UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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T
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Annual
Report Pursuant to Section 13 or 15(d) of the Exchange Act of
1934
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For the fiscal year ended: December 31,
2008
or
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£
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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Commission
file number 0-6253
SIMMONS
FIRST NATIONAL CORPORATION
(Exact
name of registrant as specified in its charter)
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Arkansas
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71-0407808
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(State or other
jurisdiction of
incorporation
or organization)
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(I.R.S.
employer
identification
No.)
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501 Main Street, Pine Bluff,
Arkansas
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71601
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(Address of principal
executive offices)
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(Zip
Code)
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(870)
541-1000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock,
$0.01 par value
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The Nasdaq Stock
Market®
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(Title of each
class)
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(Name of each
exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
£
Yes S
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
£ Yes S
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. S
Yes £
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge in definitive proxy or in information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
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o Large accelerated
filer
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x
Accelerated filer
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o Non-accelerated
filer
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.). £
Yes S
No
The
aggregate market value of the Registrant’s Common Stock, par value $0.01 per
share, held by non-affiliates on June 30, 2008, was $350,885,496 based
upon the last trade price as reported on the Nasdaq Global Select Market® of
$27.97.
The number
of shares outstanding of the Registrant's Common Stock as of February 4, 2009
was 13,982,474.
Part III
is incorporated by reference from the Registrant's Proxy Statement relating to
the Annual Meeting of Shareholders to be held on April 21, 2009.
Introduction
The
Company has chosen to combine our Annual Report to Shareholders with our Form
10-K, which is a document that U.S. public companies file with the Securities
and Exchange Commission every year. Many readers are familiar with
“Part II” of the Form 10-K, as it contains the business information and
financial statements that were included in the financial sections of our past
Annual Reports. These portions include information about our business
that the Company believes will be of interest to investors. The
Company hopes investors will find it useful to have all of this information
available in a single document.
The
Securities and Exchange Commission allows the Company to report information in
the Form 10-K by “incorporated by reference” from another part of the Form 10-K,
or from the proxy statement. You will see that information is
“incorporated by reference” in various parts of our Form 10-K.
A more
detailed table of contents for the entire Form 10-K follows:
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FORM
10-K INDEX
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Part I
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1
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7
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13
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13
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13
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13
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Part II
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14
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16
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18
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45
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48
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82
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82
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82
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Part III
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82
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82
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82
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82
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82
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Part IV
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83
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85
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PART
I
ITEM 1. BUSINESS
The
disclosures set forth in this item are qualified by Item 1A. Risk Factors and
the Forward Looking Statements section in Item 5, “Market for Registrant’s
Common Equity and Related Stockholder Matters” of this report and other
cautionary statements set forth elsewhere in this report.
The
Company and the Banks
Simmons
First National Corporation (the “Company”) is a financial holding company
registered under the Bank Holding Company Act of 1956. The
Gramm-Leach-Bliley-Act ("GLB Act") has substantially increased the financial
activities that certain banks, bank holding companies, insurance companies and
securities brokerage companies are permitted to undertake. Under the
GLB Act, expanded activities in insurance underwriting, insurance sales,
securities brokerage and securities underwriting not previously allowed for
banks and bank holding companies are now permitted upon satisfaction of certain
guidelines concerning management, capitalization and satisfaction of the
applicable Community Reinvestment Act guidelines for the
banks. Generally these new activities are permitted for bank holding
companies whose banking subsidiaries are well managed, well capitalized and have
at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company must apply to become a financial holding
company and the Board of Governors of the Federal Reserve System must approve
its application.
The
Company's application to become a financial holding company was approved by the
Board of Governors on March 13, 2000. The Company has reviewed
the new activities permitted under the Act. If the appropriate
opportunity presents itself, the Company is interested in expanding into other
financial services.
The
Company is a publicly traded financial holding company headquartered in Arkansas
with consolidated total assets of $2.9 billion, consolidated loans of $1.9
billion, consolidated deposits of $2.3 billion and total equity capital of $289
million as of December 31, 2008. The Company owns eight community
banks in Arkansas. The Company and its eight banking subsidiaries
conduct their operations through 88 offices, of which 84 are financial
centers, located in 47 communities in Arkansas.
Simmons
First National Bank (the “Bank”) is the Company’s lead bank. The Bank
is a national bank, which has been in operation since 1903. The
Bank's primary market area, with the exception of its nationally provided credit
card product, is Central and Western Arkansas. At December 31, 2008
the Bank had total assets of $1.4 billion, total loans of $955 million and
total deposits of $1.1 billion. Simmons First Trust Company N.A., a
wholly owned subsidiary of the Bank, performs the trust and fiduciary business
operations for the Bank as well as the Company. Simmons First Investment Group,
Inc. (“SFIG”), a wholly owned subsidiary of the Bank, which is a broker-dealer
registered with the Securities and Exchange Commission (“SEC”) and a member of
the National Association of Securities Dealers (“NASD”), performs the
broker-dealer operations of the Bank.
Simmons
First Bank of Jonesboro (“Simmons/Jonesboro”) is a state bank, which was
acquired in 1984. Simmons/Jonesboro’s primary market area is
Northeast Arkansas. At December 31, 2008, Simmons/Jonesboro had total
assets of $295 million, total loans of $246 million and total deposits of $250
million.
Simmons
First Bank of South Arkansas (“Simmons/South”) is a state bank, which was
acquired in 1984. Simmons/South’s primary market area is Southeast
Arkansas. At December 31, 2008, Simmons/South had total assets of
$172 million, total loans of $91 million and total deposits of $147
million.
Simmons
First Bank of Northwest Arkansas (“Simmons/Northwest”) is a state bank, which
was acquired in 1995. Simmons/Northwest’s primary market area is
Northwest Arkansas. At December 31, 2008, Simmons/Northwest had total
assets of $287 million, total loans of $202 million and total deposits of $238
million.
Simmons
First Bank of Russellville (“Simmons/Russellville”) is a state bank, which was
acquired in 1997. Simmons/Russellville’s primary market area is Russellville,
Arkansas. At December 31, 2008, Simmons/Russellville had total assets
of $202 million, total loans of $121 million and total deposits of $146
million.
Simmons
First Bank of Searcy (“Simmons/Searcy”) is a state bank, which was acquired in
1997. Simmons/Searcy’s primary market area is Searcy,
Arkansas. At December 31, 2008, Simmons/Searcy had total assets of
$152 million, total loans of $104 million and total deposits of $120
million.
1
Simmons
First Bank of Hot Springs (“Simmons/Hot Springs”) is a state bank, which was
acquired in 2004. Simmons/Hot Springs’ primary market area is Hot
Springs, Arkansas. At December 31, 2008, Simmons/Hot Springs had
total assets of $166 million, total loans of $82 million and total deposits of
$117 million.
The
Company's subsidiaries provide complete banking services to individuals and
businesses throughout the market areas they serve. Services include
consumer (credit card, student and other consumer), real estate (construction,
single family residential and other commercial) and commercial (commercial,
agriculture and financial institutions) loans, checking, savings and time
deposits, trust and investment management services, and securities and
investment services.
Loan
Risk Assessment
As part of
the ongoing risk assessment, the Company has an Asset Quality Review Committee
of management that meets quarterly to review the adequacy of the allowance for
loan losses. The Committee reviews the status of past due,
non-performing and other impaired loans, reserve ratios, and additional
performance indicators for all of its subsidiary banks. The allowance for loan
losses is determined based upon the aforementioned performance factors, and
adjustments are made accordingly. Also, an unallocated reserve is
established to compensate for the uncertainty in estimating loan losses,
including the possibility of improper risk ratings and specific reserve
allocations.
The Board
of Directors of each of the Company's subsidiary banks reviews the adequacy of
its allowance for loan losses on a monthly basis giving consideration to past
due loans, non-performing loans, other impaired loans, and current economic
conditions. The Company's loan review department monitors each of its
subsidiary bank's loan information monthly. In addition, the loan
review department prepares an analysis of the allowance for loan losses for each
subsidiary bank twice a year, and reports the results to the Company's Audit and
Security Committee. In order to verify the accuracy of the monthly
analysis of the allowance for loan losses, the loan review department performs
an on-site detailed review of each subsidiary bank's loan files on a semi-annual
basis. Additionally, the Company has instituted a Special Asset
Committee for the purpose of reviewing criticized loans in regard to collateral
adequacy, workout strategies, and proper reserve allocations.
Growth
Strategy
The
Company's growth strategy has been to primarily focus on the state of
Arkansas. In 2008, the Company completed a four-year de novo branch
expansion plan with the opening of a new regional headquarters for
Simmons/Northwest, along with an additional financial center in Little
Rock. The Company added its first financial centers in the Arkansas
markets of North Little Rock, Beebe and Paragould during 2007. New
locations were also opened in Little Rock and El Dorado during
2006. In 2005 the Company added three branch locations in the Little
Rock/Conway metropolitan area, one in the Fayetteville/Springdale/Rogers
metropolitan area and one in the Fort Smith metropolitan area. While
new financial centers can be dilutive to earnings in the short-term, the Company
believes they will reward shareholders in the intermediate and
long-term. As completion of its desired footprint within the state of
Arkansas nears, the Company continues to evaluate opportunities to expand into
contiguous states. More specifically, the Company is interested in
expansion by opening new financial centers or by acquisitions of financial
centers in growth or strategic markets, preferably with assets totaling $200
million or more.
With an
expanded presence in Arkansas, ongoing investments in technology and enhanced
products and services, the Company is in position to meet the demands of
customers in the markets it serves.
Competition
There is
significant competition among commercial banks in the Company’s market
areas. In addition, the Company also competes with other providers of
financial services, such as savings and loan associations, credit unions,
finance companies, securities firms, insurance companies, full service brokerage
firms and discount brokerage firms. Some of the Company’s competitors
have greater resources and, as such, may have higher lending limits and may
offer other services that are not provided by the Company. The
Company generally competes on the basis of customer service and responsiveness
to customer needs, available loan and deposit products, the rates of interest
charged on loans, the rates of interest paid for funds, and the availability and
pricing of trust and brokerage services.
2
Employees
As of
February 4, 2009, the Company and its subsidiaries had approximately 1,111 full
time equivalent employees. None of the employees is represented by
any union or similar groups, and the Company has not experienced any labor
disputes or strikes arising from any such organized labor groups. The
Company considers its relationship with its employees to be good.
