Simmons First National Corp (SFNC) 2010 Q3 法說會逐字稿

Good afternoon. My name is Andrea and I will be your conference operator today. At this time I would like to welcome everyone to the Simmons first -- third quarter earnings conference call. (Operator instructions) Mr. David Garner, you may begin your conference.

Good afternoon. I'm 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 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 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 achievements.

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 third quarter conference call. Before I get into the Q3 earnings discussion, I would like to first update you on our strategic plans regarding mergers and acquisitions.

Last week we announced that 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 Security Savings Bank in Olathe, Kansas.

As part of the acquisition, we acquired approximately $360 million in deposits and $427 million in assets, which includes $330 million in covered assets. Through the loss share provision, the FDIC will reimburse us for 80% of losses incurred on the deposition -- or the disposition of loans and foreclosed real estate on all covered assets. While the recent trend is failed bank acquisitions has been to reduce the loss share percent in one or more of the three FDIC loss share traunches, we were able to negotiate 80% protection on all three traunches.

The acquisition of Security Bank is a good extension of our footprint. We acquired nine locations with four in Kansas City MSA, which are located in the growth suburban markets of Olatha, Overland Park, and Leawood. We also acquired three locations in Salina, which we see as a good market with excellent core deposits.

The last two locations are in Wichita, which has an MSA population of over 600,000. The unemployment rate for the state of Kansas is 6.7%. More specifically, the unemployment rate for Johnson County, which is Olatha, Overland Park, and Leawood, is 6.2%. Salina, 5.7%, and Wichita 8.2%. All of which are favorable to the national average of 9.6%.

We're very excited about the entry into these new markets that provide additional growth opportunities. Simmons First has built its franchise around a community banking philosophy. In addition, we believe the Kansas market represents a good opportunity to expand our current niche of agricultural lending. This acquisition is the second of several that we anticipate making over the next 12 to 18 months, which is the reason we raised $70.5 million in additional capital through a secondary stock offering in November of 2009.

Earlier this year we announced the purchase of Southwest Community Bank in Springfield, Missouri, which was a good first step for expanding beyond the borders of Arkansas.

Let me now turn to the earnings report. In our press release, issued earlier today, Simmons First reported third quarter earnings of $7.6 million, which was relatively flat from the same quarter last year. Diluted EPS for Q3 2010 was $0.44 compared to $0.54 in Q3 2009. While the impact of the 2009 stock offering was diluted to EPS by approximately $0.09 in Q3 2010, the excess capital positions us to continue to take advantage of unprecedented acquisition opportunities through the FDIC assisted transaction of failed banks.

As previously reported, we have been approved by the FDIC to review potential banks up to $2 billion in size and our target area has been established in approximately 325 mile radius of central Arkansas. We will continue to actively pursue the right opportunities that lead our strategic plan regarding mergers and acquisitions.

During the Q3 we performed due diligences on three potential FDIC opportunities. And since the second quarter, we have successfully bid on an acquired two of these institutions. 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 the acquisition opportunity.

On September 30th, total assets were $3 billion and stockholders' equity was $384 million. Our equity to asset ratio was strong at 12.7% and our tangible common equity ratio was 10.9%. The regulatory tier one capital ratio was 12.3% and the total risk based capital ratio was 20.5%. Both of these regulatory ratios remain significantly above the well-capitalized levels of 5% and 10% respectively and rank in the 92nd percentile of our peer group.

Now concerning earnings. Net interest income for Q3 2010 was a record $26.1 million, an increase of $663,000, or 2.6% compared to Q3 2009. Net interest margin for Q3 2010 increased 5 basis points to 4.02% 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 flatly improving margin on our legacy balance sheet. However, we anticipate about a 15 basis points pick up on the margin in Q4.

Non-interest income for Q3 2010 was $14.8 million, a decrease of $141,000 or 0.9% compared to the same period last year. Although the net change in non-interest income was not significant, I would like to discuss several items that positively impacted non-interest income.

First, income from the sale of mortgage loans increased by $444,000 compared to the same period last year. This improvement was primarily due to lower mortgage rates, leading to a significant increase in residential refinancing volume.

The second item, credit card fees increased $227,000 or 6.1% on a quarter-over-quarter basis. This increase was due to a higher volume of credit and debit card transactions.

