UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
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, 2006
|
|
|
|
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
|
71-0407808
|
|
(State
or other jurisdiction of
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(I.R.S.
employer
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|
incorporation
or organization)
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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
|
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):
|
£
Large accelerated filer
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S
Accelerated filer
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£
Non-accelerated filer
|
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, 2006, was $369,711,360 based
upon the last trade price as reported on the Nasdaq Global Select
Market®
of
$29.01.
The
number
of shares outstanding of the Registrant's Common Stock as of February 8, 2007
was 14,192,201.
Part
III
is incorporated by reference from the Registrant's Proxy Statement relating
to
the Annual Meeting of Shareholders to be held on April 10, 2007.
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:
FORM
10-K INDEX
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BUSINESS
|
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 was the largest publicly traded financial holding company headquartered
in Arkansas with consolidated total assets of $2.7 billion, consolidated
loans
of $1.8 billion, consolidated deposits of $2.2 billion and total equity capital
of $259 million as of December 31, 2006. The Company owns eight community
banks
in Arkansas. The Company's banking subsidiaries conduct their operations
through
86 offices, of which 82 are financial centers, located in 48 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, 2006 the Bank had total assets
of
$1.3 billion, total loans of $868 million and total deposits of $1.0
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, 2006, Simmons/Jonesboro had total assets of $265 million,
total
loans of $215 million and total deposits of $237 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, 2006, Simmons/South had total assets of $142 million, total
loans
of $74 million and total deposits of $124 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, 2006, Simmons/Northwest had total assets of $279
million, total loans of $211 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, 2006, Simmons/Russellville had total assets of
$201
million, total loans of $122 million and total deposits of $155
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,
2006, Simmons/Searcy had total assets of $139 million, total loans of $97
million and total deposits of $107 million.
Simmons
First Bank of El Dorado, N.A. (“Simmons/El Dorado”) is a national bank, which
was acquired in 1999. Simmons/El Dorado’s primary market area is South Central
Arkansas. At December 31, 2006, Simmons/El Dorado had total assets of $216
million, total loans of $118 million and total deposits of $186
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, 2006, Simmons/Hot Springs had total assets of $158
million, total loans of $80 million and total deposits of $119
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.
Growth
Strategy
The
Company's growth strategy is to primarily focus on the state of Arkansas.
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. The Company added new
financial centers 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. For 2007, the Company plans to add financial centers in
Little Rock, North Little Rock, Beebe and Paragould, as well as a new
headquarters facility for Simmons/Northwest in Rogers. 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 the Company
nears
completion of its desired footprint within the state of Arkansas, it is
beginning to evaluate opportunities to expand into contiguous
states.
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
The
activities engaged in by the Company and its subsidiaries are highly
competitive. In all aspects of its business, the Company encounters intense
competition from other banks, lending institutions, credit unions, savings
and
loan associations, brokerage firms, mortgage companies, industrial loan
associations, finance companies, and several other financial and financial
service institutions. The amount of competition among commercial banks and
other
financial institutions has increased significantly over the past few years
since
the deregulation of the banking industry. The Company's subsidiary banks
actively compete with other banks and financial institutions in their efforts
to
obtain deposits and make loans, in the scope and type of services offered,
in
interest rates paid on time deposits and charged on loans and in other aspects
of commercial banking.
The
Company's banking subsidiaries are also in competition with major national
and
international retail banking establishments, brokerage firms and other financial
institutions within and outside Arkansas. Competition with these financial
institutions is expected to increase, especially with the increase in interstate
banking.
2
Employees
As
of
February 8, 2007, the Company and its subsidiaries had approximately 1,134
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.
|
NAME
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AGE
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POSITION
|
YEARS
SERVED
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|
J.
Thomas May
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60
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Chairman
and Chief Executive Officer
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20
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David
L. Bartlett
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55
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President
and Chief Operating Officer
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10
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Robert
A. Fehlman
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42
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Executive
Vice President and Chief Financial Officer
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18
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Marty
D. Casteel
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55
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Executive
Vice President
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18
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Tommie
K. Jones
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59
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Senior
Vice President and Human Resources Director
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32
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|
L.
Ann Gill
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59
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Senior
Vice President and Auditor
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41
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Kevin
J. Archer
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43
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Senior
Vice President/Credit Policy and Risk Assessment
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11
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David
W. Garner
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37
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Senior
Vice President and Controller
|
9
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|
John
L. Rush
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72
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Secretary
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39
|
Board
of Directors of the Company
The
following is a list of the Board of Directors of the Company as of December
31,
2006, along with their principal occupation.
|
NAME
|
PRINCIPAL
OCCUPATION
|
|
William
E. Clark
|
Chairman
and Chief Executive Officer
|
|
CDI
Contractors, LLC
|
|
|
Steven
A. Cosse¢
|
Executive
Vice President and General Counsel
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Murphy
Oil Corporation
|
|
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George
A. Makris, Jr.
|
President
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|
M.K.
Distributors, Inc.
|
|
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J.
Thomas May
|
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
(1)
|
President
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|
Farm
Bureau Mutual Insurance of Arkansas
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|
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Harry
L. Ryburn, D.D.S.
|
Orthodontist
(retired)
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|
Robert
L. Shoptaw
|
Chief
Executive Officer
|
|
Arkansas
Blue Cross and Blue Shield
|
|
|
Henry
F. Trotter, Jr.
|
President
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|
Trotter
Ford, Inc.; Trotter Auto, Inc.
|
|
(1)
Mr.
Reed was elected to the Board of Directors of the Company on December 11,
2006,
effective January 1, 2007.
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 5 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
Simmons
First National 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, which 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 19,
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 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.
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.
|
RISK
FACTORS
|
Investments
in the Company’s common stock involve risk. The market price of the Company’s
common stock may fluctuate significantly in response to a number of factors,
including:
|
•
|
changes
in securities analysts’ estimates of financial performance
|
|
|
•
|
volatility
of stock market prices and volumes
|
|
|
•
|
rumors
or erroneous information
|
|
|
•
|
changes
in market valuations of similar companies
|
|
|
•
|
changes
in interest rates
|
|
|
•
|
new
developments in the banking industry
|
|
|
•
|
variations
in quarterly or annual operating results
|
|
|
•
|
new
litigation or changes in existing litigation
|
|
|
•
|
regulatory
actions
|
|
|
•
|
changes
in accounting policies or procedures as may be required by the
Financial
Accounting Standards Board or other regulatory
agencies
|
If
the
Company does not adjust to changes in the financial services industry, its
financial performance may suffer. The Company’s ability to maintain its history
of strong financial performance and return on investment to shareholders
will
depend in part on its ability to expand its scope of available financial
services to its customers. In addition to other banks, competitors include
securities dealers, brokers, mortgage bankers, investment advisors, and finance
and insurance companies. The increasingly competitive environment is, in
part, a
result of changes in regulation, changes in technology and product delivery
systems, and the accelerating pace of consolidation among financial service
providers.