Executive
Officers of the Company
The
following is a list of all executive officers of the Company. The
Board of Directors elects executive officers annually.
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NAME
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AGE
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POSITION
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YEARS SERVED
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J.
Thomas May
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62
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Chairman
and Chief Executive Officer
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22
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David
L. Bartlett
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57
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President
and Chief Operating Officer
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12
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Robert
A. Fehlman
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44
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Executive
Vice President and Chief Financial Officer
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20
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Marty
D. Casteel
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57
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Executive
Vice President
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20
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Robert
C. Dill
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65
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Executive
Vice President, Marketing
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42
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David
W. Garner
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39
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Senior
Vice President and Controller
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11
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Tommie
K. Jones
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61
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Senior
Vice President and Human Resources Director
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34
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L.
Ann Gill
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61
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Senior
Vice President/Manager, Audit
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43
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Kevin
J. Archer
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45
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Senior
Vice President/Credit Policy and Risk Assessment
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13
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John
L. Rush
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74
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Secretary
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41
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Board
of Directors of the Company
The
following is a list of the Board of Directors of the Company as of December 31,
2008, along with their principal occupation.
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NAME
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PRINCIPAL OCCUPATION
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William
E. Clark, II
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President
and Chief Executive Officer
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Clark
Contractors LLC
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Steven
A. Cossé
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Executive
Vice President and General Counsel
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Murphy
Oil Corporation
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Edward
Drilling
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President
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AT&T
Arkansas
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George
A. Makris, Jr.
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President
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M.K.
Distributors, Inc.
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J.
Thomas May
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Chairman
and Chief Executive Officer
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Simmons
First National Corporation
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W.
Scott McGeorge
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President
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Pine
Bluff Sand and Gravel Company
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Stanley
E. Reed
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Farmer
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Harry
L. Ryburn
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Orthodontist
(retired)
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Robert
L. Shoptaw
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Chairman
of the Board
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Arkansas
Blue Cross and Blue
Shield
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3
SUPERVISION
AND REGULATION
The
Company
The
Company, as a bank holding company, is subject to both federal and state
regulation. Under federal law, a bank holding company generally must
obtain approval from the Board of Governors of the Federal Reserve System
("FRB") before acquiring ownership or control of the assets or stock of a bank
or a bank holding company. Prior to approval of any proposed
acquisition, the FRB will review the effect on competition of the proposed
acquisition, as well as other regulatory issues.
The
federal law generally prohibits a bank holding company from directly or
indirectly engaging in non-banking activities. This prohibition does
not include loan servicing, liquidating activities or other activities so
closely related to banking as to be a proper incident thereto. Bank
holding companies, including the Company, which have elected to qualify as
financial holding companies, are authorized to engage in financial activities.
Financial activities include any activity that is financial in nature or any
activity that is incidental or complimentary to a financial
activity.
As a
financial holding company, the Company is required to file with the FRB an
annual report and such additional information as may be required by
law. From time to time, the FRB examines the financial condition of
the Company and its subsidiaries. The FRB, through civil and criminal
sanctions, is authorized to exercise enforcement powers over bank holding
companies (including financial holding companies) and non-banking subsidiaries,
to limit activities that represent unsafe or unsound practices or constitute
violations of law.
The
Company is subject to certain laws and regulations of the state of Arkansas
applicable to financial and bank holding companies, including examination and
supervision by the Arkansas Bank Commissioner. Under Arkansas law, a
financial or bank holding company is prohibited from owning more than one
subsidiary bank, if any subsidiary bank owned by the holding company has been
chartered for less than five years and, further, requires the approval of the
Arkansas Bank Commissioner for any acquisition of more than 25% of the capital
stock of any other bank located in Arkansas. No bank acquisition may
be approved if, after such acquisition, the holding company would control,
directly or indirectly, banks having 25% of the total bank deposits in the state
of Arkansas, excluding deposits of other banks and public funds.
Legislation
enacted in 1994 allows bank holding companies (including financial holding
companies) from any state to acquire banks located in any state without regard
to state law, provided that the holding company (1) is adequately capitalized,
(2) is adequately managed, (3) would not control more than 10% of the insured
deposits in the United States or more than 30% of the insured deposits in such
state, and (4) such bank has been in existence at least five years if so
required by the applicable state law.
Subsidiary
Banks
The Bank,
Simmons/El Dorado and Simmons First Trust Company N.A., as national banking
associations, are subject to regulation and supervision, of which regular bank
examinations are a part, by the Office of the Comptroller of the Currency of the
United States ("OCC"). Simmons/Jonesboro, Simmons/South,
Simmons/Northwest and Simmons/Hot Springs, as state chartered banks, are subject
to the supervision and regulation, of which regular bank examinations are a
part, by the Federal Deposit Insurance Corporation ("FDIC") and the Arkansas
State Bank Department. Simmons/Russellville and Simmons/Searcy, as state
chartered member banks, are subject to the supervision and regulation, of which
regular bank examinations are a part, by the Federal Reserve Board and the
Arkansas State Bank Department. The lending powers of each of the
subsidiary banks are generally subject to certain restrictions, including the
amount, which may be lent to a single borrower.
Prior to
passage of the GLB Act in 1999, the subsidiary banks, with numerous exceptions,
were subject to the application of the laws of the state of Arkansas, regarding
the limitation of the maximum permissible interest rate on loans. The
Arkansas limitation for general loans was 5% over the Federal Reserve Discount
Rate, with an additional maximum limitation of 17% per annum for consumer loans
and credit sales. Certain loans secured by first liens on residential
real estate and certain loans controlled by federal law (e.g., guaranteed
student loans, SBA loans, etc.) were exempt from this limitation; however, a
substantial portion of the loans made by the subsidiary banks, including all
credit card loans, have historically been subject to this
limitation. The GLB Act included a provision which sets the maximum
interest rate on loans made in Arkansas, by banks with Arkansas as their home
state, at the greater of the rate authorized by Arkansas law or the highest rate
permitted by any of the out-of-state banks which maintain branches in
Arkansas. An action was brought in the Western District of Arkansas,
attacking the validity of the statute in 2000. Subsequently, the
District Court issued a decision upholding the statute, and during
October 2001, the Eighth Circuit Court of Appeals upheld the statute on
appeal. Thus, in the fourth quarter of 2001, the Company began to
implement the changes permitted by the GLB Act.
4
All of the
Company's subsidiary banks are members of the FDIC, which provides insurance on
deposits of each member bank up to applicable limits by the Deposit Insurance
Fund. For this protection, each bank pays a statutory assessment to
the FDIC each year.
Federal
law substantially restricts transactions between banks and their
affiliates. As a result, the Company's subsidiary banks are limited
in making extensions of credit to the Company, investing in the stock or other
securities of the Company and engaging in other financial transactions with the
Company. Those transactions that are permitted must generally be
undertaken on terms at least as favorable to the bank as those prevailing in
comparable transactions with independent third parties.
Potential
Enforcement Action for Bank Holding Companies and Banks
Enforcement
proceedings seeking civil or criminal sanctions may be instituted against any
bank, any financial or bank holding company, any director, officer, employee or
agent of the bank or holding company, which is believed by the federal banking
agencies to be violating any administrative pronouncement or engaged in unsafe
and unsound practices. In addition, the FDIC may terminate the
insurance of accounts, upon determination that the insured institution has
engaged in certain wrongful conduct or is in an unsound condition to continue
operations.
Risk-Weighted
Capital Requirements for the Company and the Banks
Since
1993, banking organizations (including financial holding companies, bank holding
companies and banks) were required to meet a minimum ratio of Total Capital to
Total Risk-Weighted Assets of 8%, of which at least 4% must be in the form of
Tier 1 Capital. A well-capitalized institution is one that has at
least a 10% "total risk-based capital" ratio. For a tabular summary
of the Company’s risk-weighted capital ratios, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations – Capital" and Note
18, Stockholders’ Equity, of the Notes to Consolidated Financial
Statements.
A banking
organization's qualifying total capital consists of two components: Tier 1
Capital and Tier 2 Capital. Tier 1 Capital is an amount
equal to the sum of common shareholders' equity, hybrid capital instruments
(instruments with characteristics of debt and equity) in an amount up to 25% of
Tier 1 Capital, certain preferred stock and the minority interest in the equity
accounts of consolidated subsidiaries. For bank holding companies and
financial holding companies, goodwill (net of any deferred tax liability
associated with that goodwill) may not be included in Tier 1
Capital. Identifiable intangible assets may be included in
Tier 1 Capital for banking organizations, in accordance with certain
further requirements. At least 50% of the banking organization's
total regulatory capital must consist of Tier 1 Capital.
Tier 2
Capital is an amount equal to the sum of the qualifying portion of the allowance
for loan losses, certain preferred stock not included in Tier 1, hybrid capital
instruments (instruments with characteristics of debt and equity), certain
long-term debt securities and eligible term subordinated debt, in an amount up
to 50% of Tier 1 Capital. The eligibility of these items for
inclusion as Tier 2 Capital is subject to certain additional requirements and
limitations of the federal banking agencies.
Under the
risk-based capital guidelines, balance sheet assets and certain off-balance
sheet items, such as standby letters of credit, are assigned to one of four-risk
weight categories (0%, 20%, 50%, or 100%), according to the nature of the asset,
its collateral or the identity of the obligor or guarantor. The
aggregate amount in each risk category is adjusted by the risk weight assigned
to that category to determine weighted values, which are then added to determine
the total risk-weighted assets for the banking organization. For
example, an asset, such as a commercial loan, assigned to a 100% risk
category, is included in risk-weighted assets at its nominal face value, but a
loan secured by a one-to-four family residence is included at only 50% of its
nominal face value. The applicable ratios reflect capital, as so
determined, divided by risk-weighted assets, as so determined.
5
Federal
Deposit Insurance Corporation Improvement Act
The
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), enacted in
1991, requires the FDIC to increase assessment rates for insured banks and
authorizes one or more "special assessments," as necessary for the repayment of
funds borrowed by the FDIC or any other necessary purpose. As
directed in FDICIA, the FDIC has adopted a transitional risk-based assessment
system, under which the assessment rate for insured banks will vary according to
the level of risk incurred in the bank's activities. The risk
category and risk-based assessment for a bank is determined from its
classification, pursuant to the regulation, as well capitalized, adequately
capitalized or undercapitalized.
