Simmons First National Corp (SFNC) 2009 Q1 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Simmons first quarter earnings 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).

And now, I would now like to turn the call over to Mr.

David Garner.

Sir, go ahead.

Good afternoon.

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

We want to welcome to you our first 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 earning release issued this morning.

We will begin our discussion with prepared comments, and then we will entertain questions.

We have invited the analysts from investment firms that pride 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, unknown risks, and 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 our 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 conference call today.

In our press release that we issued earlier today, Simmons first reported first quarter 2009 earnings of $5.2 million, or $0.37 diluted EPS, compared to $0.35 diluted core EPS in Q1, 2008.

You will remember that Q1 2008 we reported $0.18 per share non-recurring item that was related to Visa Inc.

IPO.

As anticipated the decrease in core EPS was primarily attributable to an increase in the provision for loan losses, primarily in northwest Arkansas, a decrease in the premiums from the sale of student loans, and an increase in FDIC insurance.

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

On March 31, 2009, total assets were $2.9 billion, and stockholders equity was $293 million.

Our equity to asset ratio was a strong 9.9%, and our tangible common equity ratio was 8%.

The regulatory tier one capital ratio increased to 13.6%, and the total risk-based capital ratio increased to 14.9%.

Both ratios remained significantly above the well capitalized levels of 6% and 10% respectively, and rank in the 80th percentile or better in our peer group.

Obviously our Company remains well-positioned with strong capital.

However, since the national national economy continues to be under considerable stress, we continue to focus on building our capital base, until such time that we believe an economic recovery is in sight.

As you already know, Simmons First was one of the first banks to apply and be approved for the U.S.

Treasury Capital Purchase Program, or better than known as CPP.

As previously mentioned, while we have a very strong capital base, uncertainties about the depth and breadth of the current recession have compelled us to consider participation in the program.

That is exactly the original purpose of why the Treasury initiated the CPP.

We call it insurance.

Let me give you a brief update if I might.

In October, 2008, we applied and were approved for $60 million.

On February 27th, at a special shareholders meeting we were authorized to issue the preferred shares and common stock warrants required for CPP participation.

Our plans were to issue the shares under the CPP on March 27.

Because of the continued ambiguity resulting from changes being proposed, we have requested an extension of 60 days.

Now while the extension for a specific number of days was not approved, the Treasury has acknowledged that the request had merit because of the ambiguity and uncertainty regarding the ability to repay the funds at the time of our choosing.

It is the ability to exit the program that gives us the protection we need in case future changes are not in the best interests of our shareholders.

We have been told that procedures are being drafted, which would clarify the early pay out process by participants, and we expect some clarity in the next three to four weeks.

It is possible that we will request further extensions.

Regardless, any extension is positive because of the negative spread we will incur on the proceeds, and it provides us more time to monitor participation restrictions and the state of the economy.

Now let me talk a little bit about the net interest income for Q1, 2009.

It increased $601,000 or 2.6%, compared to Q1 2008.

The net interest margin for Q1 2009 declined 12 basis points to 3.68%, when compared to the same period last year.

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

When compared to the previous quarter, net interest margin decreased two basis points, primarily due to the seasonality of our loan portfolio, and increased cash flows from the investment portfolio, as a result of call bonds.

Based on the investment portfolio call projections, we now anticipate a flat to slight margin compression for the remainder of 2009.

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

Retrospectively, we have been very successful in that effort.

On a quarter over quarter basis, our non-time core deposits have grown $180 billion or 15%, while our time deposits decreased by $107 million.

During Q1 2008, we introduced a high yield investment account, which through Q1 2009 has generated approximately $156 million in new money.

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

Another strategic move toward building liquidity was to secure about $55 million in long-term funding from Federal Home Loan Bank borrowings in early 2008.

Through this process, while we slightly negatively impacted margins, we have been able to reduce our dependency on more costly time and public fund deposits, increase our liquidity, and develop some new customer relationships.

Non-interest income for Q1 '09 was $11.5 million, down approximately $3.5 million compared to the same period last year.

Q1 2008 non-interest income included $3 million of non-reoccurring gain from the mandatory partial redemption of the Company's equity interest in Visa, as a result of Visa's IPO.

Excluding this non-reoccurring gain, Q1 2009 non-interest income decreased by $560,000, or 4.7% from 2008.

Let me take a minute, if I might, to discuss additional items that impacted the non-interest income.