6
Future
governmental regulation and legislation could limit growth. The Company and
its
subsidiaries are subject to extensive state and federal regulation, supervision
and legislation that govern nearly every aspect of its operations. Changes
to
these laws could affect the Company’s ability to deliver or expand its services
and diminish the value of its business.
Changes
in
interest rates could reduce income and cash flow. The Company’s income and cash
flow depends to a great extent on the difference between the interest earned
on
loans and investment securities, and the interest paid on deposits and other
borrowings. Interest rates are beyond the Company’s control, and they fluctuate
in response to general economic conditions and the policies of various
governmental and regulatory agencies, in particular, the Federal Reserve
Board.
Changes in monetary policy, including changes in interest rates, will influence
the origination of loans, the purchase of investments, the generation of
deposits and the rates received on loans and investment securities and paid
on
deposits.
Additional
risks and uncertainties could have a negative effect on the financial
performance of the Company and the Company’s common stock. Some of these factors
are general economic and financial market conditions, competition, continuing
consolidation in the financial services industry, new litigation or changes
in
existing litigation, regulatory actions, and losses.
|
UNRESOLVED
STAFF COMMENTS
|
There
are
currently no unresolved Commission staff comments.
|
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’s eight banks are conducting financial operations
from 86 offices,
of which
82 are financial centers,
in
48 communities throughout Arkansas.
|
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 two (2) lawsuits 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 plaintiffs are seeking
$2,000,000 in compensatory damages and $10,000,000 in punitive damages. The
Company has filed a Motion to Dismiss. The plaintiffs have been granted
additional time to discover any evidence for litigation. At this time, no
basis
for any material liability has been identified. The Company and the banks
continue to vigorously defend the claims asserted in the suit.
On
April
3, 2006, an action in Johnson County Circuit Court was filed by Tria Xiong
and
Mai Lee Xiong against Simmons First Bank of Russellville and certain individuals
alleging wrongful conduct by the bank in the underwriting and origination
of
certain loans. The plaintiffs are seeking an unspecified sum in compensatory
damages and $1,000,000.00 in punitive damages. Discovery is in process, and
the
suit is pending, with no court date set. At this time, no basis for any material
liability has been identified. The Company and the bank plan to vigorously
defend the claims asserted in the suit.
7
|
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.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
|
|
|
Quarterly
|
||||||||
|
Price
Per
|
Dividends
|
|||||||||
|
|
Common
Share
|
Per
Common
|
||||||||
|
|
High
|
Low
|
Share
|
|||||||
|
2006
|
||||||||||
|
1st
quarter
|
$
|
29.76
|
$
|
27.50
|
$
|
0.16
|
||||
|
2nd
quarter
|
30.36
|
25.00
|
0.17
|
|||||||
|
3rd
quarter
|
30.26
|
26.31
|
0.17
|
|||||||
|
4th
quarter
|
32.97
|
28.01
|
0.18
|
|||||||
|
|
||||||||||
|
2005
|
||||||||||
|
1st
quarter
|
$
|
29.57
|
$
|
22.72
|
$
|
0.15
|
||||
|
2nd
quarter
|
27.42
|
21.40
|
0.15
|
|||||||
|
3rd
quarter
|
28.75
|
25.59
|
0.15
|
|||||||
|
4th
quarter
|
29.96
|
26.08
|
0.16
|
|||||||
As
of
February 8, 2007, there were 1,433 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'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, 2006, approximately $12.7
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 19, Stockholders’ Equity,
of Notes to Consolidated Financial Statements.
8
Stock
Repurchase
The
Company made the following purchases of its common stock during the three
months
ended December 31, 2006:
|
|
|
Total
Number
|
Maximum
|
||||||||||
|
|
|
|
of
Shares
|
Number
of
|
|||||||||
|
|
Total
Number
|
Average
|
Purchased
as
|
Shares
that May
|
|||||||||
|
|
of
Shares
|
Price
Paid
|
Part
of Publicly
|
Yet
be Purchased
|
|||||||||
|
Period
|
Purchased
|
Per
Share
|
Announced
Plans
|
Under
the Plans
|
|||||||||
|
October
1 - October 31
|
1,500
|
28.94
|
1,500
|
353,667
|
|||||||||
|
November
1 - November 30
|
5,000
|
30.91
|
5,000
|
348,667
|
|||||||||
|
December
1 - December 31
|
7,700
|
31.74
|
7,700
|
340,967
|
|||||||||
| Total |
14,200
|
$ |
31.15
|
14,200
|
|||||||||
On
May 25,
2004, the Company announced the adoption by the Board of Directors of a stock
repurchase program. The program authorizes the repurchase of up to 5% of
the
outstanding Common Stock, or 733,485 shares. 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.
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, the NASDAQ Composite
Stock
Index and the S&P 500 Stock Index. The graph assumes an investment of $100
on December 31, 2001 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
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
|
Simmons
First National Corporation
|
100.00
|
117.13
|
180.42
|
193.60
|
189.60
|
219.99
|
|
NASDAQ
Bank Index
|
100.00
|
106.95
|
142.29
|
161.73
|
158.61
|
180.53
|
|
NASDAQ
Composite Index
|
100.00
|
68.76
|
103.67
|
113.16
|
115.57
|
127.58
|
|
S&P
500 Index
|
100.00
|
77.90
|
100.24
|
111.14
|
116.59
|
135.00
|
9
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.
|
SELECTED
CONSOLIDATED FINANCIAL
DATA
|
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, 2006, 2005,
2004,
2003, and 2002 were derived from consolidated financial statements of the
Company, which were audited by BKD, LLP. Earnings
per common share and dividends per common share presented in the financial
statements have been restated retroactively to reflect the effects of the
May 1,
2003, two for one stock split for
shareholders of record as of April 18, 2003. 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.