FDICIA
substantially revised the bank regulatory provisions of the Federal Deposit
Insurance Act and other federal banking statutes, requiring federal banking
agencies to establish capital measures and classifications. Pursuant
to the regulations issued under FDICIA, a depository institution will be deemed
to be well capitalized if it significantly exceeds the minimum level required
for each relevant capital measure; adequately capitalized if it meets each such
measure; undercapitalized if it fails to meet any such measure; significantly
undercapitalized if it is significantly below any such measure; and critically
undercapitalized if it fails to meet any critical capital level set forth in
regulations. The federal banking agencies must promptly mandate corrective
actions by banks that fail to meet the capital and related requirements in order
to minimize losses to the FDIC. The FDIC and OCC advised the Company
that the subsidiary banks have been classified as well capitalized under these
regulations.
The
federal banking agencies are required by FDICIA to prescribe standards for banks
and bank holding companies (including financial holding companies) relating to
operations and management, asset quality, earnings, stock valuation and
compensation. A bank or bank holding company that fails to comply
with such standards will be required to submit a plan designed to achieve
compliance. If no plan is submitted or the plan is not implemented,
the bank or holding company would become subject to additional regulatory action
or enforcement proceedings.
A variety
of other provisions included in FDICIA may affect the operations of the Company
and the subsidiary banks, including new reporting requirements, revised
regulatory standards for real estate lending, "truth in savings" provisions, and
the requirement that a depository institution give 90 days prior notice to
customers and regulatory authorities before closing any branch.
Temporary
Liquidity Guarantee Program
On
November 21, 2008, the Board of Directors of the FDIC adopted a final rule
relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG
Program was announced by the FDIC on October 14, 2008, preceded by the
determination of systemic risk by the Secretary of the Department of Treasury
(after consultation with the President) as an initiative to counter the
system-wide crisis in the nation’s financial sector. Under the TLG
Program the FDIC will (i) guarantee, through the earlier of maturity or June 30,
2012, certain newly issued senior unsecured debt issued by participating
institutions on or after October 14, 2008, and before June 30, 2009, and (ii)
provide full FDIC deposit insurance coverage for non-interest bearing
transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts
paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts
(“IOLTA”) accounts held at participating FDIC- insured institutions through
December 31, 2009. Coverage under the TLG Program was available for
the first 30 days without charge. The fee assessment for coverage of
senior unsecured debt ranges from 50 basis points to 100 basis points per annum
depending on the initial maturity of the debt. The fee assessment for
deposit insurance coverage is an annualized 10 basis points paid quarterly on
amounts in covered accounts exceeding $250,000. On December 5, 2008,
the Company elected to participate in both guarantee programs. On
February 10, 2009, the FDIC extended the date for issuing debt under the TLG
Program from June 30 to October 31, 2009.
Available
Information
The
Company maintains an Internet website at www.simmonsfirst.com. On
this website under the section, Investor Relations – Documents, the Company
makes its filings with the Securities and Exchange Commission available free of
charge. Additionally, the Company has adopted and posted on its
website a Code of Ethics that applies to its principal executive officer,
principal financial officer and principal accounting officer.
6
ITEM 1A. RISK
FACTORS
Risks
Related to the Company’s Business
The
Company’s Business May Be Adversely Affected by Conditions in the Financial
Markets and Economic Conditions Generally
Since
December 2007, the United States has been in a recession. Business
activity across a wide range of industries and regions is greatly reduced and
local governments and many businesses are in serious difficulty due to the lack
of consumer spending and the lack of liquidity in the credit
markets. Unemployment has increased significantly.
Since
mid-2007, and particularly during the second half of 2008, the financial
services industry and the securities markets generally were materially and
adversely affected by significant declines in the values of nearly all asset
classes and by a serious lack of liquidity. This was initially
triggered by declines in home prices and the values of subprime mortgages, but
spread to all mortgage and real estate asset classes, to leveraged bank loans
and to nearly all asset classes, including equities. The global
markets have been characterized by substantially increased volatility and
short-selling and an overall loss of investor confidence, initially in financial
institutions, but more recently in companies in a number of other industries and
in the broader markets.
Market
conditions have also led to the failure or merger of a number of prominent
financial institutions. Financial institution failures or
near-failures have resulted in further losses as a consequence of defaults on
securities issued by them and defaults under contracts entered into with such
entities as counterparties. Furthermore, declining asset values, defaults on
mortgages and consumer loans, and the lack of market and investor confidence, as
well as other factors, have all combined to increase credit default swap
spreads, to cause rating agencies to lower credit ratings, and to otherwise
increase the cost and decrease the availability of liquidity, despite very
significant declines in Federal Reserve borrowing rates and other government
actions. Some banks and other lenders have suffered significant
losses and have become reluctant to lend, even on a secured basis, due to the
increased risk of default and the impact of declining asset values on the value
of collateral. The foregoing has significantly weakened the strength
and liquidity of some financial institutions worldwide. In 2008, the
U.S. government, the Federal Reserve and other regulators have taken numerous
steps to increase liquidity and to restore investor confidence, including
investing approximately $200 billion in the equity of other banking
organizations, but asset values have continued to decline and access to
liquidity continues to be very limited.
The
Company’s financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
value of collateral securing those loans, is highly dependent upon on the
business environment in the markets where the Company operates (the State of
Arkansas) and in the United States as a whole. A favorable business
environment is generally characterized by, among other factors, economic growth,
efficient capital markets, low inflation, high business and investor confidence,
and strong business earnings. Unfavorable or uncertain economic and
market conditions can be caused by: declines in economic growth, business
activity or investor or business confidence; limitations on the availability or
increases in the cost of credit and capital; increases in inflation or interest
rates; natural disasters; or a combination of these or other
factors.
Overall,
during 2008, the business environment has been adverse for many households and
businesses in the United States and worldwide. The business
environment in Arkansas has been less adverse than in the United States
generally but continues to deteriorate. It is expected that the
business environment in the State of Arkansas, the United States and worldwide
will continue to deteriorate for the foreseeable future. There can be
no assurance that these conditions will improve in the near
term. Such conditions could adversely affect the credit quality of
the Company’s loans, results of operations and financial condition.
The
Company is Subject to Interest Rate Risk
The
Company’s earnings and cash flows are largely dependent upon its net interest
income. Net interest income is the difference between interest income
earned on interest-earning assets such as loans and securities and interest
expense paid on interest-bearing liabilities such as deposits and borrowed
funds. Interest rates are highly sensitive to many factors that are
beyond the Company’s control, including general economic conditions and policies
of various governmental and regulatory agencies and, in particular, the Board of
Governors of the Federal Reserve System. Changes in monetary policy,
including changes in interest rates, could influence not only the interest the
Company receives on loans and securities and the amount of interest it pays on
deposits and borrowings, but such changes could also affect (i) the Company’s
ability to originate loans and obtain deposits, (ii) the fair value of the
Company’s financial assets and liabilities, and (iii) the average duration of
the Company’s mortgage-backed securities portfolio. If the interest
rates paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, the Company’s net
interest income, and therefore earnings, could be adversely
affected. Earnings could also be adversely affected if the interest
rates received on loans and other investments fall more quickly than the
interest rates paid on deposits and other borrowings.
7
Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on the
Company’s results of operations, any substantial, unexpected, prolonged change
in market interest rates could have a material adverse effect on the Company’s
financial condition and results of operations.
The
Company is Subject to Lending Risk
There are
inherent risks associated with the Company’s lending
activities. These risks include, among other things, the impact of
changes in interest rates and changes in the economic conditions in the State of
Arkansas and the United States. Increases in interest rates and/or
continuing weakening economic conditions could adversely impact the ability of
borrowers to repay outstanding loans or the value of the collateral securing
these loans. The Company is also subject to various laws and
regulations that affect its lending activities. Failure to comply
with applicable laws and regulations could subject the Company to regulatory
enforcement action that could result in the assessment of significant civil
money penalties against the Company.
The
Company’s Allowance for Possible Loan Losses May Be Insufficient
The
Company maintains an allowance for possible loan losses, which is a reserve
established through a provision for possible loan losses charged to expense,
that represents management’s best estimate of probable losses that have been
incurred within the existing portfolio of loans. The allowance, in
the judgment of management, is necessary to reserve for estimated loan losses
and risks inherent in the loan portfolio. The level of the allowance
reflects management’s continuing evaluation of industry concentrations; specific
credit risks; loan loss experience; current loan portfolio quality; present
economic, political and regulatory conditions and unidentified losses inherent
in the current loan portfolio. The determination of the appropriate
level of the allowance for possible loan losses inherently involves a high
degree of subjectivity and requires the Company to make significant estimates of
current credit risks and future trends, all of which may undergo material
changes. Continuing deterioration in economic conditions affecting
borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of the
Company’s control, may require an increase in the allowance for possible loan
losses. In addition, bank regulatory agencies periodically review the
Company’s allowance for loan losses and may require an increase in the provision
for possible loan losses or the recognition of further loan charge-offs, based
on judgments different than those of management. In addition, if
charge-offs in future periods exceed the allowance for possible loan losses, the
Company will need additional provisions to increase the allowance for possible
loan losses. Any increases in the allowance for possible loan losses
will result in a decrease in net income and, possibly, capital, and may have a
material adverse effect on the Company’s financial condition and results of
operations.
The
Company’s Profitability Depends Significantly on Economic Conditions in the
State of Arkansas
The
Company’s success depends primarily on the general economic conditions of the
State of Arkansas and the specific local markets in which the Company
operates. Unlike larger national or other regional banks that are
more geographically diversified, the Company provides banking and financial
services to customers across Arkansas through its 84 financial centers in the
state. The economic condition of Arkansas has a significant impact on
the demand for the Company’s products and services as well as the ability of the
Company’s customers to repay loans, the value of the collateral securing loans
and the stability of the Company’s deposit funding sources. Although
economic conditions in the State of Arkansas have experienced less decline than
in the United States generally, these conditions are declining and are expected
to continue to decline. A significant decline in general economic
conditions, whether caused by recession, inflation, unemployment, changes in
securities markets, acts of terrorism, outbreak of hostilities or other
international or domestic occurrences or other factors could impact these local
economic conditions and, in turn, have a material adverse effect on the
Company’s financial condition and results of operations.
