Simmons First National Corp (SFNC) 2010 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 First 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).

I would now like to turn the call over to our first speaker, David Garner.

Good afternoon.

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

We want to welcome you to our second 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 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 risk, uncertainties and other factors which may cause actual results to be materially different from our current expectations, performance or achievement.

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

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

Thank you, David.

And welcome everyone to our second quarter conference call.

In our press release issued earlier today, Simmons First reported second quarter earnings of $8 million, which was up $2.5 million, or approximately 45% from the same quarter last year.

Diluted EPS for the second quarter was $0.46, compared to $0.39 in Q2 '09.

In May, we entered into a purchase and assumption agreement with loss share arrangements with the FDIC to purchase substantially all the assets and to assume substantially all the deposits and other liabilities of Southwest Community Bank in Springfield, Missouri.

As a result of this acquisition, we expanded our footprint outside of Arkansas borders for the first time.

We recognized a pre-tax gain of $3 million on this transaction and incurred pre-tax merger related costs of $443,000.

After taxes, this gain, net of merger related cost, contributed $1.6 million to Q2 2010 net income, or $0.09 to diluted EPS.

In our last conference call, we announced the decision to close or consolidate nine branches, primarily smaller branches in rural areas.

During June of this year, these branches were closed and we recorded a one time, non-reoccurring charge of $0.01 diluted EPS associated with the closings.

All associates at the affected branches will be reassigned to other locations and any reductions in head count will be through attrition.

Excluding the non-reoccurring items, core earnings were $6.5 million for Q2, an increase of $1 million or 18.4% from the same period in 2009.

Diluted core EPS for Q2 '10 was $0.38, down $0.01 from Q2 '09.

Now as previously reported, during the fourth quarter of '09, we completed a $75 million secondary stock offering.

While the impact of this offering was diluted to EPS by approximately $0.07 in the second quarter, the excess capital positions us to take advantage of unprecedented acquisition opportunities through the FDIC-assisted transactions of failed banks.

As previously mentioned, in May we completed our first FDIC-assisted transaction with the acquisition of Southwest Community Bank in Springfield, Missouri, a very good market.

We have been approved by the FDIC to review potential banks up to $2 billion in size.

And our target area is an approximate 325 mile radius of central Arkansas.

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

Again, while the offering is diluted to EPS 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 deliberative and disciplined in these acquisition opportunities.

On June 30th, total assets were $3 billion and stock holders' equity was $379 million.

Our equity-to-asset ratio was a strong 12.5% and our tangible common equity ratio was 10.7%.

The regulatory Tier 1 capital ratio was 18.9% and total risk-based capital ratio was 20.2%.

Both of these regulatory ratios remain significantly above the well-capitalized levels of 6% and 10% respectively and they rank in the 94th percentile of our peer group.

Concerning earnings, net interest income for the second quarter of 2010 increased $1 million or 4.4% compared to Q2 2009.

Net interest margins for Q2 '10 increased 12 basis points from 3.83% when compared to the same period last year.

We continue to see somewhat rational competitive pricing on both deposits and loans.

But unfortunately, loan demand remains extremely weak given the state of the national economy.

As such, looking to the remainder of 2010, we expect a relatively flat to slightly improving margin.

Non-interest income for the second quarter was $17.2 million, an increase of $3.9 million or 29% when compared to the same period last year.

This includes the $3 million gain associated with the acquisition.

Excluding the gain, non-interest income increased $850,000 or 6.4%.

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

First is our credit card fees which increased $446,000 or 12.4% on a quarter-over-quarter basis.

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

The second item, income from investment banking increased by $101,000, compared to last year.

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

Now the third item, premiums on the sale of student loans increased by $259,000, which is actually a timing difference.

During Q3 2010, we expect to sell the remaining loans originated during the 2009-2010 school year.

Looking to the third quarter, we expect to record the remaining premium on the sale of approximately $65 million in student loans.

The premium now is estimated at $1.9 million.

As we discussed in our last conference call, the administration and Congress made the decision to eliminate the private sector from providing student loans.

Thus, as of June 30th, Simmons First and the banking industry are no longer providers of student loans.

