Simmons First National Corp (SFNC) 2009 Q3 法說會逐字稿

Good afternoon.

At this time, I would like to welcome everyone to the Simmons First National third-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).

David Garner, you may begin your conference.

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

We want to welcome you to our third-quarter earnings teleconference and Webcast.

Joining me today are Tommy May, Chief Executive Officer; David Bartlett, Chief Operating Officer; and Bob Fehlman, 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'll 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 on this conference call are in a listen-only mode.

I would remind you of the special cautionary notice regarding forward-looking statements and that certain matters discussed in this presentation may constitute forward-looking statements and may involve certain known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from our current expectations, performance or achievements.

Additional information concerning these factors can be found in the closing paragraphs of our press release and in our Form 10K.

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

Thank you, David, and welcome, everyone, to our third-quarter conference call.

In our press release issued earlier today, Simmons First National reported record third-quarter 2009 earnings of $7.7 million or $0.54 diluted EPS compared to $0.46 diluted EPS in Q3 2008, which is an increase of 17.4%.

The earnings increase was primarily driven by improvements in non-interest income and net interest margins.

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

For the nine-month period ended September 30, 2009, net income was $18.4 million or $1.30 diluted earnings per share compared to $21.3 million or $1.51 per share for the same period in 2008.

Now, it is important to note that the EPS decrease of $0.21 is primarily attributable to $0.18 of previously discussed non-reoccurring items that were related to the Visa, Inc.

IPO in Q2 2008 and the $0.06 impact of the industrywide special assessment by the FDIC in Q2 2009.

Normalizing for these items, our nine-month EPS increased by $0.03.

On September 30, 2009, total assets were $2.9 billion, and stockholders' equity was $298 million.

Our equity-to-asset ratio was a strong 10.2%, and our tangible common equity ratio was 8.3%.

The regulatory tier 1 capital ratio was 13.9%, and the total risk-based capital ratio was 15.1%.

Both of these regulatory ratios remain 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 economy remains under stress, we continue to focus on building our capital base.

Likewise, we continue to believe that there will be some acquisition opportunities over the next 24-month period.

Thus, having excess capital will allow us to take advantage of those opportunities.

Net interest income for Q3 2009 increased $1 million or 4.3% compared to Q3 2008.

Net interest margin for Q3 2009 increased 13 basis points to 3.97% when compared to the same period last year.

We are very pleased with the increase in our margins, which is primarily driven by the decrease in cost of funds.

We continue to see more rational competitive pricing on the deposits and loans.

Looking forward to the remainder of the year, we expect flat to slight margin improvement.

Non interest income for Q3 2009 was $15 million, an increase of $3.7 million or 32.6% compared to the same period last year.

Now, let me take a few minutes to discuss the items that positively impacted our non interest income.

First is the premiums on the sale of student loans increased by $2 million, which is actually a timing issue, as we have previously discussed.

During Q3 2009, we sold the remaining loans originated during the 2008-2009 school year.

We continue to originate loans for the 2009-2010 school year, which we will sell during Q3 2010.

Pending legislation would serve to eliminate the private sector from the student loan origination business.

We will continue to evaluate both the profitability and the viability of this strategic business unit as we go forward.

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

Service charges on deposit accounts represent the second item, and they increased by $754,000 in Q3 2009 compared to Q3 2008.

And this was due primarily to an improvement in our fee structure and core deposit growth.

The third item, income on the sale of mortgage loans, increased by $203,000 or 34.1% compared to last year.

This improvement was primarily due to lower mortgage rates leading to a significant increase in residential refinancing volumes.

Our Q3 mortgage production volume was $40 million, 50% more than the same period last year.

Obviously, like the rest of the industry, the largest increase comes from refis.

The fourth and final item was income from investment banking.

It increased by $467,000 compared to last year.

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

Non interest income was negatively impacted by a decrease in trust income of some $247,000 or 15.4% in Q3 2009, compared to the same period last year.

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

Because of depressed market values and declines in the overall stock market when compared to Q3 2008, trust fees declined accordingly.

Moving on to the expense category, non interest expense for Q3 2009 was $26.3 million, which is an increase of $1.9 million or 7.6% from the same period in 2008.

This includes a $600,000 increase in deposit insurance.

Excluding the impact of the FDIC assessment, non interest expense increased by a respectable 5.3%.

Even the 5.3% increase is higher than our normal run rate.

Thus, let me take a minute to discuss several items.

First would be other real estate in foreclosures.

This expense increased by $100,000, as we continue to aggressively liquidate nonperforming assets.

The second item would be marketing expense, which increased by $210,000.