The
Company Operates in a Highly Competitive Industry
The
Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include national,
regional, and community banks within the various markets where the Company
operates. The Company also faces competition from many other types of
financial institutions, including, without limitation, savings and loans, credit
unions, finance companies, brokerage firms, insurance companies, factoring
companies and other financial intermediaries. The financial services
industry could become even more competitive as a result of legislative,
regulatory and technological changes and continued
consolidation. Banks, securities firms and insurance companies can
merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant
banking. Also, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment systems. Many
of the Company’s competitors have fewer regulatory constraints and may have
lower cost structures. Additionally, due to their size, many
competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for
those products and services than the Company can.
8
The
Company’s ability to compete successfully depends on a number of factors,
including, among other things:
|
●
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The
ability to develop, maintain and build long-term customer relationships
based on top quality service, high ethical standards and safe, sound
assets.
|
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●
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The
ability to expand the Company’s market
position.
|
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●
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The
scope, relevance and pricing of products and services offered to meet
customer needs and demands.
|
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●
|
The
rate at which the Company introduces new products and services relative to
its competitors.
|
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Customer
satisfaction with the Company’s level of
service.
|
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●
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Industry
and general economic trends.
|
Failure to
perform in any of these areas could significantly weaken the Company’s
competitive position, which could adversely affect the Company’s growth and
profitability, which, in turn, could have a material adverse effect on the
Company’s financial condition and results of operations.
The
Company is Subject to Extensive Government Regulation and
Supervision
The
Company is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds and the banking system as a
whole, not security holders. These regulations affect the Company’s
lending practices, capital structure, investment practices, dividend policy and
growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible
changes. It is likely that there will be significant changes to the
banking and financial institutions regulatory regimes in the near future in
light of the recent performance of and government intervention in the financial
services sector. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation of statutes,
regulations or policies, could affect the Company in substantial and
unpredictable ways. Such changes could subject the Company to
additional costs, limit the types of financial services and products the Company
may offer and/or increase the ability of non-banks to offer competing financial
services and products, among other things. Failure to comply with
laws, regulations or policies could result in sanctions by regulatory agencies,
civil money penalties and/or reputation damage, which could have a material
adverse effect on the Company’s business, financial condition and results of
operations. While the Company has policies and procedures designed to
prevent any such violations, there can be no assurance that such violations will
not occur.
The
Company’s Controls and Procedures May Fail or Be Circumvented
Management
regularly reviews and updates the Company’s internal controls, disclosure
controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are
met. Any failure or circumvention of the Company’s controls and
procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on the Company’s business,
results of operations and financial condition.
New
Lines of Business or New Products and Services May Subject the Company to
Additional Risks
From time
to time, the Company may implement new lines of business or offer new products
and services within existing lines of business. There are substantial
risks and uncertainties associated with these efforts, particularly in instances
where the markets are not fully developed. In developing and
marketing new lines of business and/or new products and services the Company may
invest significant time and resources. Initial timetables for the
introduction and development of new lines of business and/or new products or
services may not be achieved and price and profitability targets may not prove
feasible. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may also impact the
successful implementation of a new line of business or a new product or
service. Furthermore, any new line of business and/ or new product or
service could have a significant impact on the effectiveness of the Company’s
system of internal controls. Failure to successfully manage these
risks in the development and implementation of new lines of business or new
products or services could have a material adverse effect on the Company’s
business, results of operations and financial condition.
9
The
Company Relies on Dividends from Its Subsidiaries for Most of Its
Revenue
The
Company is a separate and distinct legal entity from its
subsidiaries. It receives substantially all of its revenue from
dividends from its subsidiaries. These dividends are the principal
source of funds to pay dividends on the Company’s common stock and interest and
principal on the Company’s debt. Various federal and/or state laws
and regulations limit the amount of dividends that the subsidiaries may pay to
the Company. In the event the subsidiaries are unable to pay
dividends to the Company, the Company may not be able to service debt, pay
obligations or pay dividends on the Company’s common stock. The
inability to receive dividends from its subsidiaries could have a material
adverse effect on the Company’s business, financial condition and results of
operations.
Potential
Acquisitions May Disrupt the Company’s Business and Dilute Stockholder
Value
The
Company seeks merger or acquisition partners that are culturally similar and
have experienced management and possess either significant market presence or
have potential for improved profitability through financial management,
economies of scale or expanded services. Acquiring other banks,
businesses, or branches involves various risks commonly associated with
acquisitions, including, among other things:
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●
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Potential
exposure to unknown or contingent liabilities of the target
company.
|
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●
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Exposure
to potential asset quality issues of the target
company.
|
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●
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Difficulty
and expense of integrating the operations and personnel of the target
company.
|
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●
|
Potential
disruption to the Company’s
business.
|
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●
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Potential
diversion of the Company’s management’s time and
attention.
|
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●
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The
possible loss of key employees and customers of the target
company.
|
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●
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Difficulty
in estimating the value of the target
company.
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●
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Potential
changes in banking or tax laws or regulations that may affect the target
company.
|
The
Company regularly evaluates merger and acquisition opportunities and conducts
due diligence activities related to possible transactions with other financial
institutions and financial services companies. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and
future mergers or acquisitions involving cash, debt or equity securities may
occur at any time. Acquisitions typically involve the payment of a
premium over book and market values, and, therefore, some dilution of the
Company’s tangible book value and net income per common share may occur in
connection with any future transaction. Furthermore, failure to
realize the expected revenue increases, cost savings, increases in geographic or
product presence, and/or other projected benefits from an acquisition could have
a material adverse effect on the Company’s financial condition and results of
operations.
The
Company May Not Be Able to Attract and Retain Skilled People
The
Company’s success depends, in large part, on its ability to attract and retain
key people. Competition for the best people in most activities
engaged in by the Company can be intense and the Company may not be able to hire
people or to retain them. The unexpected loss of services of key
personnel of the Company could have a material adverse impact on the Company’s
business because of their skills, knowledge of the Company’s market, years of
industry experience and the difficulty of promptly finding qualified replacement
personnel.
The
Company’s Information Systems May Experience an Interruption or Breach in
Security
The
Company relies heavily on communications and information systems to conduct its
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in the Company’s customer
relationship management, general ledger, deposit, loan and other
systems. While the Company has policies and procedures designed to
prevent or limit the effect of the failure, interruption or security breach of
its information systems, there can be no assurance that any such failures,
interruptions or security breaches will not occur or, if they do occur, that
they will be adequately addressed. The occurrence of any failures,
interruptions or security breaches of the Company’s information systems could
damage the Company’s reputation, result in a loss of customer business, subject
the Company to additional regulatory scrutiny, or expose the Company to civil
litigation and possible financial liability, any of which could have a material
adverse effect on the Company’s financial condition and results of
operations.
10
The
Company Continually Encounters Technological Change
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce
costs. The Company’s future success depends, in part, upon its
ability to address the needs of its customers by using technology to provide
products and services that will satisfy customer demands, as well as to create
additional efficiencies in the Company’s operations. Many of the
Company’s competitors have substantially greater resources to invest in
technological improvements. The Company may not be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to its
customers. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse
impact on the Company’s business and, in turn, the Company’s financial condition
and results of operations.
The
Company is Subject to Claims and Litigation Pertaining to Fiduciary
Responsibility
From time
to time, customers make claims and take legal action pertaining to the Company’s
performance of its fiduciary responsibilities. Whether customer
claims and legal action related to the Company’s performance of its fiduciary
responsibilities are founded or unfounded, if such claims and legal actions are
not resolved in a manner favorable to the Company they may result in significant
financial liability and/or adversely affect the market perception of the Company
and its products and services as well as impact customer demand for those
products and services. Any financial liability or reputation damage
could have a material adverse effect on the Company’s business, which, in turn,
could have a material adverse effect on the Company’s financial condition and
results of operations.
Severe
Weather, Natural Disasters, Acts of War or Terrorism and Other External Events
Could Significantly Impact the Company’s Business
Severe
weather, natural disasters, acts of war or terrorism and other adverse external
events could have a significant impact on the Company’s ability to conduct
business. Such events could affect the stability of the Company’s
deposit base, impair the ability of borrowers to repay outstanding loans, impair
the value of collateral securing loans, cause significant property damage,
result in loss of revenue and/or cause the Company to incur additional
expenses. Although management has established disaster recovery
policies and procedures, the occurrence of any such event in the future could
have a material adverse effect on the Company’s business, which, in turn, could
have a material adverse effect on the Company’s financial condition and results
of operations.
Risks
Associated with the Company’s Common Stock
The
Company’s Stock Price Can Be Volatile
Stock
price volatility may make it more difficult for you to resell your common stock
when you want and at prices you find attractive. The Company’s stock price can
fluctuate significantly in response to a variety of factors including, among
other things:
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Changes
in securities analysts’ estimates of financial
performance.
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Volatility
of stock market prices and volumes.
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Rumors
or erroneous information.
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Changes
in market valuations of similar
companies.
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Changes
in interest rates.
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New
developments in the banking
industry.
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Variations
in quarterly or annual operating
results.
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New
litigation or changes in existing
litigation.
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Regulatory
actions.
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Changes
in accounting policies or procedures as may be required by the Financial
Accounting Standards Board or other regulatory
agencies.
|
11
General
market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause the Company’s stock price to
decrease regardless of operating results.
The
Trading Volume in the Company’s Common Stock is Less Than That of Other Larger
Financial Services Companies
Although
the Company’s common stock is listed for trading on the Nasdaq Global Select
Market, the trading volume in its common stock is less than that of other,
larger financial services companies. A public trading market having
the desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of willing buyers and sellers of the Company’s
common stock at any given time. This presence depends on the
individual decisions of investors and general economic and market conditions
over which the Company has no control. Given the lower trading volume
of the Company’s common stock, significant sales of the Company’s common stock,
or the expectation of these sales, could cause the Company’s stock price to
fall.
