UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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T
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Annual
Report Pursuant to Section 13 or 15(d) of the Exchange Act of
1934
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For the fiscal year ended: December 31,
2008
or
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£
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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Commission
file number 0-6253
SIMMONS
FIRST NATIONAL CORPORATION
(Exact
name of registrant as specified in its charter)
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Arkansas
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71-0407808
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(State or other
jurisdiction of
incorporation
or organization)
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(I.R.S.
employer
identification
No.)
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501 Main Street, Pine Bluff,
Arkansas
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71601
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(Address of principal
executive offices)
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(Zip
Code)
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(870)
541-1000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock,
$0.01 par value
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The Nasdaq Stock
Market®
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(Title of each
class)
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(Name of each
exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
£
Yes S
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
£ Yes S
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. S
Yes £
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge in definitive proxy or in information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
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o Large accelerated
filer
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x
Accelerated filer
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o Non-accelerated
filer
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.). £
Yes S
No
The
aggregate market value of the Registrant’s Common Stock, par value $0.01 per
share, held by non-affiliates on June 30, 2008, was $350,885,496 based
upon the last trade price as reported on the Nasdaq Global Select Market® of
$27.97.
The number
of shares outstanding of the Registrant's Common Stock as of February 4, 2009
was 13,982,474.
Part III
is incorporated by reference from the Registrant's Proxy Statement relating to
the Annual Meeting of Shareholders to be held on April 21, 2009.
Introduction
The
Company has chosen to combine our Annual Report to Shareholders with our Form
10-K, which is a document that U.S. public companies file with the Securities
and Exchange Commission every year. Many readers are familiar with
“Part II” of the Form 10-K, as it contains the business information and
financial statements that were included in the financial sections of our past
Annual Reports. These portions include information about our business
that the Company believes will be of interest to investors. The
Company hopes investors will find it useful to have all of this information
available in a single document.
The
Securities and Exchange Commission allows the Company to report information in
the Form 10-K by “incorporated by reference” from another part of the Form 10-K,
or from the proxy statement. You will see that information is
“incorporated by reference” in various parts of our Form 10-K.
A more
detailed table of contents for the entire Form 10-K follows:
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FORM
10-K INDEX
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Part I
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1
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7
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13
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13
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13
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13
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Part II
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14
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16
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18
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45
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48
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82
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82
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82
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Part III
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82
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82
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82
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82
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82
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Part IV
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83
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85
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PART
I
ITEM 1. BUSINESS
The
disclosures set forth in this item are qualified by Item 1A. Risk Factors and
the Forward Looking Statements section in Item 5, “Market for Registrant’s
Common Equity and Related Stockholder Matters” of this report and other
cautionary statements set forth elsewhere in this report.
The
Company and the Banks
Simmons
First National Corporation (the “Company”) is a financial holding company
registered under the Bank Holding Company Act of 1956. The
Gramm-Leach-Bliley-Act ("GLB Act") has substantially increased the financial
activities that certain banks, bank holding companies, insurance companies and
securities brokerage companies are permitted to undertake. Under the
GLB Act, expanded activities in insurance underwriting, insurance sales,
securities brokerage and securities underwriting not previously allowed for
banks and bank holding companies are now permitted upon satisfaction of certain
guidelines concerning management, capitalization and satisfaction of the
applicable Community Reinvestment Act guidelines for the
banks. Generally these new activities are permitted for bank holding
companies whose banking subsidiaries are well managed, well capitalized and have
at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company must apply to become a financial holding
company and the Board of Governors of the Federal Reserve System must approve
its application.
The
Company's application to become a financial holding company was approved by the
Board of Governors on March 13, 2000. The Company has reviewed
the new activities permitted under the Act. If the appropriate
opportunity presents itself, the Company is interested in expanding into other
financial services.
The
Company is a publicly traded financial holding company headquartered in Arkansas
with consolidated total assets of $2.9 billion, consolidated loans of $1.9
billion, consolidated deposits of $2.3 billion and total equity capital of $289
million as of December 31, 2008. The Company owns eight community
banks in Arkansas. The Company and its eight banking subsidiaries
conduct their operations through 88 offices, of which 84 are financial
centers, located in 47 communities in Arkansas.
Simmons
First National Bank (the “Bank”) is the Company’s lead bank. The Bank
is a national bank, which has been in operation since 1903. The
Bank's primary market area, with the exception of its nationally provided credit
card product, is Central and Western Arkansas. At December 31, 2008
the Bank had total assets of $1.4 billion, total loans of $955 million and
total deposits of $1.1 billion. Simmons First Trust Company N.A., a
wholly owned subsidiary of the Bank, performs the trust and fiduciary business
operations for the Bank as well as the Company. Simmons First Investment Group,
Inc. (“SFIG”), a wholly owned subsidiary of the Bank, which is a broker-dealer
registered with the Securities and Exchange Commission (“SEC”) and a member of
the National Association of Securities Dealers (“NASD”), performs the
broker-dealer operations of the Bank.
Simmons
First Bank of Jonesboro (“Simmons/Jonesboro”) is a state bank, which was
acquired in 1984. Simmons/Jonesboro’s primary market area is
Northeast Arkansas. At December 31, 2008, Simmons/Jonesboro had total
assets of $295 million, total loans of $246 million and total deposits of $250
million.
Simmons
First Bank of South Arkansas (“Simmons/South”) is a state bank, which was
acquired in 1984. Simmons/South’s primary market area is Southeast
Arkansas. At December 31, 2008, Simmons/South had total assets of
$172 million, total loans of $91 million and total deposits of $147
million.
Simmons
First Bank of Northwest Arkansas (“Simmons/Northwest”) is a state bank, which
was acquired in 1995. Simmons/Northwest’s primary market area is
Northwest Arkansas. At December 31, 2008, Simmons/Northwest had total
assets of $287 million, total loans of $202 million and total deposits of $238
million.
Simmons
First Bank of Russellville (“Simmons/Russellville”) is a state bank, which was
acquired in 1997. Simmons/Russellville’s primary market area is Russellville,
Arkansas. At December 31, 2008, Simmons/Russellville had total assets
of $202 million, total loans of $121 million and total deposits of $146
million.
Simmons
First Bank of Searcy (“Simmons/Searcy”) is a state bank, which was acquired in
1997. Simmons/Searcy’s primary market area is Searcy,
Arkansas. At December 31, 2008, Simmons/Searcy had total assets of
$152 million, total loans of $104 million and total deposits of $120
million.
1
Simmons
First Bank of Hot Springs (“Simmons/Hot Springs”) is a state bank, which was
acquired in 2004. Simmons/Hot Springs’ primary market area is Hot
Springs, Arkansas. At December 31, 2008, Simmons/Hot Springs had
total assets of $166 million, total loans of $82 million and total deposits of
$117 million.
The
Company's subsidiaries provide complete banking services to individuals and
businesses throughout the market areas they serve. Services include
consumer (credit card, student and other consumer), real estate (construction,
single family residential and other commercial) and commercial (commercial,
agriculture and financial institutions) loans, checking, savings and time
deposits, trust and investment management services, and securities and
investment services.
Loan
Risk Assessment
As part of
the ongoing risk assessment, the Company has an Asset Quality Review Committee
of management that meets quarterly to review the adequacy of the allowance for
loan losses. The Committee reviews the status of past due,
non-performing and other impaired loans, reserve ratios, and additional
performance indicators for all of its subsidiary banks. The allowance for loan
losses is determined based upon the aforementioned performance factors, and
adjustments are made accordingly. Also, an unallocated reserve is
established to compensate for the uncertainty in estimating loan losses,
including the possibility of improper risk ratings and specific reserve
allocations.
The Board
of Directors of each of the Company's subsidiary banks reviews the adequacy of
its allowance for loan losses on a monthly basis giving consideration to past
due loans, non-performing loans, other impaired loans, and current economic
conditions. The Company's loan review department monitors each of its
subsidiary bank's loan information monthly. In addition, the loan
review department prepares an analysis of the allowance for loan losses for each
subsidiary bank twice a year, and reports the results to the Company's Audit and
Security Committee. In order to verify the accuracy of the monthly
analysis of the allowance for loan losses, the loan review department performs
an on-site detailed review of each subsidiary bank's loan files on a semi-annual
basis. Additionally, the Company has instituted a Special Asset
Committee for the purpose of reviewing criticized loans in regard to collateral
adequacy, workout strategies, and proper reserve allocations.
Growth
Strategy
The
Company's growth strategy has been to primarily focus on the state of
Arkansas. In 2008, the Company completed a four-year de novo branch
expansion plan with the opening of a new regional headquarters for
Simmons/Northwest, along with an additional financial center in Little
Rock. The Company added its first financial centers in the Arkansas
markets of North Little Rock, Beebe and Paragould during 2007. New
locations were also opened in Little Rock and El Dorado during
2006. In 2005 the Company added three branch locations in the Little
Rock/Conway metropolitan area, one in the Fayetteville/Springdale/Rogers
metropolitan area and one in the Fort Smith metropolitan area. While
new financial centers can be dilutive to earnings in the short-term, the Company
believes they will reward shareholders in the intermediate and
long-term. As completion of its desired footprint within the state of
Arkansas nears, the Company continues to evaluate opportunities to expand into
contiguous states. More specifically, the Company is interested in
expansion by opening new financial centers or by acquisitions of financial
centers in growth or strategic markets, preferably with assets totaling $200
million or more.
With an
expanded presence in Arkansas, ongoing investments in technology and enhanced
products and services, the Company is in position to meet the demands of
customers in the markets it serves.
Competition
There is
significant competition among commercial banks in the Company’s market
areas. In addition, the Company also competes with other providers of
financial services, such as savings and loan associations, credit unions,
finance companies, securities firms, insurance companies, full service brokerage
firms and discount brokerage firms. Some of the Company’s competitors
have greater resources and, as such, may have higher lending limits and may
offer other services that are not provided by the Company. The
Company generally competes on the basis of customer service and responsiveness
to customer needs, available loan and deposit products, the rates of interest
charged on loans, the rates of interest paid for funds, and the availability and
pricing of trust and brokerage services.
2
Employees
As of
February 4, 2009, the Company and its subsidiaries had approximately 1,111 full
time equivalent employees. None of the employees is represented by
any union or similar groups, and the Company has not experienced any labor
disputes or strikes arising from any such organized labor groups. The
Company considers its relationship with its employees to be good.
Executive
Officers of the Company
The
following is a list of all executive officers of the Company. The
Board of Directors elects executive officers annually.
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NAME
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AGE
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POSITION
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YEARS SERVED
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J.
Thomas May
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62
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Chairman
and Chief Executive Officer
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22
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David
L. Bartlett
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57
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President
and Chief Operating Officer
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12
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Robert
A. Fehlman
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44
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Executive
Vice President and Chief Financial Officer
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20
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Marty
D. Casteel
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57
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Executive
Vice President
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20
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Robert
C. Dill
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65
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Executive
Vice President, Marketing
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42
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David
W. Garner
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39
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Senior
Vice President and Controller
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11
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Tommie
K. Jones
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61
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Senior
Vice President and Human Resources Director
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34
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L.
Ann Gill
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61
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Senior
Vice President/Manager, Audit
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43
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Kevin
J. Archer
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45
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Senior
Vice President/Credit Policy and Risk Assessment
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13
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John
L. Rush
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74
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Secretary
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41
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Board
of Directors of the Company
The
following is a list of the Board of Directors of the Company as of December 31,
2008, along with their principal occupation.
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NAME
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PRINCIPAL OCCUPATION
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William
E. Clark, II
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President
and Chief Executive Officer
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Clark
Contractors LLC
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Steven
A. Cossé
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Executive
Vice President and General Counsel
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Murphy
Oil Corporation
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Edward
Drilling
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President
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AT&T
Arkansas
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George
A. Makris, Jr.
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President
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M.K.
Distributors, Inc.
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J.
Thomas May
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Chairman
and Chief Executive Officer
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Simmons
First National Corporation
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W.
Scott McGeorge
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President
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Pine
Bluff Sand and Gravel Company
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Stanley
E. Reed
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Farmer
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Harry
L. Ryburn
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Orthodontist
(retired)
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Robert
L. Shoptaw
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Chairman
of the Board
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Arkansas
Blue Cross and Blue
Shield
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3
SUPERVISION
AND REGULATION
The
Company
The
Company, as a bank holding company, is subject to both federal and state
regulation. Under federal law, a bank holding company generally must
obtain approval from the Board of Governors of the Federal Reserve System
("FRB") before acquiring ownership or control of the assets or stock of a bank
or a bank holding company. Prior to approval of any proposed
acquisition, the FRB will review the effect on competition of the proposed
acquisition, as well as other regulatory issues.
The
federal law generally prohibits a bank holding company from directly or
indirectly engaging in non-banking activities. This prohibition does
not include loan servicing, liquidating activities or other activities so
closely related to banking as to be a proper incident thereto. Bank
holding companies, including the Company, which have elected to qualify as
financial holding companies, are authorized to engage in financial activities.
Financial activities include any activity that is financial in nature or any
activity that is incidental or complimentary to a financial
activity.
As a
financial holding company, the Company is required to file with the FRB an
annual report and such additional information as may be required by
law. From time to time, the FRB examines the financial condition of
the Company and its subsidiaries. The FRB, through civil and criminal
sanctions, is authorized to exercise enforcement powers over bank holding
companies (including financial holding companies) and non-banking subsidiaries,
to limit activities that represent unsafe or unsound practices or constitute
violations of law.
The
Company is subject to certain laws and regulations of the state of Arkansas
applicable to financial and bank holding companies, including examination and
supervision by the Arkansas Bank Commissioner. Under Arkansas law, a
financial or bank holding company is prohibited from owning more than one
subsidiary bank, if any subsidiary bank owned by the holding company has been
chartered for less than five years and, further, requires the approval of the
Arkansas Bank Commissioner for any acquisition of more than 25% of the capital
stock of any other bank located in Arkansas. No bank acquisition may
be approved if, after such acquisition, the holding company would control,
directly or indirectly, banks having 25% of the total bank deposits in the state
of Arkansas, excluding deposits of other banks and public funds.
Legislation
enacted in 1994 allows bank holding companies (including financial holding
companies) from any state to acquire banks located in any state without regard
to state law, provided that the holding company (1) is adequately capitalized,
(2) is adequately managed, (3) would not control more than 10% of the insured
deposits in the United States or more than 30% of the insured deposits in such
state, and (4) such bank has been in existence at least five years if so
required by the applicable state law.
Subsidiary
Banks
The Bank,
Simmons/El Dorado and Simmons First Trust Company N.A., as national banking
associations, are subject to regulation and supervision, of which regular bank
examinations are a part, by the Office of the Comptroller of the Currency of the
United States ("OCC"). Simmons/Jonesboro, Simmons/South,
Simmons/Northwest and Simmons/Hot Springs, as state chartered banks, are subject
to the supervision and regulation, of which regular bank examinations are a
part, by the Federal Deposit Insurance Corporation ("FDIC") and the Arkansas
State Bank Department. Simmons/Russellville and Simmons/Searcy, as state
chartered member banks, are subject to the supervision and regulation, of which
regular bank examinations are a part, by the Federal Reserve Board and the
Arkansas State Bank Department. The lending powers of each of the
subsidiary banks are generally subject to certain restrictions, including the
amount, which may be lent to a single borrower.
Prior to
passage of the GLB Act in 1999, the subsidiary banks, with numerous exceptions,
were subject to the application of the laws of the state of Arkansas, regarding
the limitation of the maximum permissible interest rate on loans. The
Arkansas limitation for general loans was 5% over the Federal Reserve Discount
Rate, with an additional maximum limitation of 17% per annum for consumer loans
and credit sales. Certain loans secured by first liens on residential
real estate and certain loans controlled by federal law (e.g., guaranteed
student loans, SBA loans, etc.) were exempt from this limitation; however, a
substantial portion of the loans made by the subsidiary banks, including all
credit card loans, have historically been subject to this
limitation. The GLB Act included a provision which sets the maximum
interest rate on loans made in Arkansas, by banks with Arkansas as their home
state, at the greater of the rate authorized by Arkansas law or the highest rate
permitted by any of the out-of-state banks which maintain branches in
Arkansas. An action was brought in the Western District of Arkansas,
attacking the validity of the statute in 2000. Subsequently, the
District Court issued a decision upholding the statute, and during
October 2001, the Eighth Circuit Court of Appeals upheld the statute on
appeal. Thus, in the fourth quarter of 2001, the Company began to
implement the changes permitted by the GLB Act.
4
All of the
Company's subsidiary banks are members of the FDIC, which provides insurance on
deposits of each member bank up to applicable limits by the Deposit Insurance
Fund. For this protection, each bank pays a statutory assessment to
the FDIC each year.
Federal
law substantially restricts transactions between banks and their
affiliates. As a result, the Company's subsidiary banks are limited
in making extensions of credit to the Company, investing in the stock or other
securities of the Company and engaging in other financial transactions with the
Company. Those transactions that are permitted must generally be
undertaken on terms at least as favorable to the bank as those prevailing in
comparable transactions with independent third parties.
Potential
Enforcement Action for Bank Holding Companies and Banks
Enforcement
proceedings seeking civil or criminal sanctions may be instituted against any
bank, any financial or bank holding company, any director, officer, employee or
agent of the bank or holding company, which is believed by the federal banking
agencies to be violating any administrative pronouncement or engaged in unsafe
and unsound practices. In addition, the FDIC may terminate the
insurance of accounts, upon determination that the insured institution has
engaged in certain wrongful conduct or is in an unsound condition to continue
operations.
Risk-Weighted
Capital Requirements for the Company and the Banks
Since
1993, banking organizations (including financial holding companies, bank holding
companies and banks) were required to meet a minimum ratio of Total Capital to
Total Risk-Weighted Assets of 8%, of which at least 4% must be in the form of
Tier 1 Capital. A well-capitalized institution is one that has at
least a 10% "total risk-based capital" ratio. For a tabular summary
of the Company’s risk-weighted capital ratios, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations – Capital" and Note
18, Stockholders’ Equity, of the Notes to Consolidated Financial
Statements.
A banking
organization's qualifying total capital consists of two components: Tier 1
Capital and Tier 2 Capital. Tier 1 Capital is an amount
equal to the sum of common shareholders' equity, hybrid capital instruments
(instruments with characteristics of debt and equity) in an amount up to 25% of
Tier 1 Capital, certain preferred stock and the minority interest in the equity
accounts of consolidated subsidiaries. For bank holding companies and
financial holding companies, goodwill (net of any deferred tax liability
associated with that goodwill) may not be included in Tier 1
Capital. Identifiable intangible assets may be included in
Tier 1 Capital for banking organizations, in accordance with certain
further requirements. At least 50% of the banking organization's
total regulatory capital must consist of Tier 1 Capital.
Tier 2
Capital is an amount equal to the sum of the qualifying portion of the allowance
for loan losses, certain preferred stock not included in Tier 1, hybrid capital
instruments (instruments with characteristics of debt and equity), certain
long-term debt securities and eligible term subordinated debt, in an amount up
to 50% of Tier 1 Capital. The eligibility of these items for
inclusion as Tier 2 Capital is subject to certain additional requirements and
limitations of the federal banking agencies.
Under the
risk-based capital guidelines, balance sheet assets and certain off-balance
sheet items, such as standby letters of credit, are assigned to one of four-risk
weight categories (0%, 20%, 50%, or 100%), according to the nature of the asset,
its collateral or the identity of the obligor or guarantor. The
aggregate amount in each risk category is adjusted by the risk weight assigned
to that category to determine weighted values, which are then added to determine
the total risk-weighted assets for the banking organization. For
example, an asset, such as a commercial loan, assigned to a 100% risk
category, is included in risk-weighted assets at its nominal face value, but a
loan secured by a one-to-four family residence is included at only 50% of its
nominal face value. The applicable ratios reflect capital, as so
determined, divided by risk-weighted assets, as so determined.
5
Federal
Deposit Insurance Corporation Improvement Act
The
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), enacted in
1991, requires the FDIC to increase assessment rates for insured banks and
authorizes one or more "special assessments," as necessary for the repayment of
funds borrowed by the FDIC or any other necessary purpose. As
directed in FDICIA, the FDIC has adopted a transitional risk-based assessment
system, under which the assessment rate for insured banks will vary according to
the level of risk incurred in the bank's activities. The risk
category and risk-based assessment for a bank is determined from its
classification, pursuant to the regulation, as well capitalized, adequately
capitalized or undercapitalized.
FDICIA
substantially revised the bank regulatory provisions of the Federal Deposit
Insurance Act and other federal banking statutes, requiring federal banking
agencies to establish capital measures and classifications. Pursuant
to the regulations issued under FDICIA, a depository institution will be deemed
to be well capitalized if it significantly exceeds the minimum level required
for each relevant capital measure; adequately capitalized if it meets each such
measure; undercapitalized if it fails to meet any such measure; significantly
undercapitalized if it is significantly below any such measure; and critically
undercapitalized if it fails to meet any critical capital level set forth in
regulations. The federal banking agencies must promptly mandate corrective
actions by banks that fail to meet the capital and related requirements in order
to minimize losses to the FDIC. The FDIC and OCC advised the Company
that the subsidiary banks have been classified as well capitalized under these
regulations.
The
federal banking agencies are required by FDICIA to prescribe standards for banks
and bank holding companies (including financial holding companies) relating to
operations and management, asset quality, earnings, stock valuation and
compensation. A bank or bank holding company that fails to comply
with such standards will be required to submit a plan designed to achieve
compliance. If no plan is submitted or the plan is not implemented,
the bank or holding company would become subject to additional regulatory action
or enforcement proceedings.
A variety
of other provisions included in FDICIA may affect the operations of the Company
and the subsidiary banks, including new reporting requirements, revised
regulatory standards for real estate lending, "truth in savings" provisions, and
the requirement that a depository institution give 90 days prior notice to
customers and regulatory authorities before closing any branch.
Temporary
Liquidity Guarantee Program
On
November 21, 2008, the Board of Directors of the FDIC adopted a final rule
relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG
Program was announced by the FDIC on October 14, 2008, preceded by the
determination of systemic risk by the Secretary of the Department of Treasury
(after consultation with the President) as an initiative to counter the
system-wide crisis in the nation’s financial sector. Under the TLG
Program the FDIC will (i) guarantee, through the earlier of maturity or June 30,
2012, certain newly issued senior unsecured debt issued by participating
institutions on or after October 14, 2008, and before June 30, 2009, and (ii)
provide full FDIC deposit insurance coverage for non-interest bearing
transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts
paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts
(“IOLTA”) accounts held at participating FDIC- insured institutions through
December 31, 2009. Coverage under the TLG Program was available for
the first 30 days without charge. The fee assessment for coverage of
senior unsecured debt ranges from 50 basis points to 100 basis points per annum
depending on the initial maturity of the debt. The fee assessment for
deposit insurance coverage is an annualized 10 basis points paid quarterly on
amounts in covered accounts exceeding $250,000. On December 5, 2008,
the Company elected to participate in both guarantee programs. On
February 10, 2009, the FDIC extended the date for issuing debt under the TLG
Program from June 30 to October 31, 2009.
Available
Information
The
Company maintains an Internet website at www.simmonsfirst.com. On
this website under the section, Investor Relations – Documents, the Company
makes its filings with the Securities and Exchange Commission available free of
charge. Additionally, the Company has adopted and posted on its
website a Code of Ethics that applies to its principal executive officer,
principal financial officer and principal accounting officer.
6
ITEM 1A. RISK
FACTORS
Risks
Related to the Company’s Business
The
Company’s Business May Be Adversely Affected by Conditions in the Financial
Markets and Economic Conditions Generally
Since
December 2007, the United States has been in a recession. Business
activity across a wide range of industries and regions is greatly reduced and
local governments and many businesses are in serious difficulty due to the lack
of consumer spending and the lack of liquidity in the credit
markets. Unemployment has increased significantly.
Since
mid-2007, and particularly during the second half of 2008, the financial
services industry and the securities markets generally were materially and
adversely affected by significant declines in the values of nearly all asset
classes and by a serious lack of liquidity. This was initially
triggered by declines in home prices and the values of subprime mortgages, but
spread to all mortgage and real estate asset classes, to leveraged bank loans
and to nearly all asset classes, including equities. The global
markets have been characterized by substantially increased volatility and
short-selling and an overall loss of investor confidence, initially in financial
institutions, but more recently in companies in a number of other industries and
in the broader markets.
Market
conditions have also led to the failure or merger of a number of prominent
financial institutions. Financial institution failures or
near-failures have resulted in further losses as a consequence of defaults on
securities issued by them and defaults under contracts entered into with such
entities as counterparties. Furthermore, declining asset values, defaults on
mortgages and consumer loans, and the lack of market and investor confidence, as
well as other factors, have all combined to increase credit default swap
spreads, to cause rating agencies to lower credit ratings, and to otherwise
increase the cost and decrease the availability of liquidity, despite very
significant declines in Federal Reserve borrowing rates and other government
actions. Some banks and other lenders have suffered significant
losses and have become reluctant to lend, even on a secured basis, due to the
increased risk of default and the impact of declining asset values on the value
of collateral. The foregoing has significantly weakened the strength
and liquidity of some financial institutions worldwide. In 2008, the
U.S. government, the Federal Reserve and other regulators have taken numerous
steps to increase liquidity and to restore investor confidence, including
investing approximately $200 billion in the equity of other banking
organizations, but asset values have continued to decline and access to
liquidity continues to be very limited.
The
Company’s financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
value of collateral securing those loans, is highly dependent upon on the
business environment in the markets where the Company operates (the State of
Arkansas) and in the United States as a whole. A favorable business
environment is generally characterized by, among other factors, economic growth,
efficient capital markets, low inflation, high business and investor confidence,
and strong business earnings. Unfavorable or uncertain economic and
market conditions can be caused by: declines in economic growth, business
activity or investor or business confidence; limitations on the availability or
increases in the cost of credit and capital; increases in inflation or interest
rates; natural disasters; or a combination of these or other
factors.
Overall,
during 2008, the business environment has been adverse for many households and
businesses in the United States and worldwide. The business
environment in Arkansas has been less adverse than in the United States
generally but continues to deteriorate. It is expected that the
business environment in the State of Arkansas, the United States and worldwide
will continue to deteriorate for the foreseeable future. There can be
no assurance that these conditions will improve in the near
term. Such conditions could adversely affect the credit quality of
the Company’s loans, results of operations and financial condition.
The
Company is Subject to Interest Rate Risk
The
Company’s earnings and cash flows are largely dependent upon its net interest
income. Net interest income is the difference between interest income
earned on interest-earning assets such as loans and securities and interest
expense paid on interest-bearing liabilities such as deposits and borrowed
funds. Interest rates are highly sensitive to many factors that are
beyond the Company’s control, including general economic conditions and policies
of various governmental and regulatory agencies and, in particular, the Board of
Governors of the Federal Reserve System. Changes in monetary policy,
including changes in interest rates, could influence not only the interest the
Company receives on loans and securities and the amount of interest it pays on
deposits and borrowings, but such changes could also affect (i) the Company’s
ability to originate loans and obtain deposits, (ii) the fair value of the
Company’s financial assets and liabilities, and (iii) the average duration of
the Company’s mortgage-backed securities portfolio. If the interest
rates paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, the Company’s net
interest income, and therefore earnings, could be adversely
affected. Earnings could also be adversely affected if the interest
rates received on loans and other investments fall more quickly than the
interest rates paid on deposits and other borrowings.
7
Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on the
Company’s results of operations, any substantial, unexpected, prolonged change
in market interest rates could have a material adverse effect on the Company’s
financial condition and results of operations.
The
Company is Subject to Lending Risk
There are
inherent risks associated with the Company’s lending
activities. These risks include, among other things, the impact of
changes in interest rates and changes in the economic conditions in the State of
Arkansas and the United States. Increases in interest rates and/or
continuing weakening economic conditions could adversely impact the ability of
borrowers to repay outstanding loans or the value of the collateral securing
these loans. The Company is also subject to various laws and
regulations that affect its lending activities. Failure to comply
with applicable laws and regulations could subject the Company to regulatory
enforcement action that could result in the assessment of significant civil
money penalties against the Company.
The
Company’s Allowance for Possible Loan Losses May Be Insufficient
The
Company maintains an allowance for possible loan losses, which is a reserve
established through a provision for possible loan losses charged to expense,
that represents management’s best estimate of probable losses that have been
incurred within the existing portfolio of loans. The allowance, in
the judgment of management, is necessary to reserve for estimated loan losses
and risks inherent in the loan portfolio. The level of the allowance
reflects management’s continuing evaluation of industry concentrations; specific
credit risks; loan loss experience; current loan portfolio quality; present
economic, political and regulatory conditions and unidentified losses inherent
in the current loan portfolio. The determination of the appropriate
level of the allowance for possible loan losses inherently involves a high
degree of subjectivity and requires the Company to make significant estimates of
current credit risks and future trends, all of which may undergo material
changes. Continuing deterioration in economic conditions affecting
borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of the
Company’s control, may require an increase in the allowance for possible loan
losses. In addition, bank regulatory agencies periodically review the
Company’s allowance for loan losses and may require an increase in the provision
for possible loan losses or the recognition of further loan charge-offs, based
on judgments different than those of management. In addition, if
charge-offs in future periods exceed the allowance for possible loan losses, the
Company will need additional provisions to increase the allowance for possible
loan losses. Any increases in the allowance for possible loan losses
will result in a decrease in net income and, possibly, capital, and may have a
material adverse effect on the Company’s financial condition and results of
operations.
The
Company’s Profitability Depends Significantly on Economic Conditions in the
State of Arkansas
The
Company’s success depends primarily on the general economic conditions of the
State of Arkansas and the specific local markets in which the Company
operates. Unlike larger national or other regional banks that are
more geographically diversified, the Company provides banking and financial
services to customers across Arkansas through its 84 financial centers in the
state. The economic condition of Arkansas has a significant impact on
the demand for the Company’s products and services as well as the ability of the
Company’s customers to repay loans, the value of the collateral securing loans
and the stability of the Company’s deposit funding sources. Although
economic conditions in the State of Arkansas have experienced less decline than
in the United States generally, these conditions are declining and are expected
to continue to decline. A significant decline in general economic
conditions, whether caused by recession, inflation, unemployment, changes in
securities markets, acts of terrorism, outbreak of hostilities or other
international or domestic occurrences or other factors could impact these local
economic conditions and, in turn, have a material adverse effect on the
Company’s financial condition and results of operations.
The
Company Operates in a Highly Competitive Industry
The
Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include national,
regional, and community banks within the various markets where the Company
operates. The Company also faces competition from many other types of
financial institutions, including, without limitation, savings and loans, credit
unions, finance companies, brokerage firms, insurance companies, factoring
companies and other financial intermediaries. The financial services
industry could become even more competitive as a result of legislative,
regulatory and technological changes and continued
consolidation. Banks, securities firms and insurance companies can
merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant
banking. Also, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment systems. Many
of the Company’s competitors have fewer regulatory constraints and may have
lower cost structures. Additionally, due to their size, many
competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for
those products and services than the Company can.
8
The
Company’s ability to compete successfully depends on a number of factors,
including, among other things:
|
●
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The
ability to develop, maintain and build long-term customer relationships
based on top quality service, high ethical standards and safe, sound
assets.
|
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●
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The
ability to expand the Company’s market
position.
|
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●
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The
scope, relevance and pricing of products and services offered to meet
customer needs and demands.
|
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●
|
The
rate at which the Company introduces new products and services relative to
its competitors.
|
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Customer
satisfaction with the Company’s level of
service.
|
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●
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Industry
and general economic trends.
|
Failure to
perform in any of these areas could significantly weaken the Company’s
competitive position, which could adversely affect the Company’s growth and
profitability, which, in turn, could have a material adverse effect on the
Company’s financial condition and results of operations.
The
Company is Subject to Extensive Government Regulation and
Supervision
The
Company is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds and the banking system as a
whole, not security holders. These regulations affect the Company’s
lending practices, capital structure, investment practices, dividend policy and
growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible
changes. It is likely that there will be significant changes to the
banking and financial institutions regulatory regimes in the near future in
light of the recent performance of and government intervention in the financial
services sector. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation of statutes,
regulations or policies, could affect the Company in substantial and
unpredictable ways. Such changes could subject the Company to
additional costs, limit the types of financial services and products the Company
may offer and/or increase the ability of non-banks to offer competing financial
services and products, among other things. Failure to comply with
laws, regulations or policies could result in sanctions by regulatory agencies,
civil money penalties and/or reputation damage, which could have a material
adverse effect on the Company’s business, financial condition and results of
operations. While the Company has policies and procedures designed to
prevent any such violations, there can be no assurance that such violations will
not occur.