10
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
||||||||||||||||
|
Years
Ended December 31 (1)
|
||||||||||||||||
|
(In
thousands,
|
||||||||||||||||
|
except
per share data)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Income
statement data:
|
||||||||||||||||
|
Net
interest income
|
$
|
88,804
|
$
|
90,257
|
$
|
85,636
|
$
|
77,870
|
$
|
75,708
|
||||||
|
Provision
for loan losses
|
3,762
|
7,526
|
8,027
|
8,786
|
10,223
|
|||||||||||
|
Net
interest income after provision for
loan losses
|
85,042
|
82,731
|
77,609
|
69,084
|
65,485
|
|||||||||||
|
Non-interest
income
|
43,947
|
42,318
|
40,705
|
38,717
|
35,303
|
|||||||||||
|
Non-interest
expense
|
89,068
|
85,584
|
82,385
|
73,117
|
69,013
|
|||||||||||
|
Provision
for income taxes
|
12,440
|
12,503
|
11,483
|
10,894
|
9,697
|
|||||||||||
|
Net
income
|
27,481
|
26,962
|
24,446
|
23,790
|
22,078
|
|||||||||||
|
Per
share data:
|
||||||||||||||||
|
Basic
earnings
|
1.93
|
1.88
|
1.68
|
1.69
|
1.56
|
|||||||||||
|
Diluted
earnings
|
1.90
|
1.84
|
1.65
|
1.65
|
1.54
|
|||||||||||
|
Diluted
operating earnings (2)
|
1.90
|
1.84
|
1.68
|
1.62
|
1.54
|
|||||||||||
|
Book
value
|
18.24
|
17.04
|
16.29
|
14.89
|
13.97
|
|||||||||||
|
Dividends
|
0.68
|
0.61
|
0.57
|
0.53
|
0.48
|
|||||||||||
|
Balance
sheet data at period end:
|
||||||||||||||||
|
Assets
|
2,651,413
|
2,523,768
|
2,413,944
|
2,235,778
|
1,977,579
|
|||||||||||
|
Loans
|
1,783,495
|
1,718,107
|
1,571,376
|
1,418,314
|
1,257,305
|
|||||||||||
|
Allowance
for loan losses
|
25,385
|
26,923
|
26,508
|
25,347
|
21,948
|
|||||||||||
|
Deposits
|
2,175,531
|
2,059,958
|
1,959,195
|
1,803,468
|
1,619,196
|
|||||||||||
|
Long-term
debt
|
83,311
|
87,020
|
94,663
|
100,916
|
54,282
|
|||||||||||
|
Stockholders’
equity
|
259,016
|
244,085
|
238,222
|
209,995
|
197,605
|
|||||||||||
|
Capital
ratios at period end:
|
||||||||||||||||
|
Stockholders’
equity to total
assets
|
9.75
|
%
|
9.67
|
%
|
9.87
|
%
|
9.39
|
%
|
9.99
|
%
|
||||||
|
Leverage
(3)
|
8.83
|
%
|
8.62
|
%
|
8.46
|
%
|
9.89
|
%
|
9.29
|
%
|
||||||
|
Tier
1
|
12.38
|
%
|
12.26
|
%
|
12.72
|
%
|
14.12
|
%
|
14.02
|
%
|
||||||
|
Total
risk-based
|
13.64
|
%
|
13.54
|
%
|
14.00
|
%
|
15.40
|
%
|
15.30
|
%
|
||||||
|
Selected
ratios:
|
||||||||||||||||
|
Return
on average assets
|
1.07
|
%
|
1.08
|
%
|
1.03
|
%
|
1.18
|
%
|
1.12
|
%
|
||||||
|
Return
on average equity
|
10.93
|
%
|
11.24
|
%
|
10.64
|
%
|
11.57
|
%
|
11.56
|
%
|
||||||
|
Return
on average tangible equity (4)
|
15.03
|
%
|
15.79
|
%
|
14.94
|
%
|
14.03
|
%
|
13.99
|
%
|
||||||
|
Net
interest margin (5)
|
3.96
|
%
|
4.13
|
%
|
4.08
|
%
|
4.34
|
%
|
4.37
|
%
|
||||||
|
Allowance/nonperforming
loans
|
234.05
|
%
|
319.48
|
%
|
220.84
|
%
|
219.13
|
%
|
179.07
|
%
|
||||||
|
Allowance
for loan losses as a percentage
of period-end loans
|
1.42
|
%
|
1.57
|
%
|
1.69
|
%
|
1.79
|
%
|
1.75
|
%
|
||||||
|
Nonperforming
loans as a percentage of
period-end
loans
|
0.56
|
%
|
0.49
|
%
|
0.76
|
%
|
0.82
|
%
|
0.97
|
%
|
||||||
|
Net
charge-offs as a percentage of
average
total assets
|
0.15
|
%
|
0.28
|
%
|
0.34
|
%
|
0.41
|
%
|
0.46
|
%
|
||||||
|
Dividend
payout
|
35.79
|
%
|
33.15
|
%
|
38.80
|
%
|
31.14
|
%
|
30.75
|
%
|
||||||
(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 operating earnings exclude the following nonrecurring items. 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.
In 2003, the Company recorded a $0.03 addition to EPS resulting from the
sale of
its mortgage servicing portfolio.
(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 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%).
11
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
|
|
2006
Overview
|
Simmons
First National Corporation recorded net income of
$27,481,000 for the year ended December 31, 2006, a 1.9% increase from
net
income of $26,962,000 in 2005. Net income in 2004 was $24,446,000. Diluted
earnings per share increased $0.06, or 3.3%, to $1.90 in 2006 compared
to $1.84
in 2005. Diluted earnings per share in 2004 were $1.65. The Company’s return on
average assets and return on average stockholders’ equity for the year ended
December 31, 2006, were 1.07% and 10.93%, when compared to 1.08% and 11.24%,
respectively, for the year ended 2005.
At
December 31, 2006, the Company’s loan portfolio totaled $1.783 billion, which is
a $65.4 million, or a 3.8%, increase from the same period last year. This
increase is due primarily to a $94 million, or 9% increase in real estate
loans.
Loan growth was somewhat mitigated by a $15 million payoff of a bank stock
loan,
a $12 million reduction in a single commercial line of credit, a $5 million
reduction in student loans due to early sales in order to avoid consolidation
lenders, and a larger than normal seasonal drop in agricultural loans.