An
Investment in the Company’s Common Stock is Not an Insured Deposit
The
Company’s common stock is not a bank deposit and, therefore, is not insured
against loss by the Federal Deposit Insurance Corporation (FDIC), any other
deposit insurance fund or by any other public or private
entity. Investment in the Company’s common stock is inherently risky
for the reasons described in this “Risk Factors” section and elsewhere in this
report and is subject to the same market forces that affect the price of common
stock in any company. As a result, if you acquire the Company’s
common stock, you could lose some or all of your investment.
The
Company’s Articles of Incorporation and By-Laws As Well As Certain Banking Laws
May Have an Anti-Takeover Effect
Provisions
of the Company’s articles of incorporation and by-laws and federal banking laws,
including regulatory approval requirements, could make it more difficult for a
third party to acquire the Company, even if doing so would be perceived to be
beneficial to the Company’s shareholders. The combination of these
provisions effectively inhibits a non-negotiated merger or other business
combination, which, in turn, could adversely affect the market price of the
Company’s common stock.
Risks
Associated with the Company’s Industry
The
Earnings of Financial Services Companies Are Significantly Affected by General
Business and Economic Conditions
The
Company’s operations and profitability are impacted by general business and
economic conditions in the United States and abroad. These conditions
include short-term and long-term interest rates, inflation, money supply,
political issues, legislative and regulatory changes, fluctuations in both debt
and equity capital markets, broad trends in industry and finance, and the
strength of the U.S. economy and the local economies in which the Company
operates, all of which are beyond the Company’s control. The
continuing deterioration in economic conditions in the United States and abroad
could result in an increase in loan delinquencies and non-performing assets,
decreases in loan collateral values and a decrease in demand for the Company’s
products and services, among other things, any of which could have a material
adverse impact on the Company’s financial condition and results of
operations.
Financial
Services Companies Depend on the Accuracy and Completeness of Information about
Customers and Counterparties
In
deciding whether to extend credit or enter into other transactions, the Company
may rely on information furnished by or on behalf of customers and
counterparties, including financial statements, credit reports and other
financial information. The Company may also rely on representations
of those customers, counterparties or other third parties, such as independent
auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial
statements, credit reports or other financial information could have a material
adverse impact on the Company’s business and, in turn, the Company’s financial
condition and results of operations.
12
Consumers
May Decide Not to Use Banks to Complete their Financial
Transactions
Technology
and other changes are allowing parties to complete financial transactions that
historically have involved banks through alternative methods. For
example, consumers can now maintain funds that would have historically been held
as bank deposits in brokerage accounts or mutual funds. Consumers can
also complete transactions such as paying bills and/or transferring funds
directly without the assistance of banks. The process of eliminating
banks as intermediaries, known as “disintermediation,” could result in the loss
of fee income, as well as the loss of customer deposits and the related income
generated from those deposits. The loss of these revenue streams and
the lower cost deposits as a source of funds could have a material adverse
effect on the Company’s financial condition and results of
operations.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
There are
currently no unresolved Commission staff comments.
ITEM 2.
PROPERTIES
The
principal offices of the Company and the Bank consist of an eleven-story office
building and adjacent office space located in the central business district of
the city of Pine Bluff, Arkansas. Additionally, the Company has
corporate offices located in Little Rock, Arkansas.
The
Company and its subsidiaries own or lease additional offices throughout the
state of Arkansas. The Company and its eight banks conduct financial
operations from 88 offices, of which 84 are financial centers, in
47 communities throughout Arkansas.
ITEM 3. LEGAL
PROCEEDINGS
The
Company and/or its subsidiaries have various unrelated legal proceedings, most
of which involve loan foreclosure activity pending, which, in the aggregate, are
not expected to have a material adverse effect on the financial position of the
Company and its subsidiaries. The Company or its subsidiaries remain
the subject of the following lawsuit asserting claims against the Company or its
subsidiaries.
On October
1, 2003, an action in Pulaski County Circuit Court was filed by Thomas F.
Carter, Tena P. Carter and certain related entities against Simmons First Bank
of South Arkansas and Simmons First National Bank alleging wrongful conduct by
the banks in the collection of certain loans. The Company was later
added as a party defendant. The plaintiffs are seeking $2,000,000 in
compensatory damages and $10,000,000 in punitive damages. The Company
and the banks have filed Motions to Dismiss. The plaintiffs were
granted additional time to discover any evidence for litigation and have
submitted such findings. At the hearing on the Motions for Summary
Judgment, the Court dismissed Simmons First National Bank due to lack of
venue. Venue has been changed to Jefferson County for the Company and
Simmons First Bank of South Arkansas. Non-binding mediation failed on
June 24, 2008. Jury trial is set for the week of June 22,
2009. At this time, no basis for any material liability has been
identified. The Company and the bank continue to vigorously defend
the claims asserted in the suit.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters
were submitted to a vote of security-holders, through the solicitation of
proxies or otherwise, during the fourth quarter of the fiscal year covered by
this report.
13
PART
II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Quarterly
|
||||||||||||
|
Price
Per
|
Dividends
|
|||||||||||
|
Common
Share
|
Per
Common
|
|||||||||||
|
High
|
Low
|
Share
|
||||||||||
|
2008
|
||||||||||||
|
1st
quarter
|
$ | 29.73 | $ | 24.41 | $ | 0.19 | ||||||
|
2nd
quarter
|
32.95 | 27.97 | 0.19 | |||||||||
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3rd
quarter
|
36.00 | 26.47 | 0.19 | |||||||||
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4th
quarter
|
33.55 | 23.68 | 0.19 | |||||||||
|
2007
|
||||||||||||
|
1st
quarter
|
$ | 32.19 | $ | 25.33 | $ | 0.18 | ||||||
|
2nd
quarter
|
30.49 | 25.75 | 0.18 | |||||||||
|
3rd
quarter
|
29.00 | 22.33 | 0.18 | |||||||||
|
4th
quarter
|
29.48 | 23.81 | 0.19 | |||||||||
As of
February 4, 2009, there were 1,376 shareholders of record of the Company’s
Common Stock.
The
Company's policy is to declare regular quarterly dividends based upon the
Company's earnings, financial position, capital requirements and such other
factors deemed relevant by the Board of Directors. This dividend
policy is subject to change, however, and the payment of dividends by the
Company is necessarily dependent upon the availability of earnings and the
Company's financial condition in the future. The payment of dividends
on the Common Stock is also subject to regulatory capital
requirements. The Company has received approval from The Department
of the Treasury (the “Treasury”) to participate in the Troubled Asset Relief
Program Capital Purchase Program (the “CPP”). If the Company
participates in the CPP by issuing Preferred Stock to the Treasury, dividend
increases may be restricted and will require the Treasury’s consent for three
years. For further discussion on the CPP, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operation – Recent
Market Developments.”
The
Company's principal source of funds for dividend payments to its stockholders is
dividends received from its subsidiary banks. Under applicable
banking laws, the declaration of dividends by the Bank and Simmons/El Dorado in
any year, in excess of its net profits, as defined, for that year, combined with
its retained net profits of the preceding two years, must be approved by the
Office of the Comptroller of the Currency. Further, as to
Simmons/Jonesboro, Simmons/Northwest, Simmons/South, Simmons/Hot Springs,
Simmons/Russellville and Simmons/Searcy, regulators have specified that the
maximum dividends state banks may pay to the parent company without prior
approval is 75% of the current year earnings plus 75% of the retained net
earnings of the preceding year. At December 31, 2008, approximately
$14.3 million was available for the payment of dividends by the subsidiary banks
without regulatory approval. For further discussion of restrictions
on the payment of dividends, see "Quantitative and Qualitative Disclosures About
Market Risk – Liquidity and Market Risk Management," and Note 18, Stockholders’
Equity, of Notes to Consolidated Financial Statements.
Stock
Repurchase
The
Company made no purchases of its common stock during the three months ended
December 31, 2008.
On
November 28, 2007, the Company announced the substantial completion of the
existing stock repurchase program and the adoption by the Board of Directors of
a new stock repurchase program. The program authorizes the repurchase
of up to 700,000 shares of Class A common stock, or approximately 5% of the
outstanding common stock. Under the repurchase program, there is no
time limit for the stock repurchases, nor is there a minimum number of shares
the Company intends to repurchase. The Company may discontinue
purchases at any time that management determines additional purchases are not
warranted. The shares are to be purchased from time to time at
prevailing market prices, through open market or unsolicited negotiated
transactions, depending upon market conditions. The Company intends
to use the repurchased shares to satisfy stock option exercise, payment of
future stock dividends and general corporate purposes.
14
Effective
July 1, 2008, the Company made a strategic decision to temporarily suspend stock
repurchases. This decision was made to preserve capital at the parent
company due to the lack of liquidity in the credit markets and the uncertainties
in the overall economy. If the Company participates in the CPP by
issuing Preferred Stock to the Treasury, stock repurchases may be restricted and
will require the Treasury’s consent for three years. For further
discussion on the CPP, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operation – Recent Market Developments.”
Performance
Graph
The
performance graph below compares the cumulative total shareholder return on the
Company’s Common Stock with the cumulative total return on the equity securities
of companies included in the NASDAQ Bank Stock Index and the S&P 500 Stock
Index. The graph assumes an investment of $100 on December 31, 2003
and reinvestment of dividends on the date of payment without
commissions. The performance graph represents past performance and
should not be considered to be an indication of future performance.
|
Period
Ending
|
||||||||||||||||||||||||
|
Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
||||||||||||||||||
|
Simmons
First National Corporation
|
100.00
|
107.31
|
105.09
|
121.93
|
105.75
|
120.66
|
||||||||||||||||||
|
NASDAQ
Bank Index
|
100.00
|
110.99
|
106.18
|
117.87
|
91.85
|
69.88
|
||||||||||||||||||
|
S&P
500 Index
|
100.00
|
110.88
|
116.33
|
134.70
|
142.10
|
89.53
|
||||||||||||||||||
15
Forward
Looking Statements
Certain
statements contained in this Annual Report may not be based on historical facts
and are “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period(s) or by the use of forward-looking
terminology, such as “anticipate,” “estimate,” “expect,” “foresee,” “may,”
“might,” “will,” “would,” “could” or “intend,” future or conditional verb
tenses, and variations or negatives of such terms. These
forward-looking statements include, without limitation, those relating to the
Company’s future growth, revenue, assets, asset quality, profitability and
customer service, critical accounting policies, net interest margin,
non-interest revenue, market conditions related to the Company’s stock
repurchase program, allowance for loan losses, the effect of certain new
accounting standards on the Company’s financial statements, income tax
deductions, credit quality, the level of credit losses from lending commitments,
net interest revenue, interest rate sensitivity, loan loss experience,
liquidity, capital resources, market risk, earnings, effect of pending
litigation, acquisition strategy, legal and regulatory limitations and
compliance and competition.
