $54 million a year.

Next year it will be -- we are projecting an increase probably at the $60 million to $65 million for the '08 to '09 school year, and as Mr.

May said, that's what we can sell in the third quarter of next year -- of '09.

Okay.

That's helpful.

Well, gentlemen, those are all of my questions.

Thank you for your color.

Well, Matt, thank you very much and appreciate your questions.

Thanks, Matt.

At this time, there are no further questions.

I will will turn the conference back over to you for additional or closing comments.

Well, thank you very much.

We appreciate it, appreciate you all taking time to be with us.

Hope you have a great day.

Thank you very much, ladies and gentlemen, for joining today's conference.

This does conclude your conference.

You may now disconnect.