UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
T
|
Annual
Report Pursuant to Section 13 or 15(d) of the Exchange Act of
1934
|
For the fiscal year ended: December 31,
2009
or
|
£
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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
|
|
(State
or other jurisdiction of
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(I.R.S.
employer
|
|
incorporation
or organization)
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identification
No.)
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501
Main Street, Pine Bluff, Arkansas
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71601
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(Address
of principal executive offices)
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(Zip
Code)
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(870)
541-1000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $0.01 par value
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The
NASDAQ Global Select Market®
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|
(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. £
Yes S
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. £ Yes S
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. S
Yes £
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge in definitive proxy or in information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
|
£ Large
accelerated filer
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S
Accelerated filer
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£
Non-accelerated filer
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.). £
Yes S
No
The
aggregate market value of the Registrant’s Common Stock, par value $0.01 per
share, held by non-affiliates on June 30, 2009, was $338,095,535 based
upon the last trade price as reported on the NASDAQ Global Select Market® of
$26.72.
The number
of shares outstanding of the Registrant's Common Stock as of February 5, 2010,
was 17,127,789.
Part III
is incorporated by reference from the Registrant's Proxy Statement relating to
the Annual Meeting of Shareholders to be held on April 20, 2010.
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 we believe will be of interest to investors. We hope investors
will find it useful to have all of this information available in a single
document.
The
Securities and Exchange Commission allows us to report information in the Form
10-K by “incorporated by reference” from another part of the Form 10-K, or from
the proxy statement. You will see that information is “incorporated
by reference” in various parts of our Form 10-K.
A more
detailed table of contents for the entire Form 10-K follows:
FORM
10-K INDEX
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1
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9
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16
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16
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16
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17
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17
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19
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48
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51
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| Item 9 |
88
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88
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88
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88
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88
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88
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88
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88
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89
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CAUTIONARY
NOTE REGARDING 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,” “believe,”
“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.
These
forward-looking statements involve risks and uncertainties, and may not be
realized due to a variety of factors, including, without limitation: the effects
of future economic conditions, governmental monetary and fiscal policies, as
well as legislative and regulatory changes; the risks of changes in interest
rates and their effects on the level and composition of deposits, loan demand
and the values of loan collateral, securities and interest sensitive assets and
liabilities; the costs of evaluating possible acquisitions and the risks
inherent in integrating acquisitions; the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in our market area
and elsewhere, including institutions operating regionally, nationally and
internationally, together with such competitors offering banking products and
services by mail, telephone, computer and the Internet; the failure of
assumptions underlying the establishment of reserves for possible loan losses;
and those factors set forth under Item 1A. Risk-Factors of this report and other
cautionary statements set forth elsewhere in this report. Many
of these factors are beyond our ability to predict or control. In
addition, as a result of these and other factors, our past financial performance
should not be relied upon as an indication of future performance.
We believe
the expectations reflected in our forward-looking statements are reasonable,
based on information available to us on the date hereof. However,
given the described uncertainties and risks, we cannot guarantee our future
performance or results of operations and you should not place undue reliance on
these forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, and all written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by this
section.
ITEM
1. BUSINESS
Company
Overview
Simmons
First National Corporation (the “Company) is a multi-bank financial holding
company registered under the Bank Holding Company Act of 1956, as
amended. The Company is headquartered in Arkansas with total assets
of $3.1
billion, loans of $1.9 billion, deposits of $2.4 billion and equity capital of
$371 million as of December 31, 2009. We
own eight community banks that are strategically located throughout
Arkansas. We conduct our operations through 88 offices, of which 84
are branches, or “financial centers,” located in 47 communities in Arkansas.
We seek to
build shareholder value by (i) focusing on strong asset quality, (ii)
maintaining strong capital and managing our liquidity position, (iii) improving
our efficiency, and (iv) opportunistically growing our business, both
organically and through potential FDIC-assisted transactions and traditional
private community bank acquisitions. We believe
the depth and experience of our corporate executive management team and the
management teams and directors of each of our community banks has allowed us to
achieve excellent asset quality, a strong capital position and increased
liquidity, even in the current challenging economic climate.
1
Community
Bank Strategy
Our
community banks feature locally based management and boards of directors,
community-focused growth strategies, and flexibility in pricing of loans and
deposits. Our community banks are supported by our main subsidiary
bank, Simmons First National Bank (“SFNB” or “lead bank”), which allows our
community banks to provide products and services, such as a bank-issued credit
card, that are usually offered only by larger banks. We believe
that our enterprise-wide support system enables us to “out-product” our smaller,
Arkansas community bank competitors while our local focus allows us to
“out-service” our larger interstate bank competitors.
Our
community banking business model involves some additional administrative costs
as a result of maintaining multiple bank charters, but has allowed us to
maintain strong management at the local level to meet the needs of local
customers while ensuring good asset quality. In addition we, along
with our lead bank, provide efficiencies through consolidated back office
support for information systems, loan review, compliance, human resources,
accounting and internal audit. Likewise, through a standardizing
initiative, our banks share a common name, signage and products that enable us
to maximize our branding and overall marketing strategy.
Growth
Strategy
Over the
past 20 years, as we have expanded our markets and services, our growth strategy
has evolved and diversified. From 1989 through 1991, in addition to our internal
branching expansion, we acquired nine branches from the Resolution Trust
Corporation, the federal agency that oversaw the sale or liquidation of assets
of closed savings and loans institutions.
From 1995
to 2005, our strategic focus was on creating geographic diversification
throughout Arkansas, driven primarily by acquisitions of other banking
institutions. During this period we completed acquisitions of nine
financial institutions and a total of 20 branches from five other banking
institutions, some of which allowed us to enter key growth markets such as
Conway, Hot Springs, Russellville, Searcy and Northwest Arkansas. In
2005, we initiated a de novo branching strategy to enter selected new Arkansas
markets and to complement our presence in existing markets. From 2005
to 2008, we opened 12 new financial centers, a regional headquarters in
Northwest Arkansas and a corporate office in Little Rock. We
substantially completed our de novo branching strategy in 2008.
In late
2007, as we anticipated deteriorating economic conditions, we concentrated on
maintaining our strong asset quality, building capital and improving our
liquidity position. We intensified our focus on loan underwriting and
on monitoring our loan portfolio in order to maintain asset quality, which is
well above our peer group and the industry average. From late 2007 to
December 31, 2009, our liquidity position (net overnight funds sold) improved by
approximately $150 million as a result of a strategic initiative to introduce
deposit products that grew our core deposits in transaction and savings accounts
and improved our deposit mix. Transaction and savings deposits
increased from 48% of total deposits as of December 31, 2007, to 62% of total
deposits as of December 31, 2009.
Our
capital levels have remained strong during the current economic
downturn. As part of our strategic focus on building capital, we
suspended our stock repurchase program in July 2008. Additionally,
despite our strong capital position, in October 2008 we applied, and were one of
the earliest banks approved, for funding of up to $60 million under the U.S.
Treasury’s Capital Purchase Program, referred to as the “CPP.” After
careful consideration and analysis, we believed there had been considerable
improvement in the economic indicators since October 2008 and we determined that
participation in the CPP was not necessary nor in the best interest of our
shareholders. We notified the Treasury in July 2009 that we did not
intend to participate in the CPP.
On August
26, 2009, we filed a shelf registration statement with the Securities and
Exchange Commission (“SEC”). The shelf registration statement will
allow us to raise capital from time to time, up to an aggregate of $175 million,
through the sale of common stock, preferred stock, or a combination thereof,
subject to market conditions. Specific terms and prices will be
determined at the time of any offering under a separate prospectus supplement
that we will be required to file with the SEC at the time of the specific
offering.
In
December 2009, we completed a secondary stock offering by issuing a total of
3,047,500 shares of common stock, including the over-allotment, at a price of
$24.50 per share, less underwriting discounts and commissions. The
net proceeds of the offering after deducting underwriting discounts and
commissions and offering expenses were approximately $70.5
million. Subsequent to the stock offering, we have approximately $100
million available from our shelf registration for future offerings.
2
Acquisition
Strategy
We believe
we are strategically positioned to leverage our strong capital position to grow
through acquisitions. In the near term, the disruptions in the
financial markets continue to create opportunities for strong financial
institutions to acquire selected assets and deposits of failed banks through
FDIC-assisted transactions on attractive terms. We intend to focus
our near term acquisition strategy on such transactions. We also
believe that the challenging economic environment combined with more restrictive
bank regulatory reform will cause many financial institutions to seek merger
partners in the intermediate future. We believe our community bank
model, strong capital and successful acquisition history position us as a
purchaser of choice for community banks seeking a strong partner.