The
Company’s Controls and Procedures May Fail or Be Circumvented
Management
regularly reviews and updates the Company’s internal controls, disclosure
controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are
met. Any failure or circumvention of the Company’s controls and
procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on the Company’s business,
results of operations and financial condition.
New
Lines of Business or New Products and Services May Subject the Company to
Additional Risks
From time
to time, the Company may implement new lines of business or offer new products
and services within existing lines of business. There are substantial
risks and uncertainties associated with these efforts, particularly in instances
where the markets are not fully developed. In developing and
marketing new lines of business and/or new products and services the Company may
invest significant time and resources. Initial timetables for the
introduction and development of new lines of business and/or new products or
services may not be achieved and price and profitability targets may not prove
feasible. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may also impact the
successful implementation of a new line of business or a new product or
service. Furthermore, any new line of business and/ or new product or
service could have a significant impact on the effectiveness of the Company’s
system of internal controls. Failure to successfully manage these
risks in the development and implementation of new lines of business or new
products or services could have a material adverse effect on the Company’s
business, results of operations and financial condition.
9
The
Company Relies on Dividends from Its Subsidiaries for Most of Its
Revenue
The
Company is a separate and distinct legal entity from its
subsidiaries. It receives substantially all of its revenue from
dividends from its subsidiaries. These dividends are the principal
source of funds to pay dividends on the Company’s common stock and interest and
principal on the Company’s debt. Various federal and/or state laws
and regulations limit the amount of dividends that the subsidiaries may pay to
the Company. In the event the subsidiaries are unable to pay
dividends to the Company, the Company may not be able to service debt, pay
obligations or pay dividends on the Company’s common stock. The
inability to receive dividends from its subsidiaries could have a material
adverse effect on the Company’s business, financial condition and results of
operations.
Potential
Acquisitions May Disrupt the Company’s Business and Dilute Stockholder
Value
The
Company seeks merger or acquisition partners that are culturally similar and
have experienced management and possess either significant market presence or
have potential for improved profitability through financial management,
economies of scale or expanded services. Acquiring other banks,
businesses, or branches involves various risks commonly associated with
acquisitions, including, among other things:
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●
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Potential
exposure to unknown or contingent liabilities of the target
company.
|
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●
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Exposure
to potential asset quality issues of the target
company.
|
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●
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Difficulty
and expense of integrating the operations and personnel of the target
company.
|
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●
|
Potential
disruption to the Company’s
business.
|
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●
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Potential
diversion of the Company’s management’s time and
attention.
|
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●
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The
possible loss of key employees and customers of the target
company.
|
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●
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Difficulty
in estimating the value of the target
company.
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●
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Potential
changes in banking or tax laws or regulations that may affect the target
company.
|
The
Company regularly evaluates merger and acquisition opportunities and conducts
due diligence activities related to possible transactions with other financial
institutions and financial services companies. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and
future mergers or acquisitions involving cash, debt or equity securities may
occur at any time. Acquisitions typically involve the payment of a
premium over book and market values, and, therefore, some dilution of the
Company’s tangible book value and net income per common share may occur in
connection with any future transaction. Furthermore, failure to
realize the expected revenue increases, cost savings, increases in geographic or
product presence, and/or other projected benefits from an acquisition could have
a material adverse effect on the Company’s financial condition and results of
operations.
The
Company May Not Be Able to Attract and Retain Skilled People
The
Company’s success depends, in large part, on its ability to attract and retain
key people. Competition for the best people in most activities
engaged in by the Company can be intense and the Company may not be able to hire
people or to retain them. The unexpected loss of services of key
personnel of the Company could have a material adverse impact on the Company’s
business because of their skills, knowledge of the Company’s market, years of
industry experience and the difficulty of promptly finding qualified replacement
personnel.
The
Company’s Information Systems May Experience an Interruption or Breach in
Security
The
Company relies heavily on communications and information systems to conduct its
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in the Company’s customer
relationship management, general ledger, deposit, loan and other
systems. While the Company has policies and procedures designed to
prevent or limit the effect of the failure, interruption or security breach of
its information systems, there can be no assurance that any such failures,
interruptions or security breaches will not occur or, if they do occur, that
they will be adequately addressed. The occurrence of any failures,
interruptions or security breaches of the Company’s information systems could
damage the Company’s reputation, result in a loss of customer business, subject
the Company to additional regulatory scrutiny, or expose the Company to civil
litigation and possible financial liability, any of which could have a material
adverse effect on the Company’s financial condition and results of
operations.
10
The
Company Continually Encounters Technological Change
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce
costs. The Company’s future success depends, in part, upon its
ability to address the needs of its customers by using technology to provide
products and services that will satisfy customer demands, as well as to create
additional efficiencies in the Company’s operations. Many of the
Company’s competitors have substantially greater resources to invest in
technological improvements. The Company may not be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to its
customers. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse
impact on the Company’s business and, in turn, the Company’s financial condition
and results of operations.
The
Company is Subject to Claims and Litigation Pertaining to Fiduciary
Responsibility
From time
to time, customers make claims and take legal action pertaining to the Company’s
performance of its fiduciary responsibilities. Whether customer
claims and legal action related to the Company’s performance of its fiduciary
responsibilities are founded or unfounded, if such claims and legal actions are
not resolved in a manner favorable to the Company they may result in significant
financial liability and/or adversely affect the market perception of the Company
and its products and services as well as impact customer demand for those
products and services. Any financial liability or reputation damage
could have a material adverse effect on the Company’s business, which, in turn,
could have a material adverse effect on the Company’s financial condition and
results of operations.
Severe
Weather, Natural Disasters, Acts of War or Terrorism and Other External Events
Could Significantly Impact the Company’s Business
Severe
weather, natural disasters, acts of war or terrorism and other adverse external
events could have a significant impact on the Company’s ability to conduct
business. Such events could affect the stability of the Company’s
deposit base, impair the ability of borrowers to repay outstanding loans, impair
the value of collateral securing loans, cause significant property damage,
result in loss of revenue and/or cause the Company to incur additional
expenses. Although management has established disaster recovery
policies and procedures, the occurrence of any such event in the future could
have a material adverse effect on the Company’s business, which, in turn, could
have a material adverse effect on the Company’s financial condition and results
of operations.
Risks
Associated with the Company’s Common Stock
The
Company’s Stock Price Can Be Volatile
Stock
price volatility may make it more difficult for you to resell your common stock
when you want and at prices you find attractive. The Company’s stock price can
fluctuate significantly in response to a variety of factors including, among
other things:
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Changes
in securities analysts’ estimates of financial
performance.
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Volatility
of stock market prices and volumes.
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Rumors
or erroneous information.
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Changes
in market valuations of similar
companies.
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Changes
in interest rates.
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New
developments in the banking
industry.
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Variations
in quarterly or annual operating
results.
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New
litigation or changes in existing
litigation.
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Regulatory
actions.
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Changes
in accounting policies or procedures as may be required by the Financial
Accounting Standards Board or other regulatory
agencies.
|
11
General
market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause the Company’s stock price to
decrease regardless of operating results.
The
Trading Volume in the Company’s Common Stock is Less Than That of Other Larger
Financial Services Companies
Although
the Company’s common stock is listed for trading on the Nasdaq Global Select
Market, the trading volume in its common stock is less than that of other,
larger financial services companies. A public trading market having
the desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of willing buyers and sellers of the Company’s
common stock at any given time. This presence depends on the
individual decisions of investors and general economic and market conditions
over which the Company has no control. Given the lower trading volume
of the Company’s common stock, significant sales of the Company’s common stock,
or the expectation of these sales, could cause the Company’s stock price to
fall.
An
Investment in the Company’s Common Stock is Not an Insured Deposit
The
Company’s common stock is not a bank deposit and, therefore, is not insured
against loss by the Federal Deposit Insurance Corporation (FDIC), any other
deposit insurance fund or by any other public or private
entity. Investment in the Company’s common stock is inherently risky
for the reasons described in this “Risk Factors” section and elsewhere in this
report and is subject to the same market forces that affect the price of common
stock in any company. As a result, if you acquire the Company’s
common stock, you could lose some or all of your investment.
The
Company’s Articles of Incorporation and By-Laws As Well As Certain Banking Laws
May Have an Anti-Takeover Effect
Provisions
of the Company’s articles of incorporation and by-laws and federal banking laws,
including regulatory approval requirements, could make it more difficult for a
third party to acquire the Company, even if doing so would be perceived to be
beneficial to the Company’s shareholders. The combination of these
provisions effectively inhibits a non-negotiated merger or other business
combination, which, in turn, could adversely affect the market price of the
Company’s common stock.
Risks
Associated with the Company’s Industry
The
Earnings of Financial Services Companies Are Significantly Affected by General
Business and Economic Conditions
The
Company’s operations and profitability are impacted by general business and
economic conditions in the United States and abroad. These conditions
include short-term and long-term interest rates, inflation, money supply,
political issues, legislative and regulatory changes, fluctuations in both debt
and equity capital markets, broad trends in industry and finance, and the
strength of the U.S. economy and the local economies in which the Company
operates, all of which are beyond the Company’s control. The
continuing deterioration in economic conditions in the United States and abroad
could result in an increase in loan delinquencies and non-performing assets,
decreases in loan collateral values and a decrease in demand for the Company’s
products and services, among other things, any of which could have a material
adverse impact on the Company’s financial condition and results of
operations.
Financial
Services Companies Depend on the Accuracy and Completeness of Information about
Customers and Counterparties
In
deciding whether to extend credit or enter into other transactions, the Company
may rely on information furnished by or on behalf of customers and
counterparties, including financial statements, credit reports and other
financial information. The Company may also rely on representations
of those customers, counterparties or other third parties, such as independent
auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial
statements, credit reports or other financial information could have a material
adverse impact on the Company’s business and, in turn, the Company’s financial
condition and results of operations.
12
Consumers
May Decide Not to Use Banks to Complete their Financial
Transactions
Technology
and other changes are allowing parties to complete financial transactions that
historically have involved banks through alternative methods. For
example, consumers can now maintain funds that would have historically been held
as bank deposits in brokerage accounts or mutual funds. Consumers can
also complete transactions such as paying bills and/or transferring funds
directly without the assistance of banks. The process of eliminating
banks as intermediaries, known as “disintermediation,” could result in the loss
of fee income, as well as the loss of customer deposits and the related income
generated from those deposits. The loss of these revenue streams and
the lower cost deposits as a source of funds could have a material adverse
effect on the Company’s financial condition and results of
operations.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
There are
currently no unresolved Commission staff comments.
ITEM 2.
PROPERTIES
The
principal offices of the Company and the Bank consist of an eleven-story office
building and adjacent office space located in the central business district of
the city of Pine Bluff, Arkansas. Additionally, the Company has
corporate offices located in Little Rock, Arkansas.
The
Company and its subsidiaries own or lease additional offices throughout the
state of Arkansas. The Company and its eight banks conduct financial
operations from 88 offices, of which 84 are financial centers, in
47 communities throughout Arkansas.
ITEM 3. LEGAL
PROCEEDINGS
The
Company and/or its subsidiaries have various unrelated legal proceedings, most
of which involve loan foreclosure activity pending, which, in the aggregate, are
not expected to have a material adverse effect on the financial position of the
Company and its subsidiaries. The Company or its subsidiaries remain
the subject of the following lawsuit asserting claims against the Company or its
subsidiaries.
On October
1, 2003, an action in Pulaski County Circuit Court was filed by Thomas F.
Carter, Tena P. Carter and certain related entities against Simmons First Bank
of South Arkansas and Simmons First National Bank alleging wrongful conduct by
the banks in the collection of certain loans. The Company was later
added as a party defendant. The plaintiffs are seeking $2,000,000 in
compensatory damages and $10,000,000 in punitive damages. The Company
and the banks have filed Motions to Dismiss. The plaintiffs were
granted additional time to discover any evidence for litigation and have
submitted such findings. At the hearing on the Motions for Summary
Judgment, the Court dismissed Simmons First National Bank due to lack of
venue. Venue has been changed to Jefferson County for the Company and
Simmons First Bank of South Arkansas. Non-binding mediation failed on
June 24, 2008. Jury trial is set for the week of June 22,
2009. At this time, no basis for any material liability has been
identified. The Company and the bank continue to vigorously defend
the claims asserted in the suit.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters
were submitted to a vote of security-holders, through the solicitation of
proxies or otherwise, during the fourth quarter of the fiscal year covered by
this report.
13
PART
II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Quarterly
|
||||||||||||
|
Price
Per
|
Dividends
|
|||||||||||
|
Common
Share
|
Per
Common
|
|||||||||||
|
High
|
Low
|
Share
|
||||||||||
|
2008
|
||||||||||||
|
1st
quarter
|
$ | 29.73 | $ | 24.41 | $ | 0.19 | ||||||
|
2nd
quarter
|
32.95 | 27.97 | 0.19 | |||||||||
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3rd
quarter
|
36.00 | 26.47 | 0.19 | |||||||||
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4th
quarter
|
33.55 | 23.68 | 0.19 | |||||||||
|
2007
|
||||||||||||
|
1st
quarter
|
$ | 32.19 | $ | 25.33 | $ | 0.18 | ||||||
|
2nd
quarter
|
30.49 | 25.75 | 0.18 | |||||||||
|
3rd
quarter
|
29.00 | 22.33 | 0.18 | |||||||||
|
4th
quarter
|
29.48 | 23.81 | 0.19 | |||||||||
As of
February 4, 2009, there were 1,376 shareholders of record of the Company’s
Common Stock.
The
Company's policy is to declare regular quarterly dividends based upon the
Company's earnings, financial position, capital requirements and such other
factors deemed relevant by the Board of Directors. This dividend
policy is subject to change, however, and the payment of dividends by the
Company is necessarily dependent upon the availability of earnings and the
Company's financial condition in the future. The payment of dividends
on the Common Stock is also subject to regulatory capital
requirements. The Company has received approval from The Department
of the Treasury (the “Treasury”) to participate in the Troubled Asset Relief
Program Capital Purchase Program (the “CPP”). If the Company
participates in the CPP by issuing Preferred Stock to the Treasury, dividend
increases may be restricted and will require the Treasury’s consent for three
years. For further discussion on the CPP, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operation – Recent
Market Developments.”
The
Company's principal source of funds for dividend payments to its stockholders is
dividends received from its subsidiary banks. Under applicable
banking laws, the declaration of dividends by the Bank and Simmons/El Dorado in
any year, in excess of its net profits, as defined, for that year, combined with
its retained net profits of the preceding two years, must be approved by the
Office of the Comptroller of the Currency. Further, as to
Simmons/Jonesboro, Simmons/Northwest, Simmons/South, Simmons/Hot Springs,
Simmons/Russellville and Simmons/Searcy, regulators have specified that the
maximum dividends state banks may pay to the parent company without prior
approval is 75% of the current year earnings plus 75% of the retained net
earnings of the preceding year. At December 31, 2008, approximately
$14.3 million was available for the payment of dividends by the subsidiary banks
without regulatory approval. For further discussion of restrictions
on the payment of dividends, see "Quantitative and Qualitative Disclosures About
Market Risk – Liquidity and Market Risk Management," and Note 18, Stockholders’
Equity, of Notes to Consolidated Financial Statements.
Stock
Repurchase
The
Company made no purchases of its common stock during the three months ended
December 31, 2008.
On
November 28, 2007, the Company announced the substantial completion of the
existing stock repurchase program and the adoption by the Board of Directors of
a new stock repurchase program. The program authorizes the repurchase
of up to 700,000 shares of Class A common stock, or approximately 5% of the
outstanding common stock. Under the repurchase program, there is no
time limit for the stock repurchases, nor is there a minimum number of shares
the Company intends to repurchase. The Company may discontinue
purchases at any time that management determines additional purchases are not
warranted. The shares are to be purchased from time to time at
prevailing market prices, through open market or unsolicited negotiated
transactions, depending upon market conditions. The Company intends
to use the repurchased shares to satisfy stock option exercise, payment of
future stock dividends and general corporate purposes.
14
Effective
July 1, 2008, the Company made a strategic decision to temporarily suspend stock
repurchases. This decision was made to preserve capital at the parent
company due to the lack of liquidity in the credit markets and the uncertainties
in the overall economy. If the Company participates in the CPP by
issuing Preferred Stock to the Treasury, stock repurchases may be restricted and
will require the Treasury’s consent for three years. For further
discussion on the CPP, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operation – Recent Market Developments.”
Performance
Graph
The
performance graph below compares the cumulative total shareholder return on the
Company’s Common Stock with the cumulative total return on the equity securities
of companies included in the NASDAQ Bank Stock Index and the S&P 500 Stock
Index. The graph assumes an investment of $100 on December 31, 2003
and reinvestment of dividends on the date of payment without
commissions. The performance graph represents past performance and
should not be considered to be an indication of future performance.
|
Period
Ending
|
||||||||||||||||||||||||
|
Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
||||||||||||||||||
|
Simmons
First National Corporation
|
100.00
|
107.31
|
105.09
|
121.93
|
105.75
|
120.66
|
||||||||||||||||||
|
NASDAQ
Bank Index
|
100.00
|
110.99
|
106.18
|
117.87
|
91.85
|
69.88
|
||||||||||||||||||
|
S&P
500 Index
|
100.00
|
110.88
|
116.33
|
134.70
|
142.10
|
89.53
|
||||||||||||||||||
15
Forward
Looking Statements
Certain
statements contained in this Annual Report may not be based on historical facts
and are “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period(s) or by the use of forward-looking
terminology, such as “anticipate,” “estimate,” “expect,” “foresee,” “may,”
“might,” “will,” “would,” “could” or “intend,” future or conditional verb
tenses, and variations or negatives of such terms. These
forward-looking statements include, without limitation, those relating to the
Company’s future growth, revenue, assets, asset quality, profitability and
customer service, critical accounting policies, net interest margin,
non-interest revenue, market conditions related to the Company’s stock
repurchase program, allowance for loan losses, the effect of certain new
accounting standards on the Company’s financial statements, income tax
deductions, credit quality, the level of credit losses from lending commitments,
net interest revenue, interest rate sensitivity, loan loss experience,
liquidity, capital resources, market risk, earnings, effect of pending
litigation, acquisition strategy, legal and regulatory limitations and
compliance and competition.
We caution
the reader not to place undue reliance on the forward-looking statements
contained in this Report in that actual results could differ materially from
those indicated in such forward-looking statements due to a variety of
factors. These factors include, but are not limited to, changes in
the Company’s operating or expansion strategy, availability of and costs
associated with obtaining adequate and timely sources of liquidity, the ability
to maintain credit quality, possible adverse rulings, judgments, settlements and
other outcomes of pending litigation, the ability of the Company to collect
amounts due under loan agreements, changes in consumer preferences,
effectiveness of the Company’s interest rate risk management strategies, laws
and regulations affecting financial institutions in general or relating to
taxes, the effect of pending or future legislation, the ability of the Company
to repurchase its Common Stock on favorable terms and other risk
factors. Other relevant risk factors may be detailed from time to
time in the Company’s press releases and filings with the Securities and
Exchange Commission. We undertake no obligation to update these
forward-looking statements to reflect events or circumstances that occur after
the date of this Report.
The
following table sets forth selected consolidated financial data concerning the
Company and is qualified in its entirety by the detailed information and
consolidated financial statements, including notes thereto, included
elsewhere in this report. The income statement, balance sheet
and per common share data as of and for the years ended December 31, 2008,
2007, 2006, 2005 and 2004, were derived from consolidated financial statements
of the Company, which were audited by BKD, LLP. The selected
consolidated financial data set forth below should be read in conjunction with
the financial statements of the Company and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
16
|
SELECTED CONSOLIDATED FINANCIAL
DATA
|
||||||||||||||||||||
|
Years
Ended December 31 (1)
|
||||||||||||||||||||
|
(In
thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Income
statement data:
|
||||||||||||||||||||
|
Net
interest income
|
$ | 94,017 | $ | 92,116 | $ | 88,804 | $ | 90,257 | $ | 85,636 | ||||||||||
|
Provision
for loan losses
|
8,646 | 4,181 | 3,762 | 7,526 | 8,027 | |||||||||||||||
|
Net
interest income after provision
|
||||||||||||||||||||
|
for
loan losses
|
85,371 | 87,935 | 85,042 | 82,731 | 77,609 | |||||||||||||||
|
Non-interest
income
|
49,326 | 46,003 | 43,947 | 42,318 | 40,705 | |||||||||||||||
|
Non-interest
expense
|
96,360 | 94,197 | 89,068 | 85,584 | 82,385 | |||||||||||||||
|
Provision
for income taxes
|
11,427 | 12,381 | 12,440 | 12,503 | 11,483 | |||||||||||||||
|
Net
income
|
26,910 | 27,360 | 27,481 | 26,962 | 24,446 | |||||||||||||||
|
Per
share data:
|
||||||||||||||||||||
|
Basic
earnings
|
1.93 | 1.95 | 1.93 | 1.88 | 1.68 | |||||||||||||||
|
Diluted
earnings
|
1.91 | 1.92 | 1.90 | 1.84 | 1.65 | |||||||||||||||
|
Diluted
core earnings (non-GAAP) (2)
|
1.73 | 1.97 | 1.90 | 1.84 | 1.68 | |||||||||||||||
|
Book
value
|
20.69 | 19.57 | 18.24 | 17.04 | 16.29 | |||||||||||||||
|
Dividends
|
0.76 | 0.73 | 0.68 | 0.61 | 0.57 | |||||||||||||||
|
Balance
sheet data at period end:
|
||||||||||||||||||||
|
Assets
|
2,923,109 | 2,692,447 | 2,651,413 | 2,523,768 | 2,413,944 | |||||||||||||||
|
Loans
|
1,933,074 | 1,850,454 | 1,783,495 | 1,718,107 | 1,571,376 | |||||||||||||||
|
Allowance
for loan losses
|
25,841 | 25,303 | 25,385 | 26,923 | 26,508 | |||||||||||||||
|
Deposits
|
2,336,333 | 2,182,857 | 2,175,531 | 2,059,958 | 1,959,195 | |||||||||||||||
|
Long-term
debt
|
158,671 | 82,285 | 83,311 | 87,020 | 94,663 | |||||||||||||||
|
Stockholders’
equity
|
288,792 | 272,406 | 259,016 | 244,085 | 238,222 | |||||||||||||||
|
Capital
ratios at period end:
|
||||||||||||||||||||
|
Stockholders’
equity to
|
||||||||||||||||||||
|
total
assets
|
9.88 | % | 10.12 | % | 9.75 | % | 9.67 | % | 9.87 | % | ||||||||||
|
Leverage
(3)
|
9.15 | % | 9.06 | % | 8.83 | % | 8.62 | % | 8.46 | % | ||||||||||
|
Tier
1
|
13.24 | % | 12.43 | % | 12.38 | % | 12.26 | % | 12.72 | % | ||||||||||
|
Total
risk-based
|
14.50 | % | 13.69 | % | 13.64 | % | 13.54 | % | 14.00 | % | ||||||||||
|
Selected
ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
0.94 | % | 1.03 | % | 1.07 | % | 1.08 | % | 1.03 | % | ||||||||||
|
Return
on average equity
|
9.54 | % | 10.26 | % | 10.93 | % | 11.24 | % | 10.64 | % | ||||||||||
|
Return
on average tangible equity (non-GAAP) (4)
|
12.54 | % | 13.78 | % | 15.03 | % | 15.79 | % | 14.94 | % | ||||||||||
|
Net
interest margin (5)
|
3.75 | % | 3.96 | % | 3.96 | % | 4.13 | % | 4.08 | % | ||||||||||
|
Allowance/nonperforming
loans
|
165.12 | % | 226.10 | % | 234.05 | % | 319.48 | % | 220.84 | % | ||||||||||
|
Allowance
for loan losses as a
|
||||||||||||||||||||
|
percentage
of period-end loans
|
1.34 | % | 1.37 | % | 1.42 | % | 1.57 | % | 1.69 | % | ||||||||||
|
Nonperforming
loans as a percentage
|
||||||||||||||||||||
|
of
period-end loans
|
0.81 | % | 0.60 | % | 0.56 | % | 0.49 | % | 0.76 | % | ||||||||||
|
Net
charge-offs as a percentage
|
||||||||||||||||||||
|
of
average total assets
|
0.28 | % | 0.16 | % | 0.15 | % | 0.28 | % | 0.34 | % | ||||||||||
|
Dividend
payout
|
39.79 | % | 38.02 | % | 35.79 | % | 33.15 | % | 38.80 | % | ||||||||||
|
(1)
The selected consolidated financial data set forth above should be read in
conjunction with the financial statements of the Company and related
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this report.
|
||||||||||||||||||||
|
(2)
Diluted core earnings (net income excluding nonrecurring items) is a
non-GAAP measure. The following nonrecurring items were excluded in
the calculation of diluted core earnings per share (non-GAAP). In
2008, the Company recorded a $0.13 increase in EPS from the cash proceeds
on a mandatory Visa stock redemption and a $0.05 increase in EPS from the
reversal of Visa, Inc.’s litigation expense recorded in 2007. In
2007, the Company recorded a $0.05 reduction in EPS from litigation
expense associated with the recognition of certain contingent liabilities
related to Visa, Inc.’s litigation. In 2004, the Company recorded a
$0.03 reduction in EPS from the write-off of deferred debt issuance cost
associated with the redemption of trust preferred
securities.
|
||||||||||||||||||||
|
(3)
Leverage ratio is Tier 1 capital to quarterly average total assets less
intangible assets and gross unrealized gains/losses on available-for-sale
investments.
|
||||||||||||||||||||
|
(4)
Tangible calculations are non-GAAP measures that eliminate the effect of
goodwill and acquisition related intangible assets and the corresponding
amortization expense on a tax-effected basis where
applicable.
|
||||||||||||||||||||
|
(5)
Fully taxable equivalent (assuming an income tax rate of
37.5%).
|
||||||||||||||||||||
17
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Recent Market Developments
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S.
Treasury was given the authority to, among other things, purchase up to $700
billion of mortgages, mortgage-backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.
On October
14, 2008, the Secretary of the Department of the Treasury announced that the
Department of the Treasury (the “Treasury”) will purchase equity stakes in a
wide variety of banks and thrifts. Under the program, known as the
Troubled Asset Relief Program Capital Purchase Program (the “CPP”), from the
$700 billion authorized by the EESA, the Treasury made $250 billion of capital
available to U.S. financial institutions in the form of preferred
stock. Under the CPP, eligible healthy financial institutions, such
as the Company, will be able to sell senior preferred shares (the "Preferred
Shares") on standardized terms to the Treasury in amounts equal to between
1% and 3% of an institution’s risk-weighted assets. The CPP is
completely voluntary, and, although the Company anticipates being profitable in
the current year, has adequate sources of liquidity, and is well-capitalized
under regulatory guidelines, participation in the CPP would allow the Company to
raise additional low cost capital to ensure that, during these uncertain times,
it is well-positioned to support existing operations as well as anticipated
future growth.
On October
29, 2008, the Treasury gave the Company approval to participate in the
CPP. On January 6, 2009, the Treasury amended its approval to allow
the Company to participate in the CPP at a level up to $59.7
million. Because the Company’s Restated Articles of Incorporation do
not authorize preferred stock, as required for participation in the CPP, the
Company is holding a Special Meeting of Shareholders on February 27, 2009, to
amend the Restated Articles of Incorporation to authorize the issuance of
Preferred Shares in order to participate in the CPP.
Even if
the proposed amendment to the Restated Articles of Incorporation is adopted, the
Company has not yet determined whether it will participate in the CPP or, if it
does participate, how many Preferred Shares will be sold. If the
Company participates in the CPP by issuing Preferred Stock, the Treasury will
also receive warrants to purchase common stock with an aggregate market price
equal to 15% of the preferred investment. The Company would also be
required to adopt the Treasury’s standards for executive compensation and
corporate governance for the period during which the Treasury holds equity
issued under the CPP.
On
November 21, 2008, the Board of Directors of the Federal Deposit Insurance
Corporation (“FDIC”) adopted a final rule relating to the Temporary Liquidity
Guarantee Program (“TLG Program”). The TLG Program was announced by
the FDIC on October 14, 2008, preceded by the determination of systemic risk by
the Secretary of the Department of Treasury (after consultation with the
President) as an initiative to counter the system-wide crisis in the nation’s
financial sector. Under the TLG Program the FDIC will (i) guarantee,
through the earlier of maturity or June 30, 2012, certain newly issued senior
unsecured debt issued by participating institutions on or after October 14,
2008, and before June 30, 2009, and (ii) provide full FDIC deposit insurance
coverage for non-interest bearing transaction deposit accounts, Negotiable Order
of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and
Interest on Lawyers Trust Accounts (“IOLTA”) accounts held at participating
FDIC-insured institutions through December 31, 2009. Coverage under
the TLG Program was available for the first 30 days without
charge. The fee assessment for coverage of senior unsecured debt
ranges from 50 basis points to 100 basis points per annum depending on the
initial maturity of the debt. The fee assessment for deposit
insurance coverage is an annualized 10 basis points paid quarterly on amounts in
covered accounts exceeding $250,000. On December 5, 2008, the Company
elected to participate in both guarantee programs. On February 10,
2009, the FDIC extended the date for issuing debt under the TLG Program from
June 30 to October 31, 2009.
18
Critical
Accounting Policies
Overview
The
accounting and reporting policies followed by the Company conform, in all
material respects, to generally accepted accounting principles and to general
practices within the financial services industry. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. While
the Company bases estimates on historical experience, current information and
other factors deemed to be relevant, actual results could differ from those
estimates.
The
Company considers accounting estimates to be critical to reported financial
results if (i) the accounting estimate requires management to make assumptions
about matters that are highly uncertain and (ii) different estimates that
management reasonably could have used for the accounting estimate in the current
period, or changes in the accounting estimate that are reasonably likely to
occur from period to period, could have a material impact on the Company’s
financial statements.
The
accounting policies that we view as critical to us are those relating to
estimates and judgments regarding (a) the determination of the adequacy of the
allowance for loan losses, (b) the valuation of goodwill and the useful lives
applied to intangible assets, (c) the valuation of employee benefit plans and
(d) income taxes.
Allowance
for Loan Losses
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income. Loan
losses are charged against the allowance when management believes the
uncollectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The
allowance is maintained at a level considered adequate to provide for potential
loan losses related to specifically identified loans as well as probable credit
losses inherent in the remainder of the loan portfolio that have been incurred
as of period end. This estimate is based on management's evaluation
of the loan portfolio as well as on prevailing and anticipated economic
conditions and historical losses by loan category. General reserves
have been established based upon the aforementioned factors and allocated to the
individual loan categories. Allowances are accrued on specific loans
evaluated for impairment for which the basis of each loan, including accrued
interest, exceeds the discounted amount of expected future collections of
interest and principal or, alternatively, the fair value of loan
collateral. The unallocated reserve generally serves to compensate
for the uncertainty in estimating loan losses, including the possibility of
changes in risk ratings and specific reserve allocations in the loan portfolio
as a result of the Company’s ongoing risk management system.
A loan is
considered impaired when it is probable that the Company will not receive all
amounts due according to the contractual terms of the loan. This
includes loans that are delinquent 90 days or more, nonaccrual loans and certain
other loans identified by management. Certain other loans identified
by management consist of performing loans with specific allocations of the
allowance for loan losses. Specific allocations are applied when
quantifiable factors are present requiring a greater allocation than that
established by the Company based on its analysis of historical losses for each
loan category. Accrual of interest is discontinued and interest
accrued and unpaid is removed at the time such amounts are delinquent 90 days
unless management is aware of circumstances which warrant continuing the
interest accrual. Interest is recognized for nonaccrual loans only
upon receipt and only after all principal amounts are current according to the
terms of the contract.
