Simmons First National Corp (SFNC) 2010 Q1 法說會逐字稿

Good afternoon.

My name is Chris and I'll be your conference operator today.

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

Mr.

Garner, you may begin your conference.

Good afternoon.

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

We want to welcome you to 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, 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 institutional investors and 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 and that certain matters discussed in this presentation may constitute forward-looking statements and may involve certain known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from our current expectations, performance or achievements.

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

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

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

In our press release issued earlier today, Simmons First reported first-quarter 2010 earnings of $5 million which was down $280,000 or 5.4% from the same quarter last year.

As expected, due to our equity offering in November, our first-quarter diluted EPS was $0.29 compared to $0.37 diluted EPS in Q1 2009.

As previously reported, during the fourth quarter, we completed a $75 million secondary stock offering.

While the impact of this offering was diluted to EPS by approximately $0.05 in Q1, the excess capital positions us to take advantage of unprecedented acquisition opportunities through FDIC-assisted transactions of failed banks.

Let me take a moment to give you an update.

First, we have considerable experience acquiring and integrating traditional bank acquisitions which will be important in executing our FDIC-assisted transactions.

Secondly, we've prepared our action plan and trained our associates to be ready for the acquisition and the integration process.

Next, we have been approved by the FDIC to review potential banks up to the size of $2 billion and our target area is an approximate 325 mile radius of Central Arkansas which obviously includes the contiguous state of Arkansas.

In 2010 there's only been one opportunity that met our requirements.

We participated in due diligence, however, the bid process was canceled by the FDIC.

We will continue to actively pursue the right opportunities that meet our strategic plan regarding mergers and acquisitions.

As we have said, our focus is on but not limited to banks with assets ranging from $200 million to $300 million.

Again, while the offering is dilutive in the short term, we fully expect for it to be accretive as we complete acquisitions over the next 12 to 18 month time frame.

As with our history, we will be very deliberate and disciplined in these acquisition opportunities.

On March 31, 2010 total assets were $3.1 billion and stockholders equity was $373 million, both representing significant increases.

Our equity to asset ratio was a strong 12.1% and our tangible common equity ratio was 10.3%.

The regulatory Tier 1 capital was 18.7 and the total risk-based capital ratio was 20%.

Both of these regulatory ratios remain significantly above the well-capitalized levels of 6% and 10% respectively and range in the 97th percentile of our peer group.

Now, concerning earnings, the net interest income for Q1 2010 increased $1 million or 4.4% compared to Q1 2009.

Net interest margin for Q1 2010 increased 3 basis points to 3.71% when compared to the same period last year.

On a linked quarter basis, our margin decreased 6 basis points which was driven primarily by the seasonality in our own portfolio.

Remember, our first quarter is historically our lowest due to seasonality.

With that said, we continued to see rational competitive pricing on deposits and loans, but unfortunately, loan demand remains very weak.

As such, looking to the remainder of 2010, we expect a relatively flat margin until interest rates begin to increase.

Then we're positioned for significant margin improvement.

Non-interest income for Q1 2010 was $12.2 million, an increase of $741,000 or 6.5% compared to the same period last year.

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

First, service charges on deposit accounts increased by $574,000 in Q1 2010 compared to Q1 2009 due primarily to an improvement in our fee structure and core deposit growth.

The next item, credit card fees, increased $524,000 or 16.6% on a quarter-over-quarter basis.

This increase was due to a higher volume of credit and debit card transactions.

Third, income from investment banking increased by $194,000 compared to the same period last year.

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

In contrast, non-interest income was negatively impacted by the decrease in the income on the sale of mortgage loans by some $436,000 compared to the same period last year.

The smaller pipeline is obviously a result of a combination of higher interest rates, the winding down of the first-time homeowners program, a drying up of refi's and the recession in general.

Moving onto the expense category.

Non-interest expense for Q1 2010 was $26.8 million, an increase of $1.1 million or 4.4% from the same period in 2009.

Let me take a minute to briefly discuss several items.

First, our FDIC deposit insurance increased $422,000 or 79% from last year.