After the third quarter loan sales, we will have a remaining balance in the student loan portfolio of approximately $65 million, which we will continue to service internally until the loans pay off, we find a suitable buyer, or the students consolidate their loans.

Obviously, these loans remain guaranteed.

Item Number Four, other non-interest income increased by $213,000 over the same period last year.

This is primarily the result of a gain on the sale of land which had been held for a future branch location.

Now in contrast, non-interest income was negatively impacted by the decrease in the income on the sale of mortgage loans by $429,000, compared to last year.

The smaller pipeline is obviously a result of a combination of the winding down of the first time homeowners program, a slowing down of refis and the general weakness in the economy.

Moving on to the expense category -- non-interest expense for Q2 2010 was $27.3 million, an increase of $325,000 or 1.2% compared to the same period in 2009.

Let me take a minute to briefly discuss several items.

The first, included in non-interest expense is $443,000 in merger related costs and $372,000 in expenses associated with the previously mentioned branch closings, both of which are non-reoccurring items.

The second item is our FDIC deposit insurance which decreased by $1.5 million from last year.

As you may recall in Q2 '09, FDIC insurance expanse increased due to the special assessment impacting the entire banking industry.

The third item, credit card expense increased by $102,000 as a result of the increased transaction volumes which we continue to review as a very positive happening.

The fourth item, professional fees related to our on-going efficiency initiative increased by approximately $112,000.

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

Let me move to our loan portfolio.

As of June 30th, 2010, we reported total loans of $1.8 billion, a decrease of $121 million or 6.3% compared to the same period a year ago.

Our consumer loan portfolio decreased by almost $10 million or 2.2%

Decreases in our student loan and other consumer portfolios of $21.6 million were partially offset by an increase of $11.7 million or 6.9% in our credit card portfolio.

The real estate loan portfolio decreased by $84.7 million, including a $43.5 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 8.4% of the total portfolio.

CRE loans, excluding C&D, represent 31.6% of our loan portfolio, both of which compare very favorably to our peers.

Simmons First affiliates, like the rest of the industry, are experiencing weak loan demand as a result of the recession.

We believe loan demand is likely to remain soft for the balance of 2010.

But, we are committed and positioned to meet the borrowing needs of our customers, both consumer and business.

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

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

During the first half of 2010, we added 400 net new accounts compared to 10,000 last year.

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.

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 to, northwest Arkansas.

At June 30th, 2010, the allowance for loan losses equaled 1.42% of total loans and approximately 150% of non-performing loans.

Non-performing assets, as a percent of total assets, were 124 basis points, up 14 basis points from Q1 2010.

Non-performing loans, as a percent of total loans, increased from 83 basis points to 95 basis points.

As mentioned earlier, these ratios are higher than our internal targeted levels.

However, they compare favorably to the industry and our peer group.

In fact, our non-performing asset ratio puts us in the 80th percentile within our peer group, based on March 31st peer versus our June 30th actual.

During Q2 2010, the provisions for loan losses was $3.8 million compared to $3.2 million for Q1 2010, and $2.6 million for Q2 2009.

The annualized net charge-off ratio for the second quarter of this year was 64 basis points, down 6 basis points when compared to the first quarter.

Excluding credit cards, the annualized net charge-off ratio was 45 basis points compared to 48 for the first 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 Q2 2010 annualized net credit card charge-offs to loans was 2.41%, compared to 2.71% for Q1 2010.

Our loss ratio continues to be more than 800 basis points below the most recently published credit card charge-off industry average of over 10.5%.

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

Bottom line, quarter-over-quarter, we experienced margin expansion of 12 basis points, relatively good asset quality compared to the industry, a continuation of relatively low credit card charge-offs at 2.41%, core non-interest income growth of 6.4%, a modest non-interest expense increase, and most importantly, an extremely strong capital base with a 10.7% tangible common equity ratio.

Additionally, we expanded our footprint into Missouri and booked a $3 million pre-tax gain related to the acquisition.

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 balance of the year.

Our conservative culture has enabled us to engage in banking for 107 years.

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

It 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.

Before we move into our Q&A, let me give you an update on our branch right-sizing and efficiency initiatives.