Goodwill
and Intangible Assets
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired. Other intangible assets represent purchased
assets that also lack physical substance but can be separately distinguished
from goodwill because of contractual or other legal rights or because the asset
is capable of being sold or exchanged either on its own or in combination with a
related contract, asset or liability. The Company performs an annual
goodwill impairment test in accordance with Financial Accounting Standards Board
(“FASB”) Statement No. 142 (“SFAS No. 142”), which requires that goodwill and
intangible assets that have indefinite lives no longer be amortized but be
reviewed for impairment annually, or more frequently if certain conditions
occur. Prior to the adoption of SFAS No. 142, goodwill was being
amortized using the straight-line method over a period of 15
years. Impairment losses on recorded goodwill, if any, will be
recorded as operating expenses.
19
Employee
Benefit Plans
The
Company has adopted various stock-based compensation plans. The plans
provide for the grant of incentive stock options, nonqualified stock options,
stock appreciation rights, and bonus stock awards. Pursuant to the
plans, shares are reserved for future issuance by the Company upon exercise of
stock options or awarding of bonus shares granted to directors, officers and
other key employees.
In
accordance with FASB Statement No. 123, Share-Based Payment (Revised 2004)
(“SFAS No. 123R”), the fair value of each option award is estimated on the date
of grant using the Black-Scholes option-pricing model that uses various
assumptions. This model requires the input of highly subjective
assumptions, changes to which can materially affect the fair value
estimate. For additional information, see Note 10, Employee Benefit
Plans, in the accompanying Notes to Consolidated Financial Statements included
elsewhere in this report.
Income
Taxes
The
Company is subject to the federal income tax laws of the United States and the
tax laws of the states and other jurisdictions where it conducts
business. Due to the complexity of these laws, taxpayers and the
taxing authorities may subject these laws to different
interpretations. Management must make conclusions and estimates about
the application of these innately intricate laws, related regulations and case
law. When preparing the Company’s tax returns, management attempts to
make reasonable interpretations of the tax laws. Taxing authorities
have the ability to challenge management’s analysis of the tax law or any
reinterpretation management makes in its ongoing assessment of facts and the
developing case law. Management assesses the reasonableness of its
effective tax rate quarterly based on its current estimate of net income and the
applicable taxes expected for the full year. On a quarterly basis,
management also reviews circumstances and developments in tax law affecting the
reasonableness of deferred tax assets and liabilities and reserves for
contingent tax liabilities.
2008 Overview
Simmons
First National Corporation recorded net income of $26.9 million for the year
ended December 31, 2008, a 1.7% decrease from net income of $27.4 million in
2007. Net income in 2006 was $27.5 million. Diluted
earnings per share decreased $0.01, or 0.5%, to $1.91 in 2008 compared to $1.92
in 2007. Diluted earnings per share in 2006 were
$1.90. The Company’s return on average assets and return on average
stockholders’ equity for the year ended December 31, 2008, were 0.94% and 9.54%,
compared to 1.03% and 10.26%, respectively, for the year ended
2007.
During the
first quarter of 2008, the Company recorded a nonrecurring $0.05 increase in
diluted earnings per share related to the reversal of a $1.2 million pre-tax
contingent liability established during the fourth quarter of
2007. That contingent liability represented the Company’s pro-rata
portion of Visa, Inc.’s, and its related subsidiary Visa U.S.A.’s (collectively
“Visa”) litigation liabilities, which was satisfied in conjunction with Visa’s
initial public offering (“IPO”). Also as a result of Visa’s IPO, the
Company received cash proceeds from the mandatory partial redemption of its
equity interest in Visa, resulting in a nonrecurring $3.0 million pre-tax gain
in the first quarter 2008, or $0.13 per diluted common
share. Finally, associated with its membership in Visa, the Company
received 110,308 class B shares of Visa. The class B shares have a
restricted holding period, and the Company will not recognize any gain until
such time the shares are redeemed for cash or otherwise disposed
of.
At
December 31, 2008, the Company’s loan portfolio totaled $1.933 billion, which is
an $82.6 million, or 4.5%, increase from the same period last
year. This increase is due primarily to a $35.3 million, or 46.3%,
increase in student loans and a $69.5 million, or 7.5%, increase in commercial
and residential real estate loans. Loan growth was somewhat mitigated
by a $36.0 million, or 13.8%, decline in development and construction loans due
to permanent financing of completed projects and to the downturn in the
construction industry.
Although
the general state of the national economy remains volatile, and despite the
challenges in the Northwest Arkansas region, the Company continues to maintain
relatively good asset quality. In fact, we continue to sustain good
asset quality in all other regions of Arkansas. The allowance for
loan losses as a percent of total loans was 1.34% at December 31,
2008. Non-performing loans equaled 0.81% of total loans, up 21 basis
points from 2007. Non-performing assets were 0.64% of total assets,
up 13 basis points from 2007. The allowance for loan losses was 165%
of non-performing loans. The Company’s annualized net charge-offs for
2008 were 0.50% of total loans. Excluding credit cards, annualized
net charge-offs for 2008 were 0.36% of total loans. Annualized net
credit card charge-offs for the 2008 were 1.78%, more than 400 basis points
below the most recently published credit card charge-off industry
average. The Company does not own any securities backed by subprime
mortgage assets and has no mortgage loan products that target subprime
borrowers.
20
Total
assets for the Company at December 31, 2008, were $2.923 billion, an increase of
$231 million, or 8.6%, over the period ended December 31,
2007. Stockholders’ equity as of December 31, 2008 was $288.8
million, an increase of $16.4 million, or approximately 6.0 %, from December 31,
2007.
Simmons
First National Corporation is an Arkansas based, Arkansas committed financial
holding company with $2.9 billion in assets and eight community banks in
Pine Bluff, Lake Village, Jonesboro, Rogers, Searcy, Russellville, El Dorado and
Hot Springs, Arkansas. The Company’s eight banks conduct financial
operations from 88 offices, of which 84 are financial centers, in 47
communities.
Net Interest Income
Net
interest income, the Company's principal source of earnings, is the difference
between the interest income generated by earning assets and the total interest
cost of the deposits and borrowings obtained to fund those
assets. Factors that determine the level of net interest income
include the volume of earning assets and interest bearing liabilities, yields
earned and rates paid, the level of non-performing loans and the amount of
non-interest bearing liabilities supporting earning assets. Net
interest income is analyzed in the discussion and tables below on a fully
taxable equivalent basis. The adjustment to convert certain income to
a fully taxable equivalent basis consists of dividing tax-exempt income by one
minus the combined federal and state income tax rate of 37.50%.
The
Federal Reserve Board sets various benchmark rates, including the Federal Funds
rate, and thereby influences the general market rates of interest, including the
deposit and loan rates offered by financial institutions. The
Company’s loan portfolio is significantly affected by changes in the prime
interest rate. The prime interest rate, which is the rate offered on
loans to borrowers with strong credit, began 2006 at 7.25% and increased 50
basis points in the first quarter and 50 basis points in the second quarter to
end the year at 8.25%. During 2007, the prime interest rate decreased
50 basis points in the third quarter and 50 basis points in the fourth
quarter to end the year at 7.25%. During 2008, the prime interest
rate decreased 200 basis points in the first quarter, 25 basis points in the
second quarter and another 175 basis points in the fourth quarter to end
the year at 3.25%. The Federal Funds rate, which is the cost to banks
of immediately available overnight funds, began 2006 at 4.25%. During
2006, the Federal Funds rate increased 50 basis points in the first quarter and
50 basis points in the second quarter to end the year at
5.25%. During 2007, the Federal Funds rate decreased 50 basis points
in the third quarter and 50 basis points in the fourth quarter to end the year
at 4.25%. During 2008, the Federal Funds rate decreased 200 basis
points in the first quarter, 25 basis points in the second quarter and another
175-200 basis points in the fourth quarter to end the year at
0.00%-0.25%.
The
Company’s practice is to limit exposure to interest rate movements by
maintaining a significant portion of earning assets and interest bearing
liabilities in short-term repricing. Historically, approximately
70% of the Company’s loan portfolio and approximately 80% of the Company’s
time deposits have repriced in one year or less. These historical
percentages are consistent with the Company’s current interest rate
sensitivity.
For the
year ended December 31, 2008, net interest income on a fully taxable equivalent
basis was $98.1 million, an increase of $2.5 million, or 2.6%, from the
same period in 2007. The increase in net interest income was the
result of a $14.3 million decrease in interest expense offset by an $11.8
million decrease in interest income. As a result, the net interest
margin was 3.75% for the year ended December 31, 2008, a decrease of
21 basis points from 2007.
The $14.3
million decrease in interest expense for 2008 is primarily the result of a 92
basis point decrease in cost of funds due to competitive repricing during a
falling interest rate environment, partially offset by a $175.5 million increase
in average interest bearing liabilities. The growth in average
interest bearing liabilities was primarily due to the Company’s initiatives to
enhance liquidity during 2008 through (1) the introduction of a new high yield
investment deposit account and (2) securing additional long-term FHLB
advances. The lower interest rates accounted for a $16.2 million
decrease in interest expense. The most significant component of this decrease
was the $9.7 million decrease associated with the repricing of the Company’s
time deposits that resulted from time deposits that matured during the period or
were tied to a rate that fluctuated with changes in market
rates. Historically, approximately 80% of the Company’s time deposits
reprice in one year or less. As a result, the average rate paid on
time deposits decreased 92 basis points from 4.66% to
3.74%. Lower rates on federal funds purchased and other debt resulted
in an additional $4.8 million decrease in interest expense, with the average
rate paid on debt decreasing by 184 basis points from 5.23% to
3.39%. The higher level of average interest bearing liabilities
resulted in a $1.9 million increase in interest expense. More
specifically, the higher level of average interest bearing liabilities was the
result of increases of approximately $120.3 million from internal deposit growth
and $55.2 million in federal funds purchased and other debt.
21
The $11.8
million decrease in interest income for 2008 is primarily the result of a 101
basis point decrease in yield on earning assets associated with the repricing to
a lower interest rate environment, offset by a $205.3 million increase in
average interest earning assets due to internal growth. The lower
interest rates accounted for a $22.5 million decrease in interest
income. The most significant component of this decrease was the $20.9
million decrease associated with the repricing of the Company’s loan portfolio
that resulted from loans that matured during the period or were tied to a rate
that fluctuated with changes in market rates. Historically,
approximately 70% of the Company’s loan portfolio reprices in one year or
less. As a result, the average rate earned on the loan portfolio
decreased 111 basis points from 7.79% to 6.68%. The growth in average
interest earning assets resulted in a $10.7 million improvement in interest
income. The growth in average loans accounted for $5.2 million of
this increase, while the growth in investment securities resulted in $3.8
million of the increase.
The
Company’s net interest margin decreased 21 basis points to 3.75% for the year
ended December 31, 2008, when compared to 3.96% for the same period in
2007. This decrease in the net interest margin was primarily due to
significant repricing of earning assets due to declining interest rates
throughout 2008, along with the Company’s concentrated effort to grow core
deposits. Based on its current interest rate risk pricing model, and
considering the most recent rate reductions, the Company anticipates additional
margin compression during 2009.
For the
year ended December 31, 2007, net interest income on a fully taxable equivalent
basis was $95.6 million, an increase of $3.6 million, or 3.9%, from the
same period in 2006. The increase in net interest income was the
result of a $15.5 million increase in interest income offset by an $11.9 million
increase in interest expense. As a result, the net interest margin
was 3.96% for the year ended December 31, 2007, unchanged from
2006.
22
Tables 1
and 2 reflect an analysis of net interest income on a fully taxable equivalent
basis for the years ended December 31, 2008, 2007 and 2006, respectively, as
well as changes in fully taxable equivalent net interest margin for the years
2008 versus 2007 and 2007 versus 2006.
Table
1: Analysis of Net
Interest Income
(FTE
=Fully Taxable Equivalent)
|
Years Ended December 31
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
income
|
$ | 156,141 | $ | 168,536 | $ | 153,362 | ||||||
|
FTE
adjustment
|
4,060 | 3,463 | 3,185 | |||||||||
|
Interest
income - FTE
|
160,201 | 171,999 | 156,547 | |||||||||
|
Interest
expense
|
62,124 | 76,420 | 64,558 | |||||||||
|
Net
interest income - FTE
|
$ | 98,077 | $ | 95,579 | $ | 91,989 | ||||||
|
Yield
on earning assets - FTE
|
6.12 | % | 7.13 | % | 6.74 | % | ||||||
|
Cost
of interest bearing liabilities
|
2.77 | % | 3.69 | % | 3.24 | % | ||||||
|
Net
interest spread - FTE
|
3.35 | % | 3.44 | % | 3.50 | % | ||||||
|
Net
interest margin - FTE
|
3.75 | % | 3.96 | % | 3.96 | % | ||||||
Table
2: Changes in Fully
Taxable Equivalent Net Interest Margin
|
(In thousands)
|
2008 vs. 2007
|
2007 vs. 2006
|
||||||
|
Increase
due to change in earning assets
|
$ | 10,688 | $ | 6,959 | ||||
|
(Decrease)
increase due to change in earning asset yields
|
(22,486 | ) | 8,496 | |||||
|
Increase
(decrease) due to change in interest rates paid on
|
||||||||
|
interest
bearing liabilities
|
16,216 | (8,639 | ) | |||||
|
Decrease
due to change in interest bearing liabilities
|
(1,920 | ) | (3,226 | ) | ||||
|
Increase
in net interest income
|
$ | 2,498 | $ | 3,590 | ||||
23
Table 3
shows, for each major category of earning assets and interest bearing
liabilities, the average (computed on a daily basis) amount outstanding, the
interest earned or expensed on such amount and the average rate earned or
expensed for each of the years in the three-year period ended December 31,
2008. The table also shows the average rate earned on all earning
assets, the average rate expensed on all interest bearing liabilities, the net
interest spread and the net interest margin for the same periods. The
analysis is presented on a fully taxable equivalent basis. Nonaccrual
loans were included in average loans for the purpose of calculating the rate
earned on total loans.
Table
3: Average Balance
Sheets and Net Interest Income Analysis
|
Years Ended December 31
|
||||||||||||||||||||||||||||||||||||
|
|
2008
|
2007
|
|
2006
|
||||||||||||||||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||||||||||||||||||
|
(In thousands)
|
Balance
|
Expense
|
Rate(%)
|
Balance
|
Expense
|
Rate(%)
|
Balance
|
Expense
|
Rate(%)
|
|||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
Earning
Assets
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing balances
|
||||||||||||||||||||||||||||||||||||
|
due
from banks
|
$ | 83,547 | $ | 1,415 | 1.69 | $ | 22,957 | $ | 1,161 | 5.06 | $ | 22,746 | $ | 1,072 | 4.71 | |||||||||||||||||||||
|
Federal
funds sold
|
34,577 | 748 | 2.16 | 26,798 | 1,418 | 5.29 | 20,223 | 1,057 | 5.23 | |||||||||||||||||||||||||||
|
Investment
securities - taxable
|
437,612 | 21,057 | 4.81 | 395,388 | 18,362 | 4.64 | 410,445 | 15,705 | 3.83 | |||||||||||||||||||||||||||
|
Investment
securities - non-taxable
|
157,793 | 10,173 | 6.45 | 131,369 | 8,454 | 6.44 | 117,931 | 7,573 | 6.42 | |||||||||||||||||||||||||||
|
Mortgage
loans held for sale
|
6,909 | 411 | 5.95 | 7,971 | 505 | 6.34 | 7,666 | 476 | 6.21 | |||||||||||||||||||||||||||
|
Assets
held in trading accounts
|
5,711 | 73 | 1.28 | 4,958 | 100 | 2.02 | 4,590 | 71 | 1.55 | |||||||||||||||||||||||||||
|
Loans
|
1,891,357 | 126,324 | 6.68 | 1,822,777 | 141,999 | 7.79 | 1,740,477 | 130,593 | 7.50 | |||||||||||||||||||||||||||
|
Total
interest earning assets
|
2,617,506 | 160,201 | 6.12 | 2,412,218 | 171,999 | 7.13 | 2,324,078 | 156,547 | 6.74 | |||||||||||||||||||||||||||
|
Non-earning
assets
|
250,675 | 254,656 | 251,261 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 2,868,181 | $ | 2,666,874 | $ | 2,575,339 | ||||||||||||||||||||||||||||||
|
LIABILITIES AND
|
||||||||||||||||||||||||||||||||||||
|
STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing transaction
|
||||||||||||||||||||||||||||||||||||
|
and
savings deposits
|
$ | 959,567 | $ | 14,924 | 1.56 | $ | 736,160 | $ | 13,089 | 1.78 | $ | 737,328 | $ | 11,658 | 1.58 | |||||||||||||||||||||
|
Time
deposits
|
1,021,427 | 38,226 | 3.74 | 1,124,557 | 52,385 | 4.66 | 1,052,705 | 42,592 | 4.05 | |||||||||||||||||||||||||||
|
Total
interest bearing deposits
|
1,980,994 | 53,150 | 2.68 | 1,860,717 | 65,474 | 3.52 | 1,790,033 | 54,250 | 3.03 | |||||||||||||||||||||||||||
|
Federal
funds purchased and
|
||||||||||||||||||||||||||||||||||||
|
securities
sold under agreement
|
||||||||||||||||||||||||||||||||||||
|
to
repurchase
|
113,964 | 2,110 | 1.85 | 113,167 | 5,371 | 4.75 | 100,280 | 4,615 | 4.60 | |||||||||||||||||||||||||||
|
Other
borrowed funds
|
||||||||||||||||||||||||||||||||||||
|
Short-term
debt
|
4,333 | 111 | 2.56 | 14,757 | 804 | 5.45 | 21,065 | 1,227 | 5.82 | |||||||||||||||||||||||||||
|
Long-term
debt
|
146,218 | 6,753 | 4.62 | 81,408 | 4,771 | 5.86 | 82,525 | 4,466 | 5.41 | |||||||||||||||||||||||||||
|
Total
interest bearing liabilities
|
2,245,509 | 62,124 | 2.77 | 2,070,049 | 76,420 | 3.69 | 1,993,903 | 64,558 | 3.24 | |||||||||||||||||||||||||||
|
Non-interest
bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
Non-interest
bearing deposits
|
317,772 | 307,041 | 308,804 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
22,714 | 23,156 | 21,114 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
2,585,995 | 2,400,246 | 2,323,821 | |||||||||||||||||||||||||||||||||
|
Stockholders’
equity
|
282,186 | 266,628 | 251,518 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||||||||||||||||||
|
stockholders’
equity
|
$ | 2,868,181 | $ | 2,666,874 | $ | 2,575,339 | ||||||||||||||||||||||||||||||
|
Net
interest spread
|
3.35 | 3.44 | 3.50 | |||||||||||||||||||||||||||||||||
|
Net
interest margin
|
$ | 98,077 | 3.75 | $ | 95,579 | 3.96 | $ | 91,989 | 3.96 | |||||||||||||||||||||||||||
24
Table 4
shows changes in interest income and interest expense, resulting from changes in
volume and changes in interest rates for each of the years ended December 31,
2008 and 2007, as compared to prior years. The changes in interest
rate and volume have been allocated to changes in average volume and changes in
average rates in proportion to the relationship of absolute dollar amounts of
the changes in rates and volume.
Table
4: Volume/Rate
Analysis
|
Years Ended December 31
|
||||||||||||||||||||||||
|
2008 over 2007
|
2007 over 2006
|
|||||||||||||||||||||||
|
(In
thousands, on a fully
|
Yield/
|
Yield/
|
||||||||||||||||||||||
|
taxable equivalent
basis)
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||||||
|
Increase
(decrease) in
|
||||||||||||||||||||||||
|
Interest
income
|
||||||||||||||||||||||||
|
Interest
bearing balances
|
||||||||||||||||||||||||
|
due
from banks
|
$ | 1,436 | $ | (1,182 | ) | $ | 254 | $ | 10 | $ | 79 | $ | 89 | |||||||||||
|
Federal
funds sold
|
332 | (1,002 | ) | (670 | ) | 348 | 13 | 361 | ||||||||||||||||
|
Investment
securities - taxable
|
2,094 | 571 | 2,665 | (594 | ) | 3,252 | 2,658 | |||||||||||||||||
|
Investment
securities - non-taxable
|
1,704 | 15 | 1,719 | 865 | 17 | 882 | ||||||||||||||||||
|
Mortgage
loans held for sale
|
(64 | ) | (30 | ) | (94 | ) | 19 | 10 | 29 | |||||||||||||||
|
Assets
held in trading accounts
|
2 | 1 | 3 | 6 | 24 | 30 | ||||||||||||||||||
|
Loans
|
5,184 | (20,859 | ) | (15,675 | ) | 6,305 | 5,101 | 11,406 | ||||||||||||||||
|
Total
|
10,688 | (22,486 | ) | (11,798 | ) | 6,959 | 8,496 | 15,455 | ||||||||||||||||
|
Interest
expense
|
||||||||||||||||||||||||
|
Interest
bearing transaction and
|
||||||||||||||||||||||||
|
savings
deposits
|
3,620 | (1,785 | ) | 1,835 | (18 | ) | 1,450 | 1,432 | ||||||||||||||||
|
Time
deposits
|
(4,504 | ) | (9,655 | ) | (14,159 | ) | 3,044 | 6,750 | 9,794 | |||||||||||||||
|
Federal
funds purchased
|
||||||||||||||||||||||||
|
and
securities sold under
|
||||||||||||||||||||||||
|
agreements
to repurchase
|
38 | (3,299 | ) | (3,261 | ) | 608 | 148 | 756 | ||||||||||||||||
|
Other
borrowed funds
|
||||||||||||||||||||||||
|
Short-term
debt
|
(396 | ) | (297 | ) | (693 | ) | (347 | ) | (75 | ) | (422 | ) | ||||||||||||
|
Long-term
debt
|
3,162 | (1,180 | ) | 1,982 | (61 | ) | 366 | 305 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
1,920 | (16,216 | ) | (14,296 | ) | 3,226 | 8,639 | 11,865 | ||||||||||||||||
|
Increase
(decrease) in
|
||||||||||||||||||||||||
|
net
interest income
|
$ | 8,768 | $ | (6,270 | ) | $ | 2,498 | $ | 3,733 | $ | (143 | ) | $ | 3,590 | ||||||||||
Provision for Loan Losses
The
provision for loan losses represents management's determination of the amount
necessary to be charged against the current period's earnings in order to
maintain the allowance for loan losses at a level considered adequate in
relation to the estimated risk inherent in the loan portfolio. The
level of provision to the allowance is based on management's judgment, with
consideration given to the composition, maturity and other qualitative
characteristics of the portfolio, historical loan loss experience, assessment of
current economic conditions, past due and non-performing loans and net loan loss
experience. It is management's practice to review the allowance on at
least a quarterly basis, but generally on a monthly basis, and, after
considering the factors previously noted, to determine the level of provision
made to the allowance.
The
provision for loan losses for 2008, 2007 and 2006, was $8.6 million, $4.2
million and $3.8 million, respectively. At various times
throughout 2008, the Company recorded special provisions for loan losses
totaling approximately $2.4 million for possible loan losses related to the
Northwest Arkansas region. During 2007, the Company sustained a low
rate of net credit card charge-offs of 1.14%, allowing the provision to remain
at a level similar to that of 2006. However, the provision increased
somewhat due to an increase in non-performing assets and in net loan
charge-offs, particularly in the Northwest Arkansas region. See the
Allowance for Loan Losses section for additional analysis of the provision for
loan losses.
25
Non-Interest Income
Total
non-interest income was $49.3 million in 2008, compared to $46.0 million in 2007
and $43.9 million in 2006. Non-interest income is principally derived from
recurring fee income, which includes service charges, trust fees and credit card
fees. Non-interest income also includes income on the sale of
mortgage loans, investment banking income, premiums on sale of student loans,
income from the increase in cash surrender values of bank owned life insurance
and gains (losses) from sales of securities.
Table 5
shows non-interest income for the years ended December 31, 2008, 2007 and 2006,
respectively, as well as changes in 2008 from 2007 and in 2007 from
2006.
Table
5: Non-Interest
Income
|
Years Ended December 31
|
2008
Change
from
|
2007
Change
from
|
||||||||||||||||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||||||
|
Trust
income
|
$ | 6,230 | $ | 6,218 | $ | 5,612 | $ | 12 | 0.19 | % | $ | 606 | 10.80 | % | ||||||||||||||
|
Service
charges on deposit accounts
|
15,145 | 14,794 | 15,795 | 351 | 2.37 | (1,001 | ) | -6.34 | ||||||||||||||||||||
|
Other
service charges and fees
|
2,681 | 3,016 | 2,561 | (335 | ) | -11.11 | 455 | 17.77 | ||||||||||||||||||||
|
Income
on sale of mortgage loans,
|
||||||||||||||||||||||||||||
|
net
of commissions
|
2,606 | 2,766 | 2,849 | (160 | ) | -5.78 | (83 | ) | -2.91 | |||||||||||||||||||
|
Income
on investment banking,
|
||||||||||||||||||||||||||||
|
net
of commissions
|
1,025 | 623 | 341 | 402 | 64.53 | 282 | 82.70 | |||||||||||||||||||||
|
Credit
card fees
|
13,579 | 12,217 | 10,742 | 1,362 | 11.15 | 1,475 | 13.73 | |||||||||||||||||||||
|
Premiums
on sale of student loans
|
1,134 | 2,341 | 2,071 | (1,207 | ) | -51.56 | 270 | 13.04 | ||||||||||||||||||||
|
Bank
owned life insurance income
|
1,547 | 1,493 | 1,523 | 54 | 3.62 | (30 | ) | -1.97 | ||||||||||||||||||||
|
Gain
on mandatory partial
|
||||||||||||||||||||||||||||
|
redemption
of Visa shares
|
2,973 | -- | -- | 2,973 | -- | -- | -- | |||||||||||||||||||||
|
Other
income
|
2,406 | 2,535 | 2,453 | (129 | ) | -5.09 | 82 | 3.34 | ||||||||||||||||||||
|
Total
non-interest income
|
$ | 49,326 | $ | 46,003 | $ | 43,947 | $ | 3,323 | 7.22 | % | $ | 2,056 | 4.68 | % | ||||||||||||||
Recurring
fee income for 2008 was $37.6 million, an increase of $1.4 million, or 3.8%,
when compared with the 2007 amounts. Service charges on deposit
accounts increased by $351,000, principally due improvement in our fee
structure, along with core deposit growth. Other service charges and
fees decreased by $335,000, primarily due to a decrease in commission revenue
from a third party official check vendor as a result of a contract expiration
and the change in business related to Check 21. Credit card fees
increased $1.4 million, primarily due to a higher volume of credit and debit
card transactions, with the credit card volume increase a direct result of the
addition of new credit card accounts in 2007 and 2008.
Recurring
fee income for 2007 was $36.2 million, an increase of $1.5 million, or 4.4%,
when compared with the 2006 amounts. Trust income increased by
$606,000, mainly due to the addition of new customer
accounts. Service charges on deposit accounts decreased by $1.0
million, principally due to reduced income on insufficient funds (“NSF”)
charges. The decrease in NSF income is primarily due to the increase
in consumer use of debit cards and internet banking, and the associated decrease
in paper transactions. Other service charges and fees increased by
$455,000, primarily due to an increase in ATM income, driven by an increase in
PIN-based debit card volume and an improvement in the fee
structure. Credit card fees increased $1.5 million, primarily due to
a higher volume of credit and debit card transactions.
During the
year ended December 31, 2008, income on investment banking increased $402,000,
or 64.5% from the year ended 2007. This improvement was due to
additional sales volume driven by the interest rate environment, called
securities and customer liquidity. During 2007, income on investment
banking increased $282,000, or 82.7% from 2006, due to additional sales volume
driven by the yield curve and customers’ expectation of future interest rate
decreases.
26
Premiums
on sale of student loans decreased by $1.2 million, or 51.6%, in 2008 over
2007. The decrease was primarily due to a reduction in sales of
student loans during 2008. The student loan industry is going through
major challenges related to secondary market liquidity. The current
liquidity of the secondary market has effectively disappeared; therefore, the
Company is currently unable to sell student loans at a premium. For
the immediate future, it is the Company’s intention, and we have the liquidity,
to continue to fund new loans and hold those loans that normally would be sold
into the secondary market through the 2008-2009 school year. In July
2008, the United States Department of Education announced a one-year program to
create temporary stability and liquidity in the student loan
market. During the third quarter of 2009, the Company expects to sell
into the government program all student loans originated and fully funded during
the 2008-2009 school year. Under the terms of the government program,
the loans will be sold at par plus reimbursement of the 1% lender fee and a
premium of $75 per loan. The Company expects to increase the student
loan portfolio by approximately $50 million during the carrying period; however,
we have the option of creating liquidity by selling participation loans into the
government program.
Premiums
on sale of student loans increased by $270,000, or 13.0%, in 2007 over
2006. The increase was primarily due to accelerating the sale of
student loans during 2007. Generally, as student loans reach payout
status, the Company sells those loans into the secondary
market. Because of changes in the industry relative to loan
consolidations and in order to protect the premium on these loans, the Company
made the decision to sell student loans prior to the payout
period. This resulted in recognition of premium in 2007 on loans that
normally would have been sold in 2008.
For 2009,
the Company anticipates the entire premium on sale of student loans, currently
estimated at $1.6 million, to be recorded in the third quarter of 2009, when the
loans are sold. We will continue to evaluate the profitability and
viability of this strategic business unit going forward.
During the
first quarter of 2008, the Company recognized a nonrecurring $3.0 million gain
from the cash proceeds received on the mandatory partial redemption of the
Company’s equity interest in Visa, which was the result of Visa’s IPO completed
in March, 2008.
There were
no gains or losses on sale of securities during 2008 or 2007.
Non-Interest Expense
Non-interest
expense consists of salaries and employee benefits, occupancy, equipment,
foreclosure losses and other expenses necessary for the operation of the
Company. Management remains committed to controlling the level of
non-interest expense through the continued use of expense control measures that
have been installed. The Company utilizes an extensive profit
planning and reporting system involving all affiliates. Based on a
needs assessment of the business plan for the upcoming year, monthly and annual
profit plans are developed, including manpower and capital expenditure
budgets. These profit plans are subject to extensive initial reviews
and monitored by management on a monthly basis. Variances from the
plan are reviewed monthly and, when required, management takes corrective action
intended to ensure financial goals are met. Management also regularly
monitors staffing levels at each affiliate to ensure productivity and overhead
are in line with existing workload requirements.
Non-interest
expense for 2008 was $96.4 million, an increase of $2.2 million or 2.3%, from
2007. The increase in non-interest expense during 2008 compared to
2007 is primarily attributed to normal on-going operating expenses and the
incremental expenses of approximately $1.6 million associated with the operation
of new financial centers opened during 2008.
Also
included in non-interest expense for 2008 is a $1.2 million nonrecurring item
related to the reversal of the Company’s portion of Visa’s contingent litigation
liabilities. The Company established the liability and recorded a
$1.2 million nonrecurring expense item during the fourth quarter of
2007. This liability represented the Company’s share of legal
judgments and settlements related to Visa’s litigation, which was satisfied by
the $3 billion escrow account funded by the proceeds from Visa’s IPO, which was
completed during the quarter ended March 31, 2008. When normalized for the Visa
litigation expense, its reversal and the additional expenses from the expansion,
non-interest expense for 2008 increased by 3.2% over 2007.
27
FDIC
deposit insurance expense increased by $465,000 in 2008, or 142%, over
2007. During 2007, the FDIC issued credits based on historical
deposit levels to be used in offsetting deposit insurance assessments; the
Company received approximately $1.8 million of these credits. The
majority of the credits were exhausted during the third quarter of
2008. As these credits are used, FDIC insurance expense
increases. Based on the recent FDIC insurance assessment projections,
we estimate the Company’s annual deposit insurance expense to increase by
approximately $1.8 million in 2009 over 2008.
Credit
card expense for 2008 increased $576,000, or 14.1%, over 2007, primarily due to
increased card usage, interchange fees and other related expense resulting from
initiatives the Company has taken to grow its credit card
portfolio. See Loan Portfolio section for additional
information.
Other
non-interest expense for 2008 includes an increase of $289,000 for compensation
expense. Recognition of the expense for endorsement split-dollar life
insurance policies that provide a benefit to an employee that extends to
post-retirement periods is required by EITF 06-4, which became effective January
1, 2008. See Note 16, New Accounting Standards, of the Notes to
Consolidated Financial Statements.