We expect
that our primary geographic target area for acquisitions, both FDIC-assisted and
negotiated, will fall within a 325 mile radius of central
Arkansas. Our first priority will be to focus on acquisitions within
Arkansas while also seeking acquisitions within our target area in states
contiguous to Arkansas. The senior management teams of both our
parent company and lead bank have had extensive experience during the past
twenty years in acquiring banks, branches and deposits and post-acquisition
integration of operations. We believe this experience positions us to
successfully acquire and integrate banks on both an FDIC assisted and unassisted
basis.
With
respect to FDIC-assisted transactions:
|
·
|
We
believe one of our key strengths is our management depth at the community
bank level that will enable us to redeploy our human resources to
integrate and operate an acquired institution’s business with minimal
disruption to our existing operations. From our management pool
we have assembled an in-house acquisition team to focus on evaluating and
executing FDIC-assisted
transactions.
|
|
·
|
We
have retained a consultant with FDIC-assisted transaction experience that
has supplemented our management’s acquisition experience with additional
training focused on the unique aspects of acquiring, converting and
integrating banks through FDIC-assisted
transactions.
|
With
respect to negotiated community bank acquisitions:
|
·
|
We
have historically retained the target institution’s senior management and
have provided them with an appealing level of autonomy
post-integration. We intend to continue to pursue negotiated
community bank acquisitions and we believe that our history with respect
to such acquisitions has positioned us as an acquirer of choice for
community banks.
|
|
·
|
We
encourage acquired community banks, their boards and associates to
maintain their community involvement, while empowering the banks to offer
a broader array of financial products and services. We believe
this approach leads to enhanced profitability after the
acquisition.
|
Efficiency
Initiatives
In 2008,
we began two significant initiatives to improve our operating performance by
implementing cost efficiencies and selected revenue
enhancements. These initiatives have led to cost savings and revenue
enhancements in 2009 and are expected to lead to further improvements in 2010
and beyond.
Our first
such initiative was an effort to leverage our corporate buying power to
renegotiate our existing vendor contracts at lower prices and to maximize the
return on our investment in technology. We have begun to benefit from
operating expense savings as a result of more favorable contract terms with our
vendors in 2009 with the full annualized benefits expected to be realized in
2010.
Our second
initiative, which is larger in scope, is to identify and implement process
improvements. We are reviewing our business processes in an effort to
improve our profitability while preserving the quality of our customer
service. The scope of this initiative includes implementing revenue
enhancements, further consolidating back office processes and refining our
organizational structure. We intend to begin implementing this
initiative in 2010 and to continue its implementation in 2011. We
expect to experience significant savings and revenue enhancements as this
initiative takes effect.
3
Subsidiary
Banks
Our lead
bank, SFNB, is a national bank which has been in operation since
1903. SFNB’s primary market area, with the exception of its
nationally provided credit card product, is southeastern, central and western
Arkansas. As of December 31, 2009, SFNB had total assets of $1.6
billion, total loans of $945 million and total deposits of $1.3
billion. Simmons First Trust Company N.A., a wholly owned subsidiary
of SFNB, performs the trust and fiduciary business operations for SFNB and for
us. Simmons First Investment Group, Inc., a wholly owned subsidiary
of SFNB, is a broker-dealer registered with the SEC and a member of the National
Association of Securities Dealers and performs the broker-dealer operations for
SFNB.
The
following table shows our community subsidiary banks other than the lead
bank:
|
Year
|
As of December 31, 2009
|
|||||||||||||
|
|
Acquired
|
Primary Market
|
Assets
|
Loans
|
Deposits
|
|||||||||
|
(In thousands)
|
|
|||||||||||||
|
Simmons
First Bank of Jonesboro
|
1984
|
Northeast
Arkansas
|
$ | 312,835 | $ | 258,807 | $ | 263,327 | ||||||
|
Simmons
First Bank of South Arkansas
|
1984
|
Southeast
Arkansas
|
165,682 | 88,585 | 139,898 | |||||||||
|
Simmons
First Bank of Northwest Arkansas
|
1995
|
Northwest
Arkansas
|
272,463 | 175,485 | 219,009 | |||||||||
|
Simmons
First Bank of Russellville
|
1997
|
Russellville,
Arkansas
|
193,498 | 106,436 | 138,661 | |||||||||
|
Simmons
First Bank of Searcy
|
1997
|
Searcy,
Arkansas
|
149,732 | 106,632 | 113,771 | |||||||||
|
Simmons
First Bank of El Dorado, N.A.
|
1999
|
South
central Arkansas
|
289,326 | 116,675 | 249,118 | |||||||||
|
Simmons
First Bank of Hot Springs
|
2004
|
Hot
Springs, Arkansas
|
172,256 | 77,477 | 122,857 | |||||||||
Our
subsidiary banks provide complete banking services to individuals and businesses
throughout the market areas they serve. These banks offer 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.
Credit
Cards
We held
the 62nd largest credit card portfolio in the U.S. as of August 31, 2009, with a
balance of $175 million, which has grown to $189 million at December 31,
2009. Since the 1960s, we have offered these products through our
lead bank. Our portfolio had an all-in yield, net of any credit
losses, of over 15% for the year ended December 31, 2009. Our number
of accounts has grown 10.6% since December 31, 2008, to over 123,000 accounts as
of December 31, 2009. This growth has been balanced by a lower
approval rate for credit card applications of only 17% for the quarter ended
December 31, 2009, which is down from an approval rate of approximately 34%
during 2007. Our strong credit underwriting is reflected in our
credit card charge-off ratio of 2.41% for the quarter ended December 31,
2009. This is 790 basis points better than the industry average
charge-off ratio of 10.31% as reported by Moody’s Investors Service for the same
three month period. Our portfolio is geographically diversified, with
approximately 41% of our credit card customers in Arkansas and no geographic
concentration greater than 7% in any other state. Our credit card
customers carry an average balance of approximately $2,100. Their
average credit limit is approximately $3,600 and their average FICO score is
above 725. We believe these attributes contribute to the success of
our credit card product offering in terms of both growth and credit
quality.
Loan
Risk Assessment
As part of
our 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 our 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. Our 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 our 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, we have instituted a Special Asset Committee for
the purpose of reviewing criticized loans in regard to collateral adequacy,
workout strategies and proper reserve allocations.
4
Competition
There is
significant competition among commercial banks in our various market
areas. In addition, we also compete 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 our competitors have greater
resources and, as such, may have higher lending limits and may offer other
services that we do not provide. We generally compete 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.
Principal
Offices and Available Information
Our
principal executive offices are located at 501 Main Street, Pine Bluff, Arkansas
71601, and our telephone number is (870) 541-1000. We also have
corporate offices in Little Rock, Arkansas. We maintain a website at
http://www.simmonsfirst.com. On
this website under the section “Investor Relations”, we make our filings with
the Securities and Exchange Commission available free of charge, along with
other Company news and announcements.
Employees
As of
February 5, 2010, the Company and its subsidiaries had approximately 1,096 full
time equivalent employees. None of the employees is represented by
any union or similar groups, and we have not experienced any labor disputes or
strikes arising from any such organized labor groups. We consider our
relationship with our employees to be good.
Executive
Officers of the Company
The
following is a list of all executive officers of the Company. The
Board of Directors elects executive officers annually.
|
NAME
|
AGE
|
POSITION
|
YEARS SERVED
|
|
J.
Thomas May
|
63
|
Chairman
and Chief Executive Officer
|
23
|
|
David
L. Bartlett
|
58
|
President
and Chief Operating Officer
|
13
|
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Robert
A. Fehlman
|
45
|
Executive
Vice President and Chief Financial Officer
|
21
|
|
Marty
D. Casteel
|
58
|
Executive
Vice President
|
21
|
|
Robert
C. Dill
|
66
|
Executive
Vice President, Marketing
|
43
|
|
David
W. Garner
|
40
|
Senior
Vice President and Controller
|
12
|
|
Kevin
J. Archer
|
46
|
Senior
Vice President/Credit Policy and Risk Assessment
|
14
|
|
Sharon
K. Burdine
|
44
|
Senior
Vice President and Human Resources Director
|
12
|
|
Tina
M. Groves
|
40
|
Senior
Vice President/Manager, Audit/Compliance
|
4
|
|
John
L. Rush
|
75
|
Secretary
|
42
|
5
Board
of Directors of the Company
The
following is a list of the Board of Directors of the Company as of December 31,
2009, along with their principal occupation.
|
NAME
|
PRINCIPAL OCCUPATION
|
|
William
E. Clark, II
|
Chief
Executive Officer
|
|
Clark
Contractors LLC
|
|
|
Steven
A. Cossé
|
Executive
Vice President and General Counsel
|
|
Murphy
Oil Corporation
|
|
|
Edward
Drilling
|
President
|
|
AT&T
Arkansas
|
|
|
Eugene
Hunt
|
Attorney
|
|
Hunt
Law Firm
|
|
|
George
A. Makris, Jr.
|
President
|
|
M.K.