The first two are going to be pluses to the non-interest income, and the next two would be mitigating factors.

First, on the plus side, service charges on deposit accounts increased by $293,000 or 8.5% in Q1 2009, compared to Q1 2008, due primarily to an improvement in our fee structure and core deposit growth.

Concerning the second item, income on the sale of mortgage loans increased by $318,000 or a 44.1% compared to last year.

This improvement was primarily due to lower mortgage rate lending, certainly, and a much higher refinancing volume.

The other non-interest income items that have had a mitigating factor would be trust income, which decreased by $322,000, or 19.5% in Q1 2009, compared to Q1 2008.

Generally, trust fees are based on the market value of customer accounts.

Because of the depressed market values and the declines in the overall stock market, trust fees have declined accordingly.

Finally, premiums on the sale of student loans decreased by $624,000, and as we have discussed previously, this is primarily a timing issue.

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 are committed to serving the students of Arkansas by continuing to fund new loans with the expectations of holding them until Q3 2009.

At that time, we expect to sell loans originated and fully funded during the 2008, 2009 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 $75.00 per account.

Because of all the changes and uncertainty surrounding the Student Loan Program, let me provide a little guidance for the balance of the year.

Relative to Q2 2009, once again a timing issue, we estimate the premium income from student loans is a reduction of $507,000 compared to the same period in 2008.

Looking forward to the third quarter, we expect to record the entire annual premium on the sale of student loans now estimated at $2 million, up from our previous estimate of $1.6 million.

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

Currently there remains too many uncertainties concerning the rolls of government, secondary markets, and the private sector to make long-term decisions.

Moving on the to the expense category, non-interest expenses for Q1 2009 was $25.7 million, an increase of $2.5 million or 10.9% from the same period in 2008.

In order to get to a normalized expense, let me mention several unusual items that impacted the quarter.

The largest, a non-reoccurring item, is associated with the Visa litigation discussed in previous conference calls.

You will remember that during Q1 2008, we reversed a $1.2 million non-reoccurring expense item originally recorded in Q4 2007 related to the contingent liability associated with Visa, Inc.

litigation settlements.

A second significant driver in the non-interest expense variance is associated with deposit insurance expense of $533,000 in Q1 2009, an increase of $445,000, or five times the amount in Q1 2008.

As you might recall, 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.

By Q3 2008 the majority of these credits were exhausted.

Based on current FDIC insurance assessment rates, we estimate a $2.1 million full-year negative impact in 2009 versus 2008.

Additionally, on February 27, the FDIC announced a one-time 20 basis point special assessment for June 30, 2009.

Since the originally announced Chairman Bair has publicly discussed a possibility of a reduction to six basis points, we estimate the non-interest expense impact from the special assessment will range from $1.4 million to as high as $4.7 million, depending on the final special assessment rate.

A third item, during January 2009, we received notice from Visa and Master Card of a large nationwide breach in security at Heartland Payment Systems , a major payment transaction processing center in which approximately 57,000 of our debit and credit card were compromised.

As a result of the compromised cards, we suffered fraud losses of $125,000, and in an abundance of caution, we initiated significant card replacements at a cost of approximately $100,000.

We anticipate some recovery from our insurance, relative to the cost of card replacement.

Obviously this was a nationwide issue.

Finally, included in Q1 2009 are the fully loaded expenses associated with the Company's two new financial centers that were opened in Q1 2008.

When you exclude the impact of the previously mentioned items, non-interest expense increased by normalized 2.1%.

Now let me move to our loan portfolio.

As of March 31, 2009, we reported total loans of $1.9 billion, an increase of $75 million or 4.1%, compared to the same period a year ago.

The growth was primarily attributable to a 16.5% increase in the Consumer Loan portfolio, and a 1.6% increase in the Real Estate Loan portfolio.

The growth in consumer loans was primarily in the Student Loan portfolio.

The growth in the Real Estate Portfolio was entirely in single-family residential and commercial real estate loans.

Overall loan growth was somewhat mitigated by a 19% reduction in real estate construction and development loans, due to permanent financing of completed projects.

Like the rest of the industry, our loan pipeline remained 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 10.9% of the consolidated portfolio, and as we have mentioned before, we have no sub-prime assets, either in the Loan or Investment portfolio.

Now let me give a brief update on Credit Cards.

The portfolio's outstanding balance remained flat compared to Q1 2008.