Most of this increase was in the area of advertising and donations, and much of the increase is timing-related.

Our overall marketing expense remains within our budget guidelines.

The third item would be credit card expense, which increased by $98,000 as a result of increased transaction volume, which we view as very positive.

The fourth item, professional fees, increased by $320,000.

During Q3 2009, we had three expenses that were related to proactive initiatives for our corporation.

First, we expensed legal fees associated with the CPP approval process, which we subsequently opted not to participate in.

And the filing of our $175 million shelf registration -- the shelf registration will enable us to access the equity market faster and more efficiently if the need or opportunity presents itself.

Secondly, as a part of our M&A strategic initiatives, we contracted with the consultant to help us prepare for potential opportunities related to FDIC-assisted transactions.

Lastly, during Q3 we began to expense costs associated with our ongoing efficiency project, which will produce expense savings and revenue enhancements in 2010 and beyond.

The remainder of the increase in non-interest expense is our normal modest 2.5% growth.

Let me move to our loan portfolio.

As of September 30, 2009, we reported total loans of $1.9 billion, a decrease of $11.2 million or 0.6%., compared to the same period a year ago.

Our consumer loan portfolio actually increased $22.8 million or 5.7%, driven primarily by a $12.6 million increase in credit cards.

The real estate loan portfolio decreased by $9.4 million with the migration from C&D to the CRE and one-to-four family portfolios, due to permanent financing of completed projects.

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

Our construction and development loans represent only 10% of the total portfolio.

CRE loans, excluding C&D, represent 31% of our loan portfolio, both of which compare very favorably to our peers.

Lastly, as previously mentioned, we have no subprime assets in either the loan or investment portfolios.

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

As a matter of information, we sold approximately $74 million of our student loans in the third quarter and we anticipate funding an additional $10 million through our normal funding process during Q4 2009.

Now let me give a brief update on credit cards.

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

During the first nine months of 2009, we added nearly 13,000 net new accounts compared to 4,000 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%.

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 somewhat unsettled, and despite the challenges in the Northwest Arkansas region, we continued to have relatively good asset quality.

At September 30, 2009 the allowance for loan losses equals 1.34% of total loans and 135% of nonperforming loans.

Nonperforming assets as a percent of total assets were 86 basis points.

Nonperforming loans as a percent of total loans were 99 basis points.

These ratios compare very favorably to the industry, are relatively flat from the prior quarter and remain affected by student loans.

Now let me explain.

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

Historically, those student loans would have been sold in the secondary market and would never have hit the past due.

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

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

With this said, these ratios include approximately $2.3 million of government-guaranteed student loans over 90 days past due.

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

Excluding these past-due loans, the allowance for loan losses to nonperforming loans was 153%.

Nonperforming assets as a percent of total assets were 79 basis points, and nonperforming loans as a percent of total loans were 88 basis points.

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

In fact, our nonperforming loan and asset ratios rank us in the 90th percentile within our peer group.

The annualized net charge-off ratio for Q3 2009 was 40 basis points, down 4 basis points when compared to the second quarter.

Excluding credit cards, the annualized net charge-off ratio was 19 basis points compared to 22 for the second quarter.

We remain aggressive in the identification, quantification and resolution of problem loans.

The credit card industry continues to see pressure relative to the past dues and charge-offs.

However, our portfolio continues to compare very favorably to the industry, as our Q3 2009 annualized net credit card charge-offs to total loans decreased to 2.58% compared to 2.83% during the previous quarter and is now almost 900 basis points below the most recently published credit card charge-off industry average of 11.5%.

One of the real strengths that we have in our credit card portfolio is our geographic diversification.

With no concentration in any state other than Arkansas, where we have approximately 40% of our portfolio, we are very conscious of the potential problems associated with the high level of unemployment, and we continue to reserve accordingly.

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

During Q3 2009, the provision for loan losses was $2.8 million, an increase of $575,000 from the same quarter in 2008.

The increase is primarily the result of additional provisions for credit card portfolio.

Bottom line, quarter over quarter we experienced margin expansion of 13 basis points, increased provision expense for credit cards with good asset quality corporate-wide compared to the industry, a continuation of relatively low credit card charge-offs of 2.58%, exceptional non-interest income growth of 32.6%, or 14.4% when normalized for the premiums on the sale of student loans, normalized non interest expense growth of 5.3% and, most importantly, strong capital with an 8.3% tangible common equity 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 National is well-positioned, based on the strength of our capital, asset quality and liquidity, to deal with the challenges and opportunities that we face for the remainder of the year.

Our conservative culture has enabled us to engage in banking for 106 years.

