Good afternoon, my name is Sarah, and I will be your conference operator today. At this time I’d like to welcome everyone to the Simmons First Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session [operator instructions]. Thank you, David Garner, you may begin your conference.
Thank you and good afternoon. I am David Garner, Investor Relations Officer of Simmons First National Corporation. We want to welcome you to our Fourth Quarter Earnings teleconference and web cast. Here with me today are Tommy May, our Chief Executive Officer, David Bartlett, our Chief Operating Officer, and Bob Fehlman, our Chief Financial Officer.
The purpose of this call is to discuss the information and data provided by the company in our quarterly earnings release issued this morning. We will begin our discussion with prepared comments and then we will entertain questions. We have invited the analysts from the investment firms that provide research on our company to participate in the question and answer session. Our 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, may involved certain knows 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, we appreciate your being here with us today for our fourth quarter conference call. In our press release issued earlier today Simmons First did report total assets of $2.7 billion, and stockholder’s equity of $272 million at December 31, 2007. Our equity to asset ratio was 10.12% compared to 9.77% a year ago, while our book value at December 31, ’07 was $19.57 per share, compared to $18.24 at the end of 2006.
Simmons First also reported fourth quarter 2007 of $6.2 million or $0.44 diluted earnings per share. The 12 month earnings of $27.4 million of $1.92 diluted EPS. Further the release noted a $1.2 million pre-tax or $0.05 diluted EPS, non-recurring expense in Q4 ’07 in order to recognize the companies pro rata portion of Visa, Inc.’s litigation liabilities which we will discuss when we get to the non-interest expense section. However, considering the size of this non-recurring expense it is important to note when normalized, Q4 ’07 operating earnings were $6.9 million of $0.49 diluted operating EPS, an increase of approximately 4.3% over the same period last year. For the year 2007, operating earnings were $28.1 million or $1.97 diluted operating EPS.
Net interest margin for the fourth quarter 2007 improved 14 basis points to 4% when compared to the same period last year. Net interest income for Q4 ’07 increased by $1.2 million or 5.6% compared to Q4 ’06 due to a better than expected growth in our loan portfolio and continued improvement in the securities portfolio yield. As noted in our previous conference call, significant maturities and securities re-pricing have improved our investment throughout the year.
As anticipated on a link quarter basis, net interest margin declined slightly but only by one basis point. While recent cuts in the fed funds rate have decreased the cost of deposits our loan yields have been similarly impacted holding our margins at previous quarter levels. Due to the uncertainty of future rate movements and the seasonality of our loan portfolio, we anticipate some margin compression in Q1 ’08.
Non-interest income for Q4 ’07 was $11.8 million compared to $10.8 million for the same period last year, a 9.7% increase. Let me take a minute to discuss three areas that impacted our net interest income. First would be our credit card fees, they increased by $598,000 or 21.1% in Q4 ’07 compared to Q4 ’06. Most of this increase was due to higher volume of credit and debit card transactions. In a moment we will spend a little bit of time discussing he positive trends we continue to see in our credit card portfolio.
The second are would be our other service charges and fees which increased by $103,000 or 14.4% compared to the fourth quarter of 2006. This increase was due to the growth in ATM and debit card income which was primarily driven by pin-based debit card volume. The third and final area for discussion would be the income for investment banking which increased by $141,000 or 158% for the quarter when compared to last year. This improvement was due to additional sales volume driven by the current yield curve and customer’s expectations of future interest rate decreases.
Let me spend a few minutes and move over to the expense category if I could. Non-interest expense for the fourth quarter was $24.8 million, and increase of $2.2 million or 10% form the same period 2006. This increase is primarily the result of the previously mentioned $1.2 million pre-tax non-recurring expense to recognize the company’s prorated portion of Visa, Inc.’s liabilities. In October 2007, Simmons First as a member of Visa USA received shares of restricted stock in Visa, Inc. as a result of it’s preparation for an initial public offering. In accordance with the guidance from Visa and the SEC, Visa member banks were encouraged to consider the creation of a contingent liability based on the member banks current pro rata ownership of Visa to reserve for the potential funding of the litigation settlement. As such, Simmons First filed two 8-Ks in December related to Visa’s litigation.
The first 8-K was filed in December 17, and it reported that Simmons First recorded a $928,000 or $0.04 EPS charge related to Visa’s settlement of a lawsuit with American Express. We filed another 8-K on December 28 to report an additional charge of $292,000 or $0.01 EPS related to our pro rata portion of Visa’s estimate contingent liability to the Discover Card lawsuit. While Visa has not settled with Discover, Visa was able to estimate its potential loss with some degree of certainty. Thus according to carrying rules and previous guidance Simmons First recorded the estimate liability.
