Simmons First National Corp (SFNC) 2009 Q2 法說會逐字稿

Good afternoon.

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

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

David Garner, you may begin your conference.

Good afternoon.

I am 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 call are in a listen-only mode.

I would remind you of the special cautionary notice regarding forward-looking statements, in 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 on our Form 10-K.

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

Thank you, David.

Welcome, everyone, to our second-quarter conference call.

In our press release issued earlier today, Simmons First reported second-quarter 2009 earnings of $5.5 million or $0.39 diluted EPS, compared to $0.42 diluted EPS in Q2 '08.

The earnings decrease was primarily driven by a $2.4 million increase in FDIC insurance, with a significant portion being the special assessment impacting the entire industry.

The after-tax impact was $1.5 million or $0.11 EPS.

Otherwise, our Q2 earnings exceeded our expectations, both on a linked and a quarter-over-quarter basis.

For the six-month period ended June 30, 2009, net income was $10.7 million, or $0.76 diluted earnings per share, compared to $14.8 million, or $1.05 per share for the same period in 2008.

I would like to remind you that you will remember that, during Q1 2008, we recorded earnings of $0.18 per share for non-recurring items related to the Visa Inc.

IPO.

Normalizing for the 2008 Visa items and the 2009 FDIC insurance increases, our six-month earnings were flat.

On June 30, 2009, total assets were $2.9 billion and stockholders equity was $292 million.

Our equity-to-asset ratio was a strong 10.1%, and our tangible common equity ratio was 8.1%.

The regulatory Tier 1 Capital ratio was 13.6%, and the total risk-based capital ratio was 14.8%.

Both of these regulatory ratios remain significantly above the well-capitalized levels of 6% and 10%, respectively, and rank in the 75th percentile or better in our peer group.

Obviously, our company remains well positioned with strong capital.

However, since the national economy remains under considerable stress, we continue to focus on building our capital bases.

As announced last week, Simmons First will not participate in the US Treasury's Capital Purchase Program, or CPP.

As you will recall, Simmons First was the 32nd bank in the country to be approved with funding to be at $60 million.

While we were among the first approved, funding was delayed by our request for extensions.

After careful consideration and analysis, we believe there has been considerable improvement in the economic indicators since October of 2008.

The Arkansas economy is doing well, relative to many other geographic regions in our country, and Simmons First continues to have strong asset quality, liquidity and capital.

Accordingly, we do not believe participation in the CPP is necessary nor in the best interest of our shareholders.

While we have chosen not to participate, we do believe the CPP has served the original purpose of the treasury very well.

Net interest income for Q2 '09 increased $625,000 or 2.7% compared to Q2 '08.

Net interest margin for Q2 '09 increased 4 basis points to 3.71% when compared to the same period last year.

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

Non-interest income for Q2 '09 was $13.3 million, an increase of approximately $1.6 million or 13.6% compared to the same period last year.

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

First, service charges on deposit accounts increased by $881,000, or 23.9%, in Q2 '09 compared to Q2 '08 due primarily to an improvement in our fee structure and core deposit growth.

The second item would be the income on the sale of the mortgage loans increased by $604,000, or 79.5%, compared to last year.

This improvement was primarily due to lower mortgage rate lending [to] a significant increase in residential refinancing volume.

Our Q2 mortgage production volume was $72 million, double from the same period last year.

Obviously, the largest increase comes from refis but existing purchases were up approximately 3%.

The third item would be income from investment banking operations.

That increased by $477,000 or some 240% compared to last year.

This improvement was primarily due to a volume-driven revenue increase in our data bank operation.

Non-interest income was negatively impacted by two items.

First was trust income, which decreased by $227,000 or 15.7% in Q2 '09 compared to Q2 '08.

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

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

Premiums on the sale of student loans also have decreased by some $221,000, which is actually a timing issue.

During Q3 '09, we expect to sell the remaining loans originated during the '08/'09 school year.

Looking to the third quarter, we expect to record the remaining premium on the sale of approximately $60 million in student loans, the premium now estimated to be at $1.8 million.

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

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

Moving on to the expense category, non-interest expense for Q2 '09 was $27 million, an increase of $2.8 million or 11.4% from the same period 2008.

This includes the previously mentioned $2.4 million increase in deposit insurance.

Excluding the impact of the FDIC assessment, non-interest expense increased by a modest 1.3%.

Looking forward, we estimate the deposit insurance expense run rate to be approximately $750,000 per quarter, not including possible additional special assessments.

Let me move to our loan portfolio.

As of June 30, 2009, we reported total loans of $1.9 billion, an increase of $35 million or 1.8% compared to the same period a year ago.

The growth was attributable to a 20.9% increase in consumer loans, primarily in the student loan portfolio.