Non-interest
expense for 2007 was $94.2 million, an increase of $5.1 million or 5.8%, from
2006. The increase in non-interest expense during 2007 compared to
2006 is primarily attributed to normal on-going operating expenses and the
incremental expenses of approximately $634,000 associated with the operation of
new financial centers opened during 2007. Also, during 2007, the
Company recorded a nonrecurring expense of $1.2 million related to
indemnification obligations with Visa’s litigation, as previously
discussed. When normalized for both the Visa litigation expense and
the additional expenses from the expansion, non-interest expense for 2007
increased by 3.7% over 2006.
Credit
card expense for 2007 increased $860,000, or 26.6%, over 2006, primarily due to
the increased volume in credit card applications, card creation, interchange and
other related expense resulting from initiatives the Company has taken to
stabilize its credit card portfolio. See Loan Portfolio section for
additional information.
Other
non-interest expense for 2007 increased $832,000, or 7.8%, compared to
2006. The most significant component of the increase was an increase
of $442,000 of student loan origination fees paid by the Company in
2007. The Federal Student Loan Program began a three-year phase out
program of origination fees on its loans late in 2006. Most of the
national market began waiving and absorbing the fees themselves during the
phase-out period; therefore, as a leader in the Arkansas student loan market,
the Company decided to do the same in order to prevent putting itself at a
competitive disadvantage. Proper accounting for these fees requires
them to be amortized over the period in which the Company holds the
loans. The Company expensed $558,000 of student loan origination fees
during 2007, compared to $116,000 in 2007, an increase of
381%. Expense from the student loan origination fees in 2008
approximated 2007 levels.
Core
deposit premium amortization expense recorded for the years ended December 31,
2008, 2007 and 2006, was $807,000, $817,000 and $830,000,
respectively. The Company’s estimated amortization expense for each
of the following five years is: 2009 – $802,000; 2010 – $699,000;
2011 – $451,000; 2012 – $321,000; and 2013 – $268,000. The
estimated amortization expense decreases as core deposit premiums fully amortize
in future years.
28
Table 6
below shows non-interest expense for the years ended December 31, 2008, 2007 and
2006, respectively, as well as changes in 2008 from 2007 and in 2007 from
2006.
Table
6: Non-Interest
Expense
|
Years Ended December 31
|
2008
Change
from
|
2007
Change from |
||||||||||||||||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
2007
|
2006
|
|
||||||||||||||||||||||
|
Salaries
and employee benefits
|
$ | 57,050 | $ | 54,865 | $ | 53,442 | $ | 2,185 | 3.98 | % | $ | 1,423 | 2.66 | % | ||||||||||||||
|
Occupancy
expense, net
|
7,383 | 6,674 | 6,385 | 709 | 10.62 | 289 | 4.53 | |||||||||||||||||||||
|
Furniture
and equipment expense
|
5,967 | 5,865 | 5,718 | 102 | 1.74 | 147 | 2.57 | |||||||||||||||||||||
|
Loss
on foreclosed assets
|
239 | 212 | 136 | 27 | 12.74 | 76 | 55.88 | |||||||||||||||||||||
|
Deposit
insurance
|
793 | 328 | 270 | 465 | 141.77 | 58 | 21.48 | |||||||||||||||||||||
|
Other
operating expenses
|
||||||||||||||||||||||||||||
|
Professional
services
|
2,824 | 2,780 | 2,490 | 44 | 1.62 | 290 | 11.61 | |||||||||||||||||||||
|
Postage
|
2,256 | 2,309 | 2,278 | (53 | ) | -2.30 | 31 | 1.36 | ||||||||||||||||||||
|
Telephone
|
1,868 | 1,820 | 1,961 | 48 | 2.64 | (141 | ) | -7.19 | ||||||||||||||||||||
|
Credit
card expense
|
4,671 | 4,095 | 3,235 | 576 | 14.07 | 860 | 26.58 | |||||||||||||||||||||
|
Operating
supplies
|
1,588 | 1,669 | 1,611 | (81 | ) | -4.85 | 58 | 3.60 | ||||||||||||||||||||
|
Amortization
of core deposits
|
807 | 817 | 830 | (10 | ) | -1.22 | (13 | ) | -1.57 | |||||||||||||||||||
|
Visa
litigation liability expense
|
(1,220 | ) | 1,220 | -- | (2,440 | ) | -- | 1,220 | -- | |||||||||||||||||||
|
Other
expense
|
12,134 | 11,543 | 10,712 | 591 | 5.11 | 831 | 7.77 | |||||||||||||||||||||
|
Total
non-interest expense
|
$ | 96,360 | $ | 94,197 | $ | 89,068 | $ | 2,163 | 2.30 | % | $ | 5,129 | 5.76 | % | ||||||||||||||
Income Taxes
The
provision for income taxes for 2008 was $11.4 million, compared to $12.4 million
in 2007 and $12.4 million in 2006. The effective income tax rates for
the years ended 2008, 2007 and 2006 were 29.8%, 31.2% and 31.2%,
respectively.
Loan Portfolio
The
Company's loan portfolio averaged $1.891 billion during 2008 and $1.823 billion
during 2007. As of December 31, 2008, total loans were $1.933
billion, compared to $1.850 billion on December 31, 2007. The most
significant components of the loan portfolio were loans to businesses
(commercial loans, commercial real estate loans and agricultural loans) and
individuals (consumer loans, credit card loans and single-family residential
real estate loans).
The
Company seeks to manage its credit risk by diversifying its loan portfolio,
determining that borrowers have adequate sources of cash flow for loan repayment
without liquidation of collateral, obtaining and monitoring collateral,
providing an adequate allowance for loan losses and regularly reviewing loans
through the internal loan review process. The loan portfolio is
diversified by borrower, purpose and industry and, in the case of credit card
loans, which are unsecured, by geographic region. The Company seeks
to use diversification within the loan portfolio to reduce credit risk, thereby
minimizing the adverse impact on the portfolio, if weaknesses develop in either
the economy or a particular segment of borrowers. Collateral
requirements are based on credit assessments of borrowers and may be used to
recover the debt in case of default. The Company uses the allowance
for loan losses as a method to value the loan portfolio at its estimated
collectable amount. Loans are regularly reviewed to facilitate the
identification and monitoring of deteriorating credits.
Consumer
loans consist of credit card loans, student loans and other consumer
loans. Consumer loans were $419.3 million at December 31, 2008,
or 21.7% of total loans, compared to $379.9 million, or 20.5% of total loans at
December 31, 2007. The $39.4 million consumer loan increase from 2007
to 2008 is primarily due to the increase in the loans held in the student loan
portfolio resulting from the current lack of a secondary market.
29
The
student loan portfolio balance at December 31, 2008 was $111.6 million, an
increase of $35.3 million, or 46.3%, from December 31, 2007. The
Company expects a significant increase in student loan balances until the third
quarter of 2009 due to the departure of competitors from the market, the
Company’s decision to hold loans normally sold in the secondary market and other
issues and challenges facing the student loan industry. See
Non-Interest Income section for additional information.
Historically,
as student loans reached payout status, the Company would sell these loans into
the secondary market. Because of changes in the industry relative to
loan consolidations in 2006 and 2007 and in order to protect the premium, the
Company made the decision to sell some student loans prior to the payout period
in 2006 and continued the practice throughout 2007. These early sales
created a decline in the portfolio balance of student loans at December 31, 2007
and 2006.
The credit
card portfolio balance at December 31, 2008, increased by $3.5 million, or 2.2%,
when compared to the same period in 2007. This follows a $22.7
million, or 15.8% growth during the previous year. The growth in
outstanding credit card balances is primarily the result of an increase in net
new accounts. Management believes the increase in outstanding
balances and the addition of new accounts are the result of the introduction of
several initiatives over the past two years to make the Company’s credit card
products more competitive, while maintaining extremely high underwriting
standards. The Company added approximately 15,000 net new accounts in
2007. Although the account growth is slowing, the positive trend has
continued with the addition of over 5,000 net new accounts in 2008.
Real
estate loans consist of construction loans, single family residential loans and
commercial loans. Real estate loans were $1.219 billion at December
31, 2008, or 63.1% of total loans, compared to $1.186 billion, or 64.1% of total
loans at December 31, 2007, an increase of $33.5 million. Commercial
real estate loans increased $42.7 million during 2008 and single-family
residential loans increased by $26.9 million, primarily due to the permanent
financing of completed projects previously included in the construction loan
category. Construction and development loans represent only 11.6% of
the total loan portfolio.
Commercial
loans consist of commercial loans, agricultural loans and loans to financial
institutions. Commercial loans were $284.2 million at December 31,
2008, or 14.7% of total loans, compared to the $274.0 million, or 14.8% of
total loans at December 31, 2007. This $10.2 million increase in
commercial loans is primarily due to a $14.8 million increase in agricultural
loans, partially offset by a $4.0 million decrease in loans to financial
institutions.
The
amounts of loans outstanding at the indicated dates are reflected in table 7,
according to type of loan.
Table
7: Loan
Portfolio
|
Years Ended December 31
|
||||||||||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Consumer
|
||||||||||||||||||||
|
Credit
cards
|
$ | 169,615 | $ | 166,044 | $ | 143,359 | $ | 143,058 | $ | 155,326 | ||||||||||
|
Student
loans
|
111,584 | 76,277 | 84,831 | 89,818 | 83,283 | |||||||||||||||
|
Other
consumer
|
138,145 | 137,624 | 142,596 | 138,051 | 128,552 | |||||||||||||||
|
Real
Estate
|
||||||||||||||||||||
|
Construction
|
224,924 | 260,924 | 277,411 | 238,898 | 169,001 | |||||||||||||||
|
Single
family residential
|
409,540 | 382,676 | 364,450 | 340,839 | 318,488 | |||||||||||||||
|
Other
commercial
|
584,843 | 542,184 | 512,404 | 479,684 | 481,728 | |||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Commercial
|
192,496 | 193,091 | 178,028 | 184,920 | 158,613 | |||||||||||||||
|
Agricultural
|
88,233 | 73,470 | 62,293 | 68,761 | 62,340 | |||||||||||||||
|
Financial
institutions
|
3,471 | 7,440 | 4,766 | 20,499 | 1,079 | |||||||||||||||
|
Other
|
10,223 | 10,724 | 13,357 | 13,579 | 12,966 | |||||||||||||||
|
Total
loans
|
$ | 1,933,074 | $ | 1,850,454 | $ | 1,783,495 | $ | 1,718,107 | $ | 1,571,376 | ||||||||||
30
Table 8
reflects the remaining maturities and interest rate sensitivity of loans at
December 31, 2008.
Table
8: Maturity and Interest
Rate Sensitivity of Loans
|
|
Over
1
year |
|||||||||||||||
|
1
year
|
through
|
Over
|
||||||||||||||
|
(In thousands)
|
or less
|
5 years
|
5 years
|
Total
|
||||||||||||
|
Consumer
|
$ | 344,100 | $ | 74,597 | $ | 647 | $ | 419,344 | ||||||||
|
Real
estate
|
781,849 | 403,591 | 33,867 | 1,219,307 | ||||||||||||
|
Commercial
|
227,676 | 55,517 | 1,007 | 284,200 | ||||||||||||
|
Other
|
7,644 | 2,179 | 400 | 10,223 | ||||||||||||
|
Total
|
$ | 1,361,269 | $ | 535,884 | $ | 35,921 | $ | 1,933,074 | ||||||||
|
Predetermined
rate
|
$ | 762,131 | $ | 470,971 | $ | 35,777 | $ | 1,268,879 | ||||||||
|
Floating
rate
|
599,138 | 64,913 | 144 | 664,195 | ||||||||||||
|
Total
|
$ | 1,361,269 | $ | 535,884 | $ | 35,921 | $ | 1,933,074 | ||||||||
Asset Quality
A loan is
considered impaired when it is probable that the Company will not receive all
amounts due according to the contracted terms of the loans. Impaired
loans include non-performing loans (loans past due 90 days or more and
nonaccrual loans) and certain other loans identified by management that are
still performing.
Non-performing
loans are comprised of (a) nonaccrual loans, (b) loans that are contractually
past due 90 days and (c) other loans for which terms have been
restructured to provide a reduction or deferral of interest or principal because
of deterioration in the financial position of the borrower. The
subsidiary banks recognize income principally on the accrual basis of
accounting. When loans are classified as nonaccrual, generally, the
accrued interest is charged off and no further interest is
accrued. Loans, excluding credit card loans, are placed on a
nonaccrual basis either (1) when there are serious doubts regarding the
collectability of principal or interest or (2) when payment of interest or
principal is 90 days or more past due and either (i) not fully secured or
(ii) not in the process of collection. If a loan is determined by
management to be uncollectable, the portion of the loan determined to be
uncollectable is then charged to the allowance for loan losses.
Credit
card loans are classified as impaired when payment of interest or principal is
90 days past due. Litigation accounts are placed on nonaccrual until
such time as deemed uncollectable. Credit card loans are generally
charged off when payment of interest or principal exceeds 180 days past due but
are turned over to the credit card recovery department to be pursued until such
time as they are determined, on a case-by-case basis, to be
uncollectable.
31
Table 9
presents information concerning non-performing assets, including nonaccrual and
restructured loans and other real estate owned.
Table
9: Non-performing
Assets
|
Years Ended December 31
|
||||||||||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Nonaccrual
loans
|
$ | 14,358 | $ | 9,909 | $ | 8,958 | $ | 7,296 | $ | 10,918 | ||||||||||
|
Loans
past due 90 days or more
|
||||||||||||||||||||
|
(principal
or interest payments)
|
1,292 | 1,282 | 1,097 | 1,131 | 1,085 | |||||||||||||||
|
Total
non-performing loans
|
15,650 | 11,191 | 10,055 | 8,427 | 12,003 | |||||||||||||||
|
Other
non-performing assets
|
||||||||||||||||||||
|
Foreclosed
assets held for sale
|
2,995 | 2,629 | 1,940 | 1,540 | 1,839 | |||||||||||||||
|
Other
non-performing assets
|
12 | 17 | 52 | 16 | 83 | |||||||||||||||
|
Total
other non-performing assets
|
3,007 | 2,646 | 1,992 | 1,556 | 1,922 | |||||||||||||||
|
Total
non-performing assets
|
$ | 18,657 | $ | 13,837 | $ | 12,047 | $ | 9,983 | $ | 13,925 | ||||||||||
|
Allowance
for loan losses to
|
||||||||||||||||||||
|
non-performing
loans
|
165.12 | % | 226.10 | % | 252.46 | % | 319.48 | % | 220.84 | % | ||||||||||
|
Non-performing
loans to total loans
|
0.81 | % | 0.60 | % | 0.56 | % | 0.49 | % | 0.76 | % | ||||||||||
|
Non-performing
assets to total assets
|
0.64 | % | 0.51 | % | 0.45 | % | 0.40 | % | 0.58 | % | ||||||||||
There was no interest income on the nonaccrual loans recorded for the years ended December 31, 2008, 2007 and 2006.
At
December 31, 2008, impaired loans were $17.2 million compared to $12.5 million
in 2007. On an ongoing basis, management evaluates the underlying
collateral on all impaired loans and allocates specific reserves, where
appropriate, in order to absorb potential losses if the collateral were
ultimately foreclosed.
Allowance for Loan Losses
Overview
The
Company maintains an allowance for loan losses. This allowance is
created through charges to income and maintained at a sufficient level to absorb
expected losses in the Company’s loan portfolio. The allowance for
loan losses is determined monthly based on management’s assessment of several
factors such as (1) historical loss experience based on volumes and types, (2)
reviews or evaluations of the loan portfolio and allowance for loan losses, (3)
trends in volume, maturity and composition, (4) off balance sheet credit risk,
(5) volume and trends in delinquencies and non-accruals, (6) lending policies
and procedures including those for loan losses, collections and recoveries, (7)
national, state and local economic trends and conditions, (8) concentrations of
credit that might affect loss experience across one or more components of the
loan portfolio, (9) the experience, ability and depth of lending management and
staff and (10) other factors and trends that will affect specific loans and
categories of loans.
As the
Company evaluates the allowance for loan losses, it is categorized as follows:
(1) specific allocations, (2) allocations for classified assets with no
specific allocation, (3) general allocations for each major loan category and
(4) unallocated portion.
32
Specific
Allocations
Specific
allocations are made when factors are present requiring a greater reserve than
would be required when using the assigned risk rating allocation. As
a general rule, if a specific allocation is warranted, it is the result of an
analysis of a previously classified credit or relationship. The
evaluation process in specific allocations for the Company includes a review of
appraisals or other collateral analysis. These values are compared to
the remaining outstanding principal balance. If a loss is determined
to be reasonably possible, the possible loss is identified as a specific
allocation. If the loan is not collateral dependent, the measurement
of loss is based on the expected future cash flows of the loan.
Allocations
for Classified Assets with No Specific Allocation
The
Company establishes allocations for loans rated “watch” through “doubtful” based
upon analysis of historical loss experience by category. A percentage
rate is applied to each category of these loan categories to determine the level
of dollar allocation.
General
Allocations
The
Company establishes general allocations for each major loan
category. This section also includes allocations to loans which are
collectively evaluated for loss such as credit cards, one-to-four family owner
occupied residential real estate loans and other consumer loans. The
allocations in this section are based on an analysis of historical losses for
each loan category. The Company gives consideration to trends,
changes in loan mix, delinquencies, prior losses and other related
information.
Unallocated
Portion
Allowance
allocations other than specific, classified and general for the Company are
included in unallocated. While allocations are made for loans based
upon historical loss analysis, the unallocated portion is designed to cover the
uncertainty of how current economic conditions and other uncertainties may
impact the existing loan portfolio. Factors to consider include
national and state economic conditions such as increases in unemployment, the
recent real estate lending crisis, the downturn in the stock market and the
unknown impact of the Economic Stimulus package.
Reserve
for Unfunded Commitments
Historically,
the Company had included reserves for unfunded commitments in the allowance for
loan losses. On March 31, 2006, the reserve for unfunded
commitments was reclassified from the allowance for loan losses to other
liabilities. This reserve is maintained at a level sufficient to
absorb losses arising from unfunded loan commitments. The adequacy of
the reserve for unfunded commitments is determined monthly based on methodology
similar to the Company’s methodology for determining the allowance for loan
losses. Net adjustments to the reserve for unfunded commitments are
included in other non-interest expense.
33
An
analysis of the allowance for loan losses for the last five years is shown in
table 10.
Table
10: Allowance for Loan
Losses
|
(In thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Balance,
beginning of year
|
$ | 25,303 | $ | 25,385 | $ | 26,923 | $ | 26,508 | $ | 25,347 | ||||||||||
|
Loans
charged off
|
||||||||||||||||||||
|
Credit
card
|
3,760 | 2,663 | 2,454 | 4,950 | 4,589 | |||||||||||||||
|
Other
consumer
|
2,105 | 1,538 | 1,242 | 1,240 | 2,144 | |||||||||||||||
|
Real
estate
|
2,987 | 1,916 | 1,868 | 1,048 | 1,263 | |||||||||||||||
|
Commercial
|
1,394 | 715 | 1,317 | 3,688 | 2,409 | |||||||||||||||
|
Total
loans charged off
|
10,246 | 6,832 | 6,881 | 10,926 | 10,405 | |||||||||||||||
|
Recoveries
of loans previously charged off
|
||||||||||||||||||||
|
Credit
card
|
883 | 1,024 | 1,040 | 832 | 720 | |||||||||||||||
|
Other
consumer
|
519 | 483 | 629 | 636 | 683 | |||||||||||||||
|
Real
estate
|
207 | 648 | 901 | 251 | 277 | |||||||||||||||
|
Commercial
|
529 | 414 | 536 | 2,096 | 751 | |||||||||||||||
|
Total
recoveries
|
2,138 | 2,569 | 3,106 | 3,815 | 2,431 | |||||||||||||||
|
Net
loans charged off
|
8,108 | 4,263 | 3,775 | 7,111 | 7,974 | |||||||||||||||
|
Allowance
for loan losses of
|
||||||||||||||||||||
|
acquired
institutions
|
-- | -- | -- | -- | 1,108 | |||||||||||||||
|
Reclass
to reserve for unfunded commitments (1)
|
-- | -- | (1,525 | ) | -- | -- | ||||||||||||||
|
Provision
for loan losses
|
8,646 | 4,181 | 3,762 | 7,526 | 8,027 | |||||||||||||||
|
Balance,
end of year
|
$ | 25,841 | $ | 25,303 | $ | 25,385 | $ | 26,923 | $ | 26,508 | ||||||||||
|
Net
charge-offs to average loans
|
0.43 | % | 0.23 | % | 0.22 | % | 0.43 | % | 0.52 | % | ||||||||||
|
Allowance
for loan losses to period-end loans
|
1.34 | % | 1.37 | % | 1.42 | % | 1.57 | % | 1.69 | % | ||||||||||
|
Allowance
for loan losses to net charge-offs
|
318.71 | % | 593.55 | % | 672.45 | % | 378.6 | % | 332.4 | % | ||||||||||
Provision
for Loan Losses
The amount
of provision to the allowance each year was based on management's judgment, with
consideration given to the composition of the portfolio, historical loan loss
experience, assessment of current economic conditions, past due and
non-performing loans and net loss experience. It is management's
practice to review the allowance on at least a quarterly basis, but generally on
a monthly basis, and after considering the factors previously noted, to
determine the level of provision made to the allowance.
Allocated
Allowance for Loan Losses
The
Company utilizes a consistent methodology in the calculation and application of
its allowance for loan losses. Because there are portions of the
portfolio that have not matured to the degree necessary to obtain reliable loss
statistics from which to calculate estimated losses, the unallocated portion of
the allowance is an integral component of the total
allowance. Although unassigned to a particular credit relationship or
product segment, this portion of the allowance is vital to safeguard against the
uncertainty and imprecision inherent when estimating credit losses, especially
when trying to determine the impact the current and unprecedented economic
crisis will have on the existing loan portfolios.
Several
factors in the national economy, including the increase of unemployment rates,
the continuing credit crisis, the mortgage crisis, the uncertainty in the
residential housing market and other loan sectors which may be exhibiting
weaknesses and the unknown impact of the Economic Stimulus package further
justify the need for unallocated reserves.
34
The
Company’s allocation of the allowance for loans losses at December 31, 2008
remained relatively consistent with the allocation at December 31, 2007, with
the exception of the allocation to real estate loans, which increased by
approximately $1.5 million. The unallocated portion of the allowance
decreased approximately $689,000 during the year ended December 31,
2008. This decrease in the unallocated portion of the allowance is
primarily related to increases in general and specific allocations for loans
secured by assets located in the Northwest Arkansas region, which is also
reflected by the increase in the allocation to real estate loans. In
late 2006 the economy in Northwest Arkansas, particularly in the residential
real estate market, started showing signs of deterioration, which caused
concerns over the full recoverability of this portion of the Company’s loan
portfolio. Management began assessing the impact of these economic
conditions on this portion of the loan portfolio; however, the economic downturn
had not yet negatively impacted specific credit relationships by December 31,
2006. Therefore, given this uncertainty, management deemed it
necessary to provide a higher level of unallocated allowance. As the
Company continued to monitor the Northwest Arkansas economy, beginning in the
third quarter of 2007, specific credit relationships deteriorated to a level
requiring increased general and specific reserves. The identification
of these specific credit relationships and the increase in general and specific
allocations allowed management to reduce the unallocated portion of the
allowance related to the Company’s Northwest Arkansas region at December 31,
2007, and again at December 31, 2008.
The
remaining unallocated allowance for loan losses is based on the Company’s
concerns over the uncertainty of the national economy and the economy in
Arkansas. The impact of market pricing in the poultry, timber and
catfish industries in Arkansas remains uncertain. The Company is also
cautious regarding the continued softening of the real estate market in
Arkansas, specifically in the Northwest Arkansas region. Although
Arkansas’s unemployment rate is lagging behind the national average, it has
continued to rise. Management actively monitors the status of these
industries and economic factors as they relate to the Company’s loan portfolio
and makes changes to the allowance for loan losses as
necessary. Based on its analysis of loans and external uncertainties,
the Company believes the allowance for loan losses is adequate for the year
ended December 31, 2008.
The
Company allocates the allowance for loan losses according to the amount deemed
to be reasonably necessary to provide for losses incurred within the categories
of loans set forth in table 11.
Table
11: Allocation of
Allowance for Loan Losses
|
December 31
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Allowance
|
%
of
|
Allowance
|
%
of
|
Allowance
|
%
of
|
Allowance
|
%
of
|
Allowance
|
%
of
|
|||||||||||||||||||||||||||||||
|
(In thousands)
|
Amount
|
loans(1)
|
Amount
|
loans(1)
|
Amount
|
loans(1)
|
Amount
|
loans(1)
|
Amount
|
loans(1)
|
||||||||||||||||||||||||||||||
|
Credit
cards
|
$ | 3,957 | 8.8 | % | $ | 3,841 | 9.0 | % | $ | 3,702 | 8.0 | % | $ | 3,887 | 8.3 | % | $ | 4,217 | 9.9 | % | ||||||||||||||||||||
|
Other
consumer
|
1,325 | 12.9 | % | 1,501 | 11.5 | % | 1,402 | 12.8 | % | 1,158 | 13.3 | % | 1,097 | 13.5 | % | |||||||||||||||||||||||||
|
Real
estate
|
11,695 | 63.1 | % | 10,157 | 64.1 | % | 9,835 | 64.7 | % | 9,870 | 61.7 | % | 9,357 | 61.7 | % | |||||||||||||||||||||||||
|
Commercial
|
2,255 | 14.7 | % | 2,528 | 14.8 | % | 2,856 | 13.7 | % | 5,857 | 15.9 | % | 4,820 | 14.1 | % | |||||||||||||||||||||||||
|
Other
|
209 | 0.5 | % | 187 | 0.6 | % | -- | 0.8 | % | -- | 0.8 | % | -- | 0.8 | % | |||||||||||||||||||||||||
|
Unallocated
|
6,400 | 7,089 | 7,590 | 6,151 | 7,017 | |||||||||||||||||||||||||||||||||||
|
Total
|
$ | 25,841 | 100.0 | % | $ | 25,303 | 100.0 | % | $ | 25,385 | 100.0 | % | $ | 26,923 | 100.0 | % | $ | 26,508 | 100.0 | % | ||||||||||||||||||||
(1)
Percentage of loans in each category to total loans
35
Investment Securities
The
Company's securities portfolio is the second largest component of earning assets
and provides a significant source of revenue. Securities within the
portfolio are classified as either held-to-maturity, available-for-sale or
trading.
Held-to-maturity
securities, which include any security for which management has the positive
intent and ability to hold until maturity, are carried at historical cost,
adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized and accreted,
respectively, to interest income using the constant yield method over the period
to maturity. Interest and dividends on investments in debt and equity
securities are included in income when earned.
Available-for-sale
securities, which include any security for which management has no immediate
plans to sell, but which may be sold in the future, are carried at fair
value. Realized gains and losses, based on amortized cost of the
specific security, are included in other income. Unrealized gains and
losses are recorded, net of related income tax effects, in stockholders'
equity. Premiums and discounts are amortized and accreted,
respectively, to interest income, using the constant yield method over the
period to maturity. Interest and dividends on investments in debt and
equity securities are included in income when earned.
The
Company's philosophy regarding investments is conservative based on investment
type and maturity. Investments in the portfolio primarily include
U.S. Treasury securities, U.S. Government agencies, mortgage-backed securities
and municipal securities. The Company's general policy is not to
invest in derivative type investments or high-risk securities, except for
collateralized mortgage-backed securities for which collection of principal and
interest is not subordinated to significant superior rights held by
others.
Held-to-maturity
and available-for-sale investment securities were $187.3 million and $458.8
million, respectively, at December 31, 2008, compared to the
held-to-maturity amount of $190.3 million and available-for-sale amount of
$340.6 million at December 31, 2007.
As of
December 31, 2008, $18.0 million, or 9.6%, of the held-to-maturity securities
were invested in U.S. Treasury securities and obligations of U.S. government
agencies, none of which will mature in less than five years. In the
available-for-sale securities, $357.3 million, or 77.9%, were in U.S. Treasury
and U.S. government agency securities, 12.2% of which will mature in less than
five years.
In order
to reduce the Company's income tax burden, an additional $168.3 million, or
89.8%, of the held-to-maturity securities portfolio, as of December 31, 2008,
was invested in tax-exempt obligations of state and political
subdivisions. In the available-for-sale securities, $637,000, or
0.14%, were invested in tax-exempt obligations of state and political
subdivisions. Most of the state and political subdivision debt
obligations are non-rated bonds and represent relatively small, Arkansas issues,
which are evaluated on an ongoing basis. There are no securities of
any one state or political subdivision issuer exceeding ten percent of the
Company's stockholders' equity at December 31, 2008.
As of
December 31, 2008, $85.5 million, or 18.6%, of the available-for-sale securities
were invested in a money market mutual fund (the “AIM Fund), included in other
securities. The AIM Fund is invested entirely in U.S. Treasury
securities and obligations of U.S. government agencies, or repurchase agreements
secured by such obligations. The AIM Fund has no stated maturity
date. Investment amounts in the Fund are adjusted by the Company as
needed, without penalty.
The
Company has approximately $109,000, or 0.06%, in mortgaged-backed securities in
the held-to-maturity portfolio at December 31, 2008. In the
available-for-sale securities, $2.9 million, or 0.6% were invested in
mortgaged-backed securities.
As of
December 31, 2008, the held-to-maturity investment portfolio had gross
unrealized gains of $1.895 million and gross unrealized losses of $1.876
million.
The
Company had no gross realized gains or losses during the years ended December
31, 2008, 2007 and 2006, resulting from the sales and/or calls of
securities.
36
Trading
securities, which include any security held primarily for near-term sale, are
carried at fair value. Gains and losses on trading securities are
included in other income. The Company's trading account is
established and maintained for the benefit of investment banking. The
trading account is typically used to provide inventory for resale and is not
used to take advantage of short-term price movements. As of December
31, 2008, $4.9 million, or 84.3%, of the trading securities were invested in the
AIM Fund.
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment
losses, management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer and (iii) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
During the
third quarter of 2008, the Company determined that its investment in FNMA common
stock, held in the AFS-Other securities category, had become
other-than-temporarily impaired. As a result of this impairment the
security was written down by $75,000. The Company had accumulated
this stock over several years in the form of stock dividends from
FNMA. The remaining balance of this investment is approximately
$5,000. The Company has no investment in FNMA or FHLMC preferred
stock.
Management
has the ability and intent to hold the securities classified as held to maturity
until they mature, at which time the Company expects to receive full value for
the securities. Furthermore, as of December 31, 2008, management also
had the ability and intent to hold the securities classified as
available-for-sale for a period of time sufficient for a recovery of
cost. The unrealized losses are largely due to increases in market
interest rates over the yields available at the time the underlying securities
were purchased. The fair value is expected to recover as the bonds
approach their maturity date or repricing date or if market yields for such
investments decline. Management does not believe any of the
securities are impaired due to reasons of credit
quality. Accordingly, as of December 31, 2008, management
believes the impairments detailed in the table above are temporary.
Table 12
presents the carrying value and fair value of investment securities for each of
the years indicated.
Table
12: Investment
Securities
|
Years Ended December 31
|
||||||||||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
|
Gross
|
Gross
|
Estimated
|
|
Gross
|
Gross
|
Estimated
|
|||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||||||||||||
|
(In thousands)
|
Cost
|
Gains
|
(Losses)
|
Value
|
Cost
|
Gains
|
(Losses)
|
Value
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | 1,500 | $ | 14 | $ | -- | $ | 1,514 | ||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
18,000 | 629 | -- | 18,629 | 37,000 | 722 | (19 | ) | 37,703 | |||||||||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
109 | 2 | -- | 111 | 129 | 2 | -- | 131 | ||||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
168,262 | 1,264 | (1,876 | ) | 167,650 | 149,262 | 1,089 | (354 | ) | 149,997 | ||||||||||||||||||||||
|
Other
securities
|
930 | -- | -- | 930 | 2,393 | -- | -- | 2,393 | ||||||||||||||||||||||||
|
Total
|
$ | 187,301 | $ | 1,895 | $ | (1,876 | ) | $ | 187,320 | $ | 190,284 | $ | 1,827 | $ | (373 | ) | $ | 191,738 | ||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 5,976 | $ | 113 | $ | -- | $ | 6,089 | $ | 5,498 | $ | 26 | $ | -- | $ | 5,524 | ||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
346,585 | 5,444 | (868 | ) | 351,161 | 317,998 | 3,090 | (299 | ) | 320,789 | ||||||||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
2,909 | 37 | (67 | ) | 2,879 | 2,923 | -- | (165 | ) | 2,758 | ||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
635 | 2 | -- | 637 | 855 | 3 | -- | 858 | ||||||||||||||||||||||||
|
Other
securities
|
97,625 | 448 | (6 | ) | 98,067 | 10,608 | 109 | -- | 10,717 | |||||||||||||||||||||||
|
Total
|
$ | 453,730 | $ | 6,044 | $ | (941 | ) | $ | 458,833 | $ | 337,882 | $ | 3,228 | $ | (464 | ) | $ | 340,646 | ||||||||||||||
37
Table 13
reflects the amortized cost and estimated fair value of securities at December
31, 2008, by contractual maturity and the weighted average yields (for
tax-exempt obligations on a fully taxable equivalent basis, assuming a 37.5% tax
rate) of such securities. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties.