This increase is due to our increase in deposits, an increase in the FDIC assessment rate and the exhausting of our one-time credit.

The second item, credit card expense, increased by $137,000 as a result of increased transaction volume which we continue to view as a very positive.

The third item, professional fees, related to our ongoing efficiency project, increased by some $130,000.

Later, we will give an update on projected revenue enhancements and expense savings from this particular initiative.

Let me move to our loan portfolio.

As of March 31, 2010 we reported total loans of $1.9 billion, a decrease of $67.9 million or 3.6% compared to the same period one year ago.

Our consumer loan portfolio increased $21.9 million or 5% driven primarily by increases in credit cards and student loans.

Transversely, the real estate loan portfolio decreased by $52.1 million, including a $35.6 million decrease in the C&D portfolio.

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 9.4% of the total portfolio.

CRE loans, excluding C&D, represent 32% of our loan portfolio, both of which compare very favorably to our peers.

As I have previously said, like the rest of our industry, our overall loan pipeline remains very soft.

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

Although we're still adding net new accounts, the growth rate of the new accounts has slowed significantly.

During Q1 2010, we added 650 net new accounts compared to 3200 in Q1 2009.

You will recall our previous conversations have noted that a significant portion of our growth was coming as a result of the large credit card issuers changing terms, conditions and rates in an effort to shrink their portfolios during this recessionary cycle.

Apparently, that process has run its course and many of those same institutions are again becoming much more competitive.

Let me remind you that we have not changed our underwriting standards, although our approval rate has increased slightly to a level of approximately 22%.

As expected, we continue to see some pressure on our credit card charge-offs.

However, we continue to have exceptional credit card asset quality, which I'll discuss shortly.

Now, let me get on my soapbox relative to student loans for just a few seconds.

As you have heard, the administration and Congress have made the decision to eliminate the private sector from providing student loans.

At year-end student loans represented approximately 6% of our loan portfolio, but contributed only about $500,000 to our profit.

The profit margin was severely impacted in 2007 with the Higher Education Act.

With that act, the government took most of the interest the banks were receiving.

While the students are paying 6.8% on the loans, the banks are receiving around 1.74% which means the government is already receiving the difference of 5% or better.

At this point, we do not see any likelihood that the government will change its decision.

Simmons First has been in the student loan business since 1966 and we believe that the banking industry has been very efficient in serving the students and the schools of Arkansas.

As I mentioned, at this point it appears that the banking industry will no longer be a provider of student loans after June 30, 2010.

While the direct profits are negligible, the indirect relationships of serving the universities and the students will be a significant loss to our Company and the banking industry.

Likewise, I truly believe that the universities and the students of Arkansas will be negatively impacted over the next several years.

Before I get off my soapbox, let me say that we are extremely disappointed that the administration and Congress have chosen to eliminate the private sector by providing student loans.

We, like many other banks, have provided efficient and timely service to our universities and students.

Yet the government believes it can do it more efficiently and at a significantly reduced cost.

When one looks at the overall profit contribution of that business unit to bank earnings, one must question how the government is going to do it more efficiently and at a lower cost.

My personal belief is that universities and students once again are going to be negatively impacted by this decision.

Likewise, my belief is if the government ultimately comes to grips with the reality of their decision, it will be too late to turn back because the banking industry will have effectively dismantled the infrastructure and will be unable to take the business back where it belongs.

I've been in banking for 38 years and I have never seen an occasion where the government has taken any project and proven it can be more efficient in the delivery of that service than the private sector.

In my opinion, these decisions were made for all the wrong reasons.

Going forward, we will develop our strategy of exiting the student loan business and will be looking for a meaningful and profitable use of the freed up resources.

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

However, as expected, we continue to see some deterioration in our real estate portfolio primarily but not limited just to Northwest Arkansas.

At March 31, 2010 the allowance for loan losses equaled 1.35% of total loans and approximately 161% of non-performing loans.

Non-performing assets as a percent of total assets were 110 basis points, relatively unchanged from Q4 2009.

