Welcome to the Simmons First National Second Quarter Earnings Conference Call. (Operator Instructions) Mr. Garner, you may begin your conference.
We want to welcome you to our second quarter earnings teleconference and webcast. Joining me today is 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 invested 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 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.
In our press release issued earlier today Simmons First reported June 30, 2008 total assets of $2.9 billion and Stockholders' equity of $278 million. Our equity to asset ratio was 9.5% and our tangible equity ratio was 7.5%. Book value at June 30, '08 was $19.94 per share and tangible book value was $15.38, obviously our company remains well positioned with strong capital.
Simmons First reported second quarter 2008 earnings of $6 million or $0.42 diluted earnings per share compared to $0.49 diluted EPS in Q2 ’07. This decrease is primarily attributable to an increase in the provision for loan losses and a decrease in the premiums from the sales of student loans. We will discuss both of these items in more detail in a moment.
For the six month period ended June 30, 2008 net income was $14.8 million or $1.05 diluted earnings per share, compared to $13.7 million or $0.95 per share for the same period in 2007, an increase of $0.10 or 10.5%. As we discussed in previous conference calls, during Q1 ’08 we recorded earnings of $0.18 per share for non-recurring items related Visa, Inc.'s IPO. Excluding these nonrecurring items, core earnings for the first six months of 2008 were $0.87 per share.
Net interest income for Q2 '08 increased $305,000 or 1.3% compared to the same period last year. Net interest margin for Q2 ’08 declined, 29 basis points to 3.67%. When compared to the same period last year.
On a link quarter basis, net interest margin declined 13 basis points. The decrease in margin was primarily the result of a significant re-pricing of earning assets due to declining interest rates during the first half of the year and our concentrated effort to grow core deposits. Based on our current pricing model with rates remaining constant, we anticipate a relatively flat margin for the remainder of 2008.
During Q1 '08, we introduced two new initiatives to enhance the liquidity of the company. First, we introduced a high yield investment account, which year-to-date has generated approximately $95 million in new money and $38 million in transfers from high costing time deposits.
Overall on a quarter-over-quarter basis, our core deposits grew $290 million and our time deposits decreased by $107 million. Second we made a strategic decision to secure about $55 million in long-term funding from federal home loan bank borrowings. Through this process while we slightly negatively impacted margins, we have been able to reduce our dependency on more costly time deposits, increase our liquidity and develop approximately 600 new customer relationships.
Non-interest income for Q2 ’08 was $11.7 million compared to $11.3 million for the same period of last year, a 3.4% increase. Let me take a minute to discuss some items that impacted non-interest income. First, credit card fees increased about $455,000 or 15% in Q2 ’08 compared to same period of last year. This increase was due to a higher volume of credit and debit card transactions. The high credit card transaction volume is a direct result of the initiatives we have discussed in previous conference calls.
Second, the overall increase was somewhat mitigated by a decrease of $234,000 in premiums on the sales of student loans. This decrease was primarily the result of fewer loans being sold to avoid consolidation lenders in Q2 '08 versus Q2 '07. Let me give you an update on this line of business. As you are probably aware the liquidity of the student loan secondary market has effectively disappeared.
At this time, we did not expect to be able to sell student loans at a premium during the second half of the year. Obviously, the lack of a secondary market will create major obstacles for the private sector to continue providing educational access, however at a minimum. Our plans are to continue to turn our commitments to our customers through the 2008, 2009 school year.
By not overreacting, we hope that reasonable bonus will prevail and the private sector we will ultimately be rewarded appropriately and we would be able to continue providing the same exceptional service, as we have since 1965. Our role as an Originator Services might ultimately change, that it is too early to tell as the landscape is still being defined. As such for the immediate feature it is our intention and we have the liquidity to hold loans that we normally will sell into the secondary market.
At worst the loans originated over the next 12 month period could be sold during Q3 ’09 into a government program which was formed to create temporary stability in the student loan market. Obviously the profits on those sales could be less than we’ve historically received. However, since we are not likely to sell loans in the secondary market during the balance of 2008, we estimated net pre-tax impact on earnings for the balance of ’08 is a reduction of $400,000 compared to the same period in 2007.