These two contingent liabilities total $1.2 million or $0.05 EPS ad negatively impact reported net-income for 2007. But are excluded from operating earnings since they are non-recurring items. As reported in the 8-Ks as well as in Visa’s 8-K filed November 7, if Visa’s ITO is successful which is expected in Q1 2008, Visa will establish an escrow account to fund the litigation liability. As such, we expect to reverse the 1.2 million liability of the first quarter of 2008 resulting in a non-operating benefit of $0.05 EPS thus neutral to the shareholder.
Concluding our discussion of non-interest expense, during the fourth quarter as a part of our on-going efforts to manage our branching operations, we identified an underperforming financial center that will be closed during the first half of 2008. As a result we expensed $113,000 of leasehold improvements related tot his financial center. Needless to say, we expect the cost to be more than offset from the expense savings during the first full year.
Additionally credit card expenses increased by $209,000 n a quarter over quarter basis. As a number of credit card and debit card accounts and transaction increases there is a corresponding increase in expenses related to credit card applications, card creation and interchange. Also included in the Q4 ’07 are the expenses associated with the company’s four new financial centers that were opened since Q3 ’06. Excluding the impact of the new branches, the write-down of leasehold improvements and the non-recurring expense, non-interest expense increased by only 2.9%.
Now let’s switch gears and spend some time discussing our credit card line of business. We’re very pleased to announce an increase in Q4 ’07 of $22.7 million or 15.8% in our credit card portfolio balance compared to the same quarter last year. As we have pointed our in earlier teleconferences, the improvement is even more significant when you consider that our credit card portfolio balance had declined by $10 million to $12 million each year for the previous three years. We began seeing some improvement in Q4 ’06 as our balances increased slightly from the previous year. We have now seen progressive improvement in quarter-over-quarter credit card balances each quarter in 2007.
As we reported in previous quarters after five consecutive years of net decrease in the number of credit card accounts, we saw an addition of 1,650 net new accounts in 2006. Over the course of 2007 we added nearly 15,000 net new accounts. We believe the initiatives discussed in previous teleconferences were instrumental in the slowing in the number of accounts closed and with the introduction of our 7.25% fixed rate card in July of 2006, resulted in the increase of application volume and approved new accounts.
While we remain cautiously optimistic about our credit card portfolio growth, we fully realize the significant competitive pressures in the industry and uncertainty in the economy. Thus we cannot be assured that the growth trend will be sustained. Further, we are approaching the upper end of the target range that we established for this portfolio.
As of December 31, 2007 we reported total earnings of $1.9 billion, an increase of $67 million of 3.8% compared to the same period a year ago. The growth was primarily attributable to the increase in our credit card portfolio, a 2.7% increase in the real estate loan portfolio, primarily commercial real estate and 11.8% in commercial loans. Overall loan growth was somewhat mitigated by a 6% reduction in real estate development and construction loans due to the slow down in the industry. As discussed in the previous conference calls, student loan balances also declined due to early sales to avoid consolidation lenders. Like the rest of the industry our loan pipeline would lead us to believe that loan demand is softening.
Although the general state of the national economy is somewhat turbulent and despite our own challenges in the Northwest Arkansas region, we continue to have strong asset quality. As of December 31, 2007 the company’s non-performing loans to total loans were 60 basis points. And the non-performing asset ratio was 75 basis points. At quarter the allowance for loan losses equaled 1.37% of total loans and 226% of non-performing loans. Annualized net charge-offs to total loans for Q4 ’07 were 33 basis points. Excluding credit cards, annualized net charge-offs to total loans were 26 basis points. For the fourth quarter 2007, credit cards net charge offs as a percent of credit card portfolio were 1.12%, slightly up from 1/05% in Q4 ’06, but still approximately 300 basis points below the most recently published credit card charge off industry averages.
Credit card charge offs for the entire year were 1.14% compared to 1.06% for 2006. As we have discussed in previous teleconferences we expected credit card charge offs to increase somewhat from 2006 levels, gradually returning to more historic levels in excess of 2%. WE still expect credit card charge offs to increase; however the trend continues to be slower than anticipated.