Non-performing loans as a percent of total loans decreased from 135 basis points to 83 basis points as approximately $9.6 million in non-performing loans migrated into OREO.

As mentioned earlier, while these ratios compare favorably to the industry and our peer group, they are higher than our internal target levels.

While our level of non-performings is flat on a linked quarter basis, we have seen a positive change, if there is such a thing as a positive change, in the mix of the non-performing assets.

More specifically, the increase in OREO was primarily attributable to the acceptance of a deed in lieu of foreclosure for an $8 million motel loan which was previously on non-accrual.

The motel is continuing operations through the efforts of a management company and that company will soon be actively marketing the property.

We continue to have relatively good asset quality.

In fact, our non-performing asset ratio puts us in the 87% percentile within our peer group based on December 31 [tier] versus our March 31 actual.

During Q1 2010 the provision for loan losses was $3.2 million, an increase of $461,000 on a linked quarter basis.

The annualized net charge-off ratio of Q1 2010 was 70 basis points, down 5 basis points when compared to the fourth quarter.

Excluding credit cards, the annualized net charge-off ratio was 0.48% compared to 0.57% for the fourth quarter.

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

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

However, our portfolio continues to compare very favorably to the industry as our Q1 2010 annualized net credit card charge-offs to total loans was 2.71% compared to 2.61% during the full-year 2009.

Our loss ratio continues to be more than 800 basis points, below the most recently published credit card charge-offs industry average of over 11%.

One of the real strengths that we have in our credit card portfolio is our geographic diversification, with no concentrations of over 7% in any state other than Arkansas where we have approximately 40% of our portfolio.

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

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

Bottom line, quarter over quarter, we experienced margin expansion of 3 basis points; relatively good asset quality compared to the industry, a continuation of relatively low credit card charge-offs of 2.71%, non-interest income growth of 6.5%, non-interest expense growth of 4.4%; and most importantly, an extremely strong capital base with a 10.3% tangible common equity ratio.

Like the rest of the industry, we expect 2010 to be another year of 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 may face in the coming 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 estate, 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.

Before we move into the Q&A session, let me give you an update on our inefficiency and branch right-sizing initiative.

As previously reported, we hired a consultant in 2009 to review revenue enhancements, process improvements and branch staffing levels.

The project is nearing completion and we're beginning to implement the recommendations.

In our last conference call, we said that we would give guidance in Q1 on the projected impacts to the bottom line.

At this point, we project a total benefit from the efficiency initiative to be approximately $5 million annually to pretax income.

We estimate that one-third of this benefit will be in the form of revenue enhancements with the remainder in non-interest expense savings.

We have assured our associates no one will lose their job as a result of this initiative.

Instead, those positions impacted will be eliminated through attrition.

We will not recognize the full $5 million annual benefit until 2012.

We expect to achieve the benefits in increments of about 20% or $1 million in 2010, 60% or $3 million in 2011; and again, $5 million in 2012 and beyond.

Concerning our branch right-sizing initiative, after much deliberation and analysis, in March we announced the decision to close or consolidate nine branches in June of 2010; primarily smaller branches in rural areas.

We believe most of the customers will be absorbed into other Simmons locations in close proximity to the closed branches.

When complete, we will have 75 branches, still one of the best footprints in Arkansas.

We project non-interest expense savings of approximately $900,000 annually and hope to achieve 40% of that benefit in 2010 beginning in the third and fourth quarters.

Like the efficiency initiatives, reductions will be through attrition and the associates at the affected branches will be assigned to other locations.

Associated with the closings, we will have a one-time, non-recurring charge of $0.02 to $0.03 EPS in Q2 2010.

It is important to note that our branch right-sizing initiative has been underway for some time.

Over the last three years, we have added numerous new branch locations, we have closed some and we have relocated others.

The current announcement is a continuation of our effort to manage our product delivery system in the most efficient manner possible.

In closing, we remind our listeners that Simmons First 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.

Now, this concludes our prepared comments and we would like to now open the phone line for questions from our analysts and institutional investors.

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, Stephens Inc.