Table
13: Maturity Distribution
of Investment Securities
|
December 31, 2008
|
||||||||||||||||||||||||||||||||
|
|
Over
1
year
|
Over
5
years
|
|
Total
|
||||||||||||||||||||||||||||
|
1
year
|
through
|
through
|
Over
|
No
fixed
|
Amortized
|
Par
|
Fair
|
|||||||||||||||||||||||||
|
(In thousands)
|
or less
|
5 years
|
10 years
|
10 years
|
maturity
|
Cost
|
Value
|
Value
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
$ | -- | $ | -- | $ | 18,000 | $ | -- | $ | -- | $ | 18,000 | $ | 20,000 | $ | 18,629 | ||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
-- | -- | 70 | 39 | -- | 109 | 108 | 108 | ||||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
9,993 | 53,078 | 64,284 | 40,907 | -- | 168,262 | 168,415 | 167,653 | ||||||||||||||||||||||||
|
Other
securities
|
-- | -- | -- | 930 | -- | 930 | 930 | 930 | ||||||||||||||||||||||||
|
Total
|
$ | 9,993 | $ | 53,078 | $ | 82,354 | $ | 41,876 | $ | -- | $ | 187,301 | $ | 189,453 | $ | 187,320 | ||||||||||||||||
|
Percentage
of total
|
5.3 | % | 28.3 | % | 44.0 | % | 22.4 | % | 0.0 | % | 100.0 | % | ||||||||||||||||||||
|
Weighted
average yield
|
4.0 | % | 4.0 | % | 4.4 | % | 4.3 | % | 0.0 | % | 4.3 | % | ||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 1,989 | $ | 3,987 | $ | -- | $ | -- | $ | -- | $ | 5,976 | $ | 6,000 | $ | 6,089 | ||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
6,255 | 31,300 | 309,030 | -- | -- | 346,585 | 346,747 | 351,161 | ||||||||||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
-- | 1 | 2,113 | 795 | -- | 2,909 | 2,950 | 2,879 | ||||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
460 | 175 | -- | -- | -- | 635 | 635 | 637 | ||||||||||||||||||||||||
|
Other
securities
|
-- | -- | -- | -- | 97,625 | 97,625 | 97,625 | 98,067 | ||||||||||||||||||||||||
|
Total
|
$ | 8,704 | $ | 35,463 | $ | 311,143 | $ | 795 | $ | 97,625 | $ | 453,730 | $ | 453,957 | $ | 458,833 | ||||||||||||||||
|
Percentage
of total
|
1.9 | % | 7.8 | % | 68.6 | % | 0.2 | % | 21.5 | % | 100.0 | % | ||||||||||||||||||||
|
Weighted
average yield
|
3.2 | % | 2.6 | % | 5.2 | % | 5.3 | % | 2.4 | % | 4.3 | % | ||||||||||||||||||||
Deposits
Deposits
are the Company’s primary source of funding for earning assets and are primarily
developed through the Company’s network of 84 financial centers. The
Company offers a variety of products designed to attract and retain customers
with a continuing focus on developing core deposits. The Company’s
core deposits consist of all deposits excluding time deposits of $100,000 or
more and brokered deposits. As of December 31, 2008, core deposits
comprised 80.7% of the Company’s total deposits.
The
Company continually monitors the funding requirements at each affiliate bank
along with competitive interest rates in the markets it
serves. Because of the Company’s community banking philosophy,
affiliate executives in the local markets establish the interest rates offered
on both core and non-core deposits. This approach ensures that the
interest rates being paid are competitively priced for each particular deposit
product and structured to meet the funding requirements. The Company
believes it is paying a competitive rate when compared with pricing in those
markets.
38
The
Company manages its interest expense through deposit pricing and does not
anticipate a significant change in total deposits. The Company believes that
additional funds can be attracted and deposit growth can be accelerated through
deposit pricing if it experiences increased loan demand or other liquidity
needs. The Company also utilizes brokered deposits as an additional
source of funding to meet liquidity needs.
The
Company introduced a new high yield investment deposit account during the first
quarter of 2008 as part of its strategy to enhance liquidity. During
2008, the new account generated approximately $146 million in new core
deposits. Additionally, existing customers moved more volatile,
expensive time deposits to the new high yield investment account. The
Company’s total deposits as of December 31, 2008 were $2.336 billion, an
internal deposit growth of $153 million, or 7.0%, from $2.183 billion at
December 31, 2007.
Total time
deposits decreased approximately $136.9 million to $974.56 million at December
31, 2008, from $1.111 billion at December 31, 2007. Non-interest
bearing transaction accounts increased $24.9 million to $335.0 million at
December 31, 2008, compared to $310.2 million at December 31,
2007. Interest bearing transaction and savings accounts were $1.027
billion at December 31, 2008, a $265.6 million increase compared to $761.2
million on December 31, 2007. The Company had $33 million and $39
million of brokered deposits at December 31, 2008 and 2007,
respectively.
Table 14
reflects the classification of the average deposits and the average rate paid on
each deposit category, which are in excess of 10 percent of average total
deposits for the three years ended December 31, 2008.
Table
14: Average Deposit
Balances and Rates
|
December 31
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
|
(In thousands)
|
Amount
|
Rate Paid
|
Amount
|
Rate Paid
|
Amount
|
Rate Paid
|
||||||||||||||||||
|
Non-interest
bearing transaction
|
||||||||||||||||||||||||
|
accounts
|
$ | 317,772 | -- | $ | 307,041 | -- | $ | 308,804 | -- | |||||||||||||||
|
Interest
bearing transaction and
|
||||||||||||||||||||||||
|
savings
deposits
|
959,567 | 1.56 | % | 736,160 | 1.78 | % | 737,328 | 1.58 | % | |||||||||||||||
|
Time
deposits
|
||||||||||||||||||||||||
|
$100,000
or more
|
426,304 | 3.80 | % | 441,854 | 4.81 | % | 407,778 | 4.08 | % | |||||||||||||||
|
Other
time deposits
|
595,123 | 3.70 | % | 682,703 | 3.55 | % | 644,927 | 3.92 | % | |||||||||||||||
|
Total
|
$ | 2,298,766 | 2.31 | % | $ | 2,167,758 | 3.02 | % | $ | 2,098,837 | 2.59 | % | ||||||||||||
The
Company's maturities of large denomination time deposits at December 31, 2008
and 2007 are presented in table 15.
Table
15: Maturities of Large
Denomination Time Deposits
|
Time
Certificates of Deposit
|
||||||||||||||||
|
($100,000
or more)
|
||||||||||||||||
|
December 31
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
(In thousands)
|
Balance
|
Percent
|
Balance
|
Percent
|
||||||||||||
|
Maturing
|
||||||||||||||||
|
Three
months or less
|
$ | 144,982 | 34.6 | % | $ | 188,388 | 41.7 | % | ||||||||
|
Over
3 months to 6 months
|
107,093 | 25.6 | % | 101,297 | 22.4 | % | ||||||||||
|
Over
6 months to 12 months
|
119,186 | 28.5 | % | 120,924 | 26.7 | % | ||||||||||
|
Over
12 months
|
47,133 | 11.3 | % | 41,653 | 9.2 | % | ||||||||||
|
Total
|
$ | 418,394 | 100.00 | % | $ | 452,262 | 100.00 | % | ||||||||
39
Short-Term Debt
Federal
funds purchased and securities sold under agreements to repurchase were $115.4
million at December 31, 2008, as compared to $128.8 million at
December 31, 2007. Other short-term borrowings, consisting of
U.S. TT&L Notes and short-term FHLB borrowings, were $1.1 million at
December 31, 2008, as compared to $1.8 million at December 31,
2007.
The
Company has historically funded its growth in earning assets through the use of
core deposits, large certificates of deposits from local markets, FHLB
borrowings and Federal funds purchased. Management anticipates that these
sources will provide necessary funding in the foreseeable future.
Long-Term Debt
The
Company’s long-term debt was $158.7 million and $82.3 million at December 31,
2008 and 2007, respectively. The outstanding balance for
December 31, 2008 includes $127.8 million in FHLB long-term advances
and $30.9 million of trust preferred securities. The outstanding
balance for December 31, 2007, includes $51.4 million in FHLB long-term
advances and $30.9 million of trust preferred securities.
During the
year ended December 31, 2008, the Company increased long-term debt by
$76.4 million, or 92.8% from December 31, 2007. This increase
resulted from the strategic decision made by the Company to secure additional
long-term funding from FHLB advances during 2008 in order to enhance the
liquidity of the Company.
Aggregate
annual maturities of long-term debt at December 31, 2008 are presented in table
16.
Table
16: Maturities of
Long-Term Debt
|
|
Annual
|
||||
|
(In thousands)
|
Year
|
Maturities
|
|||
|
2009
|
$ | 7,350 | |||
|
2010
|
28,331 | ||||
|
2011
|
41,052 | ||||
|
2012
|
5,604 | ||||
|
2013
|
10,938 | ||||
|
Thereafter
|
65,396 | ||||
|
Total
|
$ | 158,671 | |||
Capital
Overview
At
December 31, 2008, total capital reached $288.8 million. Capital
represents shareholder ownership in the Company – the book value of assets in
excess of liabilities. At December 31, 2008, the Company’s equity to
asset ratio was 9.88% compared to 10.12% at year-end 2007.
Capital
Stock
At the
Company’s annual shareholder meeting held on April 10, 2007, the shareholders
approved an amendment to the Articles of Incorporation increasing the number of
authorized shares of Class A, $0.01 par value, Common Stock from 30,000,000 to
60,000,000. Class A Common Stock is the Company’s only outstanding
class of stock. If the Company’s shareholders approve the proposed
amendment to the Restated Articles of Incorporation to authorize the issuance of
Preferred Shares and if the Company participates in the CPP by issuing Preferred
Stock to the Treasury, then the Company will have Preferred Stock outstanding in
2009. For further discussion on the CPP, see “Recent Market
Developments” included elsewhere in this section.
40
Stock
Repurchase
At the
beginning of the calendar year 2007, the Company had a stock repurchase program
which authorized the repurchase of up to 733,485 shares of common
stock. On November 28, 2007, the Company announced the substantial
completion of the existing stock repurchase program and the adoption by the
Board of Directors of a new stock 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. Under the
repurchase program, there is no time limit for the stock repurchases, nor is
there a minimum number of shares the Company intends to
repurchase. The Company may discontinue purchases at any time that
management determines additional purchases are not warranted. The
shares are to be purchased from time to time at prevailing market prices through
open market or unsolicited negotiated transactions, depending upon market
conditions. The Company intends to use the repurchased shares to
satisfy stock option exercise, payment of future stock dividends and general
corporate purposes.
During the
year ended December 31, 2008, by June 30, the Company repurchased a total of
45,180 shares of stock with a weighted average repurchase price of $28.38 per
share. Under the current stock repurchase plan, the Company can
repurchase an additional 645,672 shares.
Effective
July 1, 2008, the Company made a strategic decision to temporarily suspend stock
repurchases. This decision was made to preserve capital at the parent
company due to the lack of liquidity in the credit markets and the uncertainties
in the overall economy. If the Company participates in the CPP by
issuing Preferred Stock to the Treasury, stock repurchases may be restricted and
will require the Treasury’s consent for three years. For further
discussion on the CPP, see “Recent Market Developments” included elsewhere in
this section.
Cash
Dividends
The
Company declared cash dividends on its Common Stock of $0.76 per share for the
twelve months ended December 31, 2008, compared to $0.73 per share for the
twelve months ended December 31, 2007. In recent years, the Company
increased dividends no less than annually and presently plans to continue with
this practice. However, if the Company participates in the CPP by
issuing Preferred Stock to the Treasury, dividend increases may be restricted
and will require the Treasury’s consent for three years. For further
discussion on the CPP, see “Recent Market Developments” included elsewhere in
this section.
Parent
Company Liquidity
The
primary liquidity needs of the Parent Company are the payment of dividends to
shareholders, the funding of debt obligations and the share repurchase
plan. The primary sources for meeting these liquidity needs are the
current cash on hand at the parent company and the future dividends received
from the eight affiliate banks. Payment of dividends by the eight
affiliate banks is subject to various regulatory
limitations. Reference is made to Item 7A, Liquidity and Qualitative
Disclosures About Market Risk, discussion for additional information regarding
the parent company’s liquidity.
Risk-Based
Capital
The
Company’s subsidiaries are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company’s assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Company’s capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company to maintain minimum amounts and ratios (set forth in the table below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier 1 capital (as defined) to average assets (as
defined). Management believes that, as of December 31, 2008, the
Company meets all capital adequacy requirements to which it is
subject.
41
As of the
most recent notification from regulatory agencies, the subsidiaries were well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Company and
subsidiaries must maintain minimum total risk-based, Tier 1 risk-based and Tier
1 leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
institutions’ categories.
The
Company's risk-based capital ratios at December 31, 2008 and 2007, are presented
in table 17 below:
Table
17: Risk-Based
Capital
|
December 31
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Tier
1 capital
|
||||||||
|
Stockholders’
equity
|
$ | 288,792 | $ | 272,406 | ||||
|
Trust
preferred securities
|
30,000 | 30,000 | ||||||
|
Goodwill
and core deposit premiums (1)
|
(53,034 | ) | (63,706 | ) | ||||
|
Unrealized
gain on available-
|
||||||||
|
for-sale
securities
|
(3,190 | ) | (1,728 | ) | ||||
|
Total
Tier 1 capital
|
262,568 | 236,972 | ||||||
|
Tier
2 capital
|
||||||||
|
Qualifying
unrealized gain on
|
||||||||
|
available-for-sale
equity securities
|
198 | 52 | ||||||
|
Qualifying
allowance for loan losses
|
24,828 | 23,866 | ||||||
|
Total
Tier 2 capital
|
25,026 | 23,918 | ||||||
|
Total
risk-based capital
|
$ | 287,594 | $ | 260,890 | ||||
|
Risk
weighted assets
|
$ | 1,983,654 | $ | 1,906,321 | ||||
|
Ratios
at end of year
|
||||||||
|
Leverage
ratio
|
9.15 | % | 9.06 | % | ||||
|
Tier
1 capital
|
13.24 | % | 12.43 | % | ||||
|
Total
risk-based capital
|
14.50 | % | 13.69 | % | ||||
|
Minimum
guidelines
|
||||||||
|
Leverage
ratio
|
4.00 | % | 4.00 | % | ||||
|
Tier
1 capital
|
4.00 | % | 4.00 | % | ||||
|
Total
risk-based capital
|
8.00 | % | 8.00 | % | ||||
(1) For
December 31, 2008, in accordance with an Interagency Final Rule, goodwill
deducted from Tier 1 capital has been reduced by the amount of any deferred tax
liability associated with that
goodwill.
Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations
In the
normal course of business, the Company enters into a number of financial
commitments. Examples of these commitments include but are not
limited to long-term debt financing, operating lease obligations, unfunded loan
commitments and letters of credit.
The
Company’s long-term debt at December 31, 2008, includes notes payable, FHLB
long-term advances and trust preferred securities, all of which the Company is
contractually obligated to repay in future periods.
Operating
lease obligations entered into by the Company are generally associated with the
operation of a few of the Company’s financial centers located throughout the
state of Arkansas. The financial obligation by the Company on these
locations is considered immaterial due to the limited number of financial
centers that operate under an agreement of this type.
Commitments to extend
credit and letters of credit are legally binding, conditional agreements
generally having fixed expiration or termination dates. These
commitments generally require customers to maintain certain credit standards and
are established based on management’s credit assessment of the
customer. The commitments may expire without being drawn
upon. Therefore, the total commitment does not necessarily represent
future funding requirements.
42
The
funding requirements of the Company's most significant financial commitments, at
December 31, 2008, are shown in table 18.
Table
18: Funding
Requirements of Financial Commitments
|
Payments due by period
|
||||||||||||||||||||
|
Less
than
|
1-3 |
3-5
|
Greater
than
|
|||||||||||||||||
|
(In thousands)
|
1 Year
|
Years
|
Years
|
5 Years
|
Total
|
|||||||||||||||
|
Long-term
debt
|
$ | 7,350 | $ | 69,383 | $ | 16,542 | $ | 65,396 | $ | 158,671 | ||||||||||
|
Credit
card loan commitments
|
247,969 | -- | -- | -- | 247,969 | |||||||||||||||
|
Other
loan commitments
|
422,127 | -- | -- | -- | 422,127 | |||||||||||||||
|
Letters
of credit
|
10,186 | -- | -- | -- | 10,186 | |||||||||||||||
Reconciliation of Non-GAAP Measures
The
Company has $63.2 million and $64.0 million total goodwill and core deposit
premiums for the periods ended December 31, 2008 and December 31, 2007,
respectively. Because of the Company’s high level of these two
intangible assets, management believes a useful calculation is return on
tangible equity (non-GAAP). This non-GAAP calculation for the twelve
months ended December 31, 2008, 2007, 2006, 2005 and 2004, which is similar to
the GAAP calculation of return on average stockholders’ equity, is presented in
table 19.
Table
19: Return on Tangible
Equity
|
(In thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Twelve months ended
|
||||||||||||||||||||
|
Return
on average stockholders equity: (A/C)
|
9.54 | % | 10.26 | % | 10.93 | % | 11.24 | % | 10.64 | % | ||||||||||
|
Return
on tangible equity (non-GAAP): (A+B)/(C-D)
|
12.54 | % | 13.78 | % | 15.03 | % | 15.79 | % | 14.94 | % | ||||||||||
|
(A)
Net income
|
$ | 26,910 | $ | 27,360 | $ | 27,481 | $ | 26,962 | $ | 24,446 | ||||||||||
|
(B)
Amortization of intangibles, net of taxes
|
504 | 511 | 519 | 522 | 494 | |||||||||||||||
|
(C)
Average stockholders' equity
|
282,186 | 266,628 | 251,518 | 239,976 | 229,719 | |||||||||||||||
|
(D)
Average goodwill and core deposits, net
|
63,600 | 64,409 | 65,233 | 65,913 | 62,836 | |||||||||||||||
The table below presents computations of core earnings (net income excluding nonrecurring items {Visa litigation expense and reversal, gain from the cash proceeds on mandatory Visa stock redemption and the write-off of deferred debt issuance costs}) and diluted core earnings per share (non-GAAP). Nonrecurring items are included in financial results presented in accordance with generally accepted accounting principles (GAAP).
The
Company believes the exclusion of these nonrecurring items in expressing
earnings and certain other financial measures, including “core earnings,”
provides a meaningful base for period-to-period and company-to-company
comparisons, which management believes will assist investors and analysts in
analyzing the core financial measures of the Company and predicting future
performance. This non-GAAP financial measure is also used by management to
assess the performance of the Company’s business because management does not
consider these nonrecurring items to be relevant to ongoing financial
performance. Management and the Board of Directors utilize “core
earnings” (non-GAAP) for the following purposes:
• Preparation
of the Company’s operating budgets
• Monthly
financial performance reporting
• Monthly
“flash” reporting of consolidated results (management only)
• Investor
presentations of Company performance
43
The
Company believes the presentation of “core earnings” on a diluted per share
basis, “diluted core earnings per share” (non-GAAP), provides a meaningful base
for period-to-period and company-to-company comparisons, which management
believes will assist investors and analysts in analyzing the core financial
measures of the Company and predicting future performance. This
non-GAAP financial measure is also used by management to assess the performance
of the Company’s business, because management does not consider these
nonrecurring items to be relevant to ongoing financial performance on a per
share basis. Management and the Board of Directors utilize “diluted
core earnings per share” (non-GAAP) for the following purposes:
• Calculation
of annual performance-based incentives for certain executives
• Calculation
of long-term performance-based incentives for certain executives
• Investor
presentations of Company performance
The
Company believes that presenting these non-GAAP financial measures will permit
investors and analysts to assess the performance of the Company on the same
basis as that applied by management and the Board of Directors.
“Core
earnings” and “diluted core earnings per share” (non-GAAP) have inherent
limitations, are not required to be uniformly applied and are not
audited. To mitigate these limitations, the Company has procedures in
place to identify and approve each item that qualifies as nonrecurring to ensure
that the Company’s “core” results are properly reflected for period-to-period
comparisons. Although these non-GAAP financial measures are
frequently used by stakeholders in the evaluation of a Company, they have
limitations as analytical tools and should not be considered in isolation or as
a substitute for analyses of results as reported under GAAP. In
particular, a measure of earnings that excludes nonrecurring items does not
represent the amount that effectively accrues directly to stockholders (i.e.,
nonrecurring items are included in earnings and stockholders’
equity).
During the
first quarter 2008, the Company recorded a nonrecurring $1.8 million after tax
gain, or $0.13 per diluted earnings per share, from the cash proceeds on the
mandatory partial redemption of its equity interest in Visa. Also
during the first quarter 2008, the Company recorded nonrecurring after tax
earnings of $744,000, or $0.05 per diluted earnings per share, from the
reversal of the Visa contingent liability established in the fourth quarter
2007. During the fourth quarter 2007, the Company recorded a
nonrecurring $744,000 after tax charge, or a $0.05 reduction in diluted
earnings per share, to establish a contingent liability related to
indemnification obligations with Visa U.S.A. litigation, which was reversed in
2008. For further discussion related to the Visa U.S.A. litigation,
see the analysis of “Non-Interest Expense” included elsewhere in this
section. On December 31, 2004, the Company recorded a nonrecurring
$470,000 after tax charge, or a $0.03 reduction in diluted earnings per
share, related to the write off of deferred debt issuance cost associated with
the redemption of its 9.12% trust preferred securities.
See Table
20 below for the reconciliation of non-GAAP financial measures, which exclude
nonrecurring items for the periods presented.
Table
20: Reconciliation of
Core Earnings (non-GAAP)
|
(In thousands, except share
data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Twelve months ended
|
||||||||||||||||||||
|
Net
Income
|
$ | 26,910 | $ | 27,360 | $ | 27,481 | $ | 26,962 | $ | 24,446 | ||||||||||
|
Nonrecurring
items
|
||||||||||||||||||||
|
Write
off of deferred debt issuance cost
|
-- | -- | -- | -- | 771 | |||||||||||||||
|
Mandatory
stock redemption gain (Visa)
|
(2,973 | ) | -- | -- | -- | -- | ||||||||||||||
|
Litigation
liability expense/reversal (Visa)
|
(1,220 | ) | 1,220 | -- | -- | -- | ||||||||||||||
|
Tax
effect (39%)
|
1,635 | (476 | ) | -- | -- | (301 | ) | |||||||||||||
|
Net
nonrecurring items
|
(2,558 | ) | 744 | -- | -- | 470 | ||||||||||||||
|
Core
earnings (non-GAAP)
|
$ | 24,352 | $ | 28,104 | $ | 27,481 | $ | 26,962 | $ | 24,916 | ||||||||||
|
Diluted
earnings per share
|
$ | 1.91 | $ | 1.92 | $ | 1.90 | $ | 1.84 | $ | 1.65 | ||||||||||
|
Nonrecurring
items
|
||||||||||||||||||||
|
Write
off of deferred debt issuance cost
|
-- | -- | -- | -- | 0.05 | |||||||||||||||
|
Mandatory
stock redemption gain (Visa)
|
(0.21 | ) | -- | -- | -- | -- | ||||||||||||||
|
Litigation
liability expense/reversal (Visa)
|
(0.09 | ) | 0.09 | -- | -- | -- | ||||||||||||||
|
Tax
effect (39%)
|
0.12 | (0.04 | ) | -- | -- | (0.02 | ) | |||||||||||||
|
Net
nonrecurring items
|
(0.18 | ) | 0.05 | -- | -- | 0.03 | ||||||||||||||
|
Diluted
core earnings per share (non-GAAP)
|
$ | 1.73 | $ | 1.97 | $ | 1.90 | $ | 1.84 | $ | 1.68 | ||||||||||
44
Quarterly Results
Selected
unaudited quarterly financial information for the last eight quarters is shown
in table 21.
Table
21: Quarterly
Results
|
Quarter
|
||||||||||||||||||||
|
(In thousands, except per share
data)
|
First
|
Second
|
Third
|
Fourth
|
Total
|
|||||||||||||||
|
2008
|
||||||||||||||||||||
|
Net
interest income
|
$ | 22,792 | $ | 23,098 | $ | 24,347 | $ | 23,780 | $ | 94,017 | ||||||||||
|
Provision
for loan losses
|
1,467 | 2,214 | 2,214 | 2,751 | 8,646 | |||||||||||||||
|
Non-interest
income
|
14,992 | 11,720 | 11,288 | 11,326 | 49,326 | |||||||||||||||
|
Non-interest
expense
|
23,130 | 24,209 | 24,441 | 24,580 | 96,360 | |||||||||||||||
|
Net
income
|
8,816 | 5,994 | 6,474 | 5,626 | 26,910 | |||||||||||||||
|
Basic
earnings per share
|
0.63 | 0.43 | 0.47 | 0.40 | 1.93 | |||||||||||||||
|
Diluted
earnings per share
|
0.63 | 0.42 | 0.46 | 0.40 | 1.91 | |||||||||||||||
|
2007
|
||||||||||||||||||||
|
Net
interest income
|
$ | 22,231 | $ | 22,793 | $ | 23,570 | $ | 23,522 | $ | 92,116 | ||||||||||
|
Provision
for loan losses
|
751 | 831 | 850 | 1,749 | 4,181 | |||||||||||||||
|
Non-interest
income
|
11,454 | 11,337 | 11,373 | 11,839 | 46,003 | |||||||||||||||
|
Non-interest
expense
|
23,214 | 23,011 | 23,223 | 24,749 | 94,197 | |||||||||||||||
|
Net
income
|
6,637 | 7,031 | 7,500 | 6,192 | 27,360 | |||||||||||||||
|
Basic
earnings per share
|
0.47 | 0.50 | 0.53 | 0.45 | 1.95 | |||||||||||||||
|
Diluted
earnings per share
|
0.46 | 0.49 | 0.53 | 0.44 | 1.92 | |||||||||||||||
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Liquidity and Market Risk Management
Parent
Company
The
Company has leveraged its investment in subsidiary banks and depends upon the
dividends paid to it, as the sole shareholder of the subsidiary banks, as a
principal source of funds for dividends to shareholders, stock repurchases and
debt service requirements. At December 31, 2008, undivided profits of
the Company's subsidiaries were approximately $156 million, of which
approximately $14.3 million was available for the payment of dividends to the
Company without regulatory approval. In addition to dividends, other
sources of liquidity for the Company are the sale of equity securities and the
borrowing of funds.
Banking
Subsidiaries
Generally
speaking, the Company's banking subsidiaries rely upon net inflows of cash from
financing activities, supplemented by net inflows of cash from operating
activities, to provide cash used in investing activities. Typical of
most banking companies, significant financing activities include deposit
gathering, use of short-term borrowing facilities (such as Federal funds
purchased and repurchase agreements) and the issuance of long-term
debt. The banks' primary investing activities include loan
originations and purchases of investment securities, offset by loan payoffs and
investment maturities.
Liquidity
represents an institution's ability to provide funds to satisfy demands from
depositors and borrowers by either converting assets into cash or accessing new
or existing sources of incremental funds. A major responsibility of
management is to maximize net interest income within prudent liquidity
constraints. Internal corporate guidelines have been established to
constantly measure liquid assets as well as relevant ratios concerning earning
asset levels and purchased funds. The management and board of
directors of each bank subsidiary monitor these same indicators and make
adjustments as needed.
45
In
response to tightening credit markets in 2007 and anticipating potential
liquidity pressures in 2008, the Company’s management strategically planned to
enhance the liquidity of each of its subsidiary banks during
2008. The Company introduced a new high yield investment deposit
account during the first quarter of 2008 as part of this strategy to enhance
liquidity. During 2008, the new account generated approximately $146
million in new core deposits. In addition, the Company built
liquidity in each of its banks by securing approximately $55 million in
additional long-term funding from FHLB borrowings. At December 31,
2008, each subsidiary bank was within established guidelines and total corporate
liquidity remains strong. At December 31, 2008, cash and
cash equivalents, trading and available-for-sale securities and mortgage loans
held for sale were 21.0% of total assets, as compared to 17.4% at December 31,
2007.
Liquidity
Management
The
objective of the Company’s liquidity management is to access adequate sources of
funding to ensure that cash flow requirements of depositors and borrowers are
met in an orderly and timely manner. Sources of liquidity are managed
so that reliance on any one funding source is kept to a minimum. The
Company’s liquidity sources are prioritized for both availability and time to
activation.
The
Company’s liquidity is a primary consideration in determining funding needs and
is an integral part of asset/liability management. Pricing of the
liability side is a major component of interest margin and spread
management. Adequate liquidity is a necessity in addressing this
critical task. There are five primary and secondary sources of
liquidity available to the Company. The particular liquidity need and
timeframe determine the use of these sources.
The first
source of liquidity available to the Company is Federal
funds. Federal funds, primarily from downstream correspondent banks,
are available on a daily basis and are used to meet the normal fluctuations of a
dynamic balance sheet. In addition, the Company and its affiliates
have approximately $104 million in Federal funds lines of credit from upstream
correspondent banks that can be accessed, when needed. In order to
ensure availability of these upstream funds, the Company has a plan for rotating
the usage of the funds among the upstream correspondent banks, thereby providing
approximately $40 million in funds on a given day. Historical
monitoring of these funds has made it possible for the Company to project
seasonal fluctuations and structure its funding requirements on a month-to-month
basis.
A second
source of liquidity is the retail deposits available through the Company’s
network of affiliate banks throughout Arkansas. Although this method
can be a somewhat more expensive alternative to supplying liquidity, this source
can be used to meet intermediate term liquidity needs.
Third, the
Company’s affiliate banks have lines of credits available with the Federal Home
Loan Bank. While the Company uses portions of those lines to match
off longer-term mortgage loans, the Company also uses those lines to meet
liquidity needs. Approximately $436 million of these lines of credit
are currently available, if needed.
Fourth,
the Company uses a laddered investment portfolio that ensures there is a steady
source of intermediate term liquidity. These funds can be used to
meet seasonal loan patterns and other intermediate term balance sheet
fluctuations. Approximately 71% of the investment portfolio is
classified as available-for-sale. The Company also uses securities
held in the securities portfolio to pledge when obtaining public
funds.
Finally,
the Company has the ability to access large deposits from both the public and
private sector to fund short-term liquidity needs.
The
Company believes the various sources available are ample liquidity for
short-term, intermediate-term and long-term liquidity.
Market
Risk Management
Market
risk arises from changes in interest rates. The Company has risk
management policies to monitor and limit exposure to market risk. In
asset and liability management activities, policies designed to minimize
structural interest rate risk are in place. The measurement of market
risk associated with financial instruments is meaningful only when all related
and offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified.
46
Interest
Rate Sensitivity
Interest
rate risk represents the potential impact of interest rate changes on net income
and capital resulting from mismatches in repricing opportunities of assets and
liabilities over a period of time. A number of tools are used to
monitor and manage interest rate risk, including simulation models and interest
sensitivity gap analysis. Management uses simulation models to
estimate the effects of changing interest rates and various balance sheet
strategies on the level of the Company’s net income and capital. As a
means of limiting interest rate risk to an acceptable level, management may
alter the mix of floating and fixed-rate assets and liabilities, change pricing
schedules and manage investment maturities during future security
purchases.