Distributors, Inc.
|
|
|
J.
Thomas May
|
Chairman
and Chief Executive Officer
|
|
Simmons
First National Corporation
|
|
|
W.
Scott McGeorge
|
President
|
|
Pine
Bluff Sand and Gravel Company
|
|
|
Stanley
E. Reed
|
Farmer
|
|
President
(retired)
|
|
|
Arkansas
Farm Bureau
|
|
|
Harry
L. Ryburn
|
Orthodontist
(retired)
|
|
Robert
L. Shoptaw
|
Chairman
of the Board
|
|
Arkansas
Blue Cross and Blue Shield
|
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 Simmons First National Corporation, 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, we are 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.
We are
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.
6
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
SFNB,
Simmons First Bank of El Dorado, N.A. 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 First Bank of
Jonesboro, Simmons First Bank of South Arkansas, Simmons First Bank of Northwest
Arkansas and Simmons First Bank of 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 First Bank of Russellville
and Simmons First Bank of 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.
All of our
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, our 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 Subsidiary 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 our 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.
7
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.
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,
we 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. On August 26, 2009, the FDIC extended
the Transaction Account Guaranty (“TAG”) portion of the TLG Program for six
months, through June 30, 2010. The annual assessment rate that will
apply during the extension period will be raised from the initial annualized 10
basis points on amounts in covered accounts exceeding $250,000 to either 15, 20
or 25 basis points, depending on the Risk category assigned to the participating
institution under the FDIC's risk-based premium system.
8
ITEM
1A. RISK
FACTORS
Risks
Related to Our Industry
Our
business may be adversely affected by conditions in the financial markets and
general economic conditions.
Since
December 2007, the United States has been in a recession, although there are
some indicators of improvement. Business activity across a wide range of
industries and regions has been greatly reduced and local governments and many
businesses are having difficulty due to the lack of consumer spending, the lack
of liquidity in the credit markets and high unemployment.
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.
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 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.
The
business environment in Arkansas could continue to deteriorate. There can be no
assurance that these business and economic conditions will improve in the near
term. The continuation of these conditions could adversely affect the credit
quality of our loans and our results of operations and financial
condition.
Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.
Under the
Troubled Asset Relief Program, or “TARP,” the U.S. Treasury is authorized to
purchase from financial institutions and their holding companies up to $700
billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial
institutions and their holding companies. The purpose of TARP is to restore
confidence and stability to the U.S. banking system and to encourage financial
institutions to increase their lending to customers and to each other. The
Treasury allocated $250 billion toward TARP’s Capital Purchase Program to fund
the purchase of equity securities from participating institutions.
9
Numerous
actions have been taken by the United States Congress, the Federal Reserve, the
Treasury, the FDIC, the SEC and other governmental agencies to address the
recent liquidity and credit crisis. These actions have included, among
others:
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encouraging
residential mortgage loan restructuring and modification to provide
homeowners relief;
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establishing
significant liquidity and credit facilities for financial institutions and
investment banks;
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lowering
of the federal funds rate;
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taking
emergency action against short selling
practices;
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establishing
a temporary guaranty program for money market
funds;
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establishing
a commercial paper funding facility to provide back-stop liquidity to
commercial paper issuers; and
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coordinating
international efforts to address illiquidity and other weaknesses in the
banking sector.
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A
significant goal of these legislative and regulatory actions is to stabilize the
U.S. banking system. The legislative and regulatory initiatives described above
may not have their desired effects or may have unintended consequences. Should
these or other legislative or regulatory initiatives fail to stabilize the
financial markets, our business, financial condition, results of operations and
prospects could be materially and adversely affected.
Recent
increases in deposit insurance coverage and the FDIC’s efforts to restore the
deposit insurance fund have increased our FDIC insurance assessments and
resulted in higher noninterest expense. Additional increases in deposit
insurance rates may occur and continue to negatively impact our
operations.
The
Emergency Economic Stabilization Act of 2008, referred to as “EESA,” temporarily
raised the limit on federal deposit insurance coverage from $100,000 to $250,000
per depositor. The limits are scheduled to return to $100,000 on January 1,
2014. The temporary increase in insured deposits has been accompanied by a
higher assessment for our subsidiary banks and will adversely affect our results
of operations as an increase in noninterest expense.
Separate
from the EESA, in October 2008, the FDIC announced the Temporary Liquidity
Guarantee Program (the “TLG Program”). Banks that participate in the TLG Program
are subject to a coverage charge of ten basis points per annum for
noninterest-bearing deposit accounts exceeding the existing deposit insurance
limit of $250,000. In August 2009, the FDIC issued a final rule regarding the
extension of the deposit guarantee portion of the TLG Program. Under this rule,
the expiration of the program is extended to June 30, 2010. In connection with
the extension, the annual fees associated with the deposit guarantee portion of
the TLG Program increase from ten basis points to 15 to 25 basis points after
December 31, 2009. The particular rate to be assessed will be based upon the
risk category to which an institution is assigned.
In
addition, the large number of recent bank failures combined with the potential
for significant numbers of additional bank failures has placed significant
stress on the deposit insurance fund. In order to maintain a strong funding
position and restore reserve ratios of the deposit insurance fund, the FDIC
increased assessment rates of insured institutions uniformly by seven cents for
every $100 of deposits beginning with the first quarter of 2009, with additional
charges which began April 1, 2009.
In May
2009, the FDIC voted to amend the deposit insurance fund restoration plan and
impose a special assessment of 5 basis points of each insured institution’s
assets less its Tier 1 capital as of June 30, 2009, which was collected on
September 30, 2009. Based on our deposit levels at June 30, 2009, we accrued a
special assessment amount approximately $1.4 million. The amended rule also
permits the FDIC to impose an additional emergency special assessment after June
30, 2009, of up to five basis points if necessary to maintain public confidence
in federal deposit insurance. The imposed special assessment, as well as any
future increases in assessments, will adversely affect our noninterest expense
and results of operations.
In
September 2009, the FDIC announced that it would require insured banks to prepay
their estimated FDIC assessments for the fourth quarter of 2009 and for the next
three years on December 30, 2009. The total amount of our prepaid assessment was
approximately $11.2 million.
Should
more bank failures occur, the FDIC’s premium assessments may continue to
increase or accelerate. We are generally unable to control the amount of
premiums that we are required to pay for FDIC insurance. There is a significant
possibility that the FDIC will further increase or accelerate the timing of
payment of FDIC insurance premiums, whether or not there are more bank
failures.
10
Current
levels of market volatility are unprecedented.
The
financial markets have continued to experience significant volatility. In some
cases, the financial markets have produced downward pressure on stock prices and
credit availability for certain issuers without regard to those issuers’
underlying financial strength. If financial market volatility continues or
worsens, or if there are more disruptions in the financial markets, including
disruptions to the United States or international banking systems, there can be
no assurance that we will not experience an adverse effect, which may be
material, on our ability to access capital and on our business, financial
condition and results of operations.
Risks
Related to Our Business
Our
concentration of banking activities in Arkansas, including our real estate loan
portfolio, makes us more vulnerable to adverse conditions in the particular
Arkansas markets in which we operate.
Our
subsidiary banks operate exclusively within the state of Arkansas, where the
majority of the buildings and properties securing our loans and the businesses
of our customers are located. Our financial condition, results of operations and
cash flows are subject to changes in the economic conditions in our home state,
the ability of our borrowers to repay their loans, and the value of the
collateral securing such loans. We largely depend on the continued growth and
stability of the communities we serve for our continued success. Declines in the
economies of these communities or the state of Arkansas in general could
adversely affect our ability to generate new loans or to receive repayments of
existing loans, and our ability to attract new deposits, thus adversely
affecting our net income, profitability and financial condition.
The
ability of our borrowers to repay their loans could also be adversely impacted
by the significant changes in market conditions in the region or by changes in
local real estate markets, including deflationary effects on collateral value
caused by property foreclosures. This could result in an increase in our
charge-offs and provision for loan losses. Either of these events would have an
adverse impact on our results of operations.
Our loan
portfolio in Northwest Arkansas has been more negatively impacted than our loan
portfolio comprised from other regions in Arkansas. This fact results primarily
from the acute contraction in that region’s economy and its real estate markets
as compared to Arkansas as a whole. In 2009 we have put an additional $5 million
in capital into our Northwest Arkansas bank. A continued deterioration of the
Northwest Arkansas economy or its failure to fully participate in an economic
recovery could require us to further tighten our local lending standards, inject
more capital into our Northwest Arkansas bank and increase allowances for loan
losses relative to loans made in the region.