Specifically, we estimate a reduction of sum $700,000 in premium income partially offset by $300,000 increase in net interest income due to an increase in volume. We will continue to evaluate the profitability and liability of this strategic business unit going forward. Currently, they are way too many uncertainties concerning the rules of government, secondary market and the private sector to make long-term decisions.
Moving on to the expense category, non-interest expense for Q2 ’08 was $24.2 million an increase of $1.2 million or 5.2% form the same period in 2007. Included in Q2 ’08 all the expenses associated with the company’s five new financial centers that were opened after the first quarter of 2007. Excluding the impact of these new branches non-interest expense increased by only 3%; we’re all pleased with this modest increase, however there are a couple of items I would like to discuss.
Credit card expense increased by $191,000 in Q2 ’08 compared to Q2 ’07, primarily due to the increase volume in credit card applications, card creations, inter change and other related expenses resulting from initiative the company as taken to stabilize and grow with the credit card portfolio. A new accounting pronouncement EITF 6-4 required a change in the method of accounting for post retirement benefits related to bank-on-life insurance, effective January 1, 2008. In Q2 ‘08 we recorded a $72,000 expense due to the accounting change compared to no expense in Q1 ‘07.
As of June 30, 2008 we reported total loans of $1.9 million an increase of $87 million or 4.8% compared to the same period last year. The growth was primarily attributable to 17.7% increase in commercial loan, 3.8% increase in single-family residential and commercial real estate loans and a 15.5% increase in our credit card portfolio. Overall loan growth was somewhat mitigated by 7.7% reduction in real estate construction and development loans due to prominent financing of completed projects and a 3.3% decrease in the other consumer loans.
Like the rest of the industry our loan top line is relatively soft. Considering the challenges in the economy it is important to note that we have no significant concentrations in our portfolio mix, our construction and development loans only represent 12.9% of our consolidated portfolio and we have no sub-prime assets in either our loan or investment portfolio.
Now let me give a brief update on credit cards, a line of business that we continue to be pleased with. Our credit card portfolio balance increased in Q2 ’08 by $21.8 million or 15.5% compared to the second quarter last year. This continues the trend set in 2007 as we are now seeing quarter-over-quarter growth in credit card balances for seven consecutive quarters. The increase in balances can be mostly attributed to the increase in new accounts.
As we have discussed in detail in previous conference call, after several years of net new account losses, we introduced a number of new initiatives that reversed the trend and in fact added nearly 15,000 net new accounts in 2007. Although the account growth is slowing, the positive trend has continued into 2008 with the addition of over 35,000 net new accounts in the first six months of the year.
Although the general state of the national economy is turbulent and despite the challenges in the Northwest Arkansas region we continued to have relatively good asset quality; in fact, we continued to enjoy good asset quality in all the other regions of Arkansas. At June 30, 2008 the allowance for loan losses equaled 1.35% of total loans and 178% of non-performing loans.
Non-performing assets as a percent of total assets were 0.61% up 10 basis points on a linked quarter basis. Non-performing loans as a percent of total loans were 0.76% an increase of 16 basis points. Both of these increases were driven by $3.4 million increase in non-performing loans. This increase can be primarily attributed to two credits in the Northwest Arkansas market. Both of these loans migrated from the 30 to 89 day past due category in last quarter; on another positive note the 30 day past due ratio excluding non-accrual loans was 0.48%, which is down 59 basis points from the previous quarter.
The annualized net charge-off ratio for Q2 ’08 was 0.40 or 40 basis points compared to 30 basis point for the first quarter. Excluding credit cards the annualized net charge-off ratio was 0.27% compared to 0.19% for the first quarter. Annualized net credit card charge-offs were 1.83%, an increase of 36 basis points from the previous quarter, but still more than 350 basis points below the most recently published credit card charge-off industry average. We continue to expect that credit card charge-offs will gradually return to more historical levels in excess of 2%.