We consistently 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 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 National experiences seasonality in our quarterly earnings, due to our agricultural lending, student loan and credit card portfolios; and quarterly estimates should always reflect this seasonality.

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

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

(Operator Instructions).

Matt Olney of Stephens Inc.

-- impressive in 3Q.

With what you are seeing on the past-due trend, it sounds like you still expect charge-offs to be south of the 3% range, near term.

Is that fair?

I think that's exactly right.

I think, looking at the past dues and looking at the migration that we have seen, our past-due trends are still very good, past dues less than 90 days on the credit cards are at a level of about 1.3%, 1.4%.

The charge-off ratio this quarter was actually down.

If I remember correctly, Q2 was at about 275, and the numbers were down close to 257, 258 on this quarter.

So, when you take the happenings of the last quarter and you couple that with the past-due trend, we hope to continue to see that level.

As you know, we are continuing to reserve at a 3% level, though.

Well, charge-offs below 3% for credit cards is impressive, so congrats on that.

In your prepared remarks, I believe you mentioned something about an expense initiative.

I'm not sure if I caught that right or not, but could you give us more details on that?

Well, we did.

And what we basically said is that, as we go back to, actually, the latter part of 2007 and we started projecting out our three-year strategic plan, there's several things that we were looking at.

Obviously, we were looking at turbulence waters in front of us relative to our pipeline, and we also were looking at our efficiency ratio.

And we felt like that this would be an opportune time for us to begin to do some work in that particular area.

As you well know, the efficiency ratio has been impacted, at least to some degree, by the number of locations that we have compared to our relative size.

Likewise, it has been impacted by the model that we have a multi-bank holding company and the acquisitions that we have done since 1995.

So what we did is that we brought in two different groups to help us look at the way we were doing business.

One, basically, is called our process initiatives -- in other words, the way we are actually doing business.

Are there some ways that we can do it better that will be more efficient to both the customer, our associates and to the bottom line?

Those process initiatives, we have been working on throughout the latter part of 2008 and so far into 2009.

And we have seen some fairly significant expense savings from those that you already see in the statement.

And some of that is still working its way through.

The second piece of that that we have been working on is that we brought in a consultant that helped us look at some of the contracts that we have had over a period of years and help us better understand how we can possibly renegotiate those contracts and get more bang for our buck.

And that has been both -- well, primarily in the back-office area.

So I think we are very pleased with what we are doing there, and so that's where we are.

Now, we obviously haven't quantified in our discussions what some of those initiatives are going to generate as far as expense savings or revenue production.

And the reason that we have not quantified them at this point in time is that much of that is still in process, much of the work that is being done both with the consultant and with our management teams are still being determined.

And some of it will come about in 2010, and some will come about in 2011.

As we get to the point of putting forth the execution of that and being able to quantify that, we will be discussing those in our meetings.

So it sounds like the true run rate of the potential cost saves we may not see for several quarters and maybe even into 2011.

Is that fair to say?

I think that's very accurate.

Bob, do you want to add to that?

I think you summarized it very well.

But I would just say the first, as he was talking about on the contracts, we'd say that's more using our corporate purchasing power, even though we operate as [a] separate banks, as using it as a corporate purchasing power.

And then the process improvement is that we've been in that process for the last few months.

That's the part that will take us time to implement.

We've got a lot of findings that we are working through, and the best way to implement those -- and so that part would be 2010 through 2011 before we start realizing some of the benefits.

But we do have some of the expense for the consultant purposes that we will be expensing over the quarters coming up.

I don't know if David Bartlett is there.

But if he is, could we hear some more details about some performance of charters in Arkansas and maybe, specifically, the Northwest Arkansas operation [or minus] the exposure in that market?

David is not able to be here today.

He's attending a Board meeting of one of our affiliates, which is one of our scheduled meetings.

So let me see if I can't take a shot at it.

I think, from a regional standpoint we will save Northwest Arkansas for last.

I think we are, again, very pleased with the performance that we've seen from all the regions of Arkansas, both from the standpoint of how the economies are doing in those particular regions relative to the national economy, but also based on how our particular banks are doing in those areas.

Southeast Arkansas, northeast Arkansas and eastern -- the central part of the state on the eastern side, we have agri lending.

And those institutions have done very well performance-wise over the last two or three years.

And they are going to continue to do well this year, even though the agri lending side is a little bit more challenged right now than it was six weeks ago.

Six weeks ago, I think everybody would have said we've had huge bumper crops, the farmers are going to have a profiteer like we have not had in a long time.

The rain has continued to fall and has created a problem relative to completing the growing season in certain areas and harvesting.