The
simulation model incorporates management’s assumptions regarding the level of
interest rates or balance changes for indeterminate maturity deposits for a
given level of market rate changes. These assumptions have been
developed through anticipated pricing behavior. Key assumptions in
the simulation models include the relative timing of prepayments, cash flows and
maturities. These assumptions are inherently uncertain and, as a
result, the model cannot precisely estimate net interest income or precisely
predict the impact of a change in interest rates on net income or
capital. Actual results will differ from simulated results due to the
timing, magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.
The table
below presents the Company’s interest rate sensitivity position at December 31,
2008. This analysis is based on a point in time and may not be
meaningful because assets and liabilities are categorized according to
contractual maturities, repricing periods and expected cash flows rather than
estimating more realistic behaviors as is done in the simulation
models. Also, this analysis does not consider subsequent changes in
interest rate level or spreads between asset and liability
categories.
Table
22: Interest Rate
Sensitivity
|
Interest Rate Sensitivity
Period
|
||||||||||||||||||||||||||||||||
|
0-30
|
31-90
|
91-180
|
181-365
|
1-2
|
2-5
|
Over
5
|
||||||||||||||||||||||||||
|
(In thousands, except
ratios)
|
Days
|
Days
|
Days
|
Days
|
Years
|
Years
|
Years
|
Total
|
||||||||||||||||||||||||
|
Earning
assets
|
||||||||||||||||||||||||||||||||
|
Short-term
investments
|
$ | 56,071 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | 56,071 | ||||||||||||||||
|
Assets
held in trading
|
||||||||||||||||||||||||||||||||
|
accounts
|
904 | -- | -- | -- | -- | -- | -- | 904 | ||||||||||||||||||||||||
|
Investment
securities
|
152,218 | 75,159 | 79,312 | 94,623 | 77,587 | 74,188 | 97,897 | 650,984 | ||||||||||||||||||||||||
|
Mortgage
loans held for sale
|
10,336 | -- | -- | -- | -- | -- | -- | 10,336 | ||||||||||||||||||||||||
|
Loans
|
622,566 | 239,461 | 159,564 | 332,040 | 249,732 | 286,151 | 43,560 | 1,933,074 | ||||||||||||||||||||||||
|
Total
earning assets
|
842,095 | 314,620 | 238,876 | 426,663 | 327,319 | 360,339 | 141,457 | 2,651,369 | ||||||||||||||||||||||||
|
Interest
bearing liabilities
|
||||||||||||||||||||||||||||||||
|
Interest
bearing transaction
|
||||||||||||||||||||||||||||||||
|
and
savings deposits
|
696,307 | -- | -- | -- | 66,103 | 198,310 | 66,104 | 1,026,824 | ||||||||||||||||||||||||
|
Time
deposits
|
128,404 | 182,053 | 244,106 | 289,105 | 104,820 | 26,013 | 10 | 974,511 | ||||||||||||||||||||||||
|
Short-term
debt
|
116,561 | -- | -- | -- | -- | -- | -- | 116,561 | ||||||||||||||||||||||||
|
Long-term
debt
|
602 | 11,339 | 1,542 | 4,231 | 38,727 | 62,214 | 40,016 | 158,671 | ||||||||||||||||||||||||
|
Total
interest bearing
|
||||||||||||||||||||||||||||||||
|
liabilities
|
941,874 | 193,392 | 245,648 | 293,336 | 209,650 | 286,537 | 106,130 | 2,276,567 | ||||||||||||||||||||||||
|
Interest
rate sensitivity Gap
|
$ | (99,779 | ) | $ | 121,228 | $ | (6,772 | ) | $ | 133,327 | $ | 117,669 | $ | 73,802 | $ | 35,327 | $ | 374,802 | ||||||||||||||
|
Cumulative
interest rate
|
||||||||||||||||||||||||||||||||
|
sensitivity
Gap
|
$ | (99,779 | ) | $ | 21,449 | $ | 14,677 | $ | 148,004 | $ | 265,673 | $ | 339,475 | $ | 374,802 | |||||||||||||||||
|
Cumulative
rate sensitive assets
|
||||||||||||||||||||||||||||||||
|
to
rate sensitive liabilities
|
89.4 | % | 101.9 | % | 101.1 | % | 108.8 | % | 114.1 | % | 115.6 | % | 116.5 | % | ||||||||||||||||||
|
Cumulative
Gap as a % of
|
||||||||||||||||||||||||||||||||
|
earning
assets
|
-3.8 | % | 0.8 | % | 0.6 | % | 5.6 | % | 10.0 | % | 12.8 | % | 14.1 | % | ||||||||||||||||||
47
|
CONSOLIDATED
FINANCIAL STATEMENTS AND
|
|
| SUPPLEMENTARY DATA |
INDEX
| 49 | ||||
| 50 | ||||
| 51 | ||||
| 52 | ||||
| 53 | ||||
| 54 | ||||
| 55 | ||||
| 56 |
|
Note:
|
Supplementary
Data may be found in Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Quarterly Results” on page
45 hereof.
|
48
The
management of Simmons First National Corporation (the “Company”) is responsible
for establishing and maintaining adequate internal control over financial
reporting. The Company’s internal control over financial reporting is a process
designed under the supervision of the Company’s Chief Executive Officer and
Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company’s
financial statements for external purposes in accordance with generally accepted
accounting principles.
As of
December 31, 2008, management assessed the effectiveness of the Company’s
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on the assessment, management determined that
the Company maintained effective internal control over financial reporting as of
December 31, 2008, based on those criteria.
BKD, LLP,
the independent registered public accounting firm that audited the consolidated
financial statements of the Company included in this Annual Report on Form 10-K,
has issued an attestation report on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. The report,
which expresses an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2008, immediately
follows.
Audit
Committee, Board of Directors and Stockholders
Simmons
First National Corporation
Pine
Bluff, Arkansas
We have
audited Simmons First National Corporation’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenances of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Simmons First National Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of
Simmons First National Corporation and our report dated February 23, 2009,
expressed an unqualified opinion thereon.
| BKD, LLP | |
| /s/ BKD, LLP |
Pine
Bluff, Arkansas
February
23, 2009
Audit
Committee, Board of Directors and Stockholders
Simmons
First National Corporation
Pine
Bluff, Arkansas
We have
audited the accompanying consolidated balance sheets of Simmons First National
Corporation as of December 31, 2008, and 2007, and the related consolidated
statements of income, cash flows, and stockholders’ equity for each of the years
in the three-year period ended December 31, 2008. The Company’s management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Simmons First National
Corporation as of December 31, 2008, and 2007, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2008, in conformity with accounting principles generally accepted in the
United States of America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Simmons First National Corporation’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated February 23, 2009,
expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
| BKD, LLP | |
| /s/ BKD, LLP |
Pine
Bluff, Arkansas
February
23, 2009
51
DECEMBER
31, 2008 and 2007
|
(In thousands, except share
data)
|
2008
|
2007
|
||||||
|
ASSETS
|
||||||||
|
Cash
and non-interest bearing balances due from banks
|
$ | 71,801 | $ | 82,630 | ||||
|
Interest
bearing balances due from banks
|
61,085 | 21,140 | ||||||
|
Federal
funds sold
|
6,650 | 6,460 | ||||||
|
Cash
and cash equivalents
|
139,536 | 110,230 | ||||||
|
Investment
securities
|
646,134 | 530,930 | ||||||
|
Mortgage
loans held for sale
|
10,336 | 11,097 | ||||||
|
Assets
held in trading accounts
|
5,754 | 5,658 | ||||||
|
Loans
|
1,933,074 | 1,850,454 | ||||||
|
Allowance
for loan losses
|
(25,841 | ) | (25,303 | ) | ||||
|
Net
loans
|
1,907,233 | 1,825,151 | ||||||
|
Premises
and equipment
|
78,904 | 75,473 | ||||||
|
Foreclosed
assets held for sale, net
|
2,995 | 2,629 | ||||||
|
Interest
receivable
|
20,930 | 21,345 | ||||||
|
Bank
owned life insurance
|
39,617 | 38,039 | ||||||
|
Goodwill
|
60,605 | 60,605 | ||||||
|
Core
deposit premiums
|
2,575 | 3,382 | ||||||
|
Other
assets
|
8,490 | 7,908 | ||||||
|
TOTAL
ASSETS
|
$ | 2,923,109 | $ | 2,692,447 | ||||
|
LIABILITIES
|
||||||||
|
Non-interest
bearing transaction accounts
|
$ | 334,998 | $ | 310,181 | ||||
|
Interest
bearing transaction accounts and savings deposits
|
1,026,824 | 761,233 | ||||||
|
Time
deposits
|
974,511 | 1,111,443 | ||||||
|
Total
deposits
|
2,336,333 | 2,182,857 | ||||||
|
Federal
funds purchased and securities sold
|
||||||||
|
under
agreements to repurchase
|
115,449 | 128,806 | ||||||
|
Short-term
debt
|
1,112 | 1,777 | ||||||
|
Long-term
debt
|
158,671 | 82,285 | ||||||
|
Accrued
interest and other liabilities
|
22,752 | 24,316 | ||||||
|
Total
liabilities
|
2,634,317 | 2,420,041 | ||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Capital
stock
|
||||||||
|
Class
A, common, par value $0.01 a share,
|
||||||||
|
60,000,000
shares authorized, 13,960,680 issued
|
||||||||
|
and
outstanding at 2008 and 13,918,368 at 2007
|
140 | 139 | ||||||
|
Surplus
|
40,807 | 41,019 | ||||||
|
Undivided
profits
|
244,655 | 229,520 | ||||||
|
Accumulated
other comprehensive income
|
||||||||
|
Unrealized
appreciation on available-for-sale
|
||||||||
|
securities,
net of income taxes of $1,913 at 2008
|
||||||||
|
and
$1,037 at 2007
|
3,190 | 1,728 | ||||||
|
Total
stockholders’ equity
|
288,792 | 272,406 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 2,923,109 | $ | 2,692,447 | ||||
See Notes
to Consolidated Financial Statements.
52
YEARS
ENDED DECEMBER 31, 2008, 2007 and 2006
|
(In thousands, except per share
data)
|
2008
|
2007
|
2006
|
|||||||||
|
INTEREST
INCOME
|
||||||||||||
|
Loans
|
$ | 126,079 | $ | 141,706 | $ | 130,248 | ||||||
|
Federal
funds sold
|
748 | 1,418 | 1,057 | |||||||||
|
Investment
securities
|
27,415 | 23,646 | 20,438 | |||||||||
|
Mortgage
loans held for sale
|
411 | 505 | 476 | |||||||||
|
Assets
held in trading accounts
|
73 | 100 | 71 | |||||||||
|
Interest
bearing balances due from banks
|
1,415 | 1,161 | 1,072 | |||||||||
|
TOTAL
INTEREST INCOME
|
156,141 | 168,536 | 153,362 | |||||||||
|
INTEREST
EXPENSE
|
||||||||||||
|
Deposits
|
53,150 | 65,474 | 54,250 | |||||||||
|
Federal
funds purchased and securities sold
|
||||||||||||
|
under
agreements to repurchase
|
2,110 | 5,371 | 4,615 | |||||||||
|
Short-term
debt
|
111 | 804 | 1,227 | |||||||||
|
Long-term
debt
|
6,753 | 4,771 | 4,466 | |||||||||
|
TOTAL
INTEREST EXPENSE
|
62,124 | 76,420 | 64,558 | |||||||||
|
NET
INTEREST INCOME
|
94,017 | 92,116 | 88,804 | |||||||||
|
Provision
for loan losses
|
8,646 | 4,181 | 3,762 | |||||||||
|
NET
INTEREST INCOME AFTER PROVISION
|
||||||||||||
|
FOR LOAN
LOSSES
|
85,371 | 87,935 | 85,042 | |||||||||
|
NON-INTEREST
INCOME
|
||||||||||||
|
Trust
income
|
6,230 | 6,218 | 5,612 | |||||||||
|
Service
charges on deposit accounts
|
15,145 | 14,794 | 15,795 | |||||||||
|
Other
service charges and fees
|
2,681 | 3,016 | 2,561 | |||||||||
|
Income
on sale of mortgage loans, net of commissions
|
2,606 | 2,766 | 2,849 | |||||||||
|
Income
on investment banking, net of commissions
|
1,025 | 623 | 341 | |||||||||
|
Credit
card fees
|
13,579 | 12,217 | 10,742 | |||||||||
|
Premiums
on sale of student loans
|
1,134 | 2,341 | 2,071 | |||||||||
|
Bank
owned life insurance income
|
1,547 | 1,493 | 1,523 | |||||||||
|
Gain
on mandatory partial redemption of Visa shares
|
2,973 | -- | -- | |||||||||
|
Other
income
|
2,406 | 2,535 | 2,453 | |||||||||
|
TOTAL
NON-INTEREST INCOME
|
49,326 | 46,003 | 43,947 | |||||||||
|
NON-INTEREST
EXPENSE
|
||||||||||||
|
Salaries
and employee benefits
|
57,050 | 54,865 | 53,442 | |||||||||
|
Occupancy
expense, net
|
7,383 | 6,674 | 6,385 | |||||||||
|
Furniture
and equipment expense
|
5,967 | 5,865 | 5,718 | |||||||||
|
Loss
on foreclosed assets
|
239 | 212 | 136 | |||||||||
|
Deposit
insurance
|
793 | 328 | 270 | |||||||||
|
Other
operating expenses
|
24,928 | 26,253 | 23,117 | |||||||||
|
TOTAL
NON-INTEREST EXPENSE
|
96,360 | 94,197 | 89,068 | |||||||||
|
INCOME
BEFORE INCOME TAXES
|
38,337 | 39,741 | 39,921 | |||||||||
|
Provision
for income taxes
|
11,427 | 12,381 | 12,440 | |||||||||
|
NET
INCOME
|
$ | 26,910 | $ | 27,360 | $ | 27,481 | ||||||
|
BASIC
EARNINGS PER SHARE
|
$ | 1.93 | $ | 1.95 | $ | 1.93 | ||||||
|
DILUTED
EARNINGS PER SHARE
|
$ | 1.91 | $ | 1.92 | $ | 1.90 | ||||||
53
YEARS
ENDED DECEMBER 31, 2008, 2007 and 2006
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 26,910 | $ | 27,360 | $ | 27,481 | ||||||
|
Items
not requiring (providing) cash
|
||||||||||||
|
Depreciation
and amortization
|
5,729 | 5,510 | 5,501 | |||||||||
|
Provision
for loan losses
|
8,646 | 4,181 | 3,762 | |||||||||
|
Gain
on mandatory partial redemption of Visa shares
|
(2,973 | ) | -- | -- | ||||||||
|
Net
amortization of investment securities
|
194 | 116 | 188 | |||||||||
|
Stock-based
compensation expense
|
548 | 338 | 233 | |||||||||
|
Deferred
income taxes
|
739 | 865 | 2,221 | |||||||||
|
Bank
owned life insurance income
|
(1,547 | ) | (1,493 | ) | (1,523 | ) | ||||||
|
Changes
in
|
||||||||||||
|
Interest
receivable
|
415 | 629 | (3,220 | ) | ||||||||
|
Mortgage
loans held for sale
|
761 | (4,006 | ) | 766 | ||||||||
|
Assets
held in trading accounts
|
(96 | ) | (1,171 | ) | 143 | |||||||
|
Other
assets
|
(960 | ) | 2,603 | 3,363 | ||||||||
|
Accrued
interest and other liabilities
|
(2,709 | ) | 508 | 3,596 | ||||||||
|
Income
taxes payable
|
(768 | ) | 538 | (863 | ) | |||||||
|
Net
cash provided by operating activities
|
34,889 | 35,978 | 41,648 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Net
originations of loans
|
(96,447 | ) | (75,161 | ) | (72,137 | ) | ||||||
|
Purchases
of premises and equipment, net
|
(8,353 | ) | (12,240 | ) | (9,238 | ) | ||||||
|
Proceeds
from sale of foreclosed assets
|
5,353 | 3,250 | 1,049 | |||||||||
|
Proceeds
from mandatory partial redemption of Visa shares
|
2,973 | -- | -- | |||||||||
|
Proceeds
from sale of securities
|
-- | -- | 2,161 | |||||||||
|
Proceeds
from maturities of available-for-sale securities
|
318,114 | 146,379 | 130,345 | |||||||||
|
Purchases
of available-for-sale securities
|
(434,952 | ) | (136,033 | ) | (106,088 | ) | ||||||
|
Proceeds
from maturities of held-to-maturity securities
|
41,680 | 31,123 | 29,431 | |||||||||
|
Purchases
of held-to-maturity securities
|
(38,778 | ) | (41,466 | ) | (59,213 | ) | ||||||
|
Purchases
of bank owned life insurance
|
(32 | ) | (413 | ) | (1,341 | ) | ||||||
|
Net
cash used in investing activities
|
(210,442 | ) | (84,561 | ) | (85,031 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Net
change in deposits
|
153,476 | 7,326 | 115,573 | |||||||||
|
Net
change in short-term debt
|
(665 | ) | (4,337 | ) | (1,917 | ) | ||||||
|
Dividends
paid
|
(10,601 | ) | (10,234 | ) | (9,666 | ) | ||||||
|
Proceeds
from issuance of long-term debt
|
91,029 | 10,786 | 7,275 | |||||||||
|
Repayment
of long-term debt
|
(14,643 | ) | (11,812 | ) | (10,984 | ) | ||||||
|
Net
change in Federal funds purchased and
|
||||||||||||
|
securities
sold under agreements to repurchase
|
(13,357 | ) | 23,770 | (2,187 | ) | |||||||
|
Repurchase
of common stock, net
|
(380 | ) | (7,837 | ) | (5,133 | ) | ||||||
|
Net
cash provided by financing activities
|
204,859 | 7,662 | 92,961 | |||||||||
|
INCREASE
(DECREASE) IN CASH AND
|
||||||||||||
|
CASH
EQUIVALENTS
|
29,306 | (40,921 | ) | 49,578 | ||||||||
|
CASH
AND CASH EQUIVALENTS,
|
||||||||||||
|
BEGINNING
OF YEAR
|
110,230 | 151,151 | 101,573 | |||||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$ | 139,536 | $ | 110,230 | $ | 151,151 | ||||||
See Notes to Consolidated
Financial Statements.
54
YEARS
ENDED DECEMBER 31, 2008, 2007 and 2006
|
Accumulated
|
||||||||||||||||||||
|
Other
|
||||||||||||||||||||
|
Common
|
Comprehensive
|
Undivided
|
||||||||||||||||||
|
(In thousands, except share
data)
|
Stock
|
Surplus
|
Income (Loss)
|
Profits
|
Total
|
|||||||||||||||
|
Balance,
December 31, 2005
|
$ | 143 | $ | 53,723 | $ | (4,360 | ) | $ | 194,579 | $ | 244,085 | |||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
-- | -- | -- | 27,481 | 27,481 | |||||||||||||||
|
Change
in unrealized depreciation on
|
||||||||||||||||||||
|
available-for-sale
securities, net of
|
||||||||||||||||||||
|
income
taxes of $1,296
|
-- | -- | 2,162 | -- | 2,162 | |||||||||||||||
|
Comprehensive
income:
|
29,643 | |||||||||||||||||||
|
Stock
issued as bonus shares – 10,200 shares
|
-- | 275 | -- | -- | 275 | |||||||||||||||
|
Exercise
of stock options – 106,880 shares
|
1 | 1,516 | -- | -- | 1,517 | |||||||||||||||
|
Stock
granted under
|
||||||||||||||||||||
|
stock-based
compensation plans
|
-- | 88 | -- | -- | 88 | |||||||||||||||
|
Securities
exchanged under stock option plan
|
-- | (1,291 | ) | -- | -- | (1,291 | ) | |||||||||||||
|
Repurchase
of common stock
|
||||||||||||||||||||
|
–
203,100 shares
|
(2 | ) | (5,633 | ) | -- | -- | (5,635 | ) | ||||||||||||
|
Cash
dividends declared ($0.68 per share)
|
-- | -- | -- | (9,666 | ) | (9,666 | ) | |||||||||||||
|
Balance,
December 31, 2006
|
142 | 48,678 | (2,198 | ) | 212,394 | 259,016 | ||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
-- | -- | -- | 27,360 | 27,360 | |||||||||||||||
|
Change
in unrealized depreciation on
|
||||||||||||||||||||
|
available-for-sale
securities, net of
|
||||||||||||||||||||
|
income
taxes of $1,037
|
-- | -- | 3,926 | -- | 3,926 | |||||||||||||||
|
Comprehensive
income
|
31,286 | |||||||||||||||||||
|
Stock
issued as bonus shares – 15,146 shares
|
-- | 419 | -- | -- | 419 | |||||||||||||||
|
Exercise
of stock options – 33,720 shares
|
-- | 509 | -- | -- | 509 | |||||||||||||||
|
Stock
granted under
|
||||||||||||||||||||
|
stock-based
compensation plans
|
-- | 178 | -- | -- | 178 | |||||||||||||||
|
Securities
exchanged under stock option plan
|
-- | (203 | ) | -- | -- | (203 | ) | |||||||||||||
|
Repurchase
of common stock
|
||||||||||||||||||||
|
–
320,726 shares
|
(3 | ) | (8,562 | ) | -- | -- | (8,565 | ) | ||||||||||||
|
Cash
dividends declared ($0.73 per share)
|
-- | -- | -- | (10,234 | ) | (10,234 | ) | |||||||||||||
|
Balance,
December 31, 2007
|
139 | 41,019 | 1,728 | 229,520 | 272,406 | |||||||||||||||
|
Cumulative
effect of adoption of a new
|
||||||||||||||||||||
|
accounting
principle, January 1, 2008 (Note 16)
|
-- | -- | -- | (1,174 | ) | (1,174 | ) | |||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
-- | -- | -- | 26,910 | 26,910 | |||||||||||||||
|
Change
in unrealized appreciation on
|
||||||||||||||||||||
|
available-for-sale
securities, net of
|
||||||||||||||||||||
|
income
taxes of $877
|
-- | -- | 1,462 | -- | 1,462 | |||||||||||||||
|
Comprehensive
income
|
28,372 | |||||||||||||||||||
|
Stock
issued as bonus shares – 17,490 shares
|
-- | 530 | -- | -- | 530 | |||||||||||||||
|
Stock
issued for employee stock
|
||||||||||||||||||||
|
purchase
plan – 5,359 shares
|
-- | 135 | -- | -- | 135 | |||||||||||||||
|
Exercise
of stock options – 97,497 shares
|
1 | 1,207 | -- | -- | 1,208 | |||||||||||||||
|
Stock
granted under
|
||||||||||||||||||||
|
stock-based
compensation plans
|
-- | 169 | -- | -- | 169 | |||||||||||||||
|
Securities
exchanged under stock option plan
|
-- | (973 | ) | -- | -- | (973 | ) | |||||||||||||
|
Repurchase
of common stock
|
||||||||||||||||||||
|
–
45,180 shares
|
-- | (1,280 | ) | -- | -- | (1,280 | ) | |||||||||||||
|
Cash
dividends declared ($0.76 per share)
|
-- | -- | -- | (10,601 | ) | (10,601 | ) | |||||||||||||
|
Balance,
December 31, 2008
|
$ | 140 | $ | 40,807 | $ | 3,190 | $ | 244,655 | $ | 288,792 | ||||||||||
See Notes
to Consolidated Financial Statements.
55
NOTE
1: NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
Simmons
First National Corporation (the “Company”) is primarily engaged in providing a
full range of banking services to individual and corporate customers through its
subsidiaries and their branch banks in Arkansas. The Company is
subject to competition from other financial institutions. The Company
also is subject to the regulation of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities.
Operating
Segments
The
Company is organized on a subsidiary bank-by-bank basis upon which management
makes decisions regarding how to allocate resources and assess
performance. Each of the subsidiary banks provides a group of similar
community banking services, including such products and services as loans; time
deposits, checking and savings accounts; personal and corporate trust services;
credit cards; investment management; and securities and investment
services. The individual bank segments have similar operating and
economic characteristics and have been reported as one aggregated operating
segment.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, the valuation of foreclosed
assets and the allowance for foreclosure expenses. In connection with
the determination of the allowance for loan losses and the valuation of
foreclosed assets, management obtains independent appraisals for significant
properties.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Simmons First National
Corporation and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Reclassifications
Various
items within the accompanying financial statements for previous years have been
reclassified to provide more comparative information. These
reclassifications had no effect on net earnings.
Cash
Equivalents
For
purposes of the statement of cash flows, the Company considers due from banks,
Federal funds sold and securities purchased under agreements to resell as cash
equivalents.
56
Investment
Securities
Held-to-maturity
securities, which include any security for which the Company has the positive
intent and ability to hold until maturity, are carried at historical cost
adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized and accreted,
respectively, to interest income using the constant yield method over the period
to maturity.
Available-for-sale
securities, which include any security for which the Company has no immediate
plan to sell but which may be sold in the future, are carried at fair
value. Realized gains and losses, based on specifically identified
amortized cost of the individual security, are included in other
income. Unrealized gains and losses are recorded, net of related
income tax effects, in stockholders' equity. Premiums and discounts
are amortized and accreted, respectively, to interest income using the constant
yield method over the period to maturity.
Trading
securities, which include any security held primarily for near-term sale, are
carried at fair value. Gains and losses on trading securities
are included in other income.
Interest
and dividends on investments in debt and equity securities are included in
income when earned.
Mortgage
Loans Held For Sale
Mortgage
loans held for sale are carried at the lower of cost or fair value, determined
using an aggregate basis. Write-downs to fair value are recognized as
a charge to earnings at the time the decline in value occurs. Forward
commitments to sell mortgage loans are acquired to reduce market risk on
mortgage loans in the process of origination and mortgage loans held for
sale. The forward commitments acquired by the Company for mortgage
loans in process of origination are not mandatory forward
commitments. These commitments are structured on a best efforts
basis; therefore, the Company is not required to substitute another loan or to
buy back the commitment if the original loan does not fund. Gains and
losses resulting from sales of mortgage loans are recognized when the respective
loans are sold to investors. Gains and losses are determined by the
difference between the selling price and the carrying amount of the loans sold,
net of discounts collected or paid. Fees received from borrowers to
guarantee the funding of mortgage loans held for sale are recognized as income
or expense when the loans are sold or when it becomes evident that the
commitment will not be used.
Loans
Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or pay-offs are reported at their outstanding principal adjusted
for any loans charged off and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. Interest income
is reported on the interest method and includes amortization of net deferred
loan fees and costs over the estimated life of the loan. Generally,
loans are placed on nonaccrual status at ninety days past due and interest is
considered a loss unless the loan is well secured and in the process of
collection.
Discounts
and premiums on purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on
purchased consumer loans are recognized over the expected lives of the loans
using methods that approximate the interest method.
Derivative
Financial Instruments
The
Company may enter into derivative contracts for the purposes of managing
exposure to interest rate risk to meet the financing needs of its
customers. The Company records all derivatives on the balance sheet
at fair value. Historically, the Company’s policy has been not to
invest in derivative type investments, but, in an effort to meet the financing
needs of its customers, the Company has entered into one fair value
hedge. Fair value hedges include interest rate swap agreements on
fixed rate loans. For derivatives designated as hedging the exposure
to changes in the fair value of the hedged item, the gain or loss is recognized
in earnings in the period of change together with the offsetting loss or gain of
the hedging instrument. The fair value hedge is considered to be
highly effective and any hedge ineffectiveness was deemed not
material. The notional amount of the loan being hedged was $1.8
million at December 31, 2008 and $1.8 million at December 31,
2007.
57
Allowance
for Loan Losses
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income. Loan
losses are charged against the allowance when management believes the
uncollectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The
allowance is maintained at a level considered adequate to provide for potential
loan losses related to specifically identified loans as well as probable credit
losses inherent in the remainder of the loan portfolio that have been incurred
as of period end. This estimate is based on management's evaluation
of the loan portfolio as well as on prevailing and anticipated economic
conditions and historical losses by loan category. General reserves
have been established based upon the aforementioned factors and allocated to the
individual loan categories. Allowances are accrued on specific loans
evaluated for impairment for which the basis of each loan, including accrued
interest, exceeds the discounted amount of expected future collections of
interest and principal or, alternatively, the fair value of loan
collateral. The unallocated reserve generally serves to compensate
for the uncertainty in estimating loan losses, including the possibility of
changes in risk ratings and specific reserve allocations in the loan portfolio
as a result of the Company’s ongoing risk management system.
A loan is
considered impaired when it is probable that the Company will not receive all
amounts due according to the contractual terms of the loan. This
includes loans that are delinquent 90 days or more, nonaccrual loans and certain
other loans identified by management. Certain other loans identified
by management consist of performing loans with specific allocations of the
allowance for loan losses. Specific allocations are applied when
quantifiable factors are present requiring a greater allocation than that
established by the Company based on its analysis of historical losses for each
loan category. Accrual of interest is discontinued and interest
accrued and unpaid is removed at the time such amounts are delinquent 90 days
unless management is aware of circumstances which warrant continuing the
interest accrual. Interest is recognized for nonaccrual loans only
upon receipt and only after all principal amounts are current according to the
terms of the contract.
Premises
and Equipment
Depreciable
assets are stated at cost less accumulated depreciation. Depreciation
is charged to expense using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are capitalized and
amortized by the straight-line method over the terms of the respective leases or
the estimated useful lives of the improvements, whichever is
shorter.
Foreclosed
Assets Held For Sale
Assets
acquired by foreclosure or in settlement of debt and held for sale are valued at
estimated fair value as of the date of foreclosure, and a related valuation
allowance is provided for estimated costs to sell the
assets. Management evaluates the value of foreclosed assets held for
sale periodically and increases the valuation allowance for any subsequent
declines in fair value. Changes in the valuation allowance are
charged or credited to other expense.
Goodwill
Goodwill
represents the excess of cost over the fair value of net assets of acquired
subsidiaries and branches. Financial Accounting Standards Board
Statement No’s. 142 and 147 eliminated the amortization for these assets as of
January 1, 2002. While goodwill is not amortized, impairment
testing of goodwill is performed annually, or more frequently if certain
conditions occur.
58
Core
Deposit Premiums
Core
deposit premiums represent the amount allocated to the future earnings potential
of acquired deposits. The unamortized core deposit premiums are being
amortized using both straight-line and accelerated methods over periods ranging
from 8 to 11 years. Unamortized core deposit premiums are tested for
impairment annually, or more frequently if certain conditions
occur.
Securities
Sold Under Agreements to Repurchase
The
Company sells securities under agreements to repurchase to meet customer needs
for sweep accounts. At the point funds deposited by customers become
investable, those funds are used to purchase securities owned by the Company and
held in its general account with the designation of Customers’
Securities. A third party maintains control over the securities
underlying overnight repurchase agreements. The securities involved
in these transactions are generally U.S. Treasury or Federal Agency
issues. Securities sold under agreements to repurchase generally
mature on the banking day following that on which the investment was initially
purchased and are treated as collateralized financing transactions which are
recorded at the amounts at which the securities were sold plus accrued
interest. Interest rates and maturity dates of the securities
involved vary and are not intended to be matched with funds from
customers.
Fee
Income
Periodic
bankcard fees, net of direct origination costs, are recognized as revenue on a
straight-line basis over the period the fee entitles the cardholder to use the
card. Origination fees and costs for other loans are being amortized
over the estimated life of the loan.
Income
Taxes
Deferred
tax liabilities and assets are recognized for the tax effects of differences
between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will not be
realized.
Earnings
Per Share
Basic
earnings per share are computed based on the weighted average number of shares
outstanding during each year. Diluted earnings per share are computed
using the weighted average common shares and all potential dilutive common
shares outstanding during the period.
The
computation of per share earnings is as follows:
|
(In thousands, except per share
data)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
Income
|
$ | 26,910 | $ | 27,360 | $ | 27,481 | ||||||
|
Average
common shares outstanding
|
13,945 | 14,044 | 14,226 | |||||||||
|
Average
common share stock options outstanding
|
163 | 197 | 248 | |||||||||
|
Average
diluted common shares
|
14,108 | 14,241 | 14,474 | |||||||||
|
Basic
earnings per share
|
$ | 1.93 | $ | 1.95 | $ | 1.93 | ||||||
|
Diluted
earnings per share
|
$ | 1.91 | $ | 1.92 | $ | 1.90 | ||||||
59
Stock-Based
Compensation
On January
1, 2006, the Company began recognizing compensation expense for stock options
with the adoption of Statement of Financial Accounting Standards (SFAS) No.