Asset
quality remained strong with the allowance for loan losses at 1.42% of
total
loans and 252% of non-performing loans at December 31, 2006. The internal
rating
of several large commercial loan customers was upgraded due to financial
improvement of the borrowers and two significant impaired credit relationships
paid off. Net credit card charge-offs were down $2.6 million in 2006 from
2005,
primarily due to the changes in bankruptcy laws effective in October 2005.
These
improvements resulted in a $3.7 million reduction in provision for loan
losses
in 2006 compared to 2005.
Total
assets for the Company at December 31, 2006, were $2.651 billion, an increase
of
$128 million, or 5.1%, over the period ended December 31, 2005. Stockholders’
equity as of December 31, 2006 was $259 million, an increase of $14.9 million,
or approximately 6.1%, from December 31, 2005.
Simmons
First National Corporation is an Arkansas based, Arkansas committed financial
holding company with $2.7 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 86 offices, of which 82 are financial centers, in 48
communities.
|
Critical
Accounting
Policies
|
Overview
Management
has reviewed its various accounting policies. Based on this review, management
believes the policies most critical to the Company are the policies associated
with its lending practices including the accounting for the allowance for
loan
losses, treatment of goodwill, recognition of fee income, estimates of
income
taxes, and employee benefit plan as it relates to stock options.
Loans
Loans
the
Company 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.
12
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 using the classified asset approach,
as defined by the Office of the Comptroller of the Currency. 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
Goodwill
represents the excess of cost over the fair value of net assets of acquired
subsidiaries and branches. Financial Accounting Standards Board Statement
No.
142 and No. 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.
Core
Deposit Premiums
Core
deposit premiums are being amortized using both straight-line and accelerated
methods over periods ranging from 8 to 11 years. Such assets are periodically
evaluated as to the recoverability of their carrying value.
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 assets and liabilities 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.
13
Employee
Benefit Plans
The
Company has a stock-based employee compensation plan. In December 2004, FASB
issued SFAS No. 123, Share-Based Payment (Revised 2004), which requires all
companies to measure compensation cost for all share-based payments (including
employee stock options) at fair value. As discussed in Note 11, Employee
Benefit
Plans, in the accompanying
Notes to
Consolidated Financial Statements
included
elsewhere in this report, the standard requires companies to expense the
fair
value of all stock options that have future vesting provisions, are modified,
or
are newly granted beginning on the grant date of such options. SFAS 123R
became
effective and was adopted by the Company on January 1, 2006.
|
Acquisitions
|
On
November 1, 2005, the Company completed a branch purchase in which Bank of
Little Rock sold its Southwest Little Rock, Arkansas location at 8500 Geyer
Springs Road to Simmons First National Bank, a subsidiary of the Company.
The
acquisition included approximately $3.5 million in total deposits in addition
to
the fixed assets used in the branch operation. No loans were involved in
the
transaction. As a result of this transaction, the Company recorded additional
goodwill and core deposit premiums of $151,000 and $31,000,
respectively.
On
June
25, 2004, the Company completed a branch purchase in which Cross County Bank
sold its Weiner, Arkansas location to Simmons First Bank of Jonesboro, a
subsidiary of the Company. The acquisition included approximately $6 million
in
total deposits and the fixed assets used in the branch operation. No loans
were
involved in the transaction. As a result of this transaction, the Company
recorded additional goodwill and core deposit premiums of $344,000 and $117,000,
respectively.
On
March
19, 2004, the Company merged with Alliance Bancorporation, Inc. (“ABI”). ABI
owned Alliance Bank of Hot Springs, Hot Springs, Arkansas with consolidated
assets (including goodwill and core deposits), loans and deposits of
approximately $155 million, $70 million and $110 million, respectively.
During the second quarter of 2004, Alliance Bank changed its name to Simmons
First Bank of Hot Springs and continues to operate as a separate community
bank
with virtually the same board of directors, management and staff. As a result
of
this transaction, the Company recorded additional goodwill and core deposit
premiums of $14,690,000 and $1,245,000, respectively.
The
system
integration for the 2005 acquisition was completed on the acquisition date.
The
system integration for the 2004 mergers and acquisitions were completed during
the second quarter of 2004.
|
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 Federal Funds
rate, which is the cost to banks of immediately available overnight funds,
began
2004 at 1.00%. During 2004, the
Federal Funds rate increased 125 basis points to end the year at
2.25%.
During
2005, the Federal Funds rate increased 50 basis points in each of the four
quarters to end the year at 4.25%. After seventeen consecutive quarters of
increases, the Federal Funds rate has remained at 5.25% since June 29,
2006.
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.
14
For
the
year ended December 31, 2006, net interest income on a fully taxable equivalent
basis was $92.0 million, a decrease of $1.5 million, or 1.6%, from the same
period in 2005. The decrease in net interest income was the result of a $20.2
million increase in interest income offset by a $21.7 million increase in
interest expense. As a result, the net interest margin decreased 17 basis
points
to 3.96% for the year ended December 31, 2006, when compared to 4.13%
for 2005. The Company expects to see continued pressure on the margin driven
primarily by the increase in cost of funds resulting from competitive deposit
repricing. However, since approximate $111 million of the investment
portfolio will mature or reprice during 2007, with reinvestment at a higher
yield, management anticipates a flat to slightly improving margin in
2007.
The
$20.2
million increase in interest income for 2006 is primarily the result of a
72
basis point increase in the yield on earning assets associated with the
repricing to a higher interest rate environment, along with a growth in loans.
The growth in average loans accounted for an increase of $6.2 million in
interest income. The higher interest rates resulted in a $15.2 million increase
in interest income. More specifically, $11.8 million of the increase due
to
higher rates is 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. As a result, the average rate
earned on the loan portfolio increased 68 basis points from
6.82% to 7.50%.
The
$21.7
million increase in interest expense for 2006 is primarily the result of
a 103
basis point increase in the cost of funds due to competitive repricing during
a
higher interest rate environment, coupled with a $57 million increase in
average
interest bearing liabilities generated through internal growth. The higher
interest rates accounted for a $19.8 million increase in interest expense.
The
most significant component of this increase was the $13.1 million increase
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. As a result of this repricing, the
average rate paid on time deposits increased 127 basis points from 2.78%
to
4.05%. 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 $76.7 million from internal deposit growth, offset by a
$12.8 million reduction in average Fed Funds purchased and short-term debt
and a $7.1 million reduction in average long-term debt.