This breaks the trends started in 2007, as we had seen quarter over quarter growth in credit card balances for nine consecutive quarters.

Even though outstanding balances remained flat, we continue to increase the number of net 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 that trend.

Although the account growth slowed during 2008, the positive trend has continued with the addition of over 3,200 net new accounts in Q1 2009.

Needless to say, this increase is significant when compared to all of 2008 net growth of 5,200 accounts.

Let me quickly say that we have not changed our underwriting standards, as reflected in our approval rate of approximately 20%.

As such we believe the increase in applications represents a movement from some of the larger credit card banks that have become much more aggressive in their interest rates, fee structure, and credit limits.

Although the general state of the national economy remains volatile, and despite the challenges in northwest Arkansas region, we continue to have relatively good asset quality.

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

At March 31, 2009, the allowance for loan losses equaled 1.28% of total loans and 124% of non-performing loans.

Non-performing assets as a percent of total assets were 80 basis points.

Non-performing loans as a percent of total loans were 1.03%.

While these ratios compare very favorably to the industry, they are up slightly from our historical level, primarily driven by student loans.

Now let me explain.

Since the Banking industry is no longer able to access the secondary market, and because the government program only purchases current year production, we are required to service loans that have converted to a pay out basis.

Historically, those loans would have been sold in the secondary market, thus requiring no servicing on the part of our banks.

Under existing rules the Department of Education will not purchase the pay out loans until they have exceeded a 270 day past due status.

As such, while they remain fully guaranteed, they will impact our non-performing asset ratio.

With this said, these ratios include approximately $2.7 million in government guaranteed student loans that became over 90 days past due during the quarter.

When these loans exceed 270 days past due, the Department of Education will repurchase them at 97% of principal and accrued interest.

Excluding these past-due student loans, the allowance for loan losses to non-performing loans was 144%, non-performing assets as a percent of total assets were 71 basis points, and non-performing loans as a percent of total loans were 89 basis points.

As you can see, while slightly elevated, we continued to enjoy good asset quality.

The annualized net charge off ratio for Q1 2009 was 73 basis points, up 23 basis points when compared to the fourth quarter.

Excluding credit cards, the annualized net charge off ratio was 56 basis points, compared to 36 basis points for the fourth quarter.

The preponderance of the charge-offs are associated with the challenges in northwest Arkansas, where we have been very aggressive with the identification, quantification, and resolution of the problems.

I will discuss this in more detail later in the presentation.

Concerning our Credit Cards, we have begun to see some pressure relative to the past dues and charge-offs.

However, our portfolio continues to compare very favorably to the industry.

Q1 2009 annualized net credit card charge-offs were 2.64%, an increase of 62 basis points from the previous quarter, yet still more than 600 basis points below the most recently published credit card charge-off industry average of 8.82%.

One of the real strengths that we have in our Credit Card portfolio is our geographic diversification, with no concentration in any other state other than Arkansas, where we have 50% of our portfolio, and that is good.

As you will remember from previous conference calls we expect that Credit Card charge-offs would gradually return to more historic levels in excess of 2%.

Needless to say, we are very conscious of the potential problems associated with high levels of unemployment, and we continue to reserve accordingly.

During Q1 2009, the provision for loan losses was $2.1 million, an increase of $671,000 from the same quarter in 2008.

The increase is a result of a special provision for the northwest Arkansas region, and additional provision for 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.

Let me take a minute to get more specific and reiterate a little of what we have previously said and what we continue to see in northwest Arkansas.

While bankruptcy and foreclosure filings associated with the residential real estate market in that region continue to be an issue, they appear to be slowing.

Likewise, it appears that the absorption rate in new home construction is beginning to share some positive science, primarily because new housing developments are at a standstill, and there continues to be growth in the population of northwest Arkansas.

There remains a large inventory of existing homes, which continues to put moderate pressure on the price.

As I understand, the commercial real estate absorption continues to be satisfactory.

The unemployment rate continues to be approximately 5.5%, and there is a general belief that there may be some return toward normalcy by the latter part of 2009 and early 2010.

Obviously that can change, and only time will tell.

Concerning our Company, and as we have stated previously, we have one of the most seasoned management teams in this market, and we have been very proactive in the identification and resolution of the problem assets, and they 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 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 northwest Arkansas region represented only 10.5% of our Consolidated portfolio.