123R, Share-Based Payment (Revised 2004). See Note 10, Employee
Benefit Plans, for additional information.
SFAS No.
123R requires pro forma disclosures of net income and earnings per share for all
periods prior to the adoption of the fair value accounting method for
stock-based employee compensation.
NOTE 2: INVESTMENT SECURITIES
The
amortized cost and fair value of investment securities that are classified as
held-to-maturity and available-for-sale are as follows:
|
Years Ended December 31
|
||||||||||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
Gross
|
Gross
|
Estimated
|
|||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||||||||||||
|
(In thousands)
|
Cost
|
Gains
|
(Losses)
|
Value
|
Cost
|
Gains
|
(Losses)
|
Value
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | 1,500 | $ | 14 | $ | -- | $ | 1,514 | ||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
18,000 | 629 | -- | 18,629 | 37,000 | 722 | (19 | ) | 37,703 | |||||||||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
109 | 2 | -- | 111 | 129 | 2 | -- | 131 | ||||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
168,262 | 1,264 | (1,876 | ) | 167,650 | 149,262 | 1,089 | (354 | ) | 149,997 | ||||||||||||||||||||||
|
Other
securities
|
930 | -- | -- | 930 | 2,393 | -- | -- | 2,393 | ||||||||||||||||||||||||
|
Total
|
$ | 187,301 | $ | 1,895 | $ | (1,876 | ) | $ | 187,320 | $ | 190,284 | $ | 1,827 | $ | (373 | ) | $ | 191,738 | ||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 5,976 | $ | 113 | $ | -- | $ | 6,089 | $ | 5,498 | $ | 26 | $ | -- | $ | 5,524 | ||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
346,585 | 5,444 | (868 | ) | 351,161 | 317,998 | 3,090 | (299 | ) | 320,789 | ||||||||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
2,909 | 37 | (67 | ) | 2,879 | 2,923 | -- | (165 | ) | 2,758 | ||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
635 | 2 | -- | 637 | 855 | 3 | -- | 858 | ||||||||||||||||||||||||
|
Other
securities
|
97,625 | 448 | (6 | ) | 98,067 | 10,608 | 109 | -- | 10,717 | |||||||||||||||||||||||
|
Total
|
$ | 453,730 | $ | 6,044 | $ | (941 | ) | $ | 458,833 | $ | 337,882 | $ | 3,228 | $ | (464 | ) | $ | 340,646 | ||||||||||||||
Certain
investment securities are valued at less than their historical
cost. Total fair value of these investments at December 31,
2008, was $167.8 million, which is approximately 26.0% of the Company’s
available-for-sale and held-to-maturity investment portfolio. These
declines primarily resulted from previous increases in market interest
rates.
Based on
evaluation of available evidence, management believes the declines in fair value
for these securities are temporary. It is management’s intent to hold
these securities to maturity.
Should the
impairment of any of these securities become other than temporary, the cost
basis of the investment will be reduced and the resulting loss recognized in net
income in the period the other-than-temporary impairment is
identified.
60
The following table shows the gross unrealized losses and fair value of the
Company’s investments with unrealized losses, aggregated by investment category
and length of time that individual securities have been in a continuous
unrealized loss position at December 31:
|
Less Than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
|
Estimated
|
Gross
|
Estimated
|
Gross
|
Estimated
|
Gross
|
|||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
|
(In thousands)
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||
|
Mortgage-backed
securities
|
$ | 3,623 | $ | -- | $ | -- | $ | -- | $ | 3,623 | $ | -- | ||||||||||||
|
State
and political subdivisions
|
58,790 | 1,673 | 3,854 | 204 | 62,644 | 1,876 | ||||||||||||||||||
|
Total
|
$ | 62,413 | $ | 1,673 | $ | 3,854 | $ | 204 | $ | 66,267 | $ | 1,876 | ||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 99,424 | $ | 868 | $ | -- | $ | -- | $ | 99,424 | $ | 868 | ||||||||||||
|
Mortgage-backed
securities
|
1,571 | 46 | 493 | 21 | 2,064 | 67 | ||||||||||||||||||
|
Other
securities
|
49 | 6 | -- | -- | 49 | 6 | ||||||||||||||||||
|
Total
|
$ | 101,044 | $ | 920 | $ | 493 | $ | 21 | $ | 101,537 | $ | 941 | ||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | -- | $ | -- | $ | 6,981 | $ | 19 | $ | 6,981 | $ | 19 | ||||||||||||
|
Mortgage-backed
securities
|
721 | -- | -- | -- | 721 | -- | ||||||||||||||||||
|
State
and political subdivisions
|
9,717 | 93 | 32,921 | 261 | 42,638 | 354 | ||||||||||||||||||
|
Total
|
$ | 10,438 | $ | 93 | $ | 39,902 | $ | 280 | $ | 50,340 | $ | 373 | ||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 15,931 | $ | 21 | $ | 84,755 | $ | 278 | $ | 100,686 | $ | 299 | ||||||||||||
|
Mortgage-backed
securities
|
-- | -- | 2,757 | 165 | 2,757 | 165 | ||||||||||||||||||
|
Total
|
$ | 15,931 | $ | 21 | $ | 87,512 | $ | 443 | 103,443 | $ | 464 | |||||||||||||
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment
losses, management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer, and (iii) the intent and
ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair
value.
During the
third quarter of 2008, the Company determined that its investment in FNMA common
stock, held in the AFS-Other securities category, had become
other-than-temporarily impaired. As a result of this impairment the
security was written down by $75,000. The Company had accumulated
this stock over several years in the form of stock dividends from
FNMA. The remaining balance of this investment is approximately
$5,000. The Company has no investment in FNMA or FHLMC preferred
stock.
61
Management
has the ability and intent to hold the securities classified as held to maturity
until they mature, at which time the Company expects to receive full value for
the securities. Furthermore, as of December 31, 2008, management also
had the ability and intent to hold the securities classified as
available-for-sale for a period of time sufficient for a recovery of
cost. The unrealized losses are largely due to increases in market
interest rates over the yields available at the time the underlying securities
were purchased. The fair value is expected to recover as the bonds
approach their maturity date or repricing date or if market yields for such
investments decline. Management does not believe any of the
securities are impaired due to reasons of credit
quality. Accordingly, as of December 31, 2008, management believes
the impairments detailed in the table above are temporary.
Income
earned on the above securities for the years ended December 31, 2008, 2007 and
2006, is as follows:
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Taxable
|
||||||||||||
|
Held-to-maturity
|
$ | 1,444 | $ | 2,521 | $ | 2,007 | ||||||
|
Available-for-sale
|
19,643 | 15,841 | 13,698 | |||||||||
|
Non-taxable
|
||||||||||||
|
Held-to-maturity
|
6,323 | 5,228 | 4,635 | |||||||||
|
Available-for-sale
|
35 | 56 | 98 | |||||||||
|
Total
|
$ | 27,445 | $ | 23,646 | $ | 20,438 | ||||||
The Statement of Stockholders’ Equity includes other comprehensive income. Other comprehensive income for the Company includes the change in the unrealized appreciation on available-for-sale securities. The changes in the unrealized appreciation on available-for-sale securities for the years ended December 31, 2008, 2007, and 2006, are as follows:
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Unrealized
holding gains arising during the period
|
$ | 1,462 | $ | 3,926 | $ | 2,162 | ||||||
|
Losses
realized in net income
|
-- | -- | -- | |||||||||
|
Net
change in unrealized appreciation
|
||||||||||||
|
on
available-for-sale securities
|
$ | 1,462 | $ | 3,926 | $ | 2,162 | ||||||
The
amortized cost and estimated fair value by maturity of securities are shown in
the following table. Securities are classified according to their
contractual maturities without consideration of principal amortization,
potential prepayments or call options. Accordingly, actual maturities
may differ from contractual maturities.
|
Held-to-Maturity
|
Available-for-Sale
|
|||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
|
(In thousands)
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||
|
One
year or less
|
$ | 9,993 | $ | 10,021 | $ | 8,704 | $ | 8,785 | ||||||||
|
After
one through five years
|
53,078 | 53,576 | 35,463 | 35,634 | ||||||||||||
|
After
five through ten years
|
82,354 | 82,982 | 311,143 | 315,580 | ||||||||||||
|
After
ten years
|
41,876 | 40,741 | 795 | 767 | ||||||||||||
|
Other
securities
|
-- | -- | 97,625 | 98,067 | ||||||||||||
|
Total
|
$ | 187,301 | $ | 187,320 | $ | 453,730 | $ | 458,833 | ||||||||
The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $435,120,000 at December 31, 2008 and $410,645,000 at December 31, 2007.
62
The book
value of securities sold under agreements to repurchase amounted to $87,514,000
and $91,466,000 for December 31, 2008 and 2007, respectively.
The
Company had no gross realized gains or losses during the years ended December
31, 2008, 2007 and 2006, resulting from the sales and/or calls of
securities.
Most of
the state and political subdivision debt obligations are non-rated bonds and
represent small Arkansas issues, which are evaluated on an ongoing
basis.
The
various categories of loans are summarized as follows:
|
(In thousands)
|
2008
|
2007
|
||||||
|
Consumer
|
||||||||
|
Credit
cards
|
$ | 169,615 | $ | 166,044 | ||||
|
Student
loans
|
111,584 | 76,277 | ||||||
|
Other
consumer
|
138,145 | 137,624 | ||||||
|
Real
estate
|
||||||||
|
Construction
|
224,924 | 260,924 | ||||||
|
Single
family residential
|
409,540 | 382,676 | ||||||
|
Other
commercial
|
584,843 | 542,184 | ||||||
|
Commercial
|
||||||||
|
Commercial
|
192,496 | 193,091 | ||||||
|
Agricultural
|
88,233 | 73,470 | ||||||
|
Financial
institutions
|
3,471 | 7,440 | ||||||
|
Other
|
10,223 | 10,724 | ||||||
|
Total
loans before allowance for loan losses
|
$ | 1,933,074 | $ | 1,850,454 | ||||
At December 31, 2008 and 2007, impaired loans totaled $17,230,000 and $12,519,000, respectively. All impaired loans had either specific or general allocations within the allowance for loan losses. Allocations of the allowance for loan losses relative to impaired loans at December 31, 2008 and 2007, were $4,238,000 and $2,851,000, respectively. Approximately $198,000, $203,000 and $350,000 of interest income was recognized on average impaired loans of $15,315,000, $11,724,000 and $13,072,000 for 2008, 2007 and 2006 respectively. Interest recognized on impaired loans on a cash basis during 2008, 2007 and 2006 was immaterial.
At
December 31, 2008 and 2007, accruing loans delinquent 90 days or more totaled
$1,291,000 and $1,282,000, respectively. Non-accruing loans at
December 31, 2008 and 2007 were $14,358,000 and $9,909,000,
respectively.
As of
December 31, 2008, credit card loans, which are unsecured, were $169,615,000 or
8.8%, of total loans versus $166,044,000 or 9.0%, of total loans at December 31,
2007. The credit card loans are diversified by geographic region to
reduce credit risk and minimize any adverse impact on the
portfolio. Credit card loans are regularly reviewed to facilitate the
identification and monitoring of creditworthiness.
63
Transactions
in the allowance for loan losses are as follows:
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Balance,
beginning of year
|
$ | 25,303 | $ | 25,385 | $ | 26,923 | ||||||
|
Additions
|
||||||||||||
|
Provision
for loan losses
|
8,646 | 4,181 | 3,762 | |||||||||
| 33,949 | 29,566 | 30,685 | ||||||||||
|
Deductions
|
||||||||||||
|
Losses
charged to allowance, net of recoveries
|
||||||||||||
|
of
$2,138 for 2008, $2,569 for 2007 and $3,106 for 2006
|
8,108 | 4,263 | 3,775 | |||||||||
|
Reclassification
of reserve for unfunded commitments (1)
|
-- | -- | 1,525 | |||||||||
|
Balance,
end of year
|
$ | 25,841 | $ | 25,303 | $ | 25,385 | ||||||
Goodwill
is tested annually for impairment. If the implied fair value of
goodwill is lower than its carrying amount, goodwill impairment is indicated,
and goodwill is written down to its implied fair value. Subsequent
increases in goodwill value are not recognized in the financial
statements. Goodwill totaled $60.6 million at December 31, 2008,
unchanged from December 31, 2007, as the Company made no acquisitions during the
year ended December 31, 2008, and no goodwill impairment was
recorded.
The
carrying basis and accumulated amortization of core deposit premiums (net of
core deposit premiums that were fully amortized) at December 31, 2008 and 2007,
were as follows:
|
December 31, 2008
|
December 31, 2007
|
|||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||
|
(In thousands)
|
Amount
|
Amortization
|
Net
|
Amount
|
Amortization
|
Net
|
||||||||||||||||||
|
Core
deposit premiums
|
$ | 6,822 | $ | 4,247 | $ | 2,575 | $ | 7,246 | $ | 3,864 | $ | 3,382 | ||||||||||||
Core
deposit premium amortization expense recorded for the years ended December 31,
2008, 2007 and 2006, was $807,000, $817,000 and $830,000,
respectively. The Company’s estimated amortization expense for each
of the following five years is: 2009 – $802,000; 2010 – $699,000;
2011 – $451,000; 2012 – $321,000; and 2013 – $268,000.
NOTE 5: TIME DEPOSITS
Time
deposits included approximately $418,394,000 and $452,262,000 of certificates of
deposit of $100,000 or more, at December 31, 2008 and 2007,
respectively. Brokered deposits were $33,155,000 and $39,185,000 at
December 31, 2008 and 2007, respectively. At December 31, 2008, time
deposits with a remaining maturity of one year or more amounted to
$132,242,000. Maturities of all time deposits are as
follows: 2009 – $842,269,000; 2010 – $104,820,000; 2011– $26,989,000;
2012 – $192,000; 2013 – $231,000 and $10,000 thereafter.
Deposits
are the Company's primary funding source for loans and investment
securities. The mix and repricing alternatives can significantly
affect the cost of this source of funds and, therefore, impact the interest
margin.
64
The
provision for income taxes is comprised of the following
components:
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Income
taxes currently payable
|
$ | 10,688 | $ | 11,516 | $ | 10,219 | ||||||
|
Deferred
income taxes
|
739 | 865 | 2,221 | |||||||||
|
Provision
for income taxes
|
$ | 11,427 | $ | 12,381 | $ | 12,440 | ||||||
The tax
effects of temporary differences related to deferred taxes shown on the balance
sheet were:
|
(In thousands)
|
2008
|
2007
|
||||||
|
Deferred
tax assets
|
||||||||
|
Allowance
for loan losses
|
$ | 9,057 | $ | 8,705 | ||||
|
Valuation
of foreclosed assets
|
63 | 63 | ||||||
|
Deferred
compensation payable
|
1,451 | 1,432 | ||||||
|
FHLB
advances
|
14 | 29 | ||||||
|
Vacation
compensation
|
866 | 820 | ||||||
|
Loan
interest
|
88 | 88 | ||||||
|
Other
|
276 | 234 | ||||||
|
Gross
deferred tax assets
|
11,815 | 11,371 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Accumulated
depreciation
|
(406 | ) | (558 | ) | ||||
|
Deferred
loan fee income and expenses, net
|
(1,229 | ) | (954 | ) | ||||
|
FHLB
stock dividends
|
(586 | ) | (717 | ) | ||||
|
Goodwill
and core deposit premium amortization
|
(8,643 | ) | (7,341 | ) | ||||
|
Available-for-sale
securities
|
(1,913 | ) | (1,037 | ) | ||||
|
Other
|
(1,019 | ) | (1,130 | ) | ||||
|
Gross
deferred tax liabilities
|
(13,796 | ) | (11,737 | ) | ||||
|
Net
deferred tax liability
|
$ | (1,981 | ) | $ | (366 | ) | ||
A
reconciliation of income tax expense at the statutory rate to the Company's
actual income tax expense is shown below.
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Computed
at the statutory rate (35%)
|
$ | 13,418 | $ | 13,910 | $ | 13,972 | ||||||
|
Increase
(decrease) in taxes resulting from:
|
||||||||||||
|
State
income taxes, net of federal tax benefit
|
466 | 647 | 792 | |||||||||
|
Tax
exempt interest income
|
(2,369 | ) | (2,020 | ) | (1,858 | ) | ||||||
|
Tax
exempt earnings on BOLI
|
(542 | ) | (523 | ) | (511 | ) | ||||||
|
Other
differences, net
|
454 | 367 | 45 | |||||||||
|
Actual
tax provision
|
$ | 11,427 | $ | 12,381 | $ | 12,440 | ||||||
65
The amount
of unrecognized tax benefits may increase or decrease in the future for various
reasons including adding amounts for current tax year positions, expiration of
open income tax returns due to the statutes of limitation, changes in
management’s judgment about the level of uncertainty, status of examinations,
litigation and legislative activity and the addition or elimination of uncertain
tax positions.
The
Company files income tax returns in the U.S. federal
jurisdiction. The Company’s U.S. federal income tax returns are open
and subject to examinations from the 2005 tax year and forward. The
Company’s various state income tax returns are generally open from the 2005 and
later tax return years based on individual state statute of
limitations.
NOTE 7: SHORT-TERM AND LONG-TERM DEBT
Long-term
debt at December 31, 2008, and 2007 consisted of the following
components.
|
(In thousands)
|
2008
|
2007
|
||||||
|
FHLB
advances, due 2009 to 2033, 2.40% to 8.41%,
|
||||||||
|
secured
by residential real estate loans
|
$ | 127,741 | $ | 51,355 | ||||
|
Trust
preferred securities, due 12/30/2033, fixed at 8.25%,
|
||||||||
|
callable
without penalty
|
10,310 | 10,310 | ||||||
|
Trust
preferred securities, due 12/30/2033, floating rate
|
||||||||
|
of
2.80% above the three-month LIBOR rate,
|
||||||||
|
reset
quarterly, callable without penalty
|
10,310 | 10,310 | ||||||
|
Trust
preferred securities, due 12/30/2033, fixed rate
|
||||||||
|
of
6.97% through 2010, thereafter, at a floating rate of
|
||||||||
|
2.80%
above the three-month LIBOR rate, reset
|
||||||||
|
quarterly,
callable in 2010 without penalty
|
10,310 | 10,310 | ||||||
|
Total
long-term debt
|
$ | 158,671 | $ | 82,285 | ||||
At
December 31, 2008 the Company had no Federal Home Loan Bank (“FHLB”) advances
with original maturities of one year or less.
The
Company had total FHLB advances of $127.7 million at December 31, 2008, with
approximately $436.3 million of additional advances available from the
FHLB.
The trust
preferred securities are tax-advantaged issues that qualify for Tier 1 capital
treatment. Distributions on these securities are included in interest
expense on long-term debt. Each of the trusts is a statutory business
trust organized for the sole purpose of issuing trust securities and investing
the proceeds thereof in junior subordinated debentures of the Company, the sole
asset of each trust. The preferred trust securities of each trust
represent preferred beneficial interests in the assets of the respective trusts
and are subject to mandatory redemption upon payment of the junior subordinated
debentures held by the trust. The common securities of each trust are
wholly-owned by the Company. Each trust’s ability to pay amounts due
on the trust preferred securities is solely dependent upon the Company making
payment on the related junior subordinated debentures. The Company’s
obligations under the junior subordinated securities and other relevant trust
agreements, in aggregate, constitute a full and unconditional guarantee by the
Company of each respective trust’s obligations under the trust securities issued
by each respective trust.
66
Aggregate
annual maturities of long-term debt at December 31, 2008 are as
follows:
|
|
Annual
|
||||
|
(In thousands)
|
Year
|
Maturities
|
|||
|
2009
|
$ | 7,350 | |||
|
2010
|
28,331 | ||||
|
2011
|
41,052 | ||||
|
2012
|
5,604 | ||||
|
2013
|
10,938 | ||||
|
Thereafter
|
65,396 | ||||
|
Total
|
$ | 158,671 | |||
At the
Company’s annual shareholder meeting held on April 10, 2007, the shareholders
approved an amendment to the Articles of Incorporation increasing the number of
authorized shares of Class A, $0.01 par value, Common Stock from 30,000,000 to
60,000,000. Class A Common Stock is the Company’s only outstanding
class of stock.
On
November 28, 2007, the Company announced the substantial completion of the
existing stock repurchase program and the adoption by the Board of Directors of
a new stock repurchase program. The program authorizes the repurchase
of up to 700,000 shares of Class A common stock, or approximately 5% of the
outstanding common stock. Under the repurchase program, there is no
time limit for the stock repurchases, nor is there a minimum number of shares
the Company intends to repurchase. The Company may discontinue
purchases at any time that management determines additional purchases are not
warranted. The shares are to be purchased from time to time at
prevailing market prices through open market or unsolicited negotiated
transactions, depending upon market conditions. The Company intends
to use the repurchased shares to satisfy stock option exercise, payment of
future stock dividends and general corporate purposes.
During the
year ended December 31, 2008, by June 30, the Company repurchased a total of
45,180 shares of stock with a weighted average repurchase price of $28.38 per
share. Under the current stock repurchase plan, the Company can
repurchase an additional 645,672 shares.
Effective
July 1, 2008, the Company made a strategic decision to temporarily suspend stock
repurchases. This decision was made to preserve capital at the parent
company due to the lack of liquidity in the credit markets and the uncertainties
in the overall economy. If the Company participates in the CPP by
issuing Preferred Stock to the Treasury, stock repurchases increases may be
restricted and will require the Treasury’s consent for three
years. For further discussion on the CPP, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operation – Recent
Market Developments.”
At
December 31, 2008 and 2007, the subsidiary banks had extensions of credit to
executive officers and directors and to companies in which the subsidiary banks'
executive officers or directors were principal owners in the amount of
$35.3 million in 2008 and $30.4 million in 2007.
|
(In thousands)
|
2008
|
2007
|
||||||
|
Balance,
beginning of year
|
$ | 30,445 | $ | 51,442 | ||||
|
New
extensions of credit
|
14,808 | 8,704 | ||||||
|
Repayments
|
(9,942 | ) | (29,701 | ) | ||||
|
Balance,
end of year
|
$ | 35,311 | $ | 30,445 | ||||
In management's opinion, such loans and other extensions of credit and deposits (which were not material) were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, these extensions of credit did not involve more than the normal risk of collectability or present other unfavorable features.
Retirement
Plans
The
Company’s 401(k) retirement plan covers substantially all
employees. Contribution expense totaled $575,000, $550,000 and
$525,000, in 2008, 2007 and 2006, respectively.
The
Company has a discretionary profit sharing and employee stock ownership plan
covering substantially all employees. Contribution expense totaled
$2,565,000 for 2008, $2,490,000 for 2007 and $2,370,000 for 2006.
The
Company also provides deferred compensation agreements with certain active and
retired officers. The agreements provide monthly payments which,
together with payments from the deferred annuities issued pursuant to the
terminated pension plan equal 50 percent of average compensation prior to
retirement or death. The charges to income for the plans were $12,000
for 2008, $358,000 for 2007 and $481,000 for 2006. Such charges
reflect the straight-line accrual over the employment period of the present
value of benefits due each participant, as of their full eligibility date, using
an 8 percent discount factor.
Employee
Stock Purchase Plan
The
Company established an Employee Stock Purchase Plan in 2007 which generally
allows participants to make contributions of up 3% of the employee’s salary, up
to a maximum of $7,500 per year, for the purpose of acquiring the Company’s
stock. Substantially all employees with at least two years of service
are eligible for the plan. At the end of each plan year, full shares
of the Company’s stock are purchased for each employee based on that employee’s
contributions. The stock is purchased for an amount equal to 95% of
its fair market value at the end of the plan year, or, if lower, 95% of its fair
market value at the beginning of the plan year.
Stock-Based
Compensation Plans
Prior to
January 1, 2006, employee compensation expense under stock option plans was
reported only if options were granted below market price at grant date in
accordance with the intrinsic value method of Accounting Principles Board
Opinion (APB) No.25, "Accounting for Stock Issued to Employees," and related
interpretations. Because the exercise price of the Company's employee
stock options always equaled the market price of the underlying stock on the
date of grant, no compensation expense was recognized on options
granted. As stated in Note 1, Significant Accounting Policies, the
Company adopted the provisions of SFAS 123R on January 1,
2006. SFAS 123R eliminates the ability to account for
stock-based compensation using APB 25 and requires that such transactions be
recognized as compensation cost in the income statement based on their fair
values on the measurement date, which is generally the date of the
grant. The Company transitioned to fair-value based accounting for
stock-based compensation using a modified version of prospective application
("modified prospective application"). Under modified prospective
application, as it is applicable to the Company, SFAS 123R applies to new awards
and to awards modified, repurchased, or cancelled after January 1,
2006. Additionally, compensation cost for the portion of awards for
which the requisite service has not been rendered (generally referring to
non-vested awards) that were outstanding as of January 1, 2006, will be
recognized as the remaining requisite service is rendered during the period of
and/or the periods after the adoption of SFAS 123R. The attribution of
compensation cost for those earlier awards is based on the same method and on
the same grant date fair values previously determined for the pro forma
disclosures required for companies that did not previously adopt the fair value
accounting method for stock-based employee compensation.
68
Stock-based
compensation expense for all stock-based compensation awards granted after
January 1, 2006, is based on the grant date fair value. For all
awards except stock option awards, the grant date fair value is the market value
per share as of the grant date. For stock option awards, the fair
value is estimated at the date of grant using the Black-Scholes option-pricing
model. This model requires the input of highly subjective
assumptions, changes to which can materially affect the fair value
estimate. Additionally, there may be other factors that would
otherwise have a significant effect on the value of employee stock options
granted but are not considered by the model. Accordingly, while
management believes that the Black-Scholes option-pricing model provides a
reasonable estimate of fair value, the model does not necessarily provide the
best single measure of fair value for the Company's employee stock
options.
The
Company’s Board of Directors has adopted various stock-based compensation
plans. The plans provide for the grant of incentive stock options,
nonqualified stock options, stock appreciation rights, and bonus stock
awards. Pursuant to the plans, shares are reserved for future
issuance by the Company upon exercise of stock options or awarding of bonus
shares granted to directors, officers and other key employees.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model that uses various
assumptions. Expected volatility is based on historical volatility of
the Company’s stock and other factors. The Company uses historical
data to estimate option exercise and employee termination within the valuation
model. The expected term of options granted is derived from the
output of the option valuation model and represents the period of time that
options granted are expected to be outstanding. The risk-free rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. Forfeitures are
estimated at the time of grant, and are based partially on historical
experience.
The table
below summarizes the transactions under the Company's active stock compensation
plans at December 31, 2008, 2007 and 2006, and changes during the years then
ended:
|
Stock
Options
|
Non-Vested
Stock
|
|||||||||||||||
|
Outstanding
|
Awards Outstanding
|
|||||||||||||||
|
|
Weighted
|
Weighted
|
||||||||||||||
|
Number
|
Average
|
Number
|
Average
|
|||||||||||||
|
of
Shares
|
Exercise
|
of
Shares
|
Grant-Date
|
|||||||||||||
|
(000)
|
Price
|
(000)
|
Fair-Value
|
|||||||||||||
|
Balance,
January 1, 2006
|
609 | $ | 14.77 | 18 | $ | 24.63 | ||||||||||
|
Granted
|
60 | 26.19 | 10 | 26.96 | ||||||||||||
|
Stock
Options Exercised
|
(107 | ) | 14.19 | -- | -- | |||||||||||
|
Stock
Awards Vested
|
-- | -- | (6 | ) | 24.60 | |||||||||||
|
Forfeited/Expired
|
(45 | ) | 13.50 | -- | -- | |||||||||||
|
Balance,
December 31, 2006
|
517 | 16.32 | 22 | 25.69 | ||||||||||||
|
Granted
|
57 | 28.42 | 15 | 27.68 | ||||||||||||
|
Stock
Options Exercised
|
(34 | ) | 15.11 | -- | -- | |||||||||||
|
Stock
Awards Vested
|
-- | -- | (6 | ) | 25.31 | |||||||||||
|
Forfeited/Expired
|
(4 | ) | 12.13 | -- | -- | |||||||||||
|
Balance,
December 31, 2007
|
536 | 17.71 | 31 | 26.72 | ||||||||||||
|
Granted
|
49 | 30.31 | 18 | 30.31 | ||||||||||||
|
Stock
Options Exercised
|
(98 | ) | 12.38 | -- | -- | |||||||||||
|
Stock
Awards Vested
|
-- | -- | (12 | ) | 27.16 | |||||||||||
|
Forfeited/Expired
|
(35 | ) | 14.77 | -- | -- | |||||||||||
|
Balance,
December 31, 2008
|
452 | $ | 20.46 | 37 | $ | 28.28 | ||||||||||
|
Exercisable,
December 31, 2008
|
333 | $ | 17.51 | |||||||||||||
69
The
following table summarizes information about stock options under the plans
outstanding at December 31, 2008:
|
Options Outstanding
|
Options Exercisable
|
|||||
|
Range
of
Exercise Prices |
Number
of Shares (000) |
Weighted
Average Remaining Contractual Life (Years) |
Weighted
Average Exercise Price
|
Number
of
Shares
(000)
|
Weighted
Average
Exercise
Price
|
|
|
$10.56
- $12.13
|
186
|
2.31
|
$12.09
|
186
|
$12.09
|
|
|
15.35
- 16.32
|
9
|
2.57
|
15.90
|
9
|
15.90
|
|
|
23.78 -
24.50
|
95
|
5.88
|
24.05
|
93
|
24.04
|
|
|
26.19
- 27.67
|
59
|
7.22
|
26.20
|
27
|
26.21
|
|
|
28.42
- 28.42
|
55
|
8.41
|
28.42
|
18
|
28.42
|
|
|
30.31
- 30.31
|
49
|
9.41
|
30.31
|
--
|
--
|
|
Stock-based
compensation expense totaled $548 thousand in 2008, $338 thousand in 2007 and
$233 thousand in 2006. Stock-based compensation expense is recognized
ratably over the requisite service period for all stock-based
awards. Unrecognized stock-based compensation expense related to
stock options totaled $601 thousand at December 31, 2008. At such
date, the weighted-average period over which this unrecognized expense is
expected to be recognized was 1.85 years. Unrecognized
stock-based compensation expense related to non-vested stock awards was $992
thousand at December 31, 2008. At such date, the weighted-average
period over which this unrecognized expense is expected to be recognized was
2.00 years.
Aggregate
intrinsic value of outstanding stock options and exercisable stock options was
$4.1 million and $4.0 million, respectively, at December 31,
2008. Aggregate intrinsic value represents the difference between the
Company’s closing stock price on the last trading day of the period, which was
$29.47 at December 31, 2008, and the exercise price multiplied by the number of
options outstanding. The total intrinsic value of stock options
exercised was $1.7 million in 2008, $384 thousand in 2007 and $1.6 million
in 2006.
The fair
value of the Company’s employee stock options granted is estimated on the date
of grant using the Black-Scholes option-pricing model. The
weighted-average fair value of stock options granted was $6.60 for 2008, $5.96
for 2007 and $5.01 for 2006. The Company estimated expected market
price volatility and expected term of the options based on historical data and
other factors. The weighted-average assumptions used to determine the
fair value of options granted are detailed in the table below:
|
2008
|
2007
|
2006
|
|||||||
|
Expected
dividend yield
|
2.51%
|
|
2.53%
|
2.67%
|
|||||
|
Expected
stock price volatility
|
23.00%
|
19.00%
|
17.74%
|
||||||
|
Risk-free
interest rate
|
3.68%
|
5.17%
|
4.84%
|
||||||
|
Expected
life of options
|
7
Years
|
7 -
10 Years
|
5 -
10 Years
|
70
The
following table presents additional information on cash payments and non-cash
items:
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
paid
|
$ | 64,302 | $ | 76,958 | $ | 65,108 | ||||||
|
Income
taxes paid
|
11,456 | 10,563 | 7,926 | |||||||||
|
Transfers
of loans to other real estate
|
5,713 | 3,939 | 1,449 | |||||||||
|
Post-retirement
benefit liability established upon
|
||||||||||||
|
adoption
of EITF 06-4
|
1,174 | -- | -- | |||||||||
Other
operating expenses consist of the following:
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Professional
services
|
$ | 2,824 | $ | 2,780 | $ | 2,490 | ||||||
|
Postage
|
2,256 | 2,309 | 2,278 | |||||||||
|
Telephone
|
1,868 | 1,820 | 1,961 | |||||||||
|
Credit
card expense
|
4,671 | 4,095 | 3,235 | |||||||||
|
Operating
supplies
|
1,588 | 1,669 | 1,611 | |||||||||
|
Amortization
of core deposit premiums
|
807 | 817 | 830 | |||||||||
|
Visa
litigation liability expense
|
(1,220 | ) | 1,220 | -- | ||||||||
|
Other
expense
|
12,134 | 11,543 | 10,712 | |||||||||
|
Total
|
$ | 24,928 | $ | 26,253 | $ | 23,117 | ||||||
The
Company had aggregate annual equipment rental expense of approximately $356,000
in 2008, $546,000 in 2007 and $534,000 in 2006. The Company had
aggregate annual occupancy rental expense of approximately $1,220,000 in 2008,
$1,168,000 in 2007 and $1,106,000 in 2006.
Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.
SFAS No.
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 also establishes a
fair value hierarchy that requires the use of observable inputs and minimizes
the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair
value:
|
·
|
Level 1 Inputs – Quoted
prices in active markets for identical assets or
liabilities.
|
|
·
|
Level 2 Inputs –
Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities in active markets; quoted prices for similar
assets or liabilities in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
·
|
Level 3 Inputs –
Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.
|
71
Available-for-sale securities
– Where quoted market prices are available in an active market,
securities are classified within Level 1 of the valuation
hierarchy. Level 1 securities would include highly liquid government
bonds, mortgage products and exchange traded equities. If quoted
market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted
cash flows. Level 2 securities include U.S. agency securities,
mortgage-backed agency securities, obligations of states and political
subdivisions and certain corporate, asset backed and other
securities. In certain cases where Level 1 or Level 2 inputs are not
available, securities are classified within Level 3 of the
hierarchy. The Company’s investment in a money market mutual fund
(the”AIM Fund) is reported at fair value utilizing Level 1
inputs. The remainder of the Company's available-for-sale securities
are reported at fair value utilizing Level 2 inputs.
Assets held in trading
accounts – The Company’s trading account investment in the AIM Fund is
reported at fair value utilizing Level 1 inputs. The remainder of the
Company's assets held in trading accounts are reported at fair value utilizing
Level 2 inputs.
The
following table sets forth the Company’s financial assets and liabilities by
level within the fair value hierarchy that were measured at fair value on a
recurring basis as of December 31, 2008.
|
Fair Value Measurements
Using
|
||||||||||||||||
|
Quoted
Prices in
|
||||||||||||||||
|
Active
Markets for
|
Significant
Other
|
Significant
|
||||||||||||||
|
Identical
Assets
|
Observable
Inputs
|
Unobservable
Inputs
|
||||||||||||||
|
(In thousands)
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
|
Available-for-sale
securities
|
$ | 458,833 | $ | 85,536 | $ | 373,297 | $ | -- | ||||||||
|
Assets
held in trading accounts
|
5,754 | 4,850 | 904 | -- | ||||||||||||
Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment). Financial assets and liabilities measured at fair value
on a nonrecurring basis including the following:
Impaired loans – Loan
impairment is reported when full payment under the loan terms is not
expected. Impaired loans are carried at the present value of
estimated future cash flows using the loan's existing rate, or the fair value of
collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans if the value of such
loans is deemed to be less than the unpaid balance. If these
allocations cause the allowance for loan losses to require increase, such
increase is reported as a component of the provision for loan
losses. Loan losses are charged against the allowance when Management
believes the uncollectability of a loan is confirmed. Impaired loans,
net of specific allowance, were $12,992,000 as of December 31,
2008. This valuation would be considered Level 3, consisting of
appraisals of underlying collateral and discounted cash flow
analysis.
Mortgage loans held for sale
– Mortgage loans held for sale are reported at fair value if, on an aggregate
basis, the fair value of the loans is less than cost. In determining
whether the fair value of loans held for sale is less than cost when quoted
market prices are not available, the Company may consider outstanding investor
commitments, discounted cash flow analyses with market assumptions or the fair
value of the collateral if the loan is collateral dependent. Such
loans are classified within either Level 2 or Level 3 of the fair value
hierarchy. Where assumptions are made using significant unobservable
inputs, such loans held for sale are classified as Level 3. At
December 31, 2008, the aggregate fair value of mortgage loans held for sale
exceeded their cost. Accordingly, no mortgage loans held for sale
were marked down and reported at fair value.
72
The
following table sets forth the Company’s financial assets and liabilities by
level within the fair value hierarchy that were measured at fair value on a
non-recurring basis as of December 31, 2008.
|
Fair Value Measurements
Using
|
||||||||||||||||
|
Quoted
Prices in
|
||||||||||||||||
|
Active
Markets for
|
Significant
Other
|
Significant
|
||||||||||||||
|
Identical
Assets
|
Observable
Inputs
|
Unobservable
Inputs
|
||||||||||||||
|
(In thousands)
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
|
Impaired
loans
|
$ | 12,992 | $ | -- | $ | -- | $ | 12,992 | ||||||||
SFAS No.
107, Disclosures about Fair Value of Financial Instruments, requires disclosure
of the fair value of financial assets and financial liabilities, including those
financial assets and financial liabilities that are not measured and reported at
fair value on a recurring basis or nonrecurring basis. The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments.
Cash
and Cash Equivalents
The
carrying amount for cash and cash equivalents approximates fair
value.
Held-to-Maturity
Securities
Fair
values for held-to-maturity securities equal quoted market prices, if
available. If quoted market prices are not available, fair values are
estimated based on quoted market prices of similar securities.
Loans
The fair
value of loans is estimated by discounting the future cash flows, using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Loans with
similar characteristics were aggregated for purposes of the
calculations. The carrying amount of accrued interest approximates
its fair value.
Deposits
The fair
value of demand deposits, savings accounts and money market deposits is the
amount payable on demand at the reporting date (i.e., their carrying
amount). The fair value of fixed-maturity time deposits is estimated
using a discounted cash flow calculation that applies the rates currently
offered for deposits of similar remaining maturities. The carrying
amount of accrued interest payable approximates its fair value.
Federal
Funds Purchased, Securities Sold Under Agreement to Repurchase and
Short-Term Debt
The
carrying amount for Federal funds purchased, securities sold under agreement to
repurchase and short-term debt are a reasonable estimate of fair
value.
Long-Term
Debt
Rates
currently available to the Company for debt with similar terms and remaining
maturities are used to estimate the fair value of existing
debt.
73
Commitments
to Extend Credit, Letters of Credit and Lines of Credit
The fair
value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair values of
letters of credit and lines of credit are based on fees currently charged for
similar agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.
The
following table represents estimated fair values of the Company's financial
instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows. This method involves significant
judgments by management considering the uncertainties of economic conditions and
other factors inherent in the risk management of financial
instruments. Fair value is the estimated amount at which financial
assets or liabilities could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. Because
no market exists for certain of these financial instruments and because
management does not intend to sell these financial instruments, the Company does
not know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the
aggregate.
|
|
December 31, 2008
|
December 31, 2007
|
||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(In thousands)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
|
Financial
assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 139,536 | $ | 139,536 | $ | 110,230 | $ | 110,230 | ||||||||
|
Held-to-maturity
securities
|
187,301 | 187,320 | 190,284 | 191,738 | ||||||||||||
|
Mortgage
loans held for sale
|
10,336 | 10,336 | 11,097 | 11,097 | ||||||||||||
|
Interest
receivable
|
20,930 | 20,930 | 21,345 | 21,345 | ||||||||||||
|
Loans,
net
|
1,907,233 | 1,904,421 | 1,825,151 | 1,824,235 | ||||||||||||
|
Financial
liabilities
|
||||||||||||||||
|
Non-interest
bearing transaction accounts
|
334,998 | 334,998 | 310,181 | 310,181 | ||||||||||||
|
Interest
bearing transaction accounts and
|
||||||||||||||||
|
savings
deposits
|
1,026,824 | 1,026,824 | 761,233 | 761,233 | ||||||||||||
|
Time
deposits
|
974,511 | 977,789 | 1,111,443 | 1,116,368 | ||||||||||||
|
Federal
funds purchased and securities
|
||||||||||||||||
|
sold
under agreements to repurchase
|
115,449 | 115,449 | 128,806 | 128,806 | ||||||||||||
|
Short-term
debt
|
1,112 | 1,112 | 1,777 | 1,777 | ||||||||||||
|
Long-term
debt
|
158,671 | 173,046 | 82,285 | 94,590 | ||||||||||||
|
Interest
payable
|
4,579 | 4,579 | 6,757 | 6,757 | ||||||||||||
The fair
value of commitments to extend credit and letters of credit is not presented
since management believes the fair value to be insignificant.
74
The
current economic environment presents financial institutions with unprecedented
circumstances and challenges which in some cases have resulted in large declines
in the fair values of investments and other assets, constraints on liquidity and
significant credit quality problems, including severe volatility in the
valuation of real estate and other collateral supporting loans. The
financial statements have been prepared using values and information currently
available to the Company.
Given the
volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material
future adjustments in asset values, the allowance for loan losses and capital
that could negatively impact the Company’s ability to meet regulatory capital
requirements and maintain sufficient liquidity.
Estimates
related to the allowance for loan losses and certain concentrations of credit
risk are reflected in Note 3, Loans and Allowance for Loan Losses.
The
Company grants agri-business, credit card, commercial and residential loans to
customers throughout Arkansas. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. Since a portion of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, commercial real estate and
residential real estate.
At
December 31, 2008, the Company had outstanding commitments to extend credit
aggregating approximately $247,969,000 and $422,127,000 for credit card
commitments and other loan commitments, respectively. At
December 31, 2007, the Company had outstanding commitments to extend credit
aggregating approximately $244,052,000 and $411,421,000 for credit card
commitments and other loan commitments, respectively.
Letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Company had total
outstanding letters of credit amounting to $10,186,000 and $9,906,000 at
December 31, 2008 and 2007, respectively, with terms ranging from 90 days to
three years. The Company’s deferred revenue under standby letter of
credit agreements was approximately $52,000 and $42,000 at December 31, 2008 and
2007, respectively.
At
December 31, 2008, the Company did not have concentrations of 5% or more of the
investment portfolio in bonds issued by a single municipality.
In July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109 (“FIN 48”). FIN 48 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also requires expanded disclosure with respect to the
uncertainty in income taxes. The Company adopted FIN 48 on January 1,
2007, with no significant impact on the Company’s financial position or results
of operations.
75
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (“GAAP”) and expands disclosures about fair value
measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not
require any new fair value measurements. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The
Company adopted SFAS No. 157 on January 1, 2008, with no material effect on the
Company’s financial position or results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115 (“SFAS No. 159”), to provide
companies with an option to report selected financial assets and liabilities at
fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This statement
shall be effective as of the beginning of each reporting entity's first fiscal
year that begins after November 15, 2007. The Company has elected not
to adopt SFAS No. 159.
In
September 2006, the FASB Emerging Issue Task Force (“EITF”) issued EITF 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. The EITF
determined that for an endorsement split-dollar life insurance arrangement
within the scope of the Issue, the employer should recognize a liability for
future benefits in accordance with SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, or APB Opinion 12,
Omnibus Opinion-1967, based on the substantive agreement with the
employee. In March 2007, the FASB EITF issued ElTF 06-10, Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Collateral
Assignment Split-Dollar Life Insurance Arrangements. The EITF determined that an
employer should recognize a liability for the postretirement benefit related to
a collateral assignment split-dollar life insurance arrangement in accordance
with either Statement 106 (if, in substance, a postretirement benefit plan
exists) or Opinion 12 (if the arrangement is, in substance, an individual
deferred compensation contract) based on the substantive agreement with the
employee. These Issues are effective for fiscal years beginning after
December 15, 2007, with earlier application permitted. Entities
should recognize the effects of applying EITF 06-4 through either (a) a change
in accounting principle through a cumulative effect adjustment to retained
earnings or to other components of equity or net assets in the statement of
financial position as of the beginning of the year of adoption or (b) a change
in accounting principle through retrospective application to all prior
periods. As of December 31, 2007, the Company had split-dollar life
insurance arrangements with executives of the Company that have death
benefits. EITF 06-4 was effective for the Company on January 1,
2008. The Company elected to apply EITF 06-4 through a change in
accounting principle through a cumulative-effect adjustment to retained earnings
of approximately $1 million as of January 1, 2008. The adoption of
EITF 06-4 did not have a material impact on the Company’s ongoing financial
position or results of operations.
76
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures About Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 amends
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS No. 133”), to amend and expand the
disclosure requirements of SFAS No. 133 to provide greater transparency about
(i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedge items are accounted for under SFAS No. 133 and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, results of operations and cash
flows. To meet those objectives, SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS No. 161 is effective for the Company on
January 1, 2009, and is not expected to have a significant impact on the
Company’s financial position or results of operations.
Presently,
the Company is not aware of any other changes from the Financial Accounting
Standards Board that will have a material impact on the Company’s present or
future financial position or results of operations.
NOTE 17: CONTINGENT LIABILITIES
On October
1, 2003, an action in Pulaski County Circuit Court was filed by Thomas F.
Carter, Tena P. Carter and certain related entities against Simmons First Bank
of South Arkansas and Simmons First National Bank alleging wrongful conduct by
the banks in the collection of certain loans. The Company was later
added as a party defendant. The plaintiffs are seeking $2,000,000 in
compensatory damages and $10,000,000 in punitive damages. The Company
and the banks have filed Motions to Dismiss. The plaintiffs were
granted additional time to discover any evidence for litigation and have
submitted such findings. At the hearing on the Motions for Summary
Judgment, the Court dismissed Simmons First National Bank due to lack of
venue. Venue has been changed to Jefferson County for the Company and
Simmons First Bank of South Arkansas. Non-binding mediation failed on
June 24, 2008. Jury trial is set for the week of June 22,
2009. At this time, no basis for any material liability has been
identified. The Company and the bank continue to vigorously defend
the claims asserted in the suit.
In October
2007, the Company, as a member of Visa U.S.A. Inc. (Visa U.S.A.), received
shares of restricted stock in Visa, Inc. (Visa) as a result of its participation
in the global restructuring of Visa U.S.A., Visa Canada Association, and Visa
International Service Association in preparation for an initial public
offering. Visa U.S.A asserts that the Company and other Visa U.S.A.
member banks are obligated to share in potential losses resulting from certain
litigation. The Company accrued $1.2 million in 2007 in connection
with the Company’s obligation to indemnify Visa U.S.A. for costs and liabilities
incurred in connection with certain litigation based on the Company’s
proportionate membership interest in Visa U.S.A.
As part of
Visa’s IPO in the first quarter of 2008, Visa set aside a cash escrow fund for
future settlement of covered litigation. As a result, in the first
quarter of 2008, the Company reversed the $1.2 million contingent liability
established in 2007. On October 27, 2008, Visa notified its U.S.A.
members that it had reached a settlement on covered litigation with Discover
Financial Services, Inc. This obligation was covered by the
litigation escrow fund through an additional dilution of Visa Class B shares in
the fourth quarter of 2008. The remaining covered litigation against
Visa is primarily with card retailers and merchants, mostly related to fees and
interchange rates. As of December 31, 2008, the Company has no
litigation liability recorded for any additional contingent indemnification
obligation. The Company believes that it will not incur litigation
expense on the remaining litigation due to the value of its Visa Class B shares;
however, additional accruals may be required in future periods should the
Company’s estimate of its obligations under the indemnification agreement
change. The Company must rely on disclosures made by Visa to the
public about the covered litigation in making estimates of this contingent
indemnification obligation.
77
NOTE 18: STOCKHOLDERS’ EQUITY
The
Company’s subsidiaries are subject to a legal limitation on dividends that can
be paid to the parent company without prior approval of the applicable
regulatory agencies. The approval of the Office of the Comptroller of
the Currency is required if the total of all the dividends declared by a
national bank in any calendar year exceeds the total of its net profits, as
defined, for that year, combined with its retained net profits of the preceding
two years. Arkansas bank regulators have specified that the maximum
dividend limit state banks may pay to the parent company without prior approval
is 75% of the current year earnings plus 75% of the retained net earnings of the
preceding year. At December 31, 2008, the Company subsidiaries
had approximately $14.3 million in undivided profits available for payment of
dividends to the Company without prior approval of the regulatory
agencies.
The
Company’s subsidiaries are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company’s assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Company’s capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company to maintain minimum amounts and ratios (set forth in the table below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier 1 capital (as defined) to average assets (as
defined). Management believes that, as of December 31, 2008, the
Company meets all capital adequacy requirements to which it is
subject.
As of the
most recent notification from regulatory agencies, the subsidiaries were well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Company and
subsidiaries must maintain minimum total risk-based, Tier 1 risk-based and Tier
1 leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
institutions’ categories.
78
The
Company’s actual capital amounts and ratios along with the Company’s most
significant subsidiaries are presented in the following table.
|
To
Be Well
|
||||||||||||||||||||||||
|
Minimum
|
Capitalized
Under
|
|||||||||||||||||||||||
|
For
Capital
|
Prompt
Corrective
|
|||||||||||||||||||||||
|
Actual
|
Adequacy Purposes
|
Action Provision
|
||||||||||||||||||||||
|
(In thousands)
|
Amount
|
Ratio-%
|
Amount
|
Ratio-%
|
Amount
|
Ratio-%
|
||||||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Total
Risk-Based Capital Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
$ | 287,594 | 14.5 | $ | 158,673 | 8.0 | $ | N/A | ||||||||||||||||
|
Simmons
First National Bank
|
112,220 | 11.6 | 77,393 | 8.0 | 96,741 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
27,532 | 11.9 | 18,509 | 8.0 | 23,136 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
24,639 | 19.4 | 10,160 | 8.0 | 12,701 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
24,358 | 11.4 | 17,093 | 8.0 | 21,367 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado
|
20,325 | 13.4 | 12,134 | 8.0 | 15,168 | 10.0 | ||||||||||||||||||
|
Tier
1 Capital Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
262,568 | 13.2 | 79,566 | 4.0 | N/A | |||||||||||||||||||
|
Simmons
First National Bank
|
102,412 | 10.6 | 38,646 | 4.0 | 57,969 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
24,891 | 10.7 | 9,305 | 4.0 | 13,958 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
23,051 | 18.2 | 5,066 | 4.0 | 7,599 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
21,669 | 10.1 | 8,582 | 4.0 | 12,873 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado
|
18,790 | 12.4 | 6,061 | 4.0 | 9,092 | 6.0 | ||||||||||||||||||
|
Leverage
Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
262,568 | 9.1 | 115,415 | 4.0 | N/A | |||||||||||||||||||
|
Simmons
First National Bank
|
102,412 | 7.3 | 56,116 | 4.0 | 70,145 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
24,891 | 8.4 | 11,853 | 4.0 | 14,816 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
23,051 | 11.5 | 8,018 | 4.0 | 10,022 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
21,669 | 7.7 | 11,257 | 4.0 | 14,071 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado
|
18,790 | 7.3 | 10,296 | 4.0 | 12,870 | 5.0 | ||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||||||
|
Total
Risk-Based Capital Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
$ | 260,890 | 13.7 | $ | 152,345 | 8.0 | $ | N/A | ||||||||||||||||
|
Simmons
First National Bank
|
104,961 | 11.2 | 74,972 | 8.0 | 93,715 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
25,510 | 12.3 | 16,592 | 8.0 | 20,740 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
20,349 | 15.7 | 10,369 | 8.0 | 12,961 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
23,803 | 10.7 | 17,797 | 8.0 | 22,246 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado
|
19,741 | 14.0 | 11,281 | 8.0 | 14,101 | 10.0 | ||||||||||||||||||
|
Tier
1 Capital Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
236,972 | 12.4 | 76,443 | 4.0 | N/A | |||||||||||||||||||
|
Simmons
First National Bank
|
95,523 | 10.2 | 37,460 | 4.0 | 56,190 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
23,085 | 11.2 | 8,245 | 4.0 | 12,367 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
18,726 | 14.5 | 5,166 | 4.0 | 7,749 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
21,008 | 9.4 | 8,940 | 4.0 | 13,409 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado
|
18,045 | 12.8 | 5,639 | 4.0 | 8,459 | 6.0 | ||||||||||||||||||
|
Leverage
Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
236,972 | 9.1 | 104,164 | 4.0 | N/A | |||||||||||||||||||
|
Simmons
First National Bank
|
95,523 | 7.5 | 50,946 | 4.0 | 63,682 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
23,085 | 8.6 | 10,737 | 4.0 | 13,422 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
18,726 | 10.4 | 7,202 | 4.0 | 9,003 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
21,008 | 7.5 | 11,204 | 4.0 | 14,005 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado
|
18,045 | 8.1 | 8,911 | 4.0 | 11,139 | 5.0 | ||||||||||||||||||
79
|
CONDENSED
BALANCE SHEETS
|
||||||||
|
DECEMBER
31, 2008 and 2007
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 19,890 | $ | 6,442 | ||||
|
Investment
securities
|
2,401 | 2,447 | ||||||
|
Investments
in wholly-owned subsidiaries
|
291,392 | 288,744 | ||||||
|
Intangible
assets, net
|
158 | 133 | ||||||
|
Premises
and equipment
|
796 | 2,492 | ||||||
|
Other
assets
|
7,079 | 6,661 | ||||||
|
TOTAL
ASSETS
|
$ | 321,716 | $ | 306,919 | ||||
|
LIABILITIES
|
||||||||
|
Long-term
debt
|
$ | 30,930 | $ | 30,930 | ||||
|
Other
liabilities
|
1,994 | 3,583 | ||||||
|
Total
liabilities
|
32,924 | 34,513 | ||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Common
stock
|
140 | 139 | ||||||
|
Surplus
|
40,807 | 41,019 | ||||||
|
Undivided
profits
|
244,655 | 229,520 | ||||||
|
Accumulated
other comprehensive income
|
||||||||
|
Unrealized
appreciation on available-for-sale
|
||||||||
|
securities,
net of income taxes of $1,913 at 2008
|
||||||||
|
and
$1,037 at 2007
|
3,190 | 1,728 | ||||||
|
Total
stockholders’ equity
|
288,792 | 272,406 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 321,716 | $ | 306,919 | ||||
|
CONDENSED
STATEMENTS OF INCOME
|
||||||||||||
|
YEARS
ENDED DECEMBER 31, 2008, 2007 and 2006
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
INCOME
|
||||||||||||
|
Dividends
from subsidiaries
|
$ | 27,705 | $ | 21,548 | $ | 20,472 | ||||||
|
Other
income
|
6,015 | 6,288 | 5,809 | |||||||||
| 33,720 | 27,836 | 26,281 | ||||||||||
|
EXPENSE
|
10,969 | 10,797 | 10,111 | |||||||||
|
Income
before income taxes and equity in
|
||||||||||||
|
undistributed
net income of subsidiaries
|
22,751 | 17,039 | 16,170 | |||||||||
|
Provision
for income taxes
|
(1,799 | ) | (1,438 | ) | (1,546 | ) | ||||||
|
Income
before equity in undistributed net
|
||||||||||||
|
income
of subsidiaries
|
24,550 | 18,477 | 17,716 | |||||||||
|
Equity
in undistributed net income of subsidiaries
|
2,360 | 8,883 | 9,765 | |||||||||
|
NET
INCOME
|
$ | 26,910 | $ | 27,360 | $ | 27,481 | ||||||
80
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
YEARS
ENDED DECEMBER 31, 2008, 2007 and 2006
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 26,910 | $ | 27,360 | $ | 27,481 | ||||||
|
Items
not requiring (providing) cash
|
||||||||||||
|
Depreciation
and amortization
|
265 | 298 | 213 | |||||||||
|
Deferred
income taxes
|
1,122 | 33 | 226 | |||||||||
|
Equity
in undistributed income of bank subsidiaries
|
(2,360 | ) | (8,883 | ) | (9,765 | ) | ||||||
|
Changes
in
|
||||||||||||
|
Other
assets
|
(295 | ) | 366 | (996 | ) | |||||||
|
Other
liabilities
|
(2,763 | ) | 505 | (58 | ) | |||||||
|
Net
cash provided by operating activities
|
22,879 | 19,679 | 17,101 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Net
sales (purchases) of premises and equipment
|
1,431 | (126 | ) | (629 | ) | |||||||
|
Return
of capital from subsidiary
|
-- | -- | 1,706 | |||||||||
|
Purchase
of held-to-maturity securities
|
(19 | ) | (74 | ) | (4,100 | ) | ||||||
|
Purchase
of available-for-sale securities
|
(1,511 | ) | -- | -- | ||||||||
|
Proceeds
from sale or maturity of investment securities
|
1,481 | -- | 4,640 | |||||||||
|
Net
cash provided by (used in) investing activities
|
1,382 | (200 | ) | 1,617 | ||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Principal
reduction on long-term debt
|
-- | (2,000 | ) | (2,000 | ) | |||||||
|
Dividends
paid
|
(10,601 | ) | (10,234 | ) | (9,666 | ) | ||||||
|
Repurchase
of common stock, net
|
(212 | ) | (7,661 | ) | (5,047 | ) | ||||||
|
Net
cash used in financing activities
|
(10,813 | ) | (19,895 | ) | (16,713 | ) | ||||||
|
INCREASE (DECREASE) IN CASH
AND
|
||||||||||||
|
CASH
EQUIVALENTS
|
13,448 | (416 | ) | 2,005 | ||||||||
|
CASH
AND CASH EQUIVALENTS,
|
||||||||||||
|
BEGINNING
OF YEAR
|
6,442 | 6,858 | 4,853 | |||||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$ | 19,890 | $ | 6,442 | $ | 6,858 | ||||||
81
ITEM 9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
No items
are reportable.
ITEM 9A. CONTROLS AND
PROCEDURES
(a)
Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and Chief Financial Officer have reviewed and evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
15 C. F. R. 240.13a-14(c) and 15 C. F. R. 240.15-14(c)) as of the end of the
period covered by this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are effective.
(b)
Changes in Internal Controls. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect those controls subsequent to the date of evaluation.
ITEM 9B. OTHER
INFORMATION
No items
are reportable.
PART
III
ITEM 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 21, 2009, to be filed pursuant to
Regulation 14A on or about March 13, 2009.
ITEM 11. EXECUTIVE
COMPENSATION
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 21, 2009, to be filed pursuant to
Regulation 14A on or about March 13, 2009.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held April 21, 2009, to be filed pursuant to Regulation 14A on or about March 13, 2009.
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 21, 2009, to be filed pursuant to
Regulation 14A on or about March 13, 2009.
ITEM 14. PRINCIPAL ACCOUNTING
FEES AND SERVICES
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 21, 2009, to be filed pursuant to
Regulation 14A on or about March 13, 2009.
82
PART
IV
ITEM 15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a) 1 and
2. Financial Statements and any Financial Statement
Schedules
The
financial statements and financial statement schedules listed in the
accompanying index to the consolidated financial statements and financial
statement schedules are filed as part of this report.
(b)
Listing of Exhibits
Exhibit
No. Description
|
|
3.1
|
Restated
Articles of Incorporation of Simmons First National Corporation
(incorporated by reference to Exhibit 3.1 to Simmons First National
Corporation’s Quarterly Report on Form 10-Q for the Quarter ended June 30,
2007 (File No. 6253)).
|
|
|
3.2
|
Amended
By-Laws of Simmons First National Corporation (incorporated by reference
to Exhibit 3.2 to Simmons First National Corporation’s Annual Report on
Form 10-K for the Year ended December 31, 2007 (File No.
6253)).
|
|
|
10.1
|
Amended
and Restated Trust Agreement, dated as of December 16, 2003, among the
Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company
Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as
administrative trustees, with respect to Simmons First Capital Trust II
(incorporated by reference to Exhibit 10.1 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.2
|
Guarantee
Agreement, dated as of December 16, 2003, between the Company and Deutsche
Bank Trust Company Americas, as guarantee trustee, with respect to Simmons
First Capital Trust II (incorporated by reference to Exhibit 10.2 to
Simmons First National Corporation’s Annual Report on Form 10-K for the
Year ended December 31, 2003 (File No.
6253)).
|
|
|
10.3
|
Junior
Subordinated Indenture, dated as of December 16, 2003, among the Company
and Deutsche Bank Trust Company Americas, as trustee, with respect to the
junior subordinated note held by Simmons First Capital Trust II
(incorporated by reference to Exhibit 10.3 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.4
|
Amended
and Restated Trust Agreement, dated as of December 16, 2003, among the
Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company
Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as
administrative trustees, with respect to Simmons First Capital Trust III
(incorporated by reference to Exhibit 10.4 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.5
|
Guarantee
Agreement, dated as of December 16, 2003, between the Company and Deutsche
Bank Trust Company Americas, as guarantee trustee, with respect to Simmons
First Capital Trust III (incorporated by reference to Exhibit 10.5 to
Simmons First National Corporation’s Annual Report on Form 10-K for the
Year ended December 31, 2003 (File No.
6253)).
|
|
|
10.6
|
Junior
Subordinated Indenture, dated as of December 16, 2003, among the Company
and Deutsche Bank Trust Company Americas, as trustee, with respect to the
junior subordinated note held by Simmons First Capital Trust III
(incorporated by reference to Exhibit 10.6 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
83
|
|
10.7
|
Amended
and Restated Trust Agreement, dated as of December 16, 2003, among the
Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company
Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as
administrative trustees, with respect to Simmons First Capital Trust IV
(incorporated by reference to Exhibit 10.7 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.8
|
Guarantee
Agreement, dated as of December 16, 2003, between the Company and Deutsche
Bank Trust Company Americas, as guarantee trustee, with respect to Simmons
First Capital Trust IV (incorporated by reference to Exhibit 10.8 to
Simmons First National Corporation’s Annual Report on Form 10-K for the
Year ended December 31, 2003 (File No.
6253)).
|
|
|
10.9
|
Junior
Subordinated Indenture, dated as of December 16, 2003, among the Company
and Deutsche Bank Trust Company Americas, as trustee, with respect to the
junior subordinated note held by Simmons First Capital Trust IV
(incorporated by reference to Exhibit 10.9 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.10
|
Simmons
First National Corporation Long Term Incentive Plan, adopted March 24,
2008, and Notice of Grant of Long Term Incentive Award to J. Thomas May,
David L. Bartlett, Marty Casteel, and Robert A. Fehlman (incorporated by
reference to Exhibits 10.1 through 10.5 to Simmons First National
Corporation’s Current Report on Form 8-K for March 24, 2008 (File No.
6253)).
|
|
|
14
|
Code
of Ethics, dated December 2003, for CEO, CFO, controller and other
accounting officers (incorporated by reference to Exhibit 14 to Simmons
First National Corporation’s Annual Report on Form 10-K for the Year ended
December 31, 2003 (File No. 6253)).
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification – J. Thomas May, Chairman and Chief
Executive Officer.*
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification – Robert A. Fehlman, Executive Vice
President and Chief Financial
Officer.*
|
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 – J. Thomas May, Chairman and Chief
Executive Officer.*
|
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 – Robert A. Fehlman, Executive Vice
President and Chief Financial
Officer.*
|
* Filed
herewith.
84
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
| /s/ John L. Rush |
February 23, 2009
|
|
|
John
L. Rush, Secretary
|
|
Signature
|
Title
|
||
| /s/ J. Thomas May |
Chairman
and Chief Executive Officer and Director
|
||
|
J.
Thomas May
|
|||
| /s/ Robert A. Fehlman |
Executive
Vice President and Chief Financial Officer
|
||
|
Robert
A. Fehlman
|
(Principal
Financial and Accounting Officer)
|
||
| /s/ William E. Clark II |
Director
|
||
|
William
E. Clark II
|
|||
| /s/ Steven A. Cossé |
Director
|
||
|
Steven
A. Cossé
|
|||
| /s/ Edward Drilling |
Director
|
||
|
Edward
Drilling
|
|||
| /s/ George A. Makris, Jr. |
Director
|
||
|
George
A. Makris, Jr.
|
|||
| /s/ W. Scott McGeorge |
Director
|
||
|
W.
Scott McGeorge
|
|||
| /s/ Stanley E. Reed |
Director
|
||
|
Stanley
E. Reed
|
|||
| /s/ Harry L. Ryburn |
Director
|
||
|
Harry
L. Ryburn
|
|||
| /s/ Robert L. Shoptaw |
Director
|
||
|
Robert
L. Shoptaw
|
85