A
significant decline in general economic conditions caused by inflation,
recession, unemployment, acts of terrorism or other factors beyond our control
could also have an adverse effect on our financial condition and results of
operations. In addition, because multi-family and commercial real estate loans
represent the majority of our real estate loans outstanding, a decline in tenant
occupancy due to such factors or for other reasons could adversely impact the
ability of our borrowers to repay their loans on a timely basis, which could
have a negative impact on our results of operations.
Deteriorating
credit quality, particularly in our credit card portfolio, may adversely impact
us.
We have a
significant consumer credit card portfolio. We have experienced an increased
amount of net charge-offs in our credit card portfolio in 2009, which could
continue or worsen. While we continue to experience a better performance with
respect to net charge-offs than the national average in our credit card
portfolio, our net charge-offs nevertheless increased to 2.41% of our average
outstanding credit card balances for the quarter ended December 31, 2009, from
2.02% of the average outstanding balances for the quarter ended on December 31,
2008. The current economic downturn could adversely affect consumers in a more
delayed fashion compared to commercial businesses in general. Increasing
unemployment and diminished asset values may prevent our credit card customers
from repaying their credit card balances which could result in an increased
amount of our net charge-offs that could have a material adverse effect on our
unsecured credit card portfolio.
11
Changes
to consumer protection laws may impede our origination or collection efforts
with respect to credit card accounts, change account holder use patterns or
reduce collections, any of which may result in decreased profitability of our
credit card portfolio.
Credit
card receivables that do not comply with consumer protection laws may not be
valid or enforceable under their terms against the obligors of those credit card
receivables. Federal and state consumer protection laws regulate the creation
and enforcement of consumer loans, including credit card receivables. For
instance, the federal Truth in Lending
Act was recently amended by the “Credit Card Accountability, Responsibility and
Disclosure Act of 2009,” or the “Credit CARD Act,” which, among other
things:
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prevents
any increases in interest rates and fees during the first year after a
credit card account is opened, and increases at any time on interest rates
on existing credit card balances, unless (i) the minimum payment on the
related account is 60 or more days delinquent, (ii) the rate increase is
due to the expiration of a promotional rate, (iii) the account holder
fails to comply with a negotiated workout plan or (iv) the increase is due
to an increase in the index rate for a variable rate credit
card;
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requires
that any promotional rates for credit cards be effective for at least six
months;
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requires
45 days notice for any change of an interest rate or any other significant
changes to a credit card account;
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empowers
federal bank regulators to promulgate rules to limit the amount of any
penalty fees or charges for credit card accounts to amounts that are
“reasonable and proportional to the related omission or violation;”
and
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requires
credit card companies to mail billing statements 21 calendar days before
the due date for account holder
payments.
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As a
result of the Credit CARD Act and other consumer protection laws and
regulations, it may be more difficult for us to originate additional credit card
accounts or to collect payments on credit card receivables, and the finance
charges and other fees that we can charge on credit card account balances may be
reduced. Furthermore, account holders may choose to use credit cards less as a
result of these consumer protection laws. Each of these results, independently
or collectively, could reduce the effective yield on revolving credit card
accounts and could result in decreased profitability of our credit card
portfolio.
Our
growth and expansion strategy may not be successful, and our market value and
profitability may suffer.
We have
historically employed, as important parts of our business strategy, growth
through acquisition of banks and, to a lesser extent, through branch
acquisitions and de novo
branching. Any future acquisitions, including any FDIC-assisted
transactions, in which we might engage will be accompanied by the risks commonly
encountered in acquisitions. These risks include, among other
risks:
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credit
risk associated with the acquired bank’s loans and
investments;
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difficulty
of integrating operations and personnel;
and
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potential
disruption of our ongoing business.
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In the
current economic environment, we anticipate that in addition to opportunities to
acquire other banks in privately negotiated transactions, we may also have
opportunities to bid to acquire the assets and liabilities of failed banks in
FDIC-assisted transactions. These acquisitions involve risks similar to
acquiring existing banks. Because FDIC-assisted acquisitions are structured in a
manner that would not allow us the time normally associated with due diligence
investigations prior to committing to purchase the target bank or preparing for
integration of an acquired bank, we may face additional risks in FDIC-assisted
transactions. These risks include, among other things:
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loss
of customers of the failed bank;
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strain
on management resources related to collection and management of problem
loans; and
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problems
related to integration of personnel and operating
systems.
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12
In
addition to pursuing the acquisition of existing viable financial institutions
or the acquisition of assets and liabilities of failed banks in FDIC-assisted
transactions, as opportunities arise we may also continue to engage in de novo branching to further
our growth strategy. De novo
branching and growing through acquisition involve numerous risks,
including the following:
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the
inability to obtain all required regulatory
approvals;
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the
significant costs and potential operating losses associated with
establishing a de novo branch or a new
bank;
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the
inability to secure the services of qualified senior
management;
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the
local market may not accept the services of a new bank owned and managed
by a bank holding company headquartered outside of the market area of the
new bank;
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the
risk of encountering an economic downturn in the new
market;
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the
inability to obtain attractive locations within a new market at a
reasonable cost; and
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the
additional strain on management resources and internal systems and
controls.
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We expect
that competition for suitable acquisition candidates, whether such candidates
are viable banks or are the subject of an FDIC-assisted transaction, will be
significant. We may compete with other banks or financial service companies that
are seeking to acquire our acquisition candidates, many of which are larger
competitors and have greater financial and other resources. We cannot assure you
that we will be able to successfully identify and acquire suitable acquisition
targets on acceptable terms and conditions. Further, we cannot assure you that
we will be successful in overcoming these risks or any other problems
encountered in connection with acquisitions and de novo branching. Our
inability to overcome these risks could have an adverse effect on our ability to
achieve our business and growth strategy and maintain or increase our market
value and profitability.
Our
recent results do not indicate our future results and may not provide guidance
to assess the risk of an investment in our common stock.
We may not
be able to sustain our historical rate of growth or be able to expand our
business. Various factors, such as economic conditions, regulatory and
legislative considerations and competition, may also impede or prohibit our
ability to expand our market presence. We may also be unable to identify
advantageous acquisition opportunities or, once identified, enter into
transactions to make such acquisitions. If we are not able to successfully grow
our business, our financial condition and results of operations could be
adversely affected.
Our
cost of funds may increase as a result of general economic conditions, interest
rates and competitive pressures.
Our cost
of funds may increase as a result of general economic conditions, fluctuations
in interest rates and competitive pressures. We have traditionally obtained
funds principally through local deposits as we have a base of lower cost
transaction deposits. Our costs of funds and our profitability and liquidity are
likely to be adversely affected, if we have to rely upon higher cost borrowings
from other institutional lenders or brokers to fund loan demand or liquidity
needs. Also, changes in our deposit mix and growth could adversely affect our
profitability and the ability to expand our loan portfolio.
We
have been active in making student loans and this part of our business could
decrease or terminate in the future.
Our
subsidiary banks historically have been active in the student loan market and
our student loan portfolio has been profitable in the past. Recent interruptions
in the credit markets and certain changes in the federal government programs
affecting student loans, however, have decreased the marketability of student
loans and increased our holding period for such loans. These events have
increased our expenses associated with making and holding student loans and have
decreased the profitability of making such loans. The federal government is
currently considering additional revisions to the student loan program which may
either eliminate participation by banks or substantially reduce the
profitability to banks of participating in student loan programs. Future
regulatory and legislative changes may further decrease the profitability of our
student loan portfolio and may cause us to decrease the size of the student loan
portfolio or eliminate it all together. Eliminating or decreasing that portfolio
could adversely affect our profitability in the future.
13
We
may not be able to raise the additional capital we need to grow and, as a
result, our ability to expand our operations could be materially
impaired.
Federal
and state regulatory authorities require us and our subsidiary banks to maintain
adequate levels of capital to support our operations. Many circumstances could
require us to seek additional capital, such as:
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faster
than anticipated growth;
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reduced
earning levels;
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operating
losses;
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changes
in economic conditions;
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revisions
in regulatory requirements; or
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additional
acquisition opportunities.
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Our
ability to raise additional capital will largely depend on our financial
performance, and on conditions in the capital markets which are outside our
control. If we need additional capital but cannot raise it on terms acceptable
to us, our ability to expand our operations or to engage in acquisitions could
be materially impaired.
Accounting
standards periodically change and the application of our accounting policies and
methods may require management to make estimates about matters that are
uncertain.