The third item, bank owned life insurance income, increased $111,000 or 37.9% compared to last year. The increase was primarily due to the purchase of additional BOLI in Q1 2010. In contrast, non-interest income was negatively impacted by several items. Service charge on deposit accounts decreased by $375,000 or 7.9% compared to last year. This decrease was primarily due to lower NSF income as a result of recent regulatory changes related to overdrafts on point of sale.

The second item, income from investment banking decreased by $229,000 compared to the same period last year. This decrease is due primarily to the low interest rate environment, which has resulted in a slowdown in transactions. Other non-interest income decreased by $281,000 over the same period last year. The decrease was primarily the result of a net loss on the sale of OREO.

During Q3 2010, we sold the remaining loans originated during the 2009-2010 school year recording a $2 million in premium from our student loan operations. As we discussed in our last conference call, the administration in 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 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.

Moving on to the expense category. Non-interest expense during the third quarter was $26.8 million, an increase of $451,000 or 1.7% compared to the same period in 2009. Although the increase from last year is very modest, there are some significant items that warrant discussion.

Included in Q3 non-interest expense is $134,000 in merger related costs associated with our FDIC assisted acquisition. Other real estate and foreclosure expense increased $172,000 from last year, a result of the increasing flow of non-performing loans to OREO and then through liquidation.

The third item, credit cards expense, increased by $127,000 as a result of increased transaction volume, which we continue to view as a very positive event as the related credit card income increases.

Let me move to our loan portfolio. As of September 30th, 2010 we reported total loans of $1.7 billion, a decrease of $186 million or 9.6% compared to the same period a year ago. Our consumer loan portfolio decreased by $55.9 million or 13.1%. Decreases in our student loan and other consumer portfolios to $62.1 million were partially offset by an increase of $6.3 million or 3.6% in our credit card portfolio.

The real estate loan portfolio decreased $103.9 million, including a $41.9 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 8.6% of the total portfolio. CRE loans, excluding C&D, represent 32.6% 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, so we are committed and positioned to meet the borrowing needs of our consumer and business customers.

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. Let me remind you that covered assets acquired from the FDIC are recorded at their discounted net present value and the resulting FDIC loss share indemnification provides significant protection against possible losses. Thus, FDIC covered assets are excluded from the computations of our asset quality ratios.

The allowance for loan losses equaled 1.48% of total loans and approximately 197% of non-performing loans as of September 30th. Non-performing assets as a percent of total assets were 123 basis points, down 1 basis point from Q2 2010. Non-performing loans as a percent of total loans decreased from 95 basis points to 75 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 ratios, excluding covered loans, puts us in the 80th percentile within our peer group, based on June 30th peer versus our September 30th [asset].

During Q3 2010, the provision for loan losses was $3.4 million compared to $3.8 million for Q2 2010 and $2.8 million for Q3 2009. The annualized net charge off ratio for Q3 2010 was 79 basis points, up 15 basis points when compared to the second quarter. Excluding credit cards, the annualized net charge off ratio was 63 basis points compared to 45 for the second quarter.

During Q3 we charged off several loans that had previously been reserved. 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 2010 annualized net credit card charge offs to loans was 2.24% compared to 2.41% in Q2 2010.

Our loss ratio continues to be more than 775 basis points below the most recently published credit card charge off industry average of over 10%. One of the real strengths that we have in our credit card portfolio is our geographic diversification with no concentration 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% for our credit card portfolio.

So, the bottom-line. Quarter-over-quarter we experience record net interest income, margin expansion of 5 basis points, relatively good asset quality compared to the industry, a continuation of relatively low credit card charge offs at 2.24%. Stable non-interest income, and modest non-interest expense increase, and most importantly an extremely strong capital base with a 10.9% tangible common equity ratio.

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. 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.

Before we move into our Q&A, let me give you an update on our efficiency initiatives. Our efficiency initiatives related to revenue enhancement, process improvement, and branch staffing levels is in the implementation stage. In previous conference calls we gave guidance by projecting the total benefit from the efficiency initiatives to be approximately $5 million annually to pretax income. We have assured our associates no one will lose their job as a result of these initiatives. 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 Q4 2010 is approximately $300,000. 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 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) Your first question comes from the line of Dave Bishop with SPN. Your line is open.