During June, as scheduled, we closed or consolidated nine branches, 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.

We project non-interest expense savings of approximately $1 million annually and hope to achieve 40% of that benefit in the balance of 2010.

Reductions will be through attrition and associates at the affected branches who have been reassigned to other locations.

Our efficiency initiative related to revenue enhancement, process improvement, and branch staffing levels is in the implementation phase.

In our last conference call, we gave guidance by projecting the total benefit from the efficiency initiative to be approximately $5 million annually to pre-tax income.

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, thus we will not recognize the full $5 million annual benefit until 2012.

The estimated benefit for the last half of this year is approximately $600,000.

For 2011, we estimate savings of approximately $3 million and the full $5 million benefit in 2012 and beyond.

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.

This concludes our prepared comments.

And we would like to now open the phone lines 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.

(Operation Instructions)

I will pause for just a moment to compile the Q&A roster.

Your first question comes from Matt Olney with Stephens Incorporated.

Your line is open.

Hello, Matt.

Hey, Matt.

Hey, guys.

Good afternoon.

I was going to ask about the provision, still relatively low, but it picked up a little bit from the previous quarter.

Is this the result of any kind of pick up in delinquencies in the credit card portfolio?

Or how should I be thinking about that?

Well, the first answer is no.

It's not a pick up in the credit card.

In fact, our credit card charge-offs, I think went from 271 down to 241.

And which obviously was a very positive sign.

I think when you look at the total non-performings they did pick up just a bit from the previous quarter.

And for example, our non-performing loans, total non-performing assets went up about $2.7 million, or about $3 million or so.

And it was broken up into pretty much a movement into OREO and then a little bit of an increase into the non-performings.

Our actual past dues for 30 days were down.

The $500,000 provision was really a special provision and it was primarily driven by this slight pick up in overall non-performings.

Okay, that's helpful.

And secondly, did the uptick in credit card fees, how should I interpret that?

Is that a result of better economic activity in your markets or is there some seasonality in there?

I will tell you seasonality, it's volume based on seasonality total.

And let me go back, one thing on that provision.

I used the word special on that $500,000 by design.

Again, it was driven primarily by that bump in the non-performings.

And that was sort of a one time special.

Matt, also if you'd look at our credit card balances, they're up about 10%.

Last year we added some 10,000 net new accounts.

As those net new accounts are put on balances, there's been an increase in income.

So, most of what you're seeing, a little bit in seasonality because you're getting a little slower in the first quarter.

But you also are just seeing pure volume from the number of accounts out there.

Okay, that's helpful.

And last question and I'll hop off.

Can you give us any update on the integration of the Missouri franchise and maybe compare it to your original expectations going in there?

Let me ask David Bartlett to visit on that please.

Hey, Matt.

Hey, David.

Hi, thanks.

Integration is going well.

We've gone through the loss share process and really have looked at both internal and the support that [pertained] that we acquired in Springfield could bring to that.

We have probably reviewed 65% of the assets we purchased and have an action plan developed on those.

We're starting to implement that action plan.

Larry Bates out of our western region, who is our Chairman and CEO of that market, has been a very instrumental leader for us in Springfield, bringing our culture into that bank.

We're now in the process of starting to integrate a little quicker some of our products and services so we can get that management team in Springfield into the market and starting to develop and expand our footprint there.

So, I'm going to tell you loss share is working and we're getting our arms around it.

We've got good grasp on the assets that we purchased and have developed action plans.

And then finally, the team that we have there, including Larry Bates who's bringing in the Simmons culture, is starting to expand and starting to work on developing new business.

Okay, that's great color.

Thanks for your help guys.

Great quarter.

Thanks, Matt.

Thank you.

Your next question comes from Michael Rose with Raymond James.

You line is open.

Hi, good afternoon guys.

Hi, Michael.

Sorry if I missed this, I got on the call a little bit late.

But can you quantify any impact from the financial reform bill that was just passed and if you can talk a little bit about opt-in rates for [Reg E], that'd be helpful.

Let me say on the first question, I don't think we're yet in a position to quantify the economic impact from the financial reform bill.