Now to reiterate, we do believe that the northwest Arkansas economy will work through the challenges related to an over-built real estate market and will once again be one of Arkansas' most attractive markets.

We should continue to remember the influence of Wal-Mart, Tyson, J.B.

Hunt, and the University of Arkansas, remains a powerful attraction for new job growth.

The bottom line, quarter over quarter, we experienced moderate loan growth of 4.1%, margin compression of 12 basis points, increased provision expense in northwest Arkansas in Credit Cards, but good asset quality corporate-wide, compared to the industry, a continuation of relatively low Credit Card charge-offs, 2.64%, excellent growth in core deposits, 15%, and most importantly, strong capital of 9.9% equity to asset ratio.

Like the rest of the industry, we expect the remainder of 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 throughout the year.

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

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 it is primarily a rural state we have not and likely will not experience the same highs and lows that will challenge much of our nation.

However, we will not be lulled to sleep since, there is always some concern relative to a lag effect occurring 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 portfolios, and that quarterly estimates should always reflect this seasonality.

Now this concludes our prepared comments and we would like to now open the phone line 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

Thank you very much, sir.

(Operator Instructions).

Our first question comes from Matt Olney.

Your line is open, sir.

Hello, Matt.

Hi, guys, can you hear me?

We can.

Alright.

Good afternoon, thank you.

How are you doing?

Doing well.

As you can imagine most of my questions deal with the credit side.

Yes, sir.

As far as a charge-off that we saw in the first quarter, there were 73 bps.

That's higher than we've seen previously.

Was there any clean up there from previous quarters that we need to get rid of in the first quarter, or is a higher level somewhere around that a good run rate going forward?

No, it's not a good run rate going forward, and, Matt, good observation.

It is primarily related to clean up, and from that standpoint ,what I'm really saying is that on every one of those charge-offs or the preponderance of the charge-offs we had specific reserves that had already been identified and quantified.

We were waiting for events to happen.

In certain cases, the events happened so we went ahead and took the charge-offs.

In other cases the events did not happen and were still waiting, but we decided to go ahead and take the charge-offs and if there are recoveries to come they will come.

Okay.

So out of that $1.7 million of charge-offs that was in Real Estate the first quarter, it sounds like most of that or maybe the entire thing was in northwest Arkansas.

You're exactly right.

The bulk of that was northwest Arkansas.

And future losses in Real Estate most likely will also be in that market as well.

Is that right?

We hope - - yes, yes.

Okay.

As far as the reserve ratio, it seems like most of the industry is in a race to increase the reserve ratio, higher and higher.

So I was surprised to see your reserve ratio come down the first quarter.

Is this a reflection of the confidence in your portfolio, or is it more optimism in the Arkansas economy?

I think both.

I think first when you see the industry increase, if you look at it historically, you will see that our reserve ratio was higher than the industry, and I think what you have seen is the industry move not only to where we were but north of that, reflecting I think their levels of non-performings.

I think in our particular case, our levels of non-performings is what justifies where we are relative to that particular ratio.

Obviously our nonperformings, while they've ratcheted up a bit, they still are at very good levels.

And I think the other thing that you mentioned is certainly a good point.

As you know all of our assets are in Arkansas.

Our entire loan portfolio is Arkansas, except for the government guaranteed portion of the the Credit Cards.

Otherwise outside of the Credit Card piece all of the loans are in Arkansas.

And to date the Arkansas market again has not seen the same highs and lows that other parts of the country have, and so and especially when you look at it by region, our experience not only from the standpoint of our bank but also looking at what is happening in those regions, the other regions continue to perform very well.

So, as far as delinquencies or past dues, can you give us any detail what they did in first quarter and give us any commentary on that?

Let me start with the past dues and talk about it from a couple of different perspectives.

Our 30-day past dues are actually down from Q1 2008 at 88 basis points, to Q1 2009 at 78 basis points.

Likewise, they are down on a link quarter basis because the link quarter, I mean the fourth quarter I believe was up because of student loans.

And the Student Loan piece of it has to do with the pay out portion.

The guarantee is obviously still in place but you cannot fund that guarantee until you've gone 270 days past due.

So we are seeing a migration actually from 30 days to 60 days to 90 days, on out to the 270 day category.

So overall, we think our 30-day past dues are down slightly.

We know they are down, and we think when you normalize for the Student Loan piece of it they are also down slightly.

Okay.