The
regulatory bodies that establish accounting standards, including, among others,
the Financial Accounting Standards
Board and the SEC, periodically revise or issue new financial accounting and
reporting standards that govern the preparation of our consolidated financial
statements. The effect of such revised or new standards on our financial
statements can be difficult to predict and can materially impact how we record
and report our financial condition and results of operations.
In
addition, our management must exercise judgment in appropriately applying many
of our accounting policies and methods so they comply with generally accepted
accounting principles. In some cases, management may have to select a particular
accounting policy or method from two or more alternatives. In some cases, the
accounting policy or method chosen might be reasonable under the circumstances
and yet might result in our reporting materially different amounts than would
have been reported if we had selected a different policy or method. Accounting
policies are critical to fairly presenting our financial condition and results
of operations and may require management to make difficult, subjective or
complex judgments about matters that are uncertain.
The
Federal Reserve Board’s source of strength doctrine could require that we divert
capital to our subsidiary banks instead of applying available capital towards
planned uses, such as engaging in acquisitions or paying dividends to
shareholders.
The
Federal Reserve Board’s policies and regulations require that a bank holding
company, including a financial holding company, serve as a source of financial
strength to its subsidiary banks, and further provide that a bank holding
company may not conduct operations in an unsafe or unsound manner. It is the
Federal Reserve Board’s policy that a bank holding company should stand ready to
use available resources to provide adequate capital to its subsidiary banks
during periods of financial stress or adversity, such as during periods of
significant loan losses, and that such holding company should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks if such a need were to
arise.
A bank
holding company’s failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered to be an unsafe
and unsound banking practice or a violation of the Federal Reserve Board’s
regulations, or both. Accordingly, if the financial condition of our subsidiary
banks were to deteriorate, we could be compelled to provide financial support to
our subsidiary banks at a time when, absent such Federal Reserve Board policy,
we may not deem it advisable to provide such assistance. Under such
circumstances, there is a possibility that we may not either have adequate
available capital or feel sufficiently confident regarding our financial
condition, to enter into acquisitions, pay dividends, or engage in other
corporate activities.
We
may incur environmental liabilities with respect to properties to which we take
title.
A
significant portion of our loan portfolio is secured by real property. In the
course of our business, we may own or foreclose and take title to real estate
and could become subject to environmental liabilities with respect to these
properties. We may become responsible to a governmental agency or third parties
for property damage, personal injury, investigation and clean-up costs incurred
by those parties in connection with environmental contamination, or may be
required to investigate or clean-up hazardous or toxic substances, or chemical
releases at a property. The costs associated with environmental investigation or
remediation activities could be substantial. If we were to become subject to
significant environmental liabilities, it could have a material adverse effect
on our results of operations and financial condition.
14
Our
management has broad discretion over the use of proceeds from our recent common
stock offering.
Although
we have indicated our intent to use the proceeds from our recent common stock
offering for general corporate purposes, including funding internal growth and
selected future acquisitions, our Board of Directors retains significant
discretion with respect to the use of proceeds from this offering. If we use the
funds to acquire other businesses, there can be no assurance that any business
we acquire will be successfully integrated into our operations or otherwise
perform as expected. Likewise, other uses of the proceeds from this offering may
not generate favorable returns for us.
Risks
Related to Owning Our Stock
The
holders of our subordinated debentures have rights that are senior to those of
our shareholders. If we defer payments of interest on our outstanding
subordinated debentures or if certain defaults relating to those debentures
occur, we will be prohibited from declaring or paying dividends or distributions
on, and from making liquidation payments with respect to our common
stock.
We have
$30.9 million of subordinated debentures issued in connection with trust
preferred securities. Payments of the principal and interest on the trust
preferred securities are unconditionally guaranteed by us. The subordinated
debentures are senior to our shares of common stock. As a result, we must make
payments on the subordinated debentures (and the related trust preferred
securities) before any dividends can be paid on our common stock and, in the
event of our bankruptcy, dissolution or liquidation, the holders of the
debentures must be satisfied before any distributions can be made to the holders
of our common stock. We have the right to defer distributions on the
subordinated debentures (and the related trust preferred securities) for up to
five years, during which time no dividends may be paid to holders of our capital
stock. If we elect to defer or if we default with respect to our obligations to
make payments on these subordinated debentures, this would likely have a
material adverse effect on the market value of our common stock. Moreover,
without notice to or consent from the holders of our common stock, we may issue
additional series of subordinated debt securities in the future with terms
similar to those of our existing subordinated debt securities or enter into
other financing agreements that limit our ability to purchase or to pay
dividends or distributions on our capital stock.
We
may be unable to, or choose not to, pay dividends on our common
stock.
We cannot
assure you of our ability to continue to pay dividends. Our ability to pay
dividends depends on the following factors, among others:
|
·
|
We
may not have sufficient earnings since our primary source of income, the
payment of dividends to us by our subsidiary banks, is subject to federal
and state laws that limit the ability of those banks to pay
dividends;
|
|
·
|
Federal
Reserve Board policy requires bank holding companies to pay cash dividends
on common stock only out of net income available over the past year and
only if prospective earnings retention is consistent with the
organization’s expected future needs and financial condition;
and
|
|
·
|
Our
Board of Directors may determine that, even though funds are available for
dividend payments, retaining the funds for internal uses, such as
expansion of our operations, is a better
strategy.
|
If we fail
to pay dividends, capital appreciation, if any, of our common stock may be the
sole opportunity for gains on an investment in our common stock. In addition, in
the event our subsidiary banks become unable to pay dividends to us, we may not
be able to service our debt or pay our other obligations or pay dividends on our
common stock. Accordingly, our inability to receive dividends from our
subsidiary banks could also have a material adverse effect on our business,
financial condition and results of operations and the value of your investment
in our common stock.
15
There
may be future sales of additional common stock or preferred stock or other
dilution of our equity, which may adversely affect the value of our common
stock.
We are not
restricted from issuing additional common stock or preferred stock, including
any securities that are convertible into or exchangeable for, or that represent
the right to receive, common stock or preferred stock or any substantially
similar securities. The value of our common stock could decline as a result of
sales by us of a large number of shares of common stock or preferred stock or
similar securities in the market or the perception that such sales could
occur.
Anti-takeover
provisions could negatively impact our shareholders.
Provisions
of our 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 us, even if doing so would be perceived to be beneficial to our
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 our common stock. These provisions could
also discourage proxy contests and make it more difficult for holders of our
common stock to elect directors other than the candidates nominated by our Board
of Directors.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
There are
currently no unresolved Commission staff comments.
ITEM
2. PROPERTIES
The
principal offices of the Company and the lead 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, we also
have 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 were seeking $2,000,000 in
compensatory damages and $10,000,000 in punitive damages. The Company
and the banks filed Motions to Dismiss. The plaintiffs were granted
additional time to discover any evidence for litigation, and 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 was changed to Jefferson County for the Company and
Simmons First Bank of South Arkansas. Non-binding mediation failed on
June 24, 2008. A pretrial was conducted on July 24,
2008. Several dispositive motions previously filed were heard on
April 9, 2009, and arguments were presented on June 22, 2009. On July
10, 2009, the Court issued its Order dismissing five claims, leaving only a
single claim for further pursuit in this matter. On August 18, 2009,
Plaintiffs took a nonsuit on their remaining claim of breach of good faith and
fair dealing, thereby bringing all claims set forth in this action to a
conclusion.
Plaintiffs
subsequently filed their Notice of Appeal to the appellate court, have timely
lodged the transcript with the Supreme Court Clerk, and a briefing schedule has
been issued. The Company intends to contest the appeal and seek
affirmance of the Court's dismissal of Plaintiffs' claims. At this
time, no basis for any material liability has been identified.
16
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.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our common stock is listed on the NASDAQ
Global Select Market under the symbol “SFNC.” Set forth below are the high and
low sales prices for our common stock as reported by the NASDAQ Global Select
Market for each quarter of the fiscal years ended December 31, 2009 and
2008. Also set forth below are dividends declared per share in each
of these periods:
|
Quarterly
|
||||||||||||
|
Price
Per
|
Dividends
|
|||||||||||
|
Common
Share
|
Per
Common
|
|||||||||||
|
High
|
Low
|
Share
|
||||||||||
|
2009
|
||||||||||||
|
1st
quarter
|
$ | 29.54 | $ | 20.30 | $ | 0.19 | ||||||
|
2nd
quarter
|
30.02 | 23.90 | 0.19 | |||||||||
|
3rd
quarter
|
30.84 | 26.15 | 0.19 | |||||||||
|
4th
quarter
|
30.00 | 24.50 | 0.19 | |||||||||
|
2008
|
||||||||||||
|
1st
quarter
|
$ | 29.90 | $ | 24.00 | $ | 0.19 | ||||||
|
2nd
quarter
|
32.99 | 27.82 | 0.19 | |||||||||
|
3rd
quarter
|
36.49 | 26.20 | 0.19 | |||||||||
|
4th
quarter
|
35.00 | 22.41 | 0.19 | |||||||||
On
February 5, 2010, the closing price for our common stock as reported on the
NASDAQ was $25.97. As of February
5, 2010, there were 1,337 shareholders of record of our common
stock.