During Q2 ’08 the provision for loan losses was $2.2 million, an increase of $1.4 million from the same quarter in 2007. This increase includes a $700,000 special provision for Northwest Arkansas region. The remaining $1.5 million provision represents a return to a more normalized level based on recent asset quality trends. This equates to approximately a 32 basis points annual rate of which 20 basis points are allocated to the general portfolio and 12 basis points to the credit card portfolio.
Because of the uncertainty in the overall economy we will continue to be aggressive relative to the adequacy of our loan loss reserve specifically in the Northwest Arkansas region. It is probable that the provision for loan losses will continue at more historical levels in 2008, throughout the company. Obviously, this depends on the credit card charge-offs, loan growth and overall asset quality trends.
Let me take a minute to reiterate what we have previously said and what we continue to see in Northwest Arkansas region. While bankruptcy and foreclosure filings associated with the residential real estate market in that region continued to be a problem and while we believe there are likely more to follow; at the current time there is a general belief or hope that there maybe some return for normalcy by the later part of 2009; obviously that can change, and on a positive note Washington and Benton counties continue to have population growth thus absorption rates are likely to improve since new developments in construction have slowed significantly.
Concerning our company as stated previously 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 that region. Accordingly we have made previously mentioned special provision. Before we recognize the challenges remaining in this economy and there is likely to be further deterioration in this region before a return to normalcy.
The put things in perspective, the total loans originated in the Northwest region only represent 13.6% of our total consolidated portfolio. On final thought we do believe that the Northwest Arkansas economy will work with the challenges related to an over built real estate market and will once again be one of Arkansas most attractive markets. Remember the influence of Wal-Mart, Tyson, J.B. Hunt and The University of Arkansas remains a powerful attraction on their job growth.
The company's current stock repurchase program authorizes a repurchase of up to 700,000 shares of Class A common stock or approximately 5% of the outstanding common stock with 646,000 shares remaining available. During 2008, we have repurchased approximately 45,000 shares with a weighted average repurchase price of $28.38 per share or $1.3 million. Effect of July 1, we made a strategic decision to temporarily stop our stock repurchases. This decision was made to preserve capital and cash of the parent company most of which maybe needed in potential future acquisitions.
I would like to give you a final update on our De Novo branch expansion plan which began in 2005. In Q1 ’08 we open the last two financial centers completing the original plan. We currently have no plans for additional De Novo financial centers. 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 good loan growth 4.8%, margin compression 29 basis points, increased provision expenses, good asset quality compared to the industry, a continuation of relatively low credit card charge-offs at 1.83% and an overall positive trend in the credit card portfolio and strong growth in core deposits.
Like the rest of the industry we expect the balance of 2008 to be a challenge relative to meeting our normal growth expectation. However, Simmons First is well positioned based on the strength of our capital, asset quality and liquidity to deal with the challenges and opportunities that we face for the reminder of 2008.
We continue to believe that the Arkansas economy will better sustain the economic challenges because as primarily a real estate. We have not and likely will not experience the same highs and lows that will challenge much of our nation. We remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agricultural lending and credit card portfolios and quarterly estimates should always reflect their seasonality.
This concludes our prepared comments and we would like to now open the phone line for questions from our analysts and let me ask the operator to please come back on the line and once again explaining how to queue in for questions.
(Operator Instructions) Your first question comes from Matt Olney - Stephens.
Matt Olney - Stephens Inc.
Tommy you gave some good details on the student loan issues our there and how the fee income maybe down partially offset by some interest income. Could you go with those details one more time?
Yes, I think I can. What we said is the net impact is about $400,000 for the balance of 2008. $700,000 of that would be in the area of non-interest income from the sale and then that would be offset by a positive impact of about $300,000 on the carrying in of additional loans in our portfolio for that period of time.
If you look at our income statement, you will see that premium on sale student loans in the non-interest income category; what we got in the third quarter and the fourth quarter of ’07, that income will basically go away because of the liquidity in the student loan market and that’s what Mr. May said, but yet our portfolio will increase and there will be a spread on that. So, we think again the difference will be about $400,000.