Can you give us an idea of what your overall economic assumptions are, like unemployment rate?

What are you assuming when you are looking and forecasting some of your provisions and charge-offs going forward?

Well, let me say, I believe the Arkansas unemployment 6.7, 6.8, I'm not even sure exactly what that number is, but just looking at what the state numbers are, they're looking at that unemployment going up slightly.

I think the bigger issue that we are looking at right now is obviously the national unemployment rate, where it's 8.5%, and we are projecting the same thing that everybody else is projecting, and that is that in late 2009 or even in 2010 that number could be in the 10%, 10.5% range, and so we are looking at that as to how it might affect our Credit Card operation.

And so we are using that number on a national basis to see how we would want to reserve for our Credit Card piece of the franchise.

I think also from an Arkansas standpoint, while things have been a lot better here except for pockets, and we all know that there are pockets of challenges, we are wide awake to this issue of a lag effect.

It may not always be as good as it is right now.

But based on all of the reports that we are getting from our banks and each one of the six regions, we still feel pretty good about the projections for Arkansas for 2009.

Hey, Matt, this is Bob.

Also I think we've talked about this before, we've gone back on our Credit Card portfolio and stressed what happened in the 1991 recession, the 2001 recession, now everybody knows this is a lot time and a lot different economic times at this point, but when be did go back and stress test those times, we did see an increase in charge-offs, that it wasn't a significant increase over what we had previously before those recessionary periods.

Again we don't know where it's going to go at this point, but we are hopeful to stay on the lower end of that.

Bob, do you recall if those charge-off levels got above 3%?

They did not.

No, the highest charge-off levels were probably back in 2005 actually, when right before the bankruptcy reform there was a rush for those, and at that time, Matt, if you go back to October of 2005, we hit 3.14 for that one month, but for the year we averaged 2.94.

And most of that was a rush before the bankruptcy.

But you go back even back into 2001, you go back to 1991, and we were much, much lower than those numbers.

In fact I'm looking back here, in 2001 we maxed out probably at 2.1, 2.15 at that time.

Okay.

So if I take that and I see the charge-offs at first quarter, about 2.6, 2.7, decent sized jump from fourth quarter of about 2%, and that trajectory is pretty steep right there.

Is that concerning that it could exceed 3% and get that 3.5% and 4%, is that still on the table you think right now?

Yes, I think if you look at what we have done in our shock, it is possible that it would exceed 3%.

But let me take you back a lint about the 62 basis points increase on a linked quarter basis.

I think it was 2.02, 2.01 to 2.64.

One of the things is you had the balance decline, the denominator decrease, because of the seasonality that we would normally have.

So that's one thing that's going to factor into that.

But I think the other thing right now what we are projecting is that if we have, we are reserving at a level of about 2.7%, beginning the first, or Q1 2009, we are now projecting to reserve at a level of 3%.

And we've done a portion of that right now.

We are running about 2.74, 2.75 right now.

And then we will be making a slight increase in the provision going forward to take that to a 3% level.

So the reserve is very close to the annualized charge-off level in the first quarter.

Do we think those are going to remain very close going forward, or do you think you are going to increase the reserve ratio even if charge-offs don't increase that much?

I think at this point in time we are going to leave the provision increase in place to take it to a 3% level, and then we would adjust it again if we saw that the numbers dictated going higher.

I think that right now if you look at what's likely to be in April, the numbers are running right at the 2.64 level.

But I don't think, I think we are not going to change the provision down.

We are going to leave it there until we move it to the 3% level.

What we are saying is we would leave it at the 3% level unless it went higher than we would look at it at that time.

But right now even if it stays lower we would leave it at the 3% level.

Okay.

And what about as far as the - - ?

One other thing, when we go through this shock analysis, obviously this issue with the national economy and the unemployment rate and where all of this going relative to the economy, nobody knows, but as Bob said what we simply tried to do is we've tried to take history and let history teach us as much as we can.

No place in history have we seen a charge-off ratio again higher than the 3% level.

However, we are prepared to move up if we were to need to do that.

We've actually shopped it when we were looking at the CPP program, significantly higher than that even though we have no belief that we will reach those levels.

What about the credit card balance?

You said you expect that to continue to slightly decline over the next few quarters, or do you think that could uptick again at some point?

It could uptick again.

I think probably we are going to say flat to slightly up.

Now let me explain that.