I think we all appreciate the color you gave us on the efficiency planning.

That's great news and we're excited about that.

Can you give us some idea, of that $5 million pretax income run rate, is that based off a run rate of 2008 or when should we base that off of?

2010 would be your total (multiple speakers)

I'm not quite sure what you're asking but we're expecting 2010 to achieve about $1 million of that; next year in 2011, about $3 million and then we will be going $5 million thereafter each year.

So about $0.035 in, about $0.07 (multiple speakers) in 2011.

About $0.18 total.

So you get 3.5, then you pick up 7 plus which gets you to the 10 and then you get to the 18 in year 2012.

If you were looking at a baseline of run rates, if you took 2009 and normalized that plus your normal growth that you would have in non-interest expense of 2.5 to 3%, that would be your run rate going forward.

And can you give us an idea of now that you've announced this, was it within your original expectations or was just maybe more than you were originally expecting or less?

Can you kind of frame it up for us in terms of what your expectations were originally?

I think it's within our original expectations.

As you remember, in the process improvement, what we said is we have about 300 recommendations that were coming out of the group.

And as we sat down and evaluated those, obviously some of them we knew on the front end that we were going to take off the table.

So, everything we left on the table after we went through that analysis, I think the numbers came in right on top of our expectations.

And also keep in mind, that it goes in line with our philosophy of business and our conservative nature and also the -- implementing this under our attrition model also will take us a little bit more time normally it might take.

To kind of expound on that, the attrition model that Bob is talking about as you know, it is our culture that when we do something like this, we don't simply cut and release.

What we try to do is to make sure that every associate that would be impacted from this process will continue to have a job with Simmons First.

Well, obviously, we've committed that to them.

In a recession, you don't have the turnover levels that you might have in other growth periods, so it might take a little bit longer.

So when you look at the pickup that we're getting in 2010 versus 2011 and then carry it all the way out to 2012, that truly is a part of that culture of making sure that we handle this through attrition.

And one more point also is that $5 million, we estimate about one third of that is on the revenue side, two thirds on the expense side and we think the revenue will come in sooner in 2010 and the expenses -- some in the end of 2010 and then fully in 2011 and 2012.

That's great.

Switching gears over on the margin, I know, Tommy, you said most of that compression in Q1 was from seasonality.

Was there any compression from the excess liquidity?

And if so, can you kind of quantify how much that would be?

Yes.

I think from the standpoint of just looking at the total margins, from the total margin standpoint of 371, if you take the $70 million net equity, that's about 7 basis points relative to that margin.

So, if we didn't have that impact, it would be about 3.78.

Then when you look at what we have said in the past relative to how important that we think excess liquidity is during these turbulent times, and you look at our balance sheet, you can see that we probably have another $150 million on top of the $70 million in the excess liquidity which is about 25 basis points.

So, if you adjust the 371 for the impact of the equity, it goes to 378.

If you then adjust for the cost of carrying the excess, it then goes to about 403.

It's fully our intentions on the equity piece is to put that to work within our model and within the guidance that we've given over the next 12 to 18 months in FDIC-assisted transactions which obviously is what will turn that.

As far as the excess, the other excess liquidity, we believe that we can strengthen the balance sheet and be very comfortable, another $75 million to $80 million at this point.

So that would then pick up about 12 basis points.

So, we've begun a program to make sure we're looking at all the deposits that we have, whether it happens to fall in the core, but primarily in the CDs, especially in the public funds, looking for non-relationships.

And where we have those non-relationships, we've been fairly aggressive in that repricing.

We've already seen some shrinking in the public fund sector, but quite honestly, even with the rate reductions that we've done, we just picked up cost of funds improvements.

We've not really seen any shrinking at all, which I think goes back to this quality -- like quality issue right now.

So, we're working on that but that's where we are.

Great and last question, getting back to the student loan portfolio, any thoughts there on how you are going to replace those loans going forward?

You've got some other great niches that other banks don't have on the agricultural loans and credit cards.

Could you grow those bigger or is that not really the focus right now?