Student loans increased by $64.6 million.

Our credit card portfolio increased by $6.8 million.

Other consumer loans increased by $6.7 million.

The real estate loan portfolio was relatively flat with a migration from CND to CRE and 1-to-4 family portfolios, due to permanent financing of completed projects.

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 10.2% of the total portfolio, and as we have mentioned before, we have no subprime assets in either the loan or investment portfolios.

Like the rest of the industry, our loan pipeline remains very soft.

As a matter of information, we expect to sell approximately $60 million of our student loans in September, and we anticipate funding an additional $30 million through our normal funding process during Q3 '09.

Now, let me give a brief update on credit cards.

We continue to see an increase in the number of new accounts.

During the first six months of 2009, we have added 9400 net new accounts.

This compares to 3500 during the same period last year.

Let me remind you that we have not changed our underwriting standards, as reflected in our approval rate of approximately 16% in our credit card application flow.

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

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

At June 30, 2009, the allowance for loan losses equaled 1.29% of total loans at 126% of nonperforming loans.

Nonperforming assets as a percent of total assets were 0.86%.

Nonperforming loans as a percent of total loans were 1.02%.

While these ratios compare very favorably to the industry, they are up slightly from prior periods and somewhat affected by student loans.

Let me explain.

With the turbulence in the secondary market and the positive government program only purchases current year production, we are required to service loans that have converted to a payout basis.

Historically, those loans would have been sold in the secondary market.

Under existing rules, the Department of Education will not purchase the payout loans until they have exceeded 270 days past-due status.

As such, while they remain fully guaranteed, they will impact our nonperforming asset ratio.

With this said, these ratios include approximately $2.4 million in government guaranteed student loans over 90 days past due.

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

Excluding these past due loans, the allowance for loan losses to nonperforming loans was 143%; nonperforming assets as a percent of total assets were 0.78%; and the nonperforming loans as a percent of total loans were at 90 basis points.

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

The annualized net charge-off ratio for Q2 '09 was 44 basis points, down 29 basis points when compared to the first quarter.

Excluding credit cards, the annualized net charge-off ratio was 0.22%, or 22 basis points, compared to 56 basis points for the first quarter.

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

Concerning our credit cards, we continue to see some pressure relative to the past-dues and charge-offs.

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

Q2 '09 annualized net credit card charge-offs were 2.83% compared to 2.64% during the previous quarter, and now more than 750 basis points below the most recently published credit card charge-off industry average of 10.62%.

One of the real strengths that we have in our credit card portfolio is our geographic diversification with no concentrations in any state other than Arkansas, where we have 45% of our portfolio, which is good.

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

We are currently reserving at a level of 3% for our credit card portfolio.

During Q2 '09, the provision for loan losses was $2.6 million, an increase of $408,000 from the same quarter in 2008.

The increase is the result of a special provision for the Northwest Arkansas region and additional provisions for the credit card portfolio.

Bottom line, quarter-over-quarter, we experienced slight margin expansion of 4 basis points, increased provision expense for Northwest Arkansas in credit cards, but good asset quality corporate-wide compared to the industry, and continuation of relatively low credit card charge-offs at 2.83%, exceptional non-interest income growth of 13.6%, modest normalized non-interest expense growth of 1.3% and most importantly, strong capital with a 10.1% 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 106 years.

We rank in the upper quartile of our national peer group relative to the 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 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.

Now, this concludes our prepared comments.

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

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

Thank you.

(Operator Instructions).

Matt Olney.

Good afternoon.

Great quarter.

I think your prepared remarks answered a lot of my questions, but I have a few here I want to go over.

As far as the securities portfolio, it looked like there was some movement into the held-to-maturity out of available of sale, along with some minor securities gains.

What was the strategy behind some of those movements?

Matt, that's a good question.

If I recall, probably six months ago, we were moving towards 75% in our AFS and 25% in the HTM.

That's where we've been moving in the last three or four years.

What we have done is that we have decided, with the interest rates as low as they are and certainly with the expectations that interest rates will move up over the next two years and looking at our high levels of liquidity, that we don't need those dollars in AFS.

We know when the interest rates go up that that's going to have a mark to market issue.

If we are all looking at capital growth or capital preservations, it was just a strategic decision relative to that.

The liquidity actually makes that all possible and we have -- like you said, we have been relatively successful in making those moves because we have a, as you well know, a high level of short-term maturities as well as a high level of costs.

Okay, that's helpful.

As far as the credit, it looked very good in Q2.

The reserve ratio was relatively flat.

I think you said in the past that you don't target the reserves alone; you look at reserves NPLs.

I think the bogey you talked about before has been 150 on reserves to NPLs and we are about there in Q2.