For
the
year ended December 31, 2005, net interest income on a fully taxable equivalent
basis was $93.5 million, an increase of $4.7 million, or 5.3%, from the
same period in 2004. The increase in net interest income was the result of
a $17
million increase in interest income and a $12.4 million increase in interest
expense. As a result, the net interest margin increased 5 basis points to
4.13%
for the year ended December 31, 2005, when compared to 4.08% for
2004.
15
Tables
1
and 2 reflect an analysis of net interest income on a fully taxable equivalent
basis for the years ended December 31, 2006, 2005 and 2004, respectively,
as
well as changes in fully taxable equivalent net interest margin for the years
2006 versus 2005 and 2005 versus 2004.
|
Table
1:
|
Analysis
of Net Interest Income
|
|
(FTE
=Fully Taxable Equivalent)
|
|
|
Years
Ended December 31
|
||||||||||
|
(In
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Interest
income
|
$
|
153,362
|
$
|
133,071
|
$
|
116,064
|
||||
|
FTE
adjustment
|
3,185
|
3,234
|
3,173
|
|||||||
|
Interest
income - FTE
|
156,547
|
136,305
|
119,237
|
|||||||
|
Interest
expense
|
64,558
|
42,814
|
30,428
|
|||||||
|
Net
interest income - FTE
|
$
|
91,989
|
$
|
93,491
|
$
|
88,809
|
||||
|
Yield
on earning assets - FTE
|
6.74
|
%
|
6.02
|
%
|
5.48
|
%
|
||||
|
Cost
of interest bearing liabilities
|
3.24
|
%
|
2.21
|
%
|
1.65
|
%
|
||||
|
Net
interest spread - FTE
|
3.50
|
%
|
3.81
|
%
|
3.83
|
%
|
||||
|
Net
interest margin - FTE
|
3.96
|
%
|
4.13
|
%
|
4.08
|
%
|
||||
|
Table
2:
|
Changes
in Fully Taxable Equivalent Net Interest
Margin
|
|
(In
thousands)
|
2006
vs. 2005
|
2005
vs. 2004
|
|||||
|
Increase
due to change in earning assets
|
$
|
5,056
|
$
|
7,570
|
|||
|
Increase
due to change in earning asset yields
|
15,186
|
9,498
|
|||||
|
Decrease
due to change in interest rates paid on interest
bearing liabilities
|
(19,813
|
)
|
(11,300
|
)
|
|||
|
Decrease
due to change in interest bearing liabilities
|
(1,931
|
)
|
(1,086
|
)
|
|||
|
(Decrease)
increase in net interest income
|
$
|
(1,502
|
)
|
$
|
4,682
|
||
16
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,
2006.
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
|
|||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
|
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
|
$
|
22,746
|
$
|
1,072
|
4.71
|
$
|
20,837
|
$
|
580
|
2.78
|
$
|
36,587
|
$
|
400
|
1.09
|
|||||||||||||
|
Federal
funds sold
|
20,223
|
1,057
|
5.23
|
30,598
|
925
|
3.02
|
56,423
|
748
|
1.33
|
|||||||||||||||||||
|
Investment
securities - taxable
|
410,445
|
15,705
|
3.83
|
425,030
|
13,898
|
3.27
|
411,467
|
12,416
|
3.02
|
|||||||||||||||||||
|
Investment
securities - non-taxable
|
117,931
|
7,573
|
6.42
|
122,047
|
7,670
|
6.28
|
126,349
|
7,843
|
6.21
|
|||||||||||||||||||
|
Mortgage
loans held for sale
|
7,666
|
476
|
6.21
|
9,356
|
552
|
5.90
|
10,087
|
575
|
5.70
|
|||||||||||||||||||
|
Assets
held in trading accounts
|
4,590
|
71
|
1.55
|
4,584
|
99
|
2.16
|
4,980
|
41
|
0.82
|
|||||||||||||||||||
|
Loans
|
1,740,477
|
130,593
|
7.50
|
1,651,950
|
112,581
|
6.82
|
1,528,447
|
97,214
|
6.36
|
|||||||||||||||||||
|
Total
interest earning assets
|
2,324,078
|
156,547
|
6.74
|
2,264,402
|
136,305
|
6.02
|
2,174,340
|
119,237
|
5.48
|
|||||||||||||||||||
|
Non-earning
assets
|
251,261
|
|
|
233,132
|
203,440
|
|||||||||||||||||||||||
|
Total
assets
|
$
|
2,575,339
|
|
|
|
|
$ |
2,497,534
|
$ |
2,377,780
|
||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
LIABILITIES
AND
STOCKHOLDERS’
EQUITY
|
||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||
|
Interest
bearing liabilities
|
||||||||||||||||||||||||||||
|
Interest
bearing transaction
and
savings deposits
|
$
|
737,328
|
$
|
11,658
|
1.58
|
$
|
762,558
|
$
|
7,777
|
1.02
|
$
|
729,842
|
$
|
4,965
|
0.68
|
|||||||||||||
|
Time
deposits
|
1,052,705
|
42,592
|
4.05
|
950,820
|
26,431
|
2.78
|
892,360
|
18,198
|
2.04
|
|||||||||||||||||||
|
Total
interest bearing deposits
|
1,790,033
|
54,250
|
3.03
|
1,713,378
|
34,208
|
2.00
|
1,622,202
|
23,163
|
1.43
|
|||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Federal
funds purchased and
securities
sold under agreement
to
repurchase
|
100,280
|
4,615
|
4.60
|
102,041
|
3,104
|
3.04
|
94,465
|
1,227
|
1.30
|
|||||||||||||||||||
|
Other
borrowed funds
|
||||||||||||||||||||||||||||
|
Short-term
debt
|
21,065
|
1,227
|
5.82
|
32,076
|
1,101
|
3.43
|
11,252
|
175
|
1.56
|
|||||||||||||||||||
|
Long-term
debt
|
82,525
|
4,466
|
5.41
|
89,590
|
4,401
|
4.91