During Q4 ’07 the provision for loan losses increased $1.1 million on a quarter-over-quarter basis and $900,000 on a linked quarter basis returning to more normalized levels. While we have sustained a low rate of credit card net charge offs, we have seen an increase in our residential development and construction loan delinquencies and non-performings in Northwest Arkansas region resulting in an increase in net charge offs and the increase in our provision. Likewise, because of the uncertainty in the overall economy we will continue to be proactive to the adequacy of our loan-loss reserve specifically in that region. It is probable that the provision for loan losses will continue at a more historical level in 2008 throughout the company. Obviously this depends on credit card charge offs, loan growth and overall asset quality trends.
Let me take a minute to expand on what we see in Northwest Arkansas region. While we continue to see bankruptcy and foreclosure filings associate with the residential real estate market in that region, and while we believe there are likely more to follow there is a general belief that there may be a return to normalcy by the later part of 2009. Washington and Denton Counties continue to have population growth, thus absorption rates are likely to improve since new developments and construction have slowed significantly.
Concerning our company, we have one of our most seasoned management teams in this market. We have been proactive in the identification and resolution of problem assets and we have significantly increased the loan loss reserve based on the challenges of the region; however it is important to note that our asset quality in this region remains very manageable. And in fact those non-performing loans represent a relatively small percent of the company’s total portfolio.
During the fourth quarter the company announced the substantial completion of the existing stock repurchase program, and the adoption by the board of directors of a new repurchase program. The new program authorizes the repurchase of up to 700,000 shares of Class A common stock or approximately 5% of the outstanding common stock. During 2007 the company repurchased approximately 321,000 shares under the current and previous plans with a weighted average repurchase price of $26.75 per share or $8.6 million.
Finally, let me update you on our current DeNova branch expansion plan which we began in 2005 and is focused on the growth markets of Arkansas. In 2005 we opened five new financial centers, closed four and relocated another. We opened two new financial centers in 2006. During 2007 we made our initial entries into BB, North Little Rock and Paraville, which opened during December. As a part of our continuing effort to manage our branching locations, we have closed financials in Fayetteville and Kinset in 2007 as well as identified a financial center to be closed during 2008. Currently under construction and scheduled to open in early 2008, are a new financial center in Little Rock midtown near the War Memorial Stadium and a new regional headquarters in Rogers for our Northwest Arkansas area. We continue our process of evaluating all of our financial centers relative to their efficiency, profitability and growth potential.
Bottom line, quarter-over-quarter we experienced better than expected loan growth, 4%, margin improvement, 14 basis points as anticipated, strong asset quality in the midst of challenges and continuation of low credit card charge offs, 1.12% and the overall positive trend in the credit card portfolio. All of the above resulted in a 4.3% increase in operating EPS. We entered 2008 with the premise that the banking industry will likely see some asset quality challenges, a slowing of loan demand and margin compression. In addition Simmons First will be somewhat negatively impacted by regulatory changes related to student loans and we are in the final stages of our DeNoveaux expansion plan.
On the other hand as mentioned earlier we are very pleased with the growth of our credit card operations. Like the rest of the industry we expect the rest of 2008 to be a year of challenge relative to meeting our normal growth expectations. However as we enter 2008, we are obviously pleased with the strength of our capital and asset quality. WE remind our listeners that Simmons First experiences seasonality on our quarterly earnings due to our agriculture lending and credit card portfolios and quarterly estimates should always reflect that seasonality.
This concludes our prepared comments and we would like to open the phone lines for questions form our analysts. So let me ask the operator to come back on the line and once again explain how to queue for the questions.
[Operator instructions] your first question comes from the line of Barry McCarver with Stephens, Inc.
Barry McCarver – Stephens, Inc.
Good afternoon, guys, good quarter. A couple of questions here. To start off with, all of your comments a second ago about the industry and asset quality, could you comment on any of the market sin Arkansas you’re still looking at closely and how you expect non-performers minus the credit card portfolio could roll out this year for Simmons.
That’s a good question. I think on the national front with what we call the headwinds that we’re seeing with the national economy a lot of that still has to unfold. But I think that we start the year with good numbers. Certainly until the national part unfolds, we’re not going to know where that’s going to go. But we would be, I guess, somewhat naïve to believe that Arkansas still will not be affected in general. In particular because so many of the challenges that we’re hearing about and seeing in the national economy deal with the residential side, obviously the Northwest region of Arkansas is feeling the brunt of the heat associated with some asset quality challenges. As I mentioned in the text, we have seen a continuation of some foreclosure and bankruptcy filings in that particular area.