First, is that we always have the seasonality factors, but when you normalize off the seasonality factors, what we've seen already, as we mentioned a moment ago, that the first quarter net growth was about 3,500 or so new accounts compared to 5,200 accounts for the entire year last year.

That in itself would indicate that we are going to see a growth in the portfolio.

But I think what we are also seeing is that a very significant slow down in spending, that the consumer is truly moving to the side line, we are seeing that in our volume.

So when you factor in the consumer not spending what they have in the past several years, and you also factor in the net new increase in account, that's why we are saying it would be flat to slightly up.

During the first quarter, we've actually had 22,500 applications, and one of the things that we have done is we've looked at this and we say, well, what does that mean?

The first thing is that we think that the reason that we are seeing those applications is very simple, and that is some of the very largest institutions are doing a lot of things that you have read about and that you have seen that, relative to fees and interest rates and everything else, that are causing them to lose some of their better accounts, and the reason we know their the better accounts are because we are still following our underwriting procedures as reflected in our approval rate of less than 20%.

That is good.

We are getting a fresh look at these accounts; from a asset quality standpoint you actually could not ask for anything better.

You know, you are getting new applications.

You can see very quickly that most of them, not all of them but most of them, are quality applications based on the way they have number one, paid in the past; number two, based on the number of accounts that they have.

So we are getting a fresh look at those which is very good.

The second thing is, when you consider our portfolio and how long we have been in the business, and sort of because of our high level of conservative underwriting, we haven't had the opportunity to look at a lot of new account.

So this is good because it sort of balances out.

We've got a major aging in our existing portfolio.

Now aging from the standpoint of history is good.

Aging from the standpoint of the people actually getting older and their buying habits changing is not always good.

So this gives us the best of both worlds going forward.

More than you asked but I think it's very significant.

Well, you gave some good data there.

Over 22,000 applications, it sounds like your approval rate was lower in the first quarter than it has historically been.

Is that correct?

About 14% versus about 18% to 20%.

So how do you feel about the credit card portfolio being half Arkansas, half diversified across the country, with the recent new accounts?

Would that move further outside of Arkansas?

Say that again, I apologize.

Well, I think you've said in the past that half the accounts or half the balance of the borrowers in Arkansas, but with these new applicants, I'm just assuming many of them are out of state relative to your historical levels.

I don't know, but that would be a good assumption that you are going to have more probably coming in from outside of Arkansas than you are in Arkansas, but not necessarily.

But we do have 43% of our existing portfolio that is in Arkansas.

And so that ratio, again without me knowing this factually, my guess is in your net new applications we're probably getting a larger number from out of the state than we are in the state.

So that will drive that ratio up, but from the standpoint of total, Arkansas will still be, like we're at 43% now, so it's still going to be pretty high.

Okay.

Just shifting gears, I think that was all my questions on the Credit Card and on the Credit side, but I saw a big jump in the "Available for Sale" other securities from $91 million to $185 million.

What was going on there?

As you know we have lots of liquidity.

And what we have done is we have an account, we have a large portion of that overnight money in AIM investment.

And that primarily represents a change from money coming I guess out of what was in the Government Money Market account into the AIM account.

And, I'm sorry, AIM is the Government Money Market account.

So it would really be a re-class.

Yeah, it's just what's classified on the financials.

It's the same, liquid money.

It's not really security.

So it's more of a money market instrument?

Yes.

With no maturity?

Yes.

But it is a dollar in, dollar out government fund.

Government granting.

And no penalty for taking out as well?

No, no penalty for taking out.

Overnight money basically.

Okay.

As far as the tax rate, it looked lower in the quarter.

Is that because we saw an uptick in the Municipal Security portfolio in the first quarter?

You are going to see an uptick in the municipal portfolio; also our income was lower than the first quarter of last year, and especially when you compare it with the gain that we had last year you are going to see that we have a large Muni portfolio, and if our income goes down in a quarter like this one, in comparison, you are going to see a lower tax percent, as a percent of total income.

Okay.

So as far as the Munis, though, those are all longer duration and none of those are expected to pay off any time soon?

Not outside of normal maturities.

We do have calls in some of those that would pay off sooner.

Okay.

But not outside normal.

Most of those calls are in the agencies.

Tommy you addressed TARP in your prepared remarks, and I guess you guys are looking for further clarification on the early pay out process.