|
110,946
|
5,863
|
5.28
|
|||||||||||||||||||
|
Total
interest bearing liabilities
|
1,993,903
|
64,558
|
3.24
|
1,937,085
|
42,814
|
2.21
|
1,838,865
|
30,428
|
1.65
|
|||||||||||||||||||
|
Non-interest
bearing liabilities
|
||||||||||||||||||||||||||||
|
Non-interest
bearing deposits
|
308,804
|
|
|
303,974
|
293,060
|
|||||||||||||||||||||||
|
Other
liabilities
|
21,114
|
|
16,499
|
16,136
|
||||||||||||||||||||||||
|
Total
liabilities
|
2,323,821
|
|
|
2,257,558
|
2,148,061
|
|||||||||||||||||||||||
|
Stockholders’
equity
|
251,518
|
|
|
239,976
|
229,719 | |||||||||||||||||||||||
|
Total
liabilities and stockholders’
equity
|
$
|
2,575,339
|
|
|
|
|
$ |
2,497,534
|
$ |
2,377,780
|
||||||||||||||||||
|
Net
interest spread
|
|
|
3.50
|
|
3.81
|
|
3.83
|
|||||||||||||||||||||
|
Net
interest margin
|
|
|
$
|
91,989
|
|
3.96
|
|
$
|
93,491
|
4.13
|
$ |
88,809
|
4.08
|
|||||||||||||||
17
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,
2006 and 2005, 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
|
||||||||||||||||||
|
|
2006
over 2005
|
2005
over 2004
|
|||||||||||||||||
|
(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
|
$
|
57
|
$
|
435
|
$
|
492
|
$
|
(230
|
)
|
$
|
410
|
$
|
180
|
||||||
|
Federal
funds sold
|
(387
|
)
|
518
|
131
|
(457
|
)
|
634
|
177
|
|||||||||||
|
Investment
securities - taxable
|
(491
|
)
|
2,299
|
1,808
|
419
|
1,063
|
1,482
|
||||||||||||
|
Investment
securities - non-taxable
|
(263
|
)
|
166
|
(97
|
)
|
(269
|
)
|
96
|
(173
|
)
|
|||||||||
|
Mortgage
loans held for sale
|
(104
|
)
|
28
|
(76
|
)
|
(43
|
)
|
20
|
(23
|
)
|
|||||||||
|
Assets
held in trading accounts
|
--
|
(28
|
)
|
(28
|
)
|
(3
|
)
|
61
|
58
|
||||||||||
|
Loans
|
6,244
|
11,768
|
18,012
|
8,153
|
7,214
|
15,367
|
|||||||||||||
|
Total
|
5,056
|
15,186
|
20,242
|
7,570
|
9,498
|
17,068
|
|||||||||||||
|
Interest
expense
|
|||||||||||||||||||
|
Interest
bearing transaction and savings
deposits
|
(265
|
)
|
4,145
|
3,880
|
232
|
2,580
|
2,812
|
||||||||||||
|
Time
deposits
|
3,078
|
13,083
|
16,161
|
1,258
|
6,975
|
8,233
|
|||||||||||||
|
Federal
funds purchased and
securities sold under
agreements
to repurchase
|
(55
|
)
|
1,566
|
1,511
|
105
|
1,772
|
1,877
|
||||||||||||
|
Other
borrowed funds
|
|||||||||||||||||||
|
Short-term
debt
|
(465
|
)
|
591
|
126
|
561
|
365
|
926
|
||||||||||||
|
Long-term
debt
|
(362
|
)
|
428
|
66
|
(1,070
|
)
|
(392
|
)
|
(1,462
|
)
|
|||||||||
|
Total
|
1,931
|
19,813
|
21,744
|
1,086
|
11,300
|
12,386
|
|||||||||||||
|
Increase
(decrease) in net
interest income
|
$
|
3,125
|
$
|
(4,627
|
)
|
$
|
(1,502
|
)
|
$
|
6,484
|
$
|
(1,802
|
)
|
$
|
4,682
|
||||
|
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, which is 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, to determine the level of provision made
to
the allowance after considering the factors noted above.
The
provision for loan losses for 2006, 2005 and 2004 was $3.8 million, $7.5
million
and $8.0 million, respectively. The provision reduction from 2005 to 2006
was
primarily driven by two factors.
18
First,
credit card net charge-offs were down $2.6 million, from $4.0 million in
2005 to
$1.4 million in 2006. The Company recorded credit card net charge-offs of
1.06%
of credit card balances for 2006 compared to 2.85% for 2005. Second, there
was
improvement in the credit quality of the loan portfolio, particularly due
to the
payoff of two large credit relationships in 2006. One was upgraded two levels
from substandard to watch, based on improved financial condition of the
borrower, and was ultimately paid off. The other impaired relationship, graded
substandard, was refinanced with another financial institution. A specific
reserve was applied to both of these credit relationships. Additional loans
were
classified in 2006 as non-performing based upon various criteria; however,
there
were no specific reserve allocations required for these loans. The provision
for
loan losses was reduced due to the continued significant reduction in credit
card charge-offs and the improvement in credit quality of loans with specific
reserves.
The
decrease in the provision for loans losses from 2004 to 2005 was due to the
overall improvement in the Company’s asset quality.
|
Non-Interest
Income
|
Total
non-interest income was $43.9 million in 2006, compared to $42.3 million
in 2005
and $40.7 million in 2004. 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, 2006, 2005 and
2004,
respectively, as well as changes in 2006 from 2005 and in 2005 from
2004.