Matt Olney - Stephens Inc
And that’s for both the third quarter and fourth quarter combines, is that right?
Matt Olney - Stephens Inc.
You also provided some details on the expenses Tommy, I think you mentioned the credit card applications were up, the new bully accounting rule. I didn’t see anything in then that was unusual in the sense that it would dropout in the back half of the year; is that fair to say?
No. I believe what we’ve said is that the expenses, the non-interest expense was up about 5.5% ?
Yes, about 5%, you normalize it; on a quarter-over-quarter basis for the branches would be about 3, but Matt if you look at the second quarter I think you’ve got a pretty good run rate going forward with our branches fully loaded and then at Burghley we talked about a little bit, the $72,000 or so, that’s going to carry forward going for the next few years, but, we’ll say the second quarter is a pretty good run rate and then we also noticed, Mr. May said earlier that are De Novo branches were at the end of that process right now. We’re continuing to evaluate where we are, so we should have second quarter fully loaded for the branches in there.
Matt Olney – Stephens Inc.
Could you provide any more details as to what market some of this loan growth was in, in terms of the C&I, was it one or two sizable loans or several smaller loans?
I think on the C&I, first of all it would be generally in all the markets, we did have a significant funding under a larger line of credit that we have in the company that would help drive that, but otherwise I think it was in all the regions.
Yes, looking across the region there was pretty good growth across the regions as Mr. May said.
Matt Olney – Stephens Inc.
As far as the credit card portfolio, could you remind us what your policy is regarding charge-off on outstanding balances? Is it a several of 90 days, 120 days or is it more of a case-by-case issue? How do you look at that?
Well we did have a policy that says that it will not go beyond a certain point and then it’s a case-by-case prior to that and I think that is a 120 days or 180 days.
Are they 120 days for sure.
I don’t know the exact details, but I think about a 120 days, but I think that same policy also says that there are circumstances that would cause us to charge it off prior to that and that policy is fairly consistent with the credit card policies that you would see in most banks throughout the country and certainly one that has been agreed to by the regulators.
Matt Olney – Stephens Inc.
It sounds like that the credit card balance continues to perform pretty well with your different offering out there on your credit cards. Is the number of new applications continue to increase as well over the last few months; I know there is a lot of worry out there with the consumer, but in terms of applications, are you still seeing quite a few dealings come in the door?
I think, the number of applications have increased, but they have increased at a slower rate. In fact, if you look at the net new accounts that we have in the credit cards for the first six months of ’08 they would probably be about 50% to 60% of the same level that they were in ’07. That is obviously not a big surprise and we continue to have very tough underwriting standards as the quality of our portfolio reflects.
Matt Olney – Stephens Inc.
Can you remind us of on the credit card portfolio, the customer or maybe the balance, do you have a percent of how’s that balance in Arkansas in state; your core markets maybe a percent of your core customers?
About 55% of that total loan portfolio is from Arkansas. The other 45% spread out throughout the United States with no major concentrations in the any area including the California, Florida and New York, Midwest area, there are no concentrations there.
Probably, outside of Arkansas is 4%, 5% would be the highest in anyone market, that would be in a rare case.
Your next question comes from David Scharf - FTN Midwest.
David Scharf - FTN Midwest Securities Corp.
I just wanted to follow-up where if we could go on to sort of the net interest margin. Tommy you had mentioned that the numbers certainly reflect that with considerable momentum in the core funding. Could you give me some yield analysis with that as far as what you’re offering on the money market relative to the some of the higher costs to these that have rolled off and also some of the longer term debt that you put on?
Yes, let me first of all I’ll start with a longer term that and that was the $50 million, is that right Bob?
$55 million with federal home loan bank, that was done in like two trances; one was two years, one was at three years. The average costs of that borrowing was about 210 or 215. In addition to that borrowing we introduced a new transaction account what we call our high-yield investment account and that high-yield investment account has generated somewhere close to $90 million.
The current rate on that high yield investment account is 2.55%. The other positive part of that high-yield investment is that we were able to move some money from our CD accounts that were maturing during that that offering period about, I am going to guess somewhere close to $150 million. Bob you will have to correct me if that’s wrong but about a $150 million and those rights when they were maturing they were add about 415, to 4.25% range.