Hello, Dave.

Yes, good afternoon, Tommy. How you doing?

Good.

Hey, in the overview you talked about the capacity or looking at other deals. Can you give a sense in terms of what's the appetite for potentially expanding outside of that 325-mile radius? Or are there any geographies that rank higher than -- in terms of order of importance there as you're looking there? Obviously Kansas has played into it now. Maybe give us a sense what maybe the highest and best use in terms of geography right now is.

Okay. Dave, let me just simply start by talking about capacity. I think that based on the fact that we raised $70 million and that we have now done two deals that we believe, just based on the structure that we have seen and our level of interest in bidding and opportunities, that we have the potential of doing another $1.5 billion to $2 billion relative to asset size.

I would tell you also in doing that we factor in what we think would be the shrinkage in the balance sheet and we would see that -- obviously it depends on the -- several different things. It depends on the bank, the market, it depends on our breaking interest rates, and so forth. But we see that shrinkage in the 30% to 40% find. So, still lots of opportunities as far as leveraging that capital.

As far as the geography, I would tell you that we're still very comfortable with our 325-mile radius and the appetite to expand out beyond that is really not very strong. And I would also say the reason is not does not mean there aren't other good locations or good opportunities, it's just that we have made this decision based on our culture, the fact that we feel like these markets look us, feel like us. And we think so far exactly what we have acquired fits that scenario very well.

Likewise, if you just look at what we have done relative to Springfield, and then into Kansas City, and then into Salina, and Wichita that there are opportunities, at least geographically, to fill in that footprint if the -- if banks become available.

So, I would just simply say that I think we're still very comfortable with that 325-mile radius and I hope that answers your question.

Sure. You had also alluded to the fact that the capacity for additional agricultural lending within these markets was enticing.

Right.

And the other (inaudible).

Interesting enough, I don't know that we had a strong feeling going in, but coming out we had some of our most senior people there, including people from the agri sector. It created quite a bit of excitement relative to the wheat, corn, and beans. And we are a major provider of agri lending in the state of Arkansas, especially in the row crop area. And we've been doing it for many years, we think we know what we're doing. And considering where there's not a whole lot of demand right now in other types of loans, we think this is a really good opportunity for us both in Arkansas and in the new markets.

Got you. And then finally, I think you alluded to the fact that the core margin maybe stays in flat there. There could be a 15 basis point bump on top of that. Did I hear you right there? (Inaudible)

Dave, you did. I think we feel like that the legacy margin is probably about flat in what we're looking at right now. Obviously based on where we think interest rates are going to stay where they are. And we think with the acquisition that there is a 15-basis point bump that will come. Bob, you want to --?

You're exactly right. And also, Dave, when you look at our liquidity right now for our legacy bank, we've got quite a bit of liquidity. We think through this transaction we'll be able to help utilize about $30 million to $40 million, maybe even $50 million of our liquidity that we have in overnight money. And the return on these covered assets, you've got the 80% protection on the entire covered asset portfolio. And they're risk weighted. Basically the discount is based on the risk weighting of the asset. And so we're looking at a 6.5%, 7% return on those assets going forward.

And I think obviously that when you look at the balance sheet, the level of broker deposits, and cost of funds, we're going to get some pickup there with the break in interest rates.

That's right.

Great. Thanks, guys.

Okay. Have a good day. And by break in interest rates, I mean breaking the interest rates that are there.

Your next question comes from the line of Matt Olney with Stephens Inc. Your line is open.

Hi, Matt.

Hi, guys. Good afternoon.

How are you?

Doing well, thank you. Great quarter. Wanted to ask you about the charge off mix. Anything to note from what we saw in 3Q, whether it's by geography or by type?

Well, let me talk about the total dollar increase or the percent increase. The first thing to note is that as you know, in our -- if you look at our non-performings, our non-performing loans have gone down, our OREO has gone up, and our NPA stayed about the same. And that has everything to do with our being very proactive in trying to move that out of the loans into the OREO and through the court system, and converting to cash.

And I think in doing that we had three or four loans that really were not in any particular market, but was in the commercial real estate area. Or one was in commercial, one was in commercial real estate, maybe two in the commercial real estate area, that we had fully reserved. And we went ahead and charged those down when we moved them into the OREO.