Obviously we are looking at it and obviously a lot of that is going to come when the regulations are completed, when the Fed makes the decisions that they have the flexibility of making them on some of the [inner changes] and so forth.

So, we continue to monitor that, but we also continue to try to put ourselves in a position to mitigate that.

On the opt-in, I'm going to ask Marty Casteel to say a word about that please.

Of the respondents that we've had, about 84% are opting in.

We're running about an 84% opt-in rate.

We have some initiatives in place to continue to contact customers that have not opted in.

We're about 35% response rate overall on customers that we mailed notices to.

So, I think our experience is probably tracking what other people are seeing.

About 84% of respondents are taking the service, (inaudible) service.

We think obviously the biggest hit will be in the third quarter.

We think on the high end, it's probably a couple hundred thousand dollar impact in that second quarter if we can get some of these initiatives to be a little quicker into the process and the response coming back, that could be less than that.

We think fourth quarter will be lower.

And we think with the initiatives, the opt-in and some other initiatives that we're working on, we believe by the end of the first and it may be second quarter, we'll be returning back to the same level negating the impact that we've had from this.

Okay, that's helpful.

And as a follow-up question, can you address any trends in your loan pipeline and maybe in utilization rates?

And if there's any difference in kind of the sub-markets in which you operate?

Well, I will tell you that the pipeline for the second quarter was lower than the first.

And our projection for the third quarter is for it to still be very weak.

Obviously, probably the bigger challenge right now is that where you're seeing some of our larger loans that have the capacity to pay off, they've had the capacity to pay off and not going down under the lines, because they're not in a growth mode.

So I think our portfolio is going to have a lot of peaks and valleys just from that trend that we're seeing.

But overall, as far as new demand and new loans I think the trend is very weak.

Okay, thank you guys.

That would generally be in all of our markets.

Maybe central Arkansas and northeast Arkansas a little bit better, but I think generally that would be the case in all the other markets.

Obviously, on the agri IPs that's going to continue to be a good producer.

It will continue to be seasonal.

Obviously, on the credit card fees, we have net new accounts of 400, so far year-to-date, compared to 10,000 last year, which means that the big guys are starting to return to that market.

And so, overall, I think our niche is, our credit cards will continue to be fine, just not quite as good as it was last year.

I think in the area of our traditional business loans, it's just going to be weak for an extended period of time.

I would comment also on our student loans.

You know that our student loans will actually end up funding, the sale of loans will end up funding in the third quarter about $65 million worth and will leave about $65 million on the portfolio that we will end up servicing.

Once that third quarter sale is completed, there are no more student loans.

They will all be a part of the direct loan program.

And so, that will add to our liquidity fairly significantly until we determine exactly what we're going to do with it.

Okay, that's helpful.

Thank you guys.

Thank you.

(Operator Instructions)

There are no questions in the queue at this time.

I do apologize, we have a question from Derek Hewett with KBW.

Your line is open.

Good afternoon, gentlemen.

Hey Derek.

A quick question on the M&A front.

I had to hop off the call, so I'm not sure if you guys addressed this or not.

But any interest in open bank transactions at this point?

Traditional mergers and acquisitions, is that what you're asking Derek?

Yes, instead of just FDIC-assisted transactions.

Well, I'll repeat what we've said before.

Again, obviously we've raised additional equity in hopes of taking advantage of the FDIC-assisted transactions.

It's still way too early for us to say that we're not going to be able to fill that bucket.

On the other hand, we also said from the very beginning, that we have a history of being a traditional acquirer of banks.

We do it very well.

We integrate them well.

We've been very patient when it was too expensive.

Now that that trend is beginning to change and our expectations are that that trend will continue, maybe even accelerate as reform takes hold.

Yes, we will look at and continue to monitor that opportunity.

We never ruled that out from the very beginning, but we still believe that the FDIC-assisted are going to provide some more opportunities beyond what we've already done in Springfield.

Great, thank you very much.

Yes, sir.

Thank you, Derek.

(Operator Instructions)

And there are no further questions in the queue at this time.

Okay, thank you and thank everybody for participating.

Have a great day.

This concludes today's conference call.

You may now disconnect.