So we accomplished several things through that and again it was our intentions to do so. Obviously one was to build liquidity because we felt like that was consistent with our strategy as we were moving through these turbulent times of having strength in capital asset quality and liquidity. This second thing was to change our mix in our resources from lesser reliance on the CDs and to increase the transaction side or we could get new customer relationships and obviously cross sales non-interest income services to. So, I think we’re very, very pleased with that based on where we are today.
David Scharf - FTN Midwest Securities Corp.
Yes, it’s definitely a great trend to see. What would you say are the ability of CD’s that are re-pricing over the next quarter or two that you may have the ability to move over also into that higher yield account?
David, we have about 300 and $350 million.
Yes, 340 in the next 90-days.
$340 million at of 3.85% -- 3.89% interest rate and obviously depending on what happens with interest rates between now and then we’re going to get some pick up there. Obviously, we would like to move some of them into the transaction account, but the challenge there will be we’re starting to see some of our competition to begin to pass a little bit more aggressively in trying to move dollars into the longer-term CD’s, so we just sort of have to wait and see, but we’re in a pretty good position; number, one with the CD’s maturing and number two, with our calls there at 389.
David let me give you the other numbers. We did see our April, May and June our margin improving each month in that period, so we were at the low end in April, then improved in May and improved in June. So, we did see some good things for the quarter towards the end of the quarter in margin.
David Scharf - FTN Midwest Securities Corp.
And how are you looking at the sort of towards the end of the year with the guidance of the net interest margin to be flat or maybe come in just a bit, but does not assuming the fed starts to tighten or raise rates a little bit. How are -- could you give me some thoughts on how that was text?
I think in the text what we say that based on a flat interest rate environment, our rates relatively unchanged that we would see that margin to remain relatively unchanged for the balance of the year. However, all that says is that we’re not projecting; it’s not that we don’t believe there will be some tightening.
Now, the fact is that we seem to do better with our portfolio mix in a flat interest environment, so it is very possible that while we said that we expect that margin to be flat, it is very possible that we will get some tick up based on our mix, based on our the earnings assets that we have, I mean the liabilities that we have that are going to be re-pricing. If we start moving into a rising interest rate environment, because we are asset sensitive and that’s obviously one of the reasons that we had the 13 basis point decrease is because our corporation is asset sensitive.
If rate start moving up and they move up in a relatively slow process then we also could get some pickup in the margin, but again we had no crystal ball there, so we’ve opted not to forecast.
David Scharf - FTN Midwest Securities Corp.
Is there any level of how much good loans you’ll keep on your balance sheet as far as the total portfolio?
Well that’s a very good question. In the tax what we have said is that since the secondary market has virtually disappeared, but based on -- not trying to crystal ball, but based on what we believe will ultimately happen in the market and the fact that we do know that we can sell these loans to the government in July through September of next year, we believe that we can add up to another $100 million in our portfolio and not only serve our existing relationships with the existing universities that we have, but possibly take on a little bit more where others will know it and again we think that can be very much a positive for us long-term.
If we may ask meaning the secondary market does not return or we cannot find the structure that we’re comfortable with, then we’re going to be able to sell those loans in July and September and we’re going to sell them at par, plus reimbursement of a 1% commitment fee, plus $75 per loan and that will be worthy the investment and the strategic decision to do this.
David Scharf - FTN Midwest Securities Corp.
Are the universities giving you all any concession because I mean you are standing by them. Is there any chatter now that you should get preferential spots whether it be ATM’s are advertising or anything like that?
I don’t think we’ve had the discussion, but certainly I think every university either already knows or will know and certainly most of them do know that we are the one bank that’s been in the student loan business since the 60s, have not dropped out and have done just exactly what you have said, have stood by them. So, I believe while there is no promises I believe that it will improve our relationship with them.
There are no further questions.
Thank you very much and thank all of you for being here today and hope you have a great rest of the summer. We’ll see you next quarter.
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