And so I don't think there's anything to read into that other than the fact it's being proactive in moving it through the system. Matt?

Yes, that's great. And I guess with that, is there any update for Northwest Arkansas, one of your more troubled markets? Any updates there for 3Q?

I would really say there's not much change from the report that we'd given -- gave in the second quarter. Again, looking for light at the end of the tunnel and the best light I see is that we are moving some things out of the non-performing loans into OREO, but -- and not adding a lot of new large problems. I think that would be specific to us. I think in general, you're just not seeing the high level of bankruptcy filings that you were seeing over the last 18 months.

Okay. And --

I think that still is going to be obviously a slow recovery.

Sure, yes. Kind of similar to what you've been saying, I guess, for a while now.

Exactly.

And lastly, we've heard that you guys are considering streamlining some of your charters amongst your different banks. Can you give us an update on what the thought process is there and where we are on that?

Well, let me just make sure I clarify. The streamlining we're doing has to do with regulator standardization. We still believe in our multiple charters. We have no plans to change the multiple charters. We believe that we can have our cake and eat it too.

We believe that the efficiency initiatives that we have put in place are going to be very positive in trying to get to any duplications, or most of the duplications that you have in the multiple charters. And then change your costs, or your Board of Directors, and so forth, which we think are very positive to us in asset quality, recruitment, retention, and a lot of other things. And as we negotiate for traditional acquisitions, and I just want to say that our charter structure is a big part of that too, and we think there's going to be more and more opportunities there.

But getting to the question, the point was that we said, okay now that we've done the efficiencies, what else keeps us awake at night with the multiple charters? And obviously it would be the complexity of the number of regulators that we had. We have eight banks, we acquire a bank, we allow them to keep the regulators they had. We had OCC, Federal Reserve, state banks, FDIC, and so forth.

So, what we did make the decision to do is to standardize that. We took the seven banks, the seven community banks that range in size from $200 million to $300 million and we made all of those state member banks, which meant obviously the state bank department was a primary regulator, and then in this case the Federal Reserve would become the federal regulator.

So we no longer then had the Federal Reserve on two of them, the FDIC on four of them. We had the Federal Reserve on all seven of them as the federal regulator. It just so happens obviously, that the Federal Reserve also regulates the holding company, as it does all holding companies.

So, we then -- that left the lead bank, and with the lead bank we made the decision to leave it as a national bank, regulated by the Office of the Comptroller and Currency. Size had a lot to do with it, but probably credit card also had a lot to do with it. We want to be a national bank under the National Banking Act with the credit card operations versus trying to deal with 50 different state bank departments, 50 different attorney generals, et cetera.

So, that was the streamlining that we did. Now where we are in the process is that at this point in time we have filed our El Dorado Bank, which was a national bank. We have -- that bank has filed with the state bank department and then the Federal Reserve. And the other six banks will follow. We're in the process of each one of those banks filling out their forms. We expect to -- for all of this to be completed by December 31st and probably starting the year with a streamlining approach.

Does that answer your question, Matt?

Yes, that answers the question and I appreciate the update. Thank you.

Okay.

Your next question comes from the line of Michael Rose with Raymond James. Your line is open.

Hi, Michael.

Good morning -- or good afternoon, guys. How are you?

Good.

I've got a question regarding asset quality. In the press release you say NPAs are above your internal target levels. Can you give some context around what those levels are?

Well, I can tell you they're very conservative. On our -- I'll just give you internal -- our internal non-conforming loans target is 70 basis points in the corporations. And we are at the 70 basis point level in the corporation. Our non-performing asset target would be like a 110, 115 and we would be right at or slight -- I don't know what that number is right now, but we'd be pretty close to that target. So we'd be a little bit above on the NPA, primarily driven by the Northwest Arkansas number. I think we're at -- Bob said a 123. Is that right?

That's right.

A 123. So it's a little bit above that 110, 115.

How many of the separate banks were at the end of the quarter below or above that?

Well, I can tell you that on the non-performing loan category, we had two banks -- or wait, I'm sorry. We had one bank that was a 76 basis point, which is just barely above the target. And then we had another bank at a 127, and then we had the -- actually the Northwest Arkansas was 101. So, just three banks that were above the non-performing loan category.