Is there anything else besides that that you need clarification on, I think last time we talked about M&A had to be an important part of the equation for you guys to participate.

Is that still true?

Well, we would love to use the dollars on the M&A side, and obviously you know that that has changed a little bit, that there needs to be clarification there that we know that the dollars cannot be used to buy a good bank, that the dollars could only be used to buy a challenged institution.

But as we have said in our various press releases, the only reason we are going to participate in what we call, we don't talk in terms of TARP, we emphasize the capital purchase plan being different than the original TARP.

And so we are looking at it relative to the same thing that the government initially said they were going to use it for, and that is to take the strongest banks in the country and make them stronger, so in case this recession is deeper and longer than they expect, those institutions will be there to help pull us out of that challenge.

And so we call that insurance.

And bottom line is, that's what we are willing to use it for, and so I guess with that said, the only clarification from the government we need right now is we know there's legislation that allows us to pay out at any time of our choosing subject to regulatory approval.

We know the regulatory approval is going to be based on the strength of the Company.

The problem is there are not rules and regulations written to allow that to happen.

So we are not willing to move forward until we know absolutely that we can repay this, and so we are waiting on the repayment term sheet.

I think the second thing that we are waiting on has nothing to do with the government, and that is that every day, as you well know, there's a change going on, and with that change that creates more questions.

So we are going to try it.

Once we get to the point that we are satisfied that we can go in and we can exit at a time of our choosing subject to again, the strength of the Company, then the only decision left is the economy, such that we feel like we need to move forward with that.

That's where we are.

We've been able to get an extension at this point in time.

The extension is until the rules relative to the exit term sheet are complete.

We estimate that to be sometime prior to the first of May, but we don't know that.

So we will wait on that, and in the meantime we will continue to watch the economy and watch other changes that are going on in Washington to decide whether or not we do want to move forward with it.

Does that answer your question, Matt?

It does, but I just want to clarify that as long as you request extensions and don't drawdown on the funds, then there's no cost to you?

That's exactly right.

That's exactly right.

And, Matt, also up until the time we draw funds we can choose to participate or not.

We are under no obligation to participate up until that time.

Okay.

It's very possible that the government will come back with the term sheet and then they will say it is time to move forward, you've got 30 days to make your decision.

And in that 30 days, we are going to have to decide whether or not the conditions in the economy warrant us moving forward with it, because we have already said that the real reason that we are even thinking about participating is the insurance piece of this.

Okay.

Yeah.

That's very clear.

Thank you.

Thank you.

As far as the update on the Student Loans, that's good news, I guess, that we have an expected increase in the amount you will be able to sell in the third quarter, and from $1.6 million gain to a $2 million gain.

Is that just from an increased number of loans or did something actually change in the terms of the agreement of the sale?

It is volume, number of loans.

Okay.

I will say also that we have been, like a lot of other people, very proactive, in letting our senators and congressional representatives understand the concerns that we have with the administration budget that proposes to eliminate the FFELP part of the business and basically take the private sector out.

There is some reason for encouragement.

I don't know exactly what all that means, but I do believe there is a lot of activity going on relative to re-evaluating that, at least from the standpoint of the, not necessarily the administration, but certainly from the standpoint of Congress.

When you say re-evaluate, are you focusing on resolution for the window in 2009, or are you speaking of beyond that?

No, I'm thinking long-term.

Okay.

Long-term.

We are set for '09.

Basically the private sector, what I'm talking about more than anything else, is the private sector continuing to be the provider of the FFELP program, and long-term is what we are most interested in right now.

The short term window, the short term piece, as far as the 2008, 2009 originated loans, is absolutely in place.

In fact it's in place through 2010.

So there will also be a one-month window in 3Q, 2010?

Right.

Correct.

Will there be increased costs associated with this process in the third quarter as a result?

No, it would just be the income.

The costs we've accumulated during the course of the year are just our normal servicing.

We have that built in.

Our $2 million will come as the premium on the sale of those loans in the third quarter.

Okay.

Well, guys, we've gone over all my questions and many more.

I appreciate your time this afternoon.

Great quarter.

Thanks.

Matt, thank you very much.

We appreciate it.

Okay.

We want to thank everybody.

Gentlemen, I have no further questions in queue.

I will turn it back over to you for any closing remarks.

We really don't have any remarks, just thank everybody for being here.

Have a great day.

This now concludes your Simmons first quarter earnings call.

You may now disconnect.