We caution
the reader not to place undue reliance on the forward-looking statements
contained in this Report in that actual results could differ materially from
those indicated in such forward-looking statements due to a variety of
factors. These factors include, but are not limited to, changes in
the Company’s operating or expansion strategy, availability of and costs
associated with obtaining adequate and timely sources of liquidity, the ability
to maintain credit quality, possible adverse rulings, judgments, settlements and
other outcomes of pending litigation, the ability of the Company to collect
amounts due under loan agreements, changes in consumer preferences,
effectiveness of the Company’s interest rate risk management strategies, laws
and regulations affecting financial institutions in general or relating to
taxes, the effect of pending or future legislation, the ability of the Company
to repurchase its Common Stock on favorable terms and other risk
factors. Other relevant risk factors may be detailed from time to
time in the Company’s press releases and filings with the Securities and
Exchange Commission. We undertake no obligation to update these
forward-looking statements to reflect events or circumstances that occur after
the date of this Report.
The
following table sets forth selected consolidated financial data concerning the
Company and is qualified in its entirety by the detailed information and
consolidated financial statements, including notes thereto, included
elsewhere in this report. The income statement, balance sheet
and per common share data as of and for the years ended December 31, 2008,
2007, 2006, 2005 and 2004, were derived from consolidated financial statements
of the Company, which were audited by BKD, LLP. The selected
consolidated financial data set forth below should be read in conjunction with
the financial statements of the Company and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
16
|
SELECTED CONSOLIDATED FINANCIAL
DATA
|
||||||||||||||||||||
|
Years
Ended December 31 (1)
|
||||||||||||||||||||
|
(In
thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Income
statement data:
|
||||||||||||||||||||
|
Net
interest income
|
$ | 94,017 | $ | 92,116 | $ | 88,804 | $ | 90,257 | $ | 85,636 | ||||||||||
|
Provision
for loan losses
|
8,646 | 4,181 | 3,762 | 7,526 | 8,027 | |||||||||||||||
|
Net
interest income after provision
|
||||||||||||||||||||
|
for
loan losses
|
85,371 | 87,935 | 85,042 | 82,731 | 77,609 | |||||||||||||||
|
Non-interest
income
|
49,326 | 46,003 | 43,947 | 42,318 | 40,705 | |||||||||||||||
|
Non-interest
expense
|
96,360 | 94,197 | 89,068 | 85,584 | 82,385 | |||||||||||||||
|
Provision
for income taxes
|
11,427 | 12,381 | 12,440 | 12,503 | 11,483 | |||||||||||||||
|
Net
income
|
26,910 | 27,360 | 27,481 | 26,962 | 24,446 | |||||||||||||||
|
Per
share data:
|
||||||||||||||||||||
|
Basic
earnings
|
1.93 | 1.95 | 1.93 | 1.88 | 1.68 | |||||||||||||||
|
Diluted
earnings
|
1.91 | 1.92 | 1.90 | 1.84 | 1.65 | |||||||||||||||
|
Diluted
core earnings (non-GAAP) (2)
|
1.73 | 1.97 | 1.90 | 1.84 | 1.68 | |||||||||||||||
|
Book
value
|
20.69 | 19.57 | 18.24 | 17.04 | 16.29 | |||||||||||||||
|
Dividends
|
0.76 | 0.73 | 0.68 | 0.61 | 0.57 | |||||||||||||||
|
Balance
sheet data at period end:
|
||||||||||||||||||||
|
Assets
|
2,923,109 | 2,692,447 | 2,651,413 | 2,523,768 | 2,413,944 | |||||||||||||||
|
Loans
|
1,933,074 | 1,850,454 | 1,783,495 | 1,718,107 | 1,571,376 | |||||||||||||||
|
Allowance
for loan losses
|
25,841 | 25,303 | 25,385 | 26,923 | 26,508 | |||||||||||||||
|
Deposits
|
2,336,333 | 2,182,857 | 2,175,531 | 2,059,958 | 1,959,195 | |||||||||||||||
|
Long-term
debt
|
158,671 | 82,285 | 83,311 | 87,020 | 94,663 | |||||||||||||||
|
Stockholders’
equity
|
288,792 | 272,406 | 259,016 | 244,085 | 238,222 | |||||||||||||||
|
Capital
ratios at period end:
|
||||||||||||||||||||
|
Stockholders’
equity to
|
||||||||||||||||||||
|
total
assets
|
9.88 | % | 10.12 | % | 9.75 | % | 9.67 | % | 9.87 | % | ||||||||||
|
Leverage
(3)
|
9.15 | % | 9.06 | % | 8.83 | % | 8.62 | % | 8.46 | % | ||||||||||
|
Tier
1
|
13.24 | % | 12.43 | % | 12.38 | % | 12.26 | % | 12.72 | % | ||||||||||
|
Total
risk-based
|
14.50 | % | 13.69 | % | 13.64 | % | 13.54 | % | 14.00 | % | ||||||||||
|
Selected
ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
0.94 | % | 1.03 | % | 1.07 | % | 1.08 | % | 1.03 | % | ||||||||||
|
Return
on average equity
|
9.54 | % | 10.26 | % | 10.93 | % | 11.24 | % | 10.64 | % | ||||||||||
|
Return
on average tangible equity (non-GAAP) (4)
|
12.54 | % | 13.78 | % | 15.03 | % | 15.79 | % | 14.94 | % | ||||||||||
|
Net
interest margin (5)
|
3.75 | % | 3.96 | % | 3.96 | % | 4.13 | % | 4.08 | % | ||||||||||
|
Allowance/nonperforming
loans
|
165.12 | % | 226.10 | % | 234.05 | % | 319.48 | % | 220.84 | % | ||||||||||
|
Allowance
for loan losses as a
|
||||||||||||||||||||
|
percentage
of period-end loans
|
1.34 | % | 1.37 | % | 1.42 | % | 1.57 | % | 1.69 | % | ||||||||||
|
Nonperforming
loans as a percentage
|
||||||||||||||||||||
|
of
period-end loans
|
0.81 | % | 0.60 | % | 0.56 | % | 0.49 | % | 0.76 | % | ||||||||||
|
Net
charge-offs as a percentage
|
||||||||||||||||||||
|
of
average total assets
|
0.28 | % | 0.16 | % | 0.15 | % | 0.28 | % | 0.34 | % | ||||||||||
|
Dividend
payout
|
39.79 | % | 38.02 | % | 35.79 | % | 33.15 | % | 38.80 | % | ||||||||||
|
(1)
The selected consolidated financial data set forth above should be read in
conjunction with the financial statements of the Company and related
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this report.
|
||||||||||||||||||||
|
(2)
Diluted core earnings (net income excluding nonrecurring items) is a
non-GAAP measure. The following nonrecurring items were excluded in
the calculation of diluted core earnings per share (non-GAAP). In
2008, the Company recorded a $0.13 increase in EPS from the cash proceeds
on a mandatory Visa stock redemption and a $0.05 increase in EPS from the
reversal of Visa, Inc.’s litigation expense recorded in 2007. In
2007, the Company recorded a $0.05 reduction in EPS from litigation
expense associated with the recognition of certain contingent liabilities
related to Visa, Inc.’s litigation. In 2004, the Company recorded a
$0.03 reduction in EPS from the write-off of deferred debt issuance cost
associated with the redemption of trust preferred
securities.
|
||||||||||||||||||||
|
(3)
Leverage ratio is Tier 1 capital to quarterly average total assets less
intangible assets and gross unrealized gains/losses on available-for-sale
investments.
|
||||||||||||||||||||
|
(4)
Tangible calculations are non-GAAP measures that eliminate the effect of
goodwill and acquisition related intangible assets and the corresponding
amortization expense on a tax-effected basis where
applicable.
|
||||||||||||||||||||
|
(5)
Fully taxable equivalent (assuming an income tax rate of
37.5%).
|
||||||||||||||||||||
17
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Recent Market Developments
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S.
Treasury was given the authority to, among other things, purchase up to $700
billion of mortgages, mortgage-backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.
On October
14, 2008, the Secretary of the Department of the Treasury announced that the
Department of the Treasury (the “Treasury”) will purchase equity stakes in a
wide variety of banks and thrifts. Under the program, known as the
Troubled Asset Relief Program Capital Purchase Program (the “CPP”), from the
$700 billion authorized by the EESA, the Treasury made $250 billion of capital
available to U.S. financial institutions in the form of preferred
stock. Under the CPP, eligible healthy financial institutions, such
as the Company, will be able to sell senior preferred shares (the "Preferred
Shares") on standardized terms to the Treasury in amounts equal to between
1% and 3% of an institution’s risk-weighted assets. The CPP is
completely voluntary, and, although the Company anticipates being profitable in
the current year, has adequate sources of liquidity, and is well-capitalized
under regulatory guidelines, participation in the CPP would allow the Company to
raise additional low cost capital to ensure that, during these uncertain times,
it is well-positioned to support existing operations as well as anticipated
future growth.
On October
29, 2008, the Treasury gave the Company approval to participate in the
CPP. On January 6, 2009, the Treasury amended its approval to allow
the Company to participate in the CPP at a level up to $59.7
million. Because the Company’s Restated Articles of Incorporation do
not authorize preferred stock, as required for participation in the CPP, the
Company is holding a Special Meeting of Shareholders on February 27, 2009, to
amend the Restated Articles of Incorporation to authorize the issuance of
Preferred Shares in order to participate in the CPP.
Even if
the proposed amendment to the Restated Articles of Incorporation is adopted, the
Company has not yet determined whether it will participate in the CPP or, if it
does participate, how many Preferred Shares will be sold. If the
Company participates in the CPP by issuing Preferred Stock, the Treasury will
also receive warrants to purchase common stock with an aggregate market price
equal to 15% of the preferred investment. The Company would also be
required to adopt the Treasury’s standards for executive compensation and
corporate governance for the period during which the Treasury holds equity
issued under the CPP.