Is that still a fair bogey that you guys look at?

If so, what is the outlook for the reserves going forward?

I think probably we are running about 126 or 127 right now, and as our denominator has grown somewhat with the credit card operation, then a lower level is more acceptable -- but even more so with this big increase in our student loan portfolio, which is carrying about $70 million more than normal, and that being a government guarantee, then obviously we don't think we would need that same ratio.

As those loans are sold off in September, you'll see a little bit more of a movement in that particular direction.

Did that answer your question?

Yes, that's helpful.

Can you give us any more of an update on what you're seeing in Northwest Arkansas in terms of maybe your loans in particular and then the overall, broader market?

I would tell you that -- and I've got Mr.

Bartlett here and I will let him add on.

I would tell you that we continue to see a challenge in Northwest Arkansas.

But we continue to deal with it aggressively.

I think we are starting to see some improvements in the market, but it has still got a long way to go.

If you go beyond Northwest Arkansas into the other regions of Arkansas, where we have a presence, they continue to fare very, very well in all categories.

Needless to say, there are some challenges there.

We are seeing some asset quality issues but very, very minor.

David, do you have anything to add on Northwest Arkansas?

I would have to tell you, in general, I think just the economic conditions -- I don't see the depth getting worse; I see the breadth getting wider.

A few more of the support companies, some of the things that have historically not been affected are starting to get brought into the economic challenge.

I agree with what Mr.

May said; I think we are still two years out.

I think David is right on.

Probably a couple of years out, there's going to be some cleanup in that timeframe.

To expect any more than that is probably burying your head in the sand, which we don't do.

But our people are dealing with it very effectively.

As you can see when we make a special provision, we are not beyond making special provisions on a quarterly basis to be aggressive -- to allow them to be aggressive in this identification/quantification process.

I know David meets with them regularly, monthly, going through that.

I would add one thing as far as the broader scope.

Needless to say, our credit card operations fall into that broader scope, and as we have reported, we are up a little bit to about a 2.84% or 2.83% charge-off ratio industry -- as compared to the industry of 10.6%.

You know, you can feel pretty good about that, but again I'm not worried about the industry.

I am more interested in our portfolio.

I think we are very positive about where we are, especially when you consider we are reserving at a 3% level.

In fact, we are at a 3% level.

As we mentioned in our prepared remarks, we have I think last -- at the end of June, we increased our provisions lightly to even add to that reserve.

We continue to grow the credit card portfolio.

As I have mentioned to others, you know, when you hear that, that might create little chill bumps up your spine under normal situations.

But we are not a normal credit card bank.

What we are seeing is, so far year-to-date, we've had a 9400 net new accounts compared to 3400 net new accounts this time last year.

As we have said in our prepared remarks, the bulk of those have been we are very comfortable are coming from some of the much larger credit card companies that have gone through a process of very aggressively increasing interest rates and fees, and it has created some anxiety.

We've gotten the benefit of that.

Quite honestly, the average score, FICO score, on those are running somewhere above 720.

So I think we feel very good about the growth we are getting, not only in the quality of it, but we feel very good that the quality of it is adding to our existing portfolio that is strong in quality but creating some diversification age-wise and otherwise.

So I think we see it as a positive.

Only time will tell, but that would be the other part as far as the scope of the credit situation.

So, staying with that credit card theme, what's the early read on the charge-off outlook next quarter?

How are the past-dues looking?

Are you still saying it will around the 2.80% level going forward?

I would tell you I am not sure about the past-due numbers in June, in June versus the previous three months.

But what I can tell you is that the charge-off ratios have only elevated.

For example, in April, the level was 2.74%, and then there was a decent jump to 2.92% in May, and it remained pretty much the same at 2.93% -- I'm sorry, 2.83% in June.

So it went from 2.74% to 2.92%, back down to 2.83%.

We have seen an increase in bankruptcy filing but the number has held very well at that.

So I guess, from a historical perspective, you know, we would guess that probably we are still going to be between that 2.80% and 3% range in the next quarter.

When you look at what's happening, relative to the national unemployment and elevating above the 10% range, I would not be totally shocked to see it go a little bit more than that.

But if it does, we will reserve accordingly.

Bob has something, I think.

One other number, just you asked a little bit on delinquencies.

Our total credit card past dues, they were about 140 at first quarter, and they are about 129 at the end of June 30.

So we actually saw a slight improvement.

We don't believe that's a trend that it's an improvement but for us it's a key that there wasn't just a big uptick in that number.

So I guess the answer to your question would be we would not be surprised to see it in the 2.80% range, but likewise we wouldn't be surprised to see it where we have it reserved at the 3% range.