And then on the non-performing asset category, I don't have my red light/green light thing here in front of me, but I'm guessing that we only have one. We only have one.

Just Northwest Arkansas.

Glen Rambin, the president of lead Bank is here. And we just have Northwest on that particular ratio.

Classified assets, again we're very conservative on those levels of using a classified to capital, tier one plus ALL at 18% or below. And we have three banks slightly above the -- those levels. Only one bank that again would be higher than the rest and that's Northwest. But they're making improvements.

Okay. Secondarily, I wanted to ask about the credit card business. Obviously it continues to perform well here. Is there any thoughts to maybe get a little bit more aggressive? I know you have pretty stringent credit standards and who you target. But is there -- on a go forward basis, do you think there's greater opportunity from here over the next few quarters, particularly if we are in a slow economic recovery?

Michael, I'll answer that specific question with a general answer, and then I will get to the specifics. Our Company has -- we sort of backed up and we said okay, well these are the industries that we're going to avoid over the next 12 to 18 months. These are the industries that we're going to be cautionary over the next 12 to 18 months simply because of the economic challenges that are there. And when you do that and you take away the housing market, and the student loans, and rest of CRE, that does not leave a lot of opportunities. And we said well, we're not going to chase the loan demand issue.

However, we do have some things that we do very well, so we want to reevaluate those and to see if we in fact might want to become more aggressive there. And I think your question is right on target there. We have two or three areas that we're looking at. One is in the consumer area. The other is the consumer credit card area. And then one is in the agri area. And the last happens to be in the small business area using some of the government programs that are out there.

And in particular, we think there's some agri opportunities that we have and we are in fact putting together a couple of promotions that we think will help us there, which would be then expanding that portfolio, maybe into some equipment type financing. And again, this would be outside the low crop opportunities that we might have in the new market.

So, in addition to the agri piece, we've looked at the credit card piece. Not withstanding the fact that it's unsecured, notwithstanding the fact that we've got the unemployment where it is, and not withstanding that we're projecting that unemployment to continue to be a challenge, certainly out in the 18 to 24-month range, we do believe that there's some things there that we might want to look at.

As you know, we're running around $175 million to $180 million in that particular area. So, we said well, if we are going to increase there, it's not going to be relative to risk taking. We're not going to take additional risk. Obviously our underwriting has worked for us. If you look at the 2.47% loss ratio, I think, Glenn, which is down from what we reported last --

It's 2.51%.

2.51%, which is down from what we reported last quarter. Still very, very good loss ratio. So we're not going to change our underwriting, but we do realize that there might be some opportunities on how we do our -- how we pay on the Internet applications. So my answer then would be yes, we would consider, based on our history of the credit quality of our underwriting, we would look at some expansion in that area.

Okay. And would those areas come with additional hires and are you looking at adding additional headcount? I know you have this expense efficiency program in place and you're not going to let anyone go. But conversely, would you look to hire additional people? And is there appetite to do so?

Well, I would say the appetite to do so would be yes if in fact we felt like we needed to do that. I think at this point in time, with the fixed cost infrastructure that we have in the credit card operation to manage that $180 million that we could -- we would be able to manage that with the current staffing level. Because remember, we're not talking about that significant of an increase. And I'm going to let Glenn say a word here about that in just a second.

And then I think on the agri side, we would say the same thing because we're really not looking on the agri side and necessarily adding a lot of new relationships in Arkansas, even though there might be some. That we're -- we would be looking at promotions on the equipment side that would be handled within the same headcount.

I think in Kansas that becomes quite a different issue. That in fact, they have not been agri lenders, so as we move into that market with some opportunities, Glenn, I would think there would be headcount adds.

Yes, there should -- there probably would be and the acquisition that we have made was not an agri lender.

Right.

But that is where we believe we can make a significant impact in the production agriculture and those markets, specifically Salina and Wichita.

Do you have anything on the credit card side as far as man power increases (inaudible)?

We don't believe there will be any needed increase in man power in the credit card area. And we do believe that while we can get much of the volume, we can get significant volume over the Internet, but there's a significantly higher cost per application over the Internet in the go-forward versus what it has been.

So your profit margin then is squeezed.

That's right. But where we believe that we have lots of opportunity is our -- in our own network of branches where we have really not made a difference like we can make.