I think that's a good question and the straight-out answer is we have not made a decision.

We've looked at several options in that we know at this point in time that we're basically going to be out of the student loan business come June 30 of 2010, which in effect means you have about $90 million in resources that you can do something with.

We obviously do believe that we can expand the niches that we have and you said it very well.

I can't improve upon that, that would be certainly the agri and the credit card piece of that and both of those will be considered.

Likewise, I think we all find ourselves in a position today not knowing where reform is going to roll out.

If there's anything we know, it's that the government whether it's the fed or the administration or Congress, wants to see more business loans and smaller business loans to create jobs and so forth.

So, we really have not been as big a player in the SBA market as we might could be.

So I think we'll probably look at that particular area.

And then I would say there are probably a couple of niches that we don't have that other banks have that we have studied.

But all I can say there is that we have studied them.

We have not made a decision yet, where to go there.

Great.

Thanks, guys; appreciate the color.

Michael Shermer, Raymond James.

You spoke about bidding on FDIC-assisted transactions.

I was just wondering in the next couple of quarters here, if you don't win any bids or if there aren't -- if the right opportunities don't come up, what would your plans be for the excess capital that you have?

That's a good question.

I think first of all that we have said that we're going to be very patient in this process which is consistent with what we have done traditionally, which means that we may go a little bit longer in the process of trying to make that happen before we reach some kind of conclusion that this truly is excess capital and we're not going to be able to put it to work.

My belief is right now if you look at the presentation that we made where we define the market we were looking at is that 325 mile radius, we know that there's only been one at this point in time which as we have said that we were involved in looking at.

We believe that process is going to accelerate.

I believe that we're -- under the [taxes] ratio, there's 35 with about $28 billion in assets.

So, I think we're still very patient.

We haven't reached the point that we have any angst of getting left behind in the process.

At this point, we haven't been outbid on anything.

There just hasn't been one within that area.

I think we're also still very comfortable with that radius as far as our model.

We know that we could expand that radius if we needed to or wanted to, but that's not what we want to do.

So, again, I think it's too early to say that we don't think we're going to fully utilize those dollars.

If we ever got to that point, I can promise you that we do have other options there.

Also, Michael, I would say too is I think the FDIC -- this is my opinion -- but the FDIC right now has some other areas of the country that have bubbled up that will need to be taken care of sooner.

Not that those institutions in this region won't move there, but those other areas obviously are hotspots, that those will double up quicker and ours will be a little but slower in moving there.

But they will eventually come to a head at some point.

All right, gotcha.

Great, that's very helpful.

If I could switch gears a bit here, the hotel loan that moved into OREO, did you take an additional write-down on that when it moved into --?

We did.

That was an $8 million loan.

It was written down by $1.3 million to a level of about (multiple speakers) $6.7 million.

So it was 8.1 and we wrote it back.

No, that was reserved.

We wrote it down to 6.7.

There was no increase in the reserve.

It had already been reserved as Bob has mentioned.

We had kept the lights on.

We hired a management company and the management company is continuing to assess as we transition through this and they will end up helping us market the property.

I will tell you that the appraisal on the property was actually in excess of $8 million, even though we wrote it down to $6.3 million.

Our decision to do that was obviously the market turbulence that is up in Northwest Arkansas and just the thought that at this particular time, that was a non-branded campus or non-branded motel, and it would be a bit more difficult to market.

So, we reserved accordingly and we wrote it down accordingly.

And then your provision level ticked up a little bit here.

I was wondering if you could talk about how you're thinking about provisioning going forward, if you could speak about that a little bit.

I think the (inaudible) uptick that we had in the provision was about $500,000.

Is that what it was, Bob?

Yes, more than our normal.

And that was realy related to a particular transaction in one of our institutions that really was not Northwest Arkansas but related to a particular transaction.

We expect the reserve for the quarter still to be projected at -- what?

2.9, right under $3 million.

Right under $3 million.

2.9 to $3 million.

Obviously, that is based on our projections that the credit card portfolio will continue to perform at the level that it is and that was up to 2.7 and we're reserving at 3% there.