I think you said in the past, if the charge-off level does go to the 3% range, then you would increase your provision accordingly at that time.

Is that fair?

That's right.

I would point out one other thing, Matt.

In the past-due piece of it, that little blip that we saw from 2.92% to 2.83% probably has a little bit to do with the denominator going up a few basis points.

I think, again, your assessment is right on, that we are going to be very proactive relative to the trending of the charge-offs.

Okay.

Then I guess the last question on the credit, maybe David Bartlett could give some more comments on what are you seeing in credit outside of Northwest Arkansas, if there are any other markets of concern that have arisen over the last few weeks or months.

David Bartlett; That's a good question, Matt.

We've seen a slight uptick in some markets where we've historically had outstanding credit.

One of those has been our Hot Springs market.

Because of the size of that bank, we've got one or two loans that have gotten past the 90-day and put on nonaccrual that will be cleaned up by the end of this quarter.

South still remains very, very strong in asset quality.

Northeast Arkansas still remains very strong.

So I'm going to tell you, outside of Northwest Arkansas and what Mr.

May has talked about with some of our issues here at SFNB and the student loan portfolio creating some increase, the rest of the state still looks pretty strong in my opinion.

That's good news.

Some of your Arkansas peers, public banks, have talked about improved pricing power on the loan side.

Is that something you guys are focusing on in terms of improving your loan yields as some of these loans come up for renewal?

Yes, I think so.

I think we're, you know, we are all very conscious and sensitive to not only the margin but we are equally as conscious and sensitive to risk pricing.

The truth of the matter is that the risk is different today than it is at other times and it carries with it increased reserves.

Thus, it should carry with it making sure that you're getting the loan pricing right.

So yes, I think I would agree with that assessment, that we are being very conscious of looking at risk pricing versus opportunity pricing, I think is what I would say.

We're going to look at relationships.

If we have really good relationships on the deposit side that gives us the yield, we will give them the benefit of the loan pricing.

If we don't have the relationship, then I think we are going to be more aggressive in getting a higher price relative to the loan.

We might not have done that in the past because competition might have kept us from doing that.

But I think we've all learned a little bit in that process.

I think another thing is that there comes a point in the institution at which the rate shouldn't go below a certain point.

And we have our -- Glenn Rambin, the President of Lead Bank, and David Bartlett have worked together and come up with a pricing model that basically has a floor of 5%.

We believe anything below that is just simply not where it ought to be.

So we are in fact using some of those things in our pricing structure.

What about as far as capital levels?

Your capital is very strong.

(technical difficulty) been in quite some time.

What are your thoughts on your comfort range, where you want your ratios to be, and what ratios you look at and what are your near-term thoughts about deploying that capital?

Well, obviously, we are at 10.1 equity-to-assets ratio, we are at 8.1 tangible ratios.

Obviously, from a business model standpoint, those are very important to us.

From a regulatory standpoint, we are significantly higher than the regulatory maximums.

I mean (inaudible) excuse me (multiple speakers) regulatory well capitalized and I don't have those numbers immediately in front of me.

But I can tell you we are very constable with those.

Now, what do we mean with comfort?

Well, we obviously believe those capital levels are more than sufficient to allow us to manage normal growth.

We believe they are more than sufficient to allow us to manage this company during these turbulent times.

That is exactly why we opted not to go ahead and draw down the CPP money.

Going forward, as opportunities are created -- and we believe they will be created -- we still are very interested in finding merger partners.

Obviously, if we were to find the right partner in the right location, at the right time, with the right culture, then that common equity would possibly not be sufficient to do what we would want to do there.

So we are constantly in our planning process thinking about what, when and where relative to making sure that we do have sufficient resources to handle that merger when and where it happens.

On the regulatory side, you know, we are just in very, very good shape -- 933 on the tier 1 leverage.

They put it in front of me; I didn't just all of a sudden remember it, obviously -- 933 on the tier 1 leverage, that is regulatory 5; tier 1 risk-based regulatory at 6; we are at 1358, and total risk-base at 10; we are at a total of 1484.

So again, strong capital more than capable of sustaining any growth that we have in the immediate near future, more than sufficient to enable us to continue to manage through these turbulent times, which is the reason we did not decide to go ahead with the CPP money, and then I think certainly more than sufficient to meet the expectations of our various regulators.

I think, from a strategic standpoint going forward though, we are going to, again, be looking very carefully to see if and when and at what time we would want to add to the common primarily based on merger opportunities.

Bob or David?

All right, guys, those are my questions.

Congrats on the great quarter and I think you guys have a great outlook.

Thank you very much.

(Operator Instructions).

At this time, there are no further questions.

Amanda, thank you very much.

Have a good day.

Thank you.

This concludes today's conference call.

You may now disconnect.