I think that what we are seeing -- and that will affect three of our institutions -- the lead bank, the bank in Jonesboro and the bank in Lake Village.

I think what we are now seeing is that we are looking at clear skies for the next week or so.

We think that that will go a long way towards harvesting.

And if you look at the rice and beans, which are probably now the dominant crops in all three regions, while the yield would be affected a little bit, quality will be affected a little bit, the price is high and the input cost is low.

So, while we are not going to get what the farmers had all hoped for and the bankers, in the bumper crop we are still going to have -- we are very hopeful to have a crop similar to what we did last year.

And the farmers last year had a very low level of carryover.

So despite there are some challenges there, we think it's still going to be a year like last year and the performance of all three of those regions and our banks and those regions is very good.

I would say the same thing is true in the other banks that we have in south central Arkansas and then in the central Arkansas area, Searcy and Hot Springs.

Again, all the performance levels are good -- some challenges but still doing well.

Northwest Arkansas , we will save the biggest challenged area for last.

And I guess the best way I can summarize that would be to say that, sort of like the national economy where we've been talking about a bottoming of the recession and a recovery, I think in Northwest Arkansas we are seeing some light at the end of the tunnel.

I'm not sure everything has bottomed yet.

But the big question will be that, once it does bottom, then how long will it take to finish, or get the absorption where it needs to be and start the growth cycle back?

I think we're feeling a little bit better in Northwest Arkansas as far as the region.

But it's still probably 18 to 24 months out.

I think, as far as our institution, there again, it's a well-capitalized bank, exceptional management team there.

They are dealing with the challenges proactively, and that's exactly what we would want them to do.

Did I tell you more than you

No.

That was a great update.

I appreciate that, and those were all my questions.

I appreciate you answering them.

And congrats again on the record quarter.

[Derek Hewitt], KBW.

Great quarter.

Could you guys talk a little bit about your growth-impaired loans?

I know you guys don't provide a watch list, but we use use that as our watch list and when do you see growth-impaired loans stabilizing?

I know if you look at it quarter over quarter, last quarter it increased about 50%.

Well, let me tell you that I really, truly believe that when you look at the report and you look at it from a historical perspective, it probably doesn't tell the whole story.

And by that, what I'm saying, that we all -- banks have all been working through FASB 114 and 5; and, as we have worked through 114 and 5 and the reclassifications that go with all that, we probably, over the last 18 to 24 months, are just getting the call reports right.

So where it's showing a whole lot of growth, it's probably a little bit artificial.

In other words, we didn't get those recorded like we probably should have, as soon as we probably should have.

I would tell you that, I think as has been pointed out, that when you look at the total level of those particular loans, that they still are below the [peer].

And we obviously have analyzed each one of those, and we feel like that we are very comfortable there.

Okay.

Could you -- I know it's a little early for --

Let me -- hold just a second.

Bob, do you want to add anything to that?

What I would say also on that, it's really, as Mr.

May was saying, more a change in the methodology and getting it to where we needed to be.

There has been no change on the asset quality side; it's not really a change there.

But it's more, again, getting a little bit more in line with the 5 and 114.

And we are a little slower with our eight banks, all of them coming up to being in full -- under the FAS 5 and 114.

And I know it's a little early to ask for a call report data.

But do you guys currently have updated TDRs?

I believe it was roughly about $7.7 million last quarter.

Or if you don't have the information currently available, do you have just rough estimates?

The troubled debt restructure -- I don't think we have that number right now?

But I don't believe we are expecting much of a change from prior quarter.

Again, I don't believe we have that number with us.

It is not finished yet.

We're still in process on that number.

I'm not aware of any additions to that.

Could you guys talk about bit about the increase in yield on the securities portfolio?

Yes.

Let me say a word about that, and then I'll ask Bob and David to jump in, if they would like to.

Probably the yield most represents, again, the reclassification.

For a period of time, we had a significant amount of our excess liquidity -- $100 million of our liquidity, I should say, not all excess -- that was put into the AIM fun.

We had moved it out of the Federal Reserve into the AIM fund.

And that particular AIM fund was giving us a yield of a few basis points higher than we otherwise would have gotten.

The AIM fund is classified in the securities portfolio, so basically it was pulling down the yield.

And you can see that yield, if you will look at Q1, I think, or maybe, I think if you look at Q1 and then you look at Q2, and that difference there -- and I don't have the basis points in front of me, but it's fairly significant -- that is primarily driven by the AIM fund.

And then we began to look at the Federal Reserve and what the Federal Reserve was paying.

And I'm looking at the investment securities now.

If you look at March of 2009, we were at about a 428 investment yield, dropping to 371 in Q2 2009 and then back up to 421 in Q3 2009.