Good.

Great. Thank you, guys.

Okay, thank you.

Your next question comes from the line of Derek Hewett with KBW. Your line is open.

Good afternoon, gentlemen.

Hi, Derek.

Hey, a quick question on fee income. It looks like on a linked quarter basis deposit service charges were down about $350,000. Did that have to do with [Bin] Reg and Reg E?

It did.

Okay.

Actually, it had to do with Reg E and credit card --

No, just Reg E.

Just Reg E.

On that one, yes. Just Reg E on that one.

Okay, great. And then --

And Derek, we're working to mitigate that, but the first month and a half or so into this the impact was probably the most. And we hope over time we'll neutralize most of that. But we've been working hard on the opt in and hope to see -- starting to see improvements in the latter part of this year to the beginning of next year.

Okay.

I think the work that we have done so far on the opt in piece, if I'm not mistaken, and I've reported this each time (inaudible). I think it's up to -- that we've had about 45% to 50% respondents. About 85% plus of those respondents opted in. So it's the other 50% or the 15% that opted out that we're still having to deal with.

Of that other 50%, what we are seeing is like the rest of the industry, as they move in to having debit card overdrafts, then they all of a sudden decide that they do think it's beneficial. And I think we're getting a lot of calls at that point in time to opt in.

Yes, and one more point, Derek, is of that decrease, I would say about 50%, 60% of that happened in the first -- the 15 days of August and the other for the entire month. So we did start seeing a -- the change wasn't as much in September as it was for the 15 days in August.

Okay, great. And my final question has to do with the margin, maybe looking out 12, 15 months. It was interesting that you guys are expecting the margin to go up this fourth quarter when kind of seasonally it goes down. And now I do understand that it has to do with the impact of the acquisition. But as you guys continue to add additional acquisitions to the franchise, should we expect the margin to kind of smooth out? Or because you're going to be emphasizing an ag emphasis, once you get these deals closed that we're still going to see that sort of volatility in the margin.

Yes, and let me point out too is we see -- we think we're projecting our legacy bank to be relatively a flat to slightly increasing margin in the fourth quarter. Now keep in mind because of our seasonality, that more relates to last year's fourth quarter. Our third quarter's going to be the highest. So you're going to have to go back to last year's fourth quarter to see what that was.

Okay.

I think we'll add about 15 or so basis points to that level, which would in effect bring us back to about where we were for this quarter, I would think. It's somewhere in that ballpark range.

But again, our seasonality, that fourth -- the third quarter is our largest quarter. We had two impacts this quarter as one credit -- I mean agri is at its highest point. And then second is our student loan business, we had $65 million in loans that were paid off and the government -- to the government this quarter. And that program's over. So that money basically went in to overnight money at this point and we plan to utilize some of that in this next acquisition of Security Savings Bank.

So, we believe the benefit of that and moving it from basically the security -- student loan portfolio into a higher yield on the covered assets will pick up the 15 or so basis points in the fourth quarter.

Okay.

I'd just add, with our legacy portfolio, again as Bob has said, we expect it to remain about flat as long as the interest rate situation is what it is. And as long as our liquidity remains high.

Now we have been moving some of that liquidity down, obviously by design. But we want to do it slow because as we get these acquisitions and as we bust rates, we create liquidity needs in those banks as they shrink their balance sheet and we're able to backfill that with some of our existing liquidity. So we're going from a 25 basis points overnight investment up to whatever we're busting the rates at, 220, 230, or wherever they may be.

So, we don't want to move it down too fast, but that high-level liquidity, as Bob has said earlier, is part of the reasons that our legacy margin is where it is.

Okay, thank you very much.

Uh-huh.

Thanks, Derek.

Your next question comes from the line of Joe Stieven with Stieven Capital. Your line is open.

Hey, Joe.

Good afternoon, guys. Actually all of my questions have already been answered. Dave Bishop got them first. But listen, very good quarter again. Thanks.

Well, thank you, Joe. Thanks for being here. Appreciate you.

There are no further questions in the queue at this time. I'd like to turn the call back over to the presenters for any closing remarks.

Okay. Well, we don't have any. We thank everybody for being here and we'll look forward to next quarter. Have a great day.

This concludes today's teleconference. You may now disconnect. And have a great day.