On
November 21, 2008, the Board of Directors of the Federal Deposit Insurance
Corporation (“FDIC”) adopted a final rule relating to the Temporary Liquidity
Guarantee Program (“TLG Program”). The TLG Program was announced by
the FDIC on October 14, 2008, preceded by the determination of systemic risk by
the Secretary of the Department of Treasury (after consultation with the
President) as an initiative to counter the system-wide crisis in the nation’s
financial sector. Under the TLG Program the FDIC will (i) guarantee,
through the earlier of maturity or June 30, 2012, certain newly issued senior
unsecured debt issued by participating institutions on or after October 14,
2008, and before June 30, 2009, and (ii) provide full FDIC deposit insurance
coverage for non-interest bearing transaction deposit accounts, Negotiable Order
of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and
Interest on Lawyers Trust Accounts (“IOLTA”) accounts held at participating
FDIC-insured institutions through December 31, 2009. Coverage under
the TLG Program was available for the first 30 days without
charge. The fee assessment for coverage of senior unsecured debt
ranges from 50 basis points to 100 basis points per annum depending on the
initial maturity of the debt. The fee assessment for deposit
insurance coverage is an annualized 10 basis points paid quarterly on amounts in
covered accounts exceeding $250,000. On December 5, 2008, the Company
elected to participate in both guarantee programs. On February 10,
2009, the FDIC extended the date for issuing debt under the TLG Program from
June 30 to October 31, 2009.
18
Critical
Accounting Policies
Overview
The
accounting and reporting policies followed by the Company conform, in all
material respects, to generally accepted accounting principles and to general
practices within the financial services industry. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. While
the Company bases estimates on historical experience, current information and
other factors deemed to be relevant, actual results could differ from those
estimates.
The
Company considers accounting estimates to be critical to reported financial
results if (i) the accounting estimate requires management to make assumptions
about matters that are highly uncertain and (ii) different estimates that
management reasonably could have used for the accounting estimate in the current
period, or changes in the accounting estimate that are reasonably likely to
occur from period to period, could have a material impact on the Company’s
financial statements.
The
accounting policies that we view as critical to us are those relating to
estimates and judgments regarding (a) the determination of the adequacy of the
allowance for loan losses, (b) the valuation of goodwill and the useful lives
applied to intangible assets, (c) the valuation of employee benefit plans and
(d) income taxes.
Allowance
for Loan Losses
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income. Loan
losses are charged against the allowance when management believes the
uncollectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The
allowance is maintained at a level considered adequate to provide for potential
loan losses related to specifically identified loans as well as probable credit
losses inherent in the remainder of the loan portfolio that have been incurred
as of period end. This estimate is based on management's evaluation
of the loan portfolio as well as on prevailing and anticipated economic
conditions and historical losses by loan category. General reserves
have been established based upon the aforementioned factors and allocated to the
individual loan categories. Allowances are accrued on specific loans
evaluated for impairment for which the basis of each loan, including accrued
interest, exceeds the discounted amount of expected future collections of
interest and principal or, alternatively, the fair value of loan
collateral. The unallocated reserve generally serves to compensate
for the uncertainty in estimating loan losses, including the possibility of
changes in risk ratings and specific reserve allocations in the loan portfolio
as a result of the Company’s ongoing risk management system.
A loan is
considered impaired when it is probable that the Company will not receive all
amounts due according to the contractual terms of the loan. This
includes loans that are delinquent 90 days or more, nonaccrual loans and certain
other loans identified by management. Certain other loans identified
by management consist of performing loans with specific allocations of the
allowance for loan losses. Specific allocations are applied when
quantifiable factors are present requiring a greater allocation than that
established by the Company based on its analysis of historical losses for each
loan category. Accrual of interest is discontinued and interest
accrued and unpaid is removed at the time such amounts are delinquent 90 days
unless management is aware of circumstances which warrant continuing the
interest accrual. Interest is recognized for nonaccrual loans only
upon receipt and only after all principal amounts are current according to the
terms of the contract.
Goodwill
and Intangible Assets
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired. Other intangible assets represent purchased
assets that also lack physical substance but can be separately distinguished
from goodwill because of contractual or other legal rights or because the asset
is capable of being sold or exchanged either on its own or in combination with a
related contract, asset or liability. The Company performs an annual
goodwill impairment test in accordance with Financial Accounting Standards Board
(“FASB”) Statement No. 142 (“SFAS No. 142”), which requires that goodwill and
intangible assets that have indefinite lives no longer be amortized but be
reviewed for impairment annually, or more frequently if certain conditions
occur. Prior to the adoption of SFAS No. 142, goodwill was being
amortized using the straight-line method over a period of 15
years. Impairment losses on recorded goodwill, if any, will be
recorded as operating expenses.
19
Employee
Benefit Plans
The
Company has adopted various stock-based compensation plans. The plans
provide for the grant of incentive stock options, nonqualified stock options,
stock appreciation rights, and bonus stock awards. Pursuant to the
plans, shares are reserved for future issuance by the Company upon exercise of
stock options or awarding of bonus shares granted to directors, officers and
other key employees.
In
accordance with FASB Statement No. 123, Share-Based Payment (Revised 2004)
(“SFAS No. 123R”), the fair value of each option award is estimated on the date
of grant using the Black-Scholes option-pricing model that uses various
assumptions. This model requires the input of highly subjective
assumptions, changes to which can materially affect the fair value
estimate. For additional information, see Note 10, Employee Benefit
Plans, in the accompanying Notes to Consolidated Financial Statements included
elsewhere in this report.
Income
Taxes
The
Company is subject to the federal income tax laws of the United States and the
tax laws of the states and other jurisdictions where it conducts
business. Due to the complexity of these laws, taxpayers and the
taxing authorities may subject these laws to different
interpretations. Management must make conclusions and estimates about
the application of these innately intricate laws, related regulations and case
law. When preparing the Company’s tax returns, management attempts to
make reasonable interpretations of the tax laws. Taxing authorities
have the ability to challenge management’s analysis of the tax law or any
reinterpretation management makes in its ongoing assessment of facts and the
developing case law. Management assesses the reasonableness of its
effective tax rate quarterly based on its current estimate of net income and the
applicable taxes expected for the full year. On a quarterly basis,
management also reviews circumstances and developments in tax law affecting the
reasonableness of deferred tax assets and liabilities and reserves for
contingent tax liabilities.
2008 Overview
Simmons
First National Corporation recorded net income of $26.9 million for the year
ended December 31, 2008, a 1.7% decrease from net income of $27.4 million in
2007. Net income in 2006 was $27.5 million. Diluted
earnings per share decreased $0.01, or 0.5%, to $1.91 in 2008 compared to $1.92
in 2007. Diluted earnings per share in 2006 were
$1.90. The Company’s return on average assets and return on average
stockholders’ equity for the year ended December 31, 2008, were 0.94% and 9.54%,
compared to 1.03% and 10.26%, respectively, for the year ended
2007.
During the
first quarter of 2008, the Company recorded a nonrecurring $0.05 increase in
diluted earnings per share related to the reversal of a $1.2 million pre-tax
contingent liability established during the fourth quarter of
2007. That contingent liability represented the Company’s pro-rata
portion of Visa, Inc.’s, and its related subsidiary Visa U.S.A.’s (collectively
“Visa”) litigation liabilities, which was satisfied in conjunction with Visa’s
initial public offering (“IPO”). Also as a result of Visa’s IPO, the
Company received cash proceeds from the mandatory partial redemption of its
equity interest in Visa, resulting in a nonrecurring $3.0 million pre-tax gain
in the first quarter 2008, or $0.13 per diluted common
share. Finally, associated with its membership in Visa, the Company
received 110,308 class B shares of Visa. The class B shares have a
restricted holding period, and the Company will not recognize any gain until
such time the shares are redeemed for cash or otherwise disposed
of.
At
December 31, 2008, the Company’s loan portfolio totaled $1.933 billion, which is
an $82.6 million, or 4.5%, increase from the same period last
year. This increase is due primarily to a $35.3 million, or 46.3%,
increase in student loans and a $69.5 million, or 7.5%, increase in commercial
and residential real estate loans. Loan growth was somewhat mitigated
by a $36.0 million, or 13.8%, decline in development and construction loans due
to permanent financing of completed projects and to the downturn in the
construction industry.
Although
the general state of the national economy remains volatile, and despite the
challenges in the Northwest Arkansas region, the Company continues to maintain
relatively good asset quality. In fact, we continue to sustain good
asset quality in all other regions of Arkansas. The allowance for
loan losses as a percent of total loans was 1.34% at December 31,
2008. Non-performing loans equaled 0.81% of total loans, up 21 basis
points from 2007. Non-performing assets were 0.64% of total assets,
up 13 basis points from 2007. The allowance for loan losses was 165%
of non-performing loans. The Company’s annualized net charge-offs for
2008 were 0.50% of total loans. Excluding credit cards, annualized
net charge-offs for 2008 were 0.36% of total loans. Annualized net
credit card charge-offs for the 2008 were 1.78%, more than 400 basis points
below the most recently published credit card charge-off industry
average. The Company does not own any securities backed by subprime
mortgage assets and has no mortgage loan products that target subprime
borrowers.
20
Total
assets for the Company at December 31, 2008, were $2.923 billion, an increase of
$231 million, or 8.6%, over the period ended December 31,
2007. Stockholders’ equity as of December 31, 2008 was $288.8
million, an increase of $16.4 million, or approximately 6.0 %, from December 31,
2007.
Simmons
First National Corporation is an Arkansas based, Arkansas committed financial
holding company with $2.9 billion in assets and eight community banks in
Pine Bluff, Lake Village, Jonesboro, Rogers, Searcy, Russellville, El Dorado and
Hot Springs, Arkansas. The Company’s eight banks conduct financial
operations from 88 offices, of which 84 are financial centers, in 47
communities.
Net Interest Income
Net
interest income, the Company's principal source of earnings, is the difference
between the interest income generated by earning assets and the total interest
cost of the deposits and borrowings obtained to fund those
assets. Factors that determine the level of net interest income
include the volume of earning assets and interest bearing liabilities, yields
earned and rates paid, the level of non-performing loans and the amount of
non-interest bearing liabilities supporting earning assets. Net
interest income is analyzed in the discussion and tables below on a fully
taxable equivalent basis. The adjustment to convert certain income to
a fully taxable equivalent basis consists of dividing tax-exempt income by one
minus the combined federal and state income tax rate of 37.50%.