Now, obviously, the other thing is that we've been fairly aggressive in the past in the identification of loans relative to non-performing loans and have been pretty aggressive in trying to move those into OREO and if we found ourselves having to take a special provision in order to complete that, I think we would continue that process but just normalized right now, just south of $3 million.

If I could, just one final question, if you could address what drove the increase in salaries expense this quarter.

Was that seasonal or what was happening there?

Most of that was coming back more to more of the normalized levels in some of the FICA taxes in this quarter compared to the previous quarter.

But on the salary side, it was more coming back to the normalized levels on some of the different incentive levels and LIPs, loan incentives and so forth.

All right, thank you very much.

Derek Hewitt, KBW.

Quick question, going back to the motel loan, what was the date of that appraisal?

The actual appraisal was about seven months old, seven or eight months old.

It was a 2009 appraisal for fourth quarter.

Late third, early fourth quarter 2009.

That's what I would guess.

Great, thank you.

Going back to student loans, how much do you expect to originate in the second quarter?

And then when you end up selling them back to the government, is that a third -- that should be a third-quarter event?

And I guess looking at the premiums, would the premium be relatively or materially different from what we saw in the third quarter of last year?

Let me just say that the aggregate premium would be relatively the same as what we saw last year, maybe about $300,000 lower.

We project right now that the premium will be about $500,000 in Q2 2010 and about $2 million in Q3 2010, for a total of $2.5 million and I think last year in Q3 it was about 2.2.

So we're getting a little bit more spread out here.

As far -- the question of total dollars, let me approach first from that.

It's about $90 million in total.

Generally, 50% of that has been originated in 2009, the first half of 2009.

The fall semester.

The fall semester and about half of that is in the second semester which most of that has already been funded.

I'd say $40 million or so of that has already been funded.

So there are very few dollars left to fund of the total $90 million.

So at this point in time, we'll be selling a portion of it Q2 2010 for $500,000.

The balance will be sold Q3 2010 for about the $2 million and then nothing after June 30, 2010.

Great and then what about the legacy portion of that portfolio?

What is the total dollar amount and I guess what are your expectations?

Can you sell that at par or close to par or would you have to take a small loss to move that off your books if you so chose?

One month ago, we would basically tell you the legacy could not be sold at par.

We obviously have been looking at marketing that as we tried to disengage.

It's a total of $67 million that basically we can't sell and that we're going to have to service out.

But I would tell you that we also have learned that there are some provisions effective July 10 through July 2011 that would allow consolidation loans with the government.

And by that what I mean is let's say that a certain number of students have loans both with us and the government.

Then we can market to the students to try to get them to move this loan to the government and they can do so without any cost to them.

We estimate that could be based on our research so far about $40 million to $45 million.

And let's just say it was $40 million, then that would leave $27 million of the legacy loan amount that we would have to deal with.

If we had tried to go to the secondary market and sell the $67 million, there is no appetite.

We would have had to take a discount of 2 million (multiple speakers)

3%.

About $2 million.

And we decided that we didn't have any appetite for that.

And so, after we get rid of the 45, if we get rid of the 40 to 45, that's going to bring it down into a very, very manageable level.

Okay, great.

Thank you very much.

My final question has to do with the securities portfolio.

I know only 25% is held in available for sale, but could you talk a little bit about this duration of the portfolio and what are your underlying prepayment assumptions?

First, let me just explain that a year ago, we would have 75% in AFS and 25% in held to maturity.

As we work through the value of capital and where interest rates were and how much liquidity we had, we felt like that strategically we should flip-flop that and begin to have less in AFS.

Because again, we do have so much liquidity and interest rates are so low, we know where they are going to go and we know what that will do to marked to market.

So, that was a real good decision for us, we think.

The issue of if you basically took the pure securities portfolio and looked at it from a duration standpoint, it's about 5 to 5.5 years of which that's primarily driven because again, we have probably a lot more in municipals than a lot of institutions because we have nothing in the CMO side or any of the mortgage backed side or virtually nothing.