|
Table
5:
|
Non-Interest
Income
|
|
|
|
2006
|
2005
|
|||||||||||||||||||
|
|
Years
Ended December 31
|
Change
from
|
Change
from
|
|||||||||||||||||||
|
(In
thousands)
|
2006
|
2005
|
2004
|
2005
|
2004
|
|||||||||||||||||
|
Trust
income
|
$
|
5,612
|
$
|
5,589
|
$
|
5,421
|
$
|
23
|
0.41
|
%
|
$
|
168
|
3.10
|
%
|
||||||||
|
Service
charges on deposit accounts
|
15,795
|
15,818
|
14,564
|
(23
|
)
|
(0.15
|
)
|
1,254
|
8.61
|
|||||||||||||
|
Other
service charges and fees
|
2,561
|
2,017
|
2,016
|
544
|
26.97
|
1
|
0.05
|
|||||||||||||||
|
Income
on sale of mortgage loans, net
of commissions
|
2,849
|
2,919
|
3,391
|
(70
|
)
|
(2.40
|
)
|
(472
|
)
|
(13.92
|
)
|
|||||||||||
|
Income
on investment banking, net
of commissions
|
341
|
416
|
645
|
(75
|
)
|
(18.03
|
)
|
(229
|
)
|
(35.50
|
)
|
|||||||||||
|
Credit
card fees
|
10,742
|
10,252
|
10,001
|
490
|
4.78
|
251
|
2.51
|
|||||||||||||||
|
Premiums
on sale of student loans
|
2,071
|
1,822
|
2,114
|
249
|
13.67
|
(292
|
)
|
(13.81
|
)
|
|||||||||||||
|
Bank
owned life insurance income
|
1,523
|
953
|
261
|
570
|
59.81
|
692
|
265.13
|
|||||||||||||||
|
Other
income
|
2,453
|
2,700
|
2,292
|
(247
|
)
|
(9.15
|
)
|
408
|
17.80
|
|||||||||||||
|
Loss
on sale of securities, net
|
--
|
(168
|
)
|
--
|
168
|
100.00
|
(168
|
)
|
(100.00
|
)
|
||||||||||||
|
Total
non-interest income
|
$
|
43,947
|
$
|
42,318
|
$
|
40,705
|
$
|
1,629
|
3.85
|
%
|
$
|
1,613
|
3.96
|
%
|
||||||||
Recurring
fee income for 2006 was $34.7 million, an increase of $1.0 million, or 3.0%,
when compared with the 2005 amounts. This increase was principally the result
of
growth in ATM income due to increased volume and an improvement in the fee
structure. The increase in credit card fees was primarily the result of a
pricing change related to interchange fees.
Recurring
fee income for 2005 was $33.7 million, an increase of $1.7 million, or 5.2%,
when compared with the 2004 amounts. The increase in service charges on deposit
accounts for 2005 can be primarily attributed to normal growth in transaction
accounts and improvement in the fee structure associated with the Company’s
deposit accounts.
During
the
years ended December 31, 2006 and 2005, combined income on the sale of mortgage
loans and income on investment banking decreased $145,000 and $701,000,
respectively, from the years ended in 2005 and 2004. The decrease was primarily
the result of a reduced demand for those products due to the rising interest
rate environment.
19
Premiums
on sale of student loans increased by $249,000, or 13.7%, in 2006 over 2005.
The
increase was primarily due to accelerating the sale of student loans during
2006. Normally, as student loans reach payout status, the Company generally
sells student 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 2006 on loans that
normally would have been sold in 2007. Premiums on sale of student loans
decreased by $292,000, or 13.8%, in 2005 over 2004 due to similar accelerated
sales during 2004.
On
April
29, 2005, the Company invested an additional $25 million in Bank Owned Life
Insurance (“BOLI”). BOLI income increased by $570,000 in 2006 over 2005,
primarily due to an improved earnings credit on the investment. The remainder
of
the increase can be attributed to the timing of the investment, with
approximately eight months of earnings in 2005 compared to a full year in 2006.
BOLI income increased by $692,000 in 2005 over 2004, with the increase almost
entirely attributable to this purchase.
There
were
no gains or losses on sale of securities during 2006. During the second quarter
of 2005, the Company sold certain available-for-sale investment securities
obtained in a prior acquisition that did not fit its current investment
portfolio strategy. As a result of this liquidation, the Company recognized
an
after-tax loss on sale of securities of $168,000. There were no gains or losses
on sale of securities during 2004.
|
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 2006 was $89.1 million, an increase of $3.5 million or 4.1%, from
2005. The increase in non-interest expense during 2006 compared to 2005 is
primarily attributed to normal on-going operating expenses and the incremental
expenses of approximately $1.1 million associated with the operation of new
financial centers opened during 2005 and 2006. When normalized for the
additional expenses from the expansion, non-interest expense for 2006 increased
by 2.8% over 2005.
Non-interest
expense for 2005 was $85.6 million, an increase of $3.2 million or 3.9%, from
2004. The increase in non-interest expense during 2005 compared to 2004 is
primarily attributed to normal on-going operating expenses and the additional
expenses of approximately $748,000 associated with the operation of new
financial centers opened during 2005. During 2004, the Company recorded a
nonrecurring expense of $771,000 related to the write off of deferred debt
issuance cost associated with the redemption of its 9.12% trust preferred
securities. When normalized for both the prepayment of the trust preferred
securities and the additional expenses from the expansion, non-interest expense
for 2005 increased by the same 3.9% over 2004.
The
increase in credit card expense over the past two years was primarily
attributable to the Company’s travel rewards program. Accumulated travel rewards
expire after 36 months. The
Company has introduced several new initiatives to make its product more
competitive. One of the key initiatives introduced in 2005 was to move as many
qualifying accounts as possible from a standard VISA product to a Platinum
VISA
Rewards product. As a result of this conversion process, travel rewards expense
increased in 2005 and in 2006.
Core
deposit premium amortization expense recorded for the years ended December
31,
2006, 2005 and 2004, was $830,000, $830,000 and $791,000, respectively. The
Company’s estimated amortization expense for each of the following five years
is: 2007 - $818,000; 2008 - $807,000; 2009 - $802,000; 2010 - $698,000; and
2011 -$451,000. The estimated amortization expense decreases as core
deposit premiums fully amortize in future years.
20
Table
6
below shows non-interest expense for the years ended December 31, 2006, 2005
and
2004, respectively, as well as changes in 2006 from 2005 and in 2005 from
2004.