The timing
and amount of future dividends are at the discretion of our Board of Directors
and will depend upon our consolidated earnings, financial condition, liquidity
and capital requirements, the amount of cash dividends paid to us by our
subsidiaries, applicable government regulations and policies and other factors
considered relevant by our Board of Directors. Our Board of Directors
anticipates that we will continue to pay quarterly dividends in amounts
determined based on the factors discussed above. However, there can be no
assurance that we will continue to pay dividends on our common stock at the
current levels or at all.
Our
principal source of funds for dividend payments to our stockholders is
distributions, including dividends, from our subsidiary banks, which are subject
to restrictions tied to such institution’s earnings. Under applicable
banking laws, the declaration of dividends by the lead bank and Simmons First
Bank of 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 First Bank of Jonesboro, Simmons
First Bank of Northwest Arkansas, Simmons First Bank of South Arkansas, Simmons
First Bank of Hot Springs, Simmons First Bank of Russellville and Simmons First
Bank of 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, 2009, approximately $15.2 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
On
November 28, 2007, we 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 we intend to
repurchase. 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. We intend to use the
repurchased shares to satisfy stock option exercise, payment of future stock
dividends and general corporate purposes. We may discontinue
purchases at any time that management determines additional purchases are not
warranted. As part of our strategic focus on building capital, we
suspended our stock repurchase program in July 2008. We made no
purchases of our common stock during the three months or year ended
December 31, 2009. Because of the recently completed stock
offering and based on our strategy to retain capital, we do not anticipate
resuming our stock repurchase during 2010.
17
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, 2004
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
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||||||||
|
Simmons
First National Corporation
|
100.00 | 97.93 | 113.63 | 98.55 | 112.44 | 109.17 | ||||||||||||||||||
|
NASDAQ
Bank Index
|
100.00 | 95.67 | 106.20 | 82.76 | 62.96 | 51.31 | ||||||||||||||||||
|
S&P
500 Index
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
18
ITEM
6. SELECTED
CONSOLIDATED FINANCIAL DATA
The
following table sets forth selected consolidated financial data concerning the
Company and is qualified in its entirety by the detailed information and
consolidated financial statements, including notes thereto, included
elsewhere in this report. The income statement, balance sheet
and per common share data as of and for the years ended December 31, 2009,
2008, 2007, 2006 and 2005, were derived from consolidated financial statements
of the Company, which were audited by BKD, LLP. Results from past
periods are not necessarily indicative of results that may be expected for any
future period.
Management
believes that certain non-GAAP measures, including diluted core earnings per
share, tangible book value, the ratio of tangible common equity to tangible
assets, tangible stockholders’ equity and return on average tangible equity, may
be useful to analysts and investors in evaluating the performance of our
Company. We have included certain of these non-GAAP measures,
including cautionary remarks regarding the usefulness of these analytical tools,
in this table. 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.
| Years Ended December 31 | ||||||||||||||||||||
|
(In thousands, except per share & other
data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Income
statement data:
|
||||||||||||||||||||
|
Net
interest income
|
$ | 97,727 | $ | 94,017 | $ | 92,116 | $ | 88,804 | $ | 90,257 | ||||||||||
|
Provision
for loan losses
|
10,316 | 8,646 | 4,181 | 3,762 | 7,526 | |||||||||||||||
|
Net
interest income after provision
|
||||||||||||||||||||
|
for
loan losses
|
87,411 | 85,371 | 87,935 | 85,042 | 82,731 | |||||||||||||||
|
Non-interest
income
|
52,711 | 49,326 | 46,003 | 43,947 | 42,318 | |||||||||||||||
|
Non-interest
expense
|
104,722 | 96,360 | 94,197 | 89,068 | 85,584 | |||||||||||||||
|
Income
before taxes
|
35,400 | 38,337 | 39,741 | 39,921 | 39,465 | |||||||||||||||
|
Provision
for income taxes
|
10,190 | 11,427 | 12,381 | 12,440 | 12,503 | |||||||||||||||
|
Net
income
|
$ | 25,210 | $ | 26,910 | $ | 27,360 | $ | 27,481 | $ | 26,962 | ||||||||||
|
Per
share data:
|
||||||||||||||||||||
|
Basic
earnings
|
1.75 | 1.93 | 1.95 | 1.93 | 1.88 | |||||||||||||||
|
Diluted
earnings
|
1.74 | 1.91 | 1.92 | 1.90 | 1.84 | |||||||||||||||
|
Diluted
core earnings (non-GAAP) (1)
|
1.74 | 1.73 | 1.97 | 1.90 | 1.84 | |||||||||||||||
|
Book
value
|
21.72 | 20.69 | 19.57 | 18.24 | 17.04 | |||||||||||||||
|
Tangible
book value (non-GAAP) (2)
|
18.07 | 16.16 | 14.97 | 13.68 | 12.46 | |||||||||||||||
|
Dividends
|
0.76 | 0.76 | 0.73 | 0.68 | 0.61 | |||||||||||||||
|
Basic
average common shares outstanding
|
14,375,323 | 13,945,249 | 14,043,626 | 14,226,481 | 14,375,005 | |||||||||||||||
|
Diluted
average common shares outstanding
|
14,465,718 | 14,107,943 | 14,241,182 | 14,474,812 | 14,686,927 | |||||||||||||||
|
Balance
sheet data at period end:
|
||||||||||||||||||||
|
Assets
|
3,093,322 | 2,923,109 | 2,692,447 | 2,651,413 | 2,523,768 | |||||||||||||||
|
Investment
securities
|
646,915 | 646,134 | 530,930 | 527,126 | 521,789 | |||||||||||||||
|
Total
loans
|
1,874,989 | 1,933,074 | 1,850,454 | 1,783,495 | 1,718,107 | |||||||||||||||
|
Allowance
for loan losses
|
25,016 | 25,841 | 25,303 | 25,385 | 26,923 | |||||||||||||||
|
Goodwill
& other intangible assets
|
62,374 | 63,180 | 63,987 | 64,804 | 65,634 | |||||||||||||||
|
Non
interest bearing deposits
|
363,154 | 334,998 | 310,181 | 305,327 | 331,113 | |||||||||||||||
|
Deposits
|
2,432,172 | 2,336,333 | 2,182,857 | 2,175,531 | 2,059,958 | |||||||||||||||
|
Long-term
debt
|
128,894 | 127,741 | 51,355 | 52,381 | 56,090 | |||||||||||||||
|
Subordinated
debt & trust preferred
|
30,930 | 30,930 | 30,930 | 30,930 | 30,930 | |||||||||||||||
|
Stockholders’
equity
|
371,247 | 288,792 | 272,406 | 259,016 | 244,085 | |||||||||||||||
|
Tangible
stockholders’ equity (non GAAP) (2)
|
308,873 | 225,612 | 208,419 | 194,212 | 178,451 | |||||||||||||||
|
Capital
ratios at period end:
|
||||||||||||||||||||
|
Stockholders’
equity to total assets
|
12.00 | % | 9.88 | % | 10.12 | % | 9.77 | % | 9.67 | % | ||||||||||
|
Tangible
common equity to tangible assets
|
||||||||||||||||||||
|
(non-GAAP)
(3)
|
10.19 | % | 7.89 | % | 7.93 | % | 7.51 | % | 7.26 | % | ||||||||||
|
Tier
1 leverage ratio
|
11.64 | % | 9.15 | % | 9.06 | % | 8.83 | % | 8.62 | % | ||||||||||
|
Tier
1 risk-based ratio
|
17.91 | % | 13.24 | % | 12.43 | % | 12.38 | % | 12.26 | % | ||||||||||
|
Total
risk-based capital ratio
|
19.17 | % | 14.50 | % | 13.69 | % | 13.64 | % | 13.54 | % | ||||||||||
|
Dividend
payout
|
43.68 | % | 39.79 | % | 38.02 | % | 35.79 | % | 33.15 | % | ||||||||||
19
|
Annualized
performance ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
0.85 | % | 0.94 | % | 1.03 | % | 1.07 | % | 1.08 | % | ||||||||||
|
Return
on average equity
|
8.26 | % | 9.54 | % | 10.26 | % | 10.93 | % | 11.24 | % | ||||||||||
|
Return
on average tangible equity (non-GAAP) (2)
(4)
|
10.61 | % | 12.54 | % | 13.78 | % | 15.03 | % | 15.79 | % | ||||||||||
|
Net
interest margin (5)
|
3.78 | % | 3.75 | % | 3.96 | % | 3.96 | % | 4.13 | % | ||||||||||
|
Efficiency
ratio (6)
|
65.69 | % | 66.84 | % | 64.94 | % | 64.81 | % | 62.30 | % | ||||||||||
|
Balance
sheet ratios:
|
||||||||||||||||||||
|
Nonperforming
assets as a percentage of
|
||||||||||||||||||||
|
period-end
assets
|
1.12 | % | 0.64 | % | 0.51 | % | 0.45 | % | 0.40 | % | ||||||||||
|
Nonperforming
loans as a percentage
|
||||||||||||||||||||
|
of
period-end loans
|
1.35 | % | 0.81 | % | 0.60 | % | 0.56 | % | 0.49 | % | ||||||||||
|
Nonperforming
assets as a percentage of
|
||||||||||||||||||||
|
period-end
loans & OREO
|
1.83 | % | 0.96 | % | 0.75 | % | 0.67 | % | 0.58 | % | ||||||||||
|
Allowance/to
nonperforming loans
|
98.81 | % | 165.12 | % | 226.10 | % | 252.46 | % | 319.48 | % | ||||||||||
|
Allowance
for loan losses as a
|
||||||||||||||||||||
|
percentage
of period-end loans
|
1.33 | % | 1.34 | % | 1.37 | % | 1.42 | % | 1.57 | % | ||||||||||
|
Net
(recoveries) charge-offs as a percentage
|
||||||||||||||||||||
|
of
average loans
|
0.58 | % | 0.43 | % | 0.23 | % | 0.22 | % | 0.43 | % | ||||||||||
|
Other
data
|
||||||||||||||||||||
|
Number
of financial centers
|
84 | 84 | 83 | 81 | 79 | |||||||||||||||
|
Number
of full time equivalent employees
|
1,091 | 1,123 | 1,128 | 1,134 | 1,110 | |||||||||||||||
|
(1)
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.