The
Federal Reserve Board sets various benchmark rates, including the Federal Funds
rate, and thereby influences the general market rates of interest, including the
deposit and loan rates offered by financial institutions. The
Company’s loan portfolio is significantly affected by changes in the prime
interest rate. The prime interest rate, which is the rate offered on
loans to borrowers with strong credit, began 2006 at 7.25% and increased 50
basis points in the first quarter and 50 basis points in the second quarter to
end the year at 8.25%. During 2007, the prime interest rate decreased
50 basis points in the third quarter and 50 basis points in the fourth
quarter to end the year at 7.25%. During 2008, the prime interest
rate decreased 200 basis points in the first quarter, 25 basis points in the
second quarter and another 175 basis points in the fourth quarter to end
the year at 3.25%. The Federal Funds rate, which is the cost to banks
of immediately available overnight funds, began 2006 at 4.25%. During
2006, the Federal Funds rate increased 50 basis points in the first quarter and
50 basis points in the second quarter to end the year at
5.25%. During 2007, the Federal Funds rate decreased 50 basis points
in the third quarter and 50 basis points in the fourth quarter to end the year
at 4.25%. During 2008, the Federal Funds rate decreased 200 basis
points in the first quarter, 25 basis points in the second quarter and another
175-200 basis points in the fourth quarter to end the year at
0.00%-0.25%.
The
Company’s practice is to limit exposure to interest rate movements by
maintaining a significant portion of earning assets and interest bearing
liabilities in short-term repricing. Historically, approximately
70% of the Company’s loan portfolio and approximately 80% of the Company’s
time deposits have repriced in one year or less. These historical
percentages are consistent with the Company’s current interest rate
sensitivity.
For the
year ended December 31, 2008, net interest income on a fully taxable equivalent
basis was $98.1 million, an increase of $2.5 million, or 2.6%, from the
same period in 2007. The increase in net interest income was the
result of a $14.3 million decrease in interest expense offset by an $11.8
million decrease in interest income. As a result, the net interest
margin was 3.75% for the year ended December 31, 2008, a decrease of
21 basis points from 2007.
The $14.3
million decrease in interest expense for 2008 is primarily the result of a 92
basis point decrease in cost of funds due to competitive repricing during a
falling interest rate environment, partially offset by a $175.5 million increase
in average interest bearing liabilities. The growth in average
interest bearing liabilities was primarily due to the Company’s initiatives to
enhance liquidity during 2008 through (1) the introduction of a new high yield
investment deposit account and (2) securing additional long-term FHLB
advances. The lower interest rates accounted for a $16.2 million
decrease in interest expense. The most significant component of this decrease
was the $9.7 million decrease associated with the repricing of the Company’s
time deposits that resulted from time deposits that matured during the period or
were tied to a rate that fluctuated with changes in market
rates. Historically, approximately 80% of the Company’s time deposits
reprice in one year or less. As a result, the average rate paid on
time deposits decreased 92 basis points from 4.66% to
3.74%. Lower rates on federal funds purchased and other debt resulted
in an additional $4.8 million decrease in interest expense, with the average
rate paid on debt decreasing by 184 basis points from 5.23% to
3.39%. The higher level of average interest bearing liabilities
resulted in a $1.9 million increase in interest expense. More
specifically, the higher level of average interest bearing liabilities was the
result of increases of approximately $120.3 million from internal deposit growth
and $55.2 million in federal funds purchased and other debt.
21
The $11.8
million decrease in interest income for 2008 is primarily the result of a 101
basis point decrease in yield on earning assets associated with the repricing to
a lower interest rate environment, offset by a $205.3 million increase in
average interest earning assets due to internal growth. The lower
interest rates accounted for a $22.5 million decrease in interest
income. The most significant component of this decrease was the $20.9
million decrease associated with the repricing of the Company’s loan portfolio
that resulted from loans that matured during the period or were tied to a rate
that fluctuated with changes in market rates. Historically,
approximately 70% of the Company’s loan portfolio reprices in one year or
less. As a result, the average rate earned on the loan portfolio
decreased 111 basis points from 7.79% to 6.68%. The growth in average
interest earning assets resulted in a $10.7 million improvement in interest
income. The growth in average loans accounted for $5.2 million of
this increase, while the growth in investment securities resulted in $3.8
million of the increase.
The
Company’s net interest margin decreased 21 basis points to 3.75% for the year
ended December 31, 2008, when compared to 3.96% for the same period in
2007. This decrease in the net interest margin was primarily due to
significant repricing of earning assets due to declining interest rates
throughout 2008, along with the Company’s concentrated effort to grow core
deposits. Based on its current interest rate risk pricing model, and
considering the most recent rate reductions, the Company anticipates additional
margin compression during 2009.
For the
year ended December 31, 2007, net interest income on a fully taxable equivalent
basis was $95.6 million, an increase of $3.6 million, or 3.9%, from the
same period in 2006. The increase in net interest income was the
result of a $15.5 million increase in interest income offset by an $11.9 million
increase in interest expense. As a result, the net interest margin
was 3.96% for the year ended December 31, 2007, unchanged from
2006.
22
Tables 1
and 2 reflect an analysis of net interest income on a fully taxable equivalent
basis for the years ended December 31, 2008, 2007 and 2006, respectively, as
well as changes in fully taxable equivalent net interest margin for the years
2008 versus 2007 and 2007 versus 2006.
Table
1: Analysis of Net
Interest Income
(FTE
=Fully Taxable Equivalent)
|
Years Ended December 31
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
income
|
$ | 156,141 | $ | 168,536 | $ | 153,362 | ||||||
|
FTE
adjustment
|
4,060 | 3,463 | 3,185 | |||||||||
|
Interest
income - FTE
|
160,201 | 171,999 | 156,547 | |||||||||
|
Interest
expense
|
62,124 | 76,420 | 64,558 | |||||||||
|
Net
interest income - FTE
|
$ | 98,077 | $ | 95,579 | $ | 91,989 | ||||||
|
Yield
on earning assets - FTE
|
6.12 | % | 7.13 | % | 6.74 | % | ||||||
|
Cost
of interest bearing liabilities
|
2.77 | % | 3.69 | % | 3.24 | % | ||||||
|
Net
interest spread - FTE
|
3.35 | % | 3.44 | % | 3.50 | % | ||||||
|
Net
interest margin - FTE
|
3.75 | % | 3.96 | % | 3.96 | % | ||||||
Table
2: Changes in Fully
Taxable Equivalent Net Interest Margin
|
(In thousands)
|
2008 vs. 2007
|
2007 vs. 2006
|
||||||
|
Increase
due to change in earning assets
|
$ | 10,688 | $ | 6,959 | ||||
|
(Decrease)
increase due to change in earning asset yields
|
(22,486 | ) | 8,496 | |||||
|
Increase
(decrease) due to change in interest rates paid on
|
||||||||
|
interest
bearing liabilities
|
16,216 | (8,639 | ) | |||||
|
Decrease
due to change in interest bearing liabilities
|
(1,920 | ) | (3,226 | ) | ||||
|
Increase
in net interest income
|
$ | 2,498 | $ | 3,590 | ||||
23
Table 3
shows, for each major category of earning assets and interest bearing
liabilities, the average (computed on a daily basis) amount outstanding, the
interest earned or expensed on such amount and the average rate earned or
expensed for each of the years in the three-year period ended December 31,
2008. The table also shows the average rate earned on all earning
assets, the average rate expensed on all interest bearing liabilities, the net
interest spread and the net interest margin for the same periods. The
analysis is presented on a fully taxable equivalent basis. Nonaccrual
loans were included in average loans for the purpose of calculating the rate
earned on total loans.
Table
3: Average Balance
Sheets and Net Interest Income Analysis
|
Years Ended December 31
|
||||||||||||||||||||||||||||||||||||
|
|
2008
|
2007
|
|
2006
|
||||||||||||||||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||||||||||||||||||
|
(In thousands)
|
Balance
|
Expense
|
Rate(%)
|
Balance
|
Expense
|
Rate(%)
|
Balance
|
Expense
|
Rate(%)
|
|||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
Earning
Assets
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing balances
|
||||||||||||||||||||||||||||||||||||
|
due
from banks
|
$ | 83,547 | $ | 1,415 | 1.69 | $ | 22,957 | $ | 1,161 | 5.06 | $ | 22,746 | $ | 1,072 | 4.71 | |||||||||||||||||||||
|
Federal
funds sold
|
34,577 | 748 | 2.16 | 26,798 | 1,418 | 5.29 | 20,223 | 1,057 | 5.23 | |||||||||||||||||||||||||||
|
Investment
securities - taxable
|
437,612 | 21,057 | 4.81 | 395,388 | 18,362 | 4.64 | 410,445 | 15,705 | 3.83 | |||||||||||||||||||||||||||
|
Investment
securities - non-taxable
|
157,793 | 10,173 | 6.45 | 131,369 | 8,454 | 6.44 | 117,931 | 7,573 | 6.42 | |||||||||||||||||||||||||||
|
Mortgage
loans held for sale
|
6,909 | 411 | 5.95 | 7,971 | 505 | 6.34 | 7,666 | 476 | 6.21 | |||||||||||||||||||||||||||
|
Assets
held in trading accounts
|
5,711 | 73 | 1.28 | 4,958 | 100 | 2.02 | 4,590 | 71 | 1.55 | |||||||||||||||||||||||||||
|
Loans
|
1,891,357 | 126,324 | 6.68 | 1,822,777 | 141,999 | 7.79 | 1,740,477 | 130,593 | 7.50 | |||||||||||||||||||||||||||
|
Total
interest earning assets
|
2,617,506 | 160,201 | 6.12 | 2,412,218 | 171,999 | 7.13 | 2,324,078 | 156,547 | 6.74 | |||||||||||||||||||||||||||
|
Non-earning
assets
|
250,675 | 254,656 | 251,261 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 2,868,181 | $ | 2,666,874 | $ | 2,575,339 | ||||||||||||||||||||||||||||||
|
LIABILITIES AND
|
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