|
Table
6:
|
Non-Interest
Expense
|
|
|
|
2006
|
2005
|
||||||||||||||||||||
|
|
Years
Ended December 31
|
Change
from
|
Change
from
|
||||||||||||||||||||
|
(In
thousands)
|
2006
|
2005
|
2004
|
2005
|
2004
|
||||||||||||||||||
|
Salaries
and employee benefits
|
$
|
53,442
|
$
|
51,270
|
$
|
48,533
|
$
|
2,172
|
4.24
|
%
|
$
|
2,737
|
5.64
|
%
|
|||||||||
|
Occupancy
expense, net
|
6,385
|
5,840
|
5,500
|
545
|
9.33
|
340
|
6.18
|
||||||||||||||||
|
Furniture
and equipment expense
|
5,718
|
5,758
|
5,646
|
(40
|
)
|
(0.69
|
)
|
112
|
1.98
|
||||||||||||||
|
Loss
on foreclosed assets
|
136
|
191
|
346
|
(55
|
)
|
(28.80
|
)
|
(155
|
)
|
(44.80
|
)
|
||||||||||||
|
Deposit
insurance
|
270
|
279
|
284
|
(9
|
)
|
(3.23
|
)
|
(5
|
)
|
(1.76
|
)
|
||||||||||||
|
Other
operating expenses
|
|||||||||||||||||||||||
|
Professional
services
|
2,490
|
2,201
|
2,029
|
289
|
13.13
|
172
|
8.48
|
||||||||||||||||
|
Postage
|
2,278
|
2,281
|
2,256
|
(3
|
)
|
(0.13
|
)
|
25
|
1.11
|
||||||||||||||
|
Telephone
|
1,961
|
1,847
|
1,784
|
114
|
6.17
|
63
|
3.53
|
||||||||||||||||
|
Credit
card expense
|
3,235
|
2,693
|
2,374
|
542
|
20.13
|
319
|
13.44
|
||||||||||||||||
|
Operating
supplies
|
1,611
|
1,555
|
1,528
|
56
|
3.60
|
27
|
1.77
|
||||||||||||||||
|
Amortization
of core deposits
|
830
|
830
|
791
|
--
|
0.00
|
39
|
4.93
|
||||||||||||||||
|
Write
off of deferred debt issuance cost
|
--
|
--
|
771
|
--
|
--
|
(771
|
)
|
(100.00
|
)
|
||||||||||||||
|
Other
expense
|
10,712
|
10,839
|
10,543
|
(127
|
)
|
(1.17
|
)
|
296
|
2.81
|
||||||||||||||
|
Total
non-interest expense
|
$
|
89,068
|
$
|
85,584
|
$
|
82,385
|
$
|
3,484
|
4.07
|
%
|
$
|
3,199
|
3.88
|
%
|
|||||||||
|
Income
Taxes
|
The
provision for income taxes for 2006 was $12.4 million, compared to $12.5
million
in 2005 and $11.5 million in 2004. The effective income tax rates for the
years
ended 2006, 2005 and 2004 were 31.2%, 31.7% and 32.0%,
respectively.
|
Loan
Portfolio
|
The
Company's loan portfolio averaged $1.740 billion during 2006 and $1.652 billion
during 2005. As of December 31, 2006, total loans were $1.783 billion, compared
to $1.718 billion on December 31, 2005. 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 $370.8 million at December 31, 2006, or 20.8% of total
loans, compared to $370.9 million, or 21.6% of total loans at December 31,
2005.
The $141,000 consumer loan decrease from 2005 to 2006 is the result of an
increase in indirect lending, offset by a decline in student loans. The increase
in the indirect consumer loan portfolio was primarily the result of more
aggressive marketing efforts by the Company, along with less attractive finance
incentives offered by car manufacturers. As student loans reach payout status,
the Company generally sells these loans into the secondary market. Because
of
changes in the industry relative to loan consolidations, and in order to
protect
the premium, the Company made the decision to sell some student loans prior
to
the payout period in 2006. These early sales created a decline in the portfolio
balances at December 31, 2006.
21
The
Company continues to experience significant competitive pressure from the credit
card industry. Over the previous three years, the credit card portfolio has
decreased by approximately $10 million to $14 million each year, primarily
due
to closed accounts. However, the Company experienced a slow-down in this trend
in 2006, with the credit card portfolio balance increasing by approximately
$300
thousand from December 31, 2005 to December 31, 2006.
Management
believes the increase in outstanding balances is the result of the introduction
of several initiatives over the past two years to make the Company’s credit card
products more competitive, and therefore slow down the number of closed
accounts. In 2005, as part of its retention strategy, the Company converted
over
15,000 accounts to a new Platinum VISA Rewards product, carrying a low fixed
interest rate of 8.95%, and offering customers competitive rewards based on
their purchases. The accounts were converted from the Company’s standard VISA
product, the card that has been primarily impacted by the competitive teaser
rates. As a continuation of efforts to stabilize the credit card portfolio,
the
Company introduced another new initiative in July 2006, a 7.25% fixed rate
card
with no fees and no rewards. Over the previous five years, 2001 - 2005, the
Company had a net cumulative decrease of 14,500 accounts in its credit card
portfolio. In 2006, there was an addition of 1,650 net new accounts, with the
most significant growth coming since the introduction of the 7.25% fixed rate
card in July. While these results are positive, management cannot be assured
that a sustained growth trend has yet been established.
Real
estate loans consist of construction loans, single family residential loans
and
commercial loans. Real estate loans were $1.2 billion at December 31, 2006,
or
64.7% of total loans, compared to $1.1 billion, or 61.7% of total loans at
December 31, 2005. Construction loans accounted for $38.5 million of the
increase in real estate loans, single-family residential loans increased by
$23.6 million and commercial real estate loans increased $32.7 million
during 2006. These increases are primarily due to increased loan demand in
various growth areas of Arkansas.
Commercial
loans consist of commercial loans, agricultural loans and financial institution
loans. Commercial loans were $245.1 million at December 31, 2006, or 13.7%
of
total loans, compared to the $274.2 million, or 16.0% of total loans at
December 31, 2005. This $29.1 million reduction in commercial loans resulted
from unexpected decreases in each commercial loan category. Other commercial
loans decreased $6.9 million, primarily due to a reduction of one significant
commercial line of credit. The $6.5 million dollar decrease in agricultural
loans resulted from early payoffs of loans due to a successful year for farmers.
The payoff of one bank stock loan was the primary reason for the $15.7 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)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Consumer
|
||||||||||||||||
|
Credit
cards
|
$
|
143,359
|
$
|
143,058
|
$
|
155,326
|
$
|
165,919
|
$
|
180,439
|
||||||
|
Student
loans
|
84,831
|
89,818
|
83,283
|
86,301
|
83,890
|
|||||||||||
|
Other
consumer
|
142,596
|
138,051
|
128,552
|
142,995
|
153,103
|
|||||||||||
|
Real
Estate
|
||||||||||||||||
|
Construction
|
277,411
|
238,898
|
169,001
|
111,567
|
90,736
|
|||||||||||
|
Single
family residential
|
364,450
|
340,839
|
318,488
|
261,936
|
233,193
|
|||||||||||
|
Other
commercial
|
512,404
|
479,684
|
481,728
|
408,452
|
290,469
|
|||||||||||
|
Commercial
|
||||||||||||||||
|
Commercial
|
178,028
|
184,920
|
158,613
|
162,122
|
144,678
|
|||||||||||
|
Agricultural | ||||||||||||||||