|
||||||||||||||||||||
|
(2)
Because of our significant level of intangible assets, total goodwill and
core deposit premiums, management believes a useful calculation for
investors in their analysis of our Company is tangible book value per
share (non-GAAP). This non-GAAP calculation eliminates the effect of
goodwill and acquisition related intangible assets and is calculated by
subtracting goodwill and intangible assets from total stockholders’
equity, and dividing the resulting number by the common stock outstanding
at period end. The following table reflects the reconciliation of this
non-GAAP measure to the GAAP presentation of book value for the periods
presented above:
|
||||||||||||||||||||
|
Years Ended December 31
|
||||||||||||||||||||
|
(In thousands, except per share & other
data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Stockholders’
equity
|
$ | 371,247 | $ | 288,792 | $ | 272,406 | $ | 259,016 | $ | 244,085 | ||||||||||
|
Less:
Intangible assets
|
||||||||||||||||||||
|
Goodwill
|
60,605 | 60,605 | 60,605 | 60,605 | 60,605 | |||||||||||||||
|
Other
intangibles
|
1,769 | 2,575 | 3,382 | 4,199 | 5,029 | |||||||||||||||
|
Tangible
stockholders’ equity (non-GAAP)
|
$ | 308,873 | $ | 225,612 | $ | 208,419 | $ | 194,212 | $ | 178,451 | ||||||||||
|
Book
value per share
|
$ | 21.72 | $ | 20.69 | $ | 19.57 | $ | 18.24 | $ | 17.04 | ||||||||||
|
Tangible
book value per share (non-GAAP)
|
$ | 18.07 | $ | 16.16 | $ | 14.97 | $ | 13.68 | $ | 12.46 | ||||||||||
|
Shares
outstanding
|
17,093,931 | 13,960,680 | 13,918,368 | 14,196,855 | 14,326,923 | |||||||||||||||
|
(3)
Tangible common equity to tangible assets ratio is tangible stockholders’
equity (non-GAAP) divided by total assets less goodwill and other
intangible assets as and for the periods ended presented
above.
|
||||||||||||||||||||
|
(4)
Return on average tangible equity is a non-GAAP measure that removes the
effect of goodwill and intangible assets, as well as the amortization of
intangibles, from the return on average equity. This non-GAAP measure is
calculated as net income, adjusted for the tax-effected effect of
intangibles, divided by average tangible equity.
|
||||||||||||||||||||
|
(5)
Fully taxable equivalent (assuming an income tax rate of
37.5%).
|
||||||||||||||||||||
|
(6)
The efficiency ratio is total non-interest expense less foreclosure
expense and amortization of intangibles, divided by the sum of net
interest income on a fully taxable equivalent basis plus total
non-interest income less security gains, net of tax. For the year ended
December 31, 2009, this calculation excludes the FDIC special assessment
of $1.4 million from total non-interest expense. For the year ended
December 31, 2008, this calculation adds the VISA litigation expense
reversal of $1.2 million to total non-interest expense and excludes gain
on partial redemption of Visa shares of $3.0 million from total
non-interest income. For the year ended December 31, 2007, this
calculation excludes VISA litigation expense of $1.2 million from total
non-interest expense.
|
||||||||||||||||||||
20
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
| Critical Accounting Policies |
Overview
As
discussed in Note 16, New Accounting Standards, in the accompanying Notes to
Consolidated Financial Statements included elsewhere in this report, on July 1,
2009, the Accounting Standards Codification (“ASC”) became the Financial
Accounting Standards Board’s (“FASB”) officially recognized source of
authoritative U.S. generally accepted accounting principles (“GAAP”) for all
nongovernmental entities, with the exception of guidance issued by the SEC and
its staff. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the way companies
refer to GAAP in financial statements and accounting policies. Citing
particular content in the ASC involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph
structure. We adopted this accounting standard in preparing the
Consolidated Financial Statements beginning with the period ended September 30,
2009.
We follow
accounting and reporting policies that 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 we base estimates
on historical experience, current information and other factors deemed to be
relevant, actual results could differ from those estimates.
We
consider 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 our 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 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 our ongoing risk management system.
A loan is
considered impaired when it is probable that we 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 we
established based on our 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.
21
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. We perform an annual goodwill
impairment test, and more than annually if circumstances warrant, in accordance
with ASC Topic 350, Intangibles – Goodwill and Other. ASC Topic 350
requires that goodwill and intangible assets that have indefinite lives be
reviewed for impairment annually, or more frequently if certain conditions
occur. Impairment losses on recorded goodwill, if any, will be
recorded as operating expenses.
Employee
Benefit Plans
We have
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 ASC Topic 718, Compensation – Stock Compensation, 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
We are
subject to the federal income tax laws of the United States, and the tax laws of
the states and other jurisdictions where we conduct 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
income 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.
| 2009 Overview |
Our net
income for the year ended December 31, 2009, was $25.2 million, a 6.3% decrease
from net income of $26.9 million in 2008. Net income in 2007 was
$27.4 million. Diluted earnings per share decreased $0.17, or 8.9%,
to $1.74 in 2009 compared to $1.91 in 2008. Diluted earnings per
share in 2007 were $1.92.
During the
first quarter of 2008, we 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 our 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, we received cash proceeds
from the mandatory partial redemption of our 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. Excluding these nonrecurring items, our
core earnings per share increased by $0.01 in 2009 over 2008. See
Reconciliation of Non-GAAP Measures and Table 20 - Reconciliation of Core
Earnings (non-GAAP) for additional discussion of non-GAAP measures.
At
December 31, 2009, our loan portfolio totaled $1.875 billion, which is a $58.1
million, or 3.0%, decrease from the same period last year. This
decrease was due due primarily to a $49.8 million decrease in real estate loans,
primarily in construction and development loans. Even during
this period of soft loan demand, our consumer loan portfolio increased by $23.8
million, or 5.7%, primarily driven by a $19.5 million increase in credit card
balances.
22
Although
the general state of the national economy remains volatile, and despite the
challenges in the Northwest Arkansas region, we continue to maintain relatively
good asset quality. The allowance for loan losses as a percent of
total loans was 1.33% at December 31, 2009. Non-performing loans
equaled 1.35% of total loans, up 54 basis points from
2008. Non-performing assets were 1.12% of total assets, up 48 basis
points from 2008. The allowance for loan losses was 99% of
non-performing loans. The Company’s annualized net charge-offs for
2009 were 0.75% of total loans. Excluding credit cards, annualized
net charge-offs for 2009 were 0.57% of total loans. Net credit card
charge-offs for 2009 were 2.61%, more than 750 basis points below the most
recently published credit card charge-off industry average. We do not
own any securities backed by subprime mortgage assets and we have no mortgage
loan products that target subprime borrowers.