Really at this point I think overall Arkansas has just not seen a lot of the challenges but there are still some to be had. Except for the Northwest Arkansas region. We feel like in the Northwest Arkansas area there is some light at the end of the tunnel.
If we look at the market just in general I think what we are seeing, the most positive thing is the two counties, Washington and Benton County continue to have growth. We’re also seeing, as one would expect, not many new permits coming about. Not a lot of lot development and certainly not a lot of construction of new homes. Thus the absorption we hope will continue to look a little bit better.
I guess the bottom line would be, we still feel very good about Arkansas. We still are very concerned about the Northwest Arkansas region in general. But as we have gone through and looked at our particular institution, while we’re going to be affected like everybody else, with the rising tide impact, I think our group is very proactive. I think we’ve done a good job of identifying and quantifying and I think we will the storm as well as it can be weathered.
This is David Bartlett. I’d like to add to what Mr. May just said. Looking at the data that we’re seeing in Northwest Arkansas, as Mr. May already pointed out we’re seeing somewhere around 500 new jobs created a month, 900 to 950 people moving into the community a month. Relatively speaking that’s not too bad. When we hone it down and start looking particularly at the housing market, the time on the market is still staying well below 90 days. The prices in both existing home sales and new home sales are close to 97-98% of their asking price. Prices are still hanging in, in the $95 to $100 per square foot range on both existing and new construction.
Yes, we’ve seen a downturn, but relatively speaking the cleansing process and everything else, we feel like there’s still some problems ahead, but overall the market seems to be holding on okay.
And as Mr. May said before m the leadership of our management staff up here is giving us a lot of additional comfort.
Barry, let me take another piece of that portfolio, which obviously other than the Northwest region of Arkansas that we have to pay lots of attention to and that’s our credit card portfolio. We’ve been in this business4 for a long time and as you look at an economy like we’re looking at, the thing you have to be concerned about or at least have your eyes wide open about, is what happens if we move closer and closer to recessionary challenges and you have people that have loss of jobs and so forth. We haven’t buried our heads in the sand and just assumed because everything has always been good that it will continue to be.
I think we have proven that we have done a very good job of underwriting. Again, you do get the rising tide impact. So nationally we could be impacted more so on the credit card side and the way we have acknowledged that is through the increase in provision. As we think we’ll continue to see at least a return to closer to normalcy in our charge offs there. It’s been very, very good and our charge offs that are about 1.14 up from 1.05 still much better than where we would project that it would be at this point in time.
We’re going to be proactive there and jump our provision up in anticipation of some challenges in that particular arena.
Barry McCarver – Stephens, Inc.
You started in on my second question, too about the loan-loss provision, could you give us just a little bit more detail on how it got to the 1.7 to make sure we’ve got our model right going forward?
I think there are two things. I think first of all the quarter number of 1.7 is probably a little bit higher than our projection for 1008 just based on as we are modeling the things we just talked about. Not only the Northwest Arkansas region, but that number is probably closer to the historic ranges of $1,500,000 is the number we would look at per quarter. Again that’s just using our modeling for those two particular areas.
As you well know, only time is going tell whether or not we have to make adjustments in those numbers. The fourth quarter is a little bit higher because we did make some special provisions in Northwest Arkansas as David said. Our team there has been very proactive in wanting to be on the front end of the process.
Barry McCarver – Stephens, Inc.
Okay, that's good. Just lastly, I didn't catch all your comments about the growth in the credit card portfolio in the fourth quarter. Could you give me the drivers there again and your thoughts going forward?
The total dollars in the quarter was about $22 million on a quarter-over-quarter basis which is about 15% as I mentioned in the text, remember last year, after we had turned the trend of loss in accounts with the initiatives that we put in place, ’06 was about 1,600 new accounts. Then, of course, in ’07 with the introduction in July of ’06 of the 7.25% no frills fixed rate card, we started to see the results of that. I thin you've seen it here. Correspondingly 15,000 new accounts, so we’ve got a 15% increase in total dollars.
Remember one of the things that we said is that we tried to stabilize that credit card portfolio somewhere in the north of $140 million after it had actually dropped to $125 million. In fact we are north of the $140 million range and we ended the year somewhere around $164 million on a seasonality basis. We’ve accomplished what we want to do and if you take that seasonal impact out of it, it will probably come back into that 150 range. We’re sort of approaching the upper end of the range that we want to see there which I think is very much a positive.