Again, the movement into the AIM fund, put it in the securities portfolio, the basis points that we were getting there at the time was -- well, it was a little bit more than 17 basis points now, I think, wasn't it?

Yes, when we pulled it out.

When we put it in, it was a little bit more than that.

But recently, it's been about 17 basis points.

And then we could get -- Federal Reserve, we get 25 basis points.

And again, we were running anywhere from $60 million to $100 million in there before deciding exactly where we were going to place it.

And so we took it, then, out of the AIM fund and put it into the Federal Reserve, where we got probably about a 7 or 8 basis point pickup, and that's what you see here.

And if you would normalize that June for that AIM fund, that would put it at about a 4.25 yield for securities, which is pretty much in line.

Just for information purposes, as you know, we are a multi-bank holding company.

We have some state charters, and we have some national charters.

And the state charters obviously did not have access into the Fed.

So what we simply did is we consolidated all of that as being invested through Simmons First National Bank.

In last quarter's 10-Q, you guys mentioned that you had roughly, I believe, $930 million of CDs, of which about 89% were going to be re-pricing within the year.

How far are we through that process right now?

How far are we through the repricing process?

Yes.

I'm going to, probably, guess probably 40% to 50% through the repricing process for the end of the year, if that's what you're asking.

Is that what you're asking?

Yes, roughly, yes.

Okay, let me just say this.

If you look at our margin and you look at our margin improvement of 13 basis points, that you will see the bulk of that margin improvement came from the cost of funds side.

So we have done a relatively good job of repricing those deposits, even to the point that we have been willing to accept some shrinking of the balance sheet.

The challenge we have found is that they are not willing to leave.

There is a safe haven issue right now, and a lot of depositors are just simply keeping those dollars there.

So we probably see a few more opportunities as we continue to look at repricing.

The rates we are right now seem to be very competitive in the market.

There does not seem to be any irrational pricing in the market.

But we do believe there will be some basis point pickup as we continue to price whatever is left over between now and the end of the year.

I think we are showing, right now, the next 90 days on the CD side we have about $308 million.

So, where I told you there was probably 50% of that have been processed, it's probably more like 60% or 70% has already been repriced.

Also, our CD rates, our time deposits on a link quarter basis improved 29 basis points.

A lot of that was the benefit of our margin going up.

And if you look at the balances on a linked quarter basis, our time deposits dropped by maybe about $18 million, $19 million.

And part of that, as Mr.

May said, was by design to lower the cost of funds.

And we reaped the benefit of that in our margin.

Going to the margin, maybe in a normalized environment, who knows when that's going to be -- maybe two to five years out, where do you guys think you'll end up, just roughly?

Well, we'd like to know that answer also.

I would tell you over the last three months, as we've improved this quarter over last quarter, we saw July, August and September, each month -- each quarter -- I'm sorry, again, each month improving by about 5 to 7 basis points.

We think, one, we are obviously getting close to the bottom on the cost of funds side.

As the earning assets side goes up, we believe we will be able to benefit on that side.

Our target has always been over the 4% level.

But with the squeeze and the compression on in the industry, the higher likelihood is it's going to be between the 3.75 and the 4 level, on a go-forward basis.

Now, that's just hard to judge where the industry is going to fall out when rates start rising and competition in the liquidity changes and all that.

But that would be what I would guess right now.

Derek, I think there was a very good question.

And what I would say when I said Bob is that we've been having that debate amongst ourselves in, number one, trying to define normal.

Number two is trying to figure out that when this interest rate movements starts, obviously, the big question of how fast and how far the depth and breadth of it.

And probably that's the one issue that, more than anything else, we can model this and we can make some reasonably good guesstimates during normal times.

But getting from where we are to those normal times, trying to make those projections for our model becomes very, very difficult.

And I think we all agree that we are not going to see margins, maybe ever again, like we have seen in the past.

But we are certainly -- we are certainly still hopeful that we would see them a little bit north of 4.

But we think it's going to be a challenge getting there for the industry.

I would also point out our seasonality.

When you are modeling the first quarter, there's a significant drop in the margin because of our seasonality with [agri] loans paying off and credit card stopping in the third quarter.

So it's hard to look at us on a linked quarter basis on margin when you get into seasonality.

So it's very critical in that first quarter.

The last time we were at the 4 level, I guess, was in January of 2008; there was one little bump up in another time.

There are no further questions at this time.

I turn the call back over to the presenters.

Well, thank all of you for being here.

And we look forward to next quarter.

Have a great day.

This concludes today's conference call.

You may now disconnect.