If you adjust that and look at it like we do often, with the calls, then that duration moves closer to the three-year range.

And at this point in time with all of our reinvestments, we're obviously looking at assumptions that are going to be based on rising interest rates in the 8 to 10 month range with some pretty good shocks related to those and we have positioned ourselves accordingly.

Okay, great.

Thank you very much.

(Operator Instructions) Dave Bishop, Stifel Nicolaus.

Most of my questions have been answered, but did I hear that expectations for the margin is relatively flat assuming the fed sort of stays on the sidelines from here for the next couple of quarters?

I think that's exactly right.

Assuming that there is no significant move in the fed, that we would expect those margins to remain relatively flat.

But we do expect again that our margin movement, the best opportunity for our margin movements like others is going to be when those rates do move and we fully expect them to do it at some time.

I would also say, David, on the margin; we will tick up a little bit in the second quarter.

Third quarter will be our best and there's probably a 20 basis point or so pickup in that third quarter because of seasonality as those (inaudible) loans come on and those are new loans on the books, so they're at a higher rate.

And then it will go back down a little bit in the fourth quarter and then down to the lowest level in the first quarter.

This will be our lowest for the year and as Mr.

May said, we see going forward relatively flat on the margin (inaudible) besides the seasonality adjustment, but we do see when rates move up that we're well positioned with that, with the excess liquidity that we have, with our credit card portfolio; almost probably 80 to 90% of that being variable rate now.

It used to be a lot of that was tied to fixed rates.

All of that is variable now, so that will be a favorable move.

Any of the student loans that's still on books will have some positive impact on that also.

And again, plus all the excess liquidity and then obviously the variable rate loans and so forth.

I think also if you just look at the high level of calls that we got as the market moves closer to the expectations of those rising interest rates, that that's going to change, that expectation is going to change and we're going to be impacted in the short term with that.

But long-term, we feel a generic statement of flat is about where we need to be until those rates start moving.

We sure don't see the loan pipeline doing anything to create any excitement and we're not seeing any irrational pricing on the deposit side.

Gotcha, great.

Thanks, guys.

(Operator Instructions) Joe Stieven, Stieven Capital.

I joined a few minutes late, so I hope I'm not asking a question that was already asked.

But your NPAs have stayed low.

But in the quarter, you have some shifts from non-accruals into foreclosed.

Can you just give us a little highlight on that?

Was that one or two loans and sort of with it now being an OREO, sort of what type of timeframe do you think you can move something like that?

The numbers, overall non-performings were flat.

The shift was from obviously the non-performing loans to OREO.

That was a hotel loan, one loan (multiple speakers) motel loan and it was $8 million.

We already had reserved $1.3 million.

We moved that into -- we took a deed in lieu, moved that into OREO, wrote it down by $1.3 million.

Great question on how long it's going to take to move that from a non-performing, convert it to something that's going to make money.

We do have a management company that is allowing us to keep the lights on, that is generating cash flow to pay for that process.

And the management company we have we think is very, very good at what they do.

And once we get a few things fixed up and cleaned up with that whole process, I think they'll start actively marketing it and I really do not know the timeline at this point in time.

One of the big things that will decide that is obviously the recovery of Northwest Arkansas.

If you just look at the bottom feeders right now and some of the offers they're putting out there, obviously there's not a belief that recovery is any time soon relative to the motel industry.

But, I think that there's some things that we can do and probably should do in the marketing of it.

We will just have to look at it.

Part of that is branding.

It was non-branded.

So we will just have to see.

It's probably too early to tell there.

We did not have really anything else that caused that shift.

So, I think we were relatively pleased that we did not have anything to follow up into the non-performing levels.

I think all of us know as the regulators come in these days, they are going to be very highly sensitive to their interpretations of non-performings and non-accruals.

I would not be surprised to see some changes there, but I think it was fairly positive.

I appreciate your comments.

Thank you.

You have no further questions at this time.

Okay, we just want to thank everybody for being here.

Have a great day.

This concludes today's conference call.

You may now disconnect.