We don’t expect competition to go away in that particular arena and if we’re able to continue to grow it, then that gives us other opportunities of how to manage that might in fact create [OVERLAY]
Barry keep in mind our seasonality in the first quarter, our seasonality in credit cards is $10-$12 million for the Christmas season and that will drop in the first quarter. Also our loans will continue to pay off in the first quarter and in the second quarter is when they’ll come back on.
Barry McCarver – Stephens, Inc.
Okay. Alright, guys, good quarter, thanks a lot.
Your next question comes from the line of David Scharf of FTN Midwest.
David Scharf - FTN Midwest
Good quarter, minus the Visa, but you couldn’t help that, could you?
I just wanted to touch a little more if you’re seeing some deposit pricing coming in, and presumably the fed’s going to cut and just sort of your thoughts on how it’s going to work on the cost to funds side and also on your ability to keep the loan [inaudible – 00:06:04]
Good question I wish I had a good answer to the pricing side. Let me start with that and simply say if you look at tour cost of funds we have had some reductions to the cost of funds. But not a lot of that has come from the CD side. I think what we’re seeing is that certainly we’re starting to see some backing off. When you look at the last two reduction in the federal funds rate, we did not see a whole lot of decreases relative to the CD pricing. Our expectation would be that we’re going to see some adjustment probably going forward if one was to assume that the federal reserve decides to drop again on the 29th and 30th.
Right now as we look forward into the first quarter, we have quite a bit of deposit re-pricing opportunities. Certainly we’re hoping to see some opportunities to re-price those down, I don’t think we’re expecting to see a lot of that.
David Scharf - FTN Midwest
What portion of your loan portfolio is fixed right now?
David I don’t know exactly what that answer is. I guess I could back into it. There’s two floating rate parts that we have obviously as the commercial floating rate and then our credit card floating rate and then the fixed rates would be the same. I'm going to guess that probably over 40% of that loan would be fixed wither in the credit card side and or the commercial side. Our fixing is relatively short. Generally speaking we try to stay in that three to five year range.
That’s not exact, that’s sort of a guess based on, I think my fellows are advising me that that’s pretty close. That it’s 47%. Remember that’s factoring in the credit fixed rate card also, and it’s saying that those fixed are probably somewhere in the three to five year average.
David Scharf - FTN Midwest
Okay. And what’s the amount of CD’s that are rolling off this quarter?
In the CD’s corporate wide in the quarter we have about $70 million that are going to be re-priced in a special campaign that we have out there that averaged about 4.45%. Then total we’re going to have about $350 to $400 million that are going to be re-pricing and I'm going to say that’s in a 90 day period and it still falls in that 430 to 450 range.
David Scharf - FTN Midwest
Just a follow up on Barry’s question, could you just give a little more clarity, granularity on the NPL portfolio, what’s comprised as far as loan composition?
On non-performing loans? On thing I’d guess you’d notice that in that $9.9 million, I think it is total in non-performing loans, it’s up about $1 million over what it was last year, and probably a big portion of that, basically all of that, would be coming out of Northwest Arkansas. About $7.3 million of that total is in real estate 883 and commercial and about $1.6 million, $1.7 million in the consumer side. And that real estate of $7.3 million, I don’t know what portion of that would be commercial real estate, but I can tell you out of the total $10 million in non-accruals about a little over $3 million of that is in Northwest Arkansas. That would generally be the mix.
David Scharf - FTN Midwest
As far as working through the OREOs, how is that process.
I think again, if out look at the regions of Arkansas and you look at what we’ve got, we’ve only got $2.6 million in total OREO property throughout the corporation. And so we’ve managed that very, very well, and we continue to manage it very well. Obviously again in Northwest Arkansas, we’ve tried to be proactive in the identification and the resolution of it. I think likewise once we move it into OREO we tried to be proactive, yet prudent in moving that property and I think these numbers probably show that we’ve been successful there.
David Scharf - FTN Midwest
Is it fair to say real estate values are somewhat stabilizing In that portion of the state?
Let me try to attempt to answer that. I'm going to tell you again, the ripple effect of the foreclosures, I'm not sure we’ve seen the end of that, they’re not going to keep that property on the books long and that’s going to continue to depress the market but just based on the sales numbers that we saw at the end of the forth quarter last year in Northwest Arkansas, they’re hitting still in the high 90% range on asking price. If it’s stabilized, there’s probably still some weakness in it. Has it deteriorated greatly? No.
David Scharf - FTN Midwest
Okay, great, thanks so much for your time guys.
There are no further questions at this time.
Well thank you very much and thank everyone for being here. We look forward to talking to you again soon. Have a great day.
This concludes today’s conference call, you may now disconnect.
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