Total
assets at December 31, 2009, were $3.093 billion, an increase of $170 million,
or 5.8%, over the period ended December 31, 2008. Stockholders’
equity as of December 31, 2009, was $371.2 million, an increase of $82.4
million, or approximately 28.6%, from December 31,
2008. Approximately $70.5 million of the increase in stockholders’
equity was the result of the secondary stock offering we completed in December
2009, in which we issued a total of 3,047,500 shares of common stock, including
the over-allotment, at a price of $24.50 per share, less underwriting discounts
and commissions
Simmons
First National Corporation is an Arkansas based, Arkansas committed financial
holding company with $3.1 billion in assets and eight community banks in
Pine Bluff, Lake Village, Jonesboro, Rogers, Searcy, Russellville, El Dorado and
Hot Springs, Arkansas. Our eight subsidiary banks conduct financial
operations from 88 offices, of which 84 are financial centers, in 47
communities.
U.S.
Treasury’s Capital Purchase Program
On October
29, 2008, the U.S. Department of the Treasury (“Treasury”) gave the Company
approval to participate in the Troubled Asset Relief Program – Capital Purchase
Program (“CPP”), designed to provide additional capital to healthy financial
institutions, thereby increasing confidence in our banking industry and
encouraging increased lending. On January 6, 2009, the Treasury
amended its approval to allow us to participate in the CPP at a level up to
$59.7 million. At a Special Meeting of Shareholders held on
February 27, 2009, our shareholders voted to amend the Articles of Incorporation
to authorize the issuance of preferred shares and common stock warrants required
for participation in the CPP.
Approximately
600 banks nationwide have participated in the CPP. We were the
thirty-second bank in the country to be approved. Our original plans
were to issue the shares under the CPP on March 27, 2009. However,
due to the continued ambiguity resulting from changes being proposed by
Congress, we requested and were granted an extension by the Treasury due to the
ambiguity and uncertainty regarding the ability to repay the funds at the time
of our choosing.
On July 7,
2009, management notified the Treasury that the Company would not participate in
the CPP. After careful consideration and analysis, The Arkansas
economy continued doing well relative to many other geographic regions of the
country, and we continued to have strong asset quality, liquidity and
capital. Accordingly, we did not believe our participation in the CPP
was necessary nor in the best interest of our shareholders.
| Net Interest Income |
Net
interest income, our 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. Our 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 prime interest rate remained at 3.25%
throughout 2009.
23
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 Federal Funds rate remained
unchanged throughout 2009.
Our
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 our
loan portfolio and approximately 80% of our time deposits have repriced in one
year or less. These historical percentages are consistent with our
current interest rate sensitivity.
For the
year ended December 31, 2009, net interest income on a fully taxable equivalent
basis was $102.7 million, an increase of $4.6 million, or 4.7%, from the same
period in 2008. The increase in net interest income was the result of
a $23.3 million decrease in interest expense offset by an $18.7 million decrease
in interest income. As a result, the net interest margin was 3.78%
for the year ended December 31, 2009, an increase of 3 basis points from
2008.
The $23.3
million decrease in interest expense for 2009 is primarily the result of a 108
basis point decrease in cost of funds due to competitive repricing during a
falling interest rate environment, partially offset by a $57.3 million increase
in average interest bearing liabilities. The growth in average
interest bearing liabilities was primarily due to our initiatives to enhance
liquidity during 2008 and 2009 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 $22.8 million
decrease in interest expense. The most significant component of this decrease
was the $12.6 million decrease associated with the repricing of our 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 our time deposits reprice
in one year or less. As a result, the average rate paid on time
deposits decreased 131 basis points from 3.74% to 2.43%. Lower rates
on federal funds purchased and other debt resulted in an additional $1.7 million
decrease in interest expense, with the average rate paid on debt decreasing by
108 basis points from 2.77% to 1.69%. The higher level of average
interest bearing liabilities resulted in a $522,000 decrease in interest
expense. More specifically, the higher level of average interest
bearing liabilities was the result of increases of approximately $50.3 million
from internal deposit growth and $7.0 million in federal funds purchased and
other debt.
The $18.7
million decrease in interest income for 2009 is primarily the result of a 91
basis point decrease in yield on earning assets associated with the repricing to
a lower interest rate environment, offset by a $95.8 million increase in average
interest earning assets due to internal growth. The lower interest
rates accounted for a $24.3 million decrease in interest income. The
most significant component of this decrease was the $14.6 million decrease
associated with the repricing of our 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 our loan
portfolio reprices in one year or less. As a result, the average rate
earned on the loan portfolio decreased 76 basis points from 6.68% to
5.92%. The growth in average interest earning assets resulted in a
$5.5 million improvement in interest income. The growth in investment
securities accounted for $3.0 million of the increase, while the growth in
average loans resulted in $2.2 million of this increase.
Our 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. Based
on our current interest rate risk pricing model, we anticipate flat to slight
margin improvement in 2010.
24
Tables 1
and 2 reflect an analysis of net interest income on a fully taxable equivalent
basis for the years ended December 31, 2009, 2008 and 2007, respectively, as
well as changes in fully taxable equivalent net interest margin for the years
2009 versus 2008 and 2008 versus 2007.
|
Table
1: Analysis
of Net Interest Income
|
|
|||||||||||
|
(FTE
=Fully Taxable Equivalent)
|
||||||||||||
|
|
Years Ended December 31
|
|||||||||||
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Interest
income
|
$ | 136,533 | $ | 156,141 | $ | 168,536 | ||||||
|
FTE
adjustment
|
4,935 | 4,060 | 3,463 | |||||||||
|
Interest
income - FTE
|
141,468 | 160,201 | 171,999 | |||||||||
|
Interest
expense
|
38,806 | 62,124 | 76,420 | |||||||||
|
Net
interest income - FTE
|
$ | 102,662 | $ | 98,077 | $ | 95,579 | ||||||
|
Yield
on earning assets - FTE
|
5.21 | % | 6.12 | % | 7.13 | % | ||||||
|
Cost
of interest bearing liabilities
|
1.69 | % | 2.77 | % | 3.69 | % | ||||||
|
Net
interest spread - FTE
|
3.52 | % | 3.35 | % | 3.44 | % | ||||||
|
Net
interest margin - FTE
|
3.78 | % | 3.75 | % | 3.96 | % | ||||||
|
Table
2: Changes
in Fully Taxable Equivalent Net Interest Margin
|
|
|||||||||||
|
(In thousands)
|
2009 vs. 2008
|
2008 vs. 2007
|
||||||||||
|
Increase
due to change in earning assets
|
$ | 5,523 | $ | 10,688 | ||||||||
|
(Decrease)
due to change in earning asset yields
|
(24,256 | ) | (22,486 | ) | ||||||||
|
Increase
due to change in interest rates paid on
|
||||||||||||
|
interest
bearing liabilities
|
22,796 | 16,216 | ||||||||||
|
Increase
(decrease) due to change in interest bearing liabilities
|
522 | (1,920 | ) | |||||||||
|
Increase
in net interest income
|
$ | 4,585 | $ | 2,498 | ||||||||
25
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,
2009. 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 | ||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
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
|
$ | 120,763 | $ | 439 | 0.36 | $ | 83,547 | $ | 1,415 | 1.69 | $ | 22,957 | $ | 1,161 | 5.06 | |||||||||||||||||||||
|
Federal
funds sold
|
4,271 | 27 | 0.63 | 34,577 | 748 | 2.16 | 26,798 | 1,418 | 5.29 | |||||||||||||||||||||||||||
|
Investment
securities - taxable
|
448,918 | 13,896 | 3.10 | 437,612 | 21,057 | 4.81 | 395,388 | 18,362 | 4.64 | |||||||||||||||||||||||||||
|
Investment
securities - non-taxable
|
196,446 | 12,632 | 6.43 | 157,793 | 10,173 | 6.45 | 131,369 | 8,454 | 6.44 | |||||||||||||||||||||||||||
|
Mortgage
loans held for sale
|
12,428 | 608 | 4.89 | 6,909 | 411 | 5.95 | 7,971 | 505 | 6.34 | |||||||||||||||||||||||||||
|
Assets
held in trading accounts
|
6,187 | 20 | 0.32 | 5,711 | 73 | 1.28 | 4,958 | 100 | 2.02 | |||||||||||||||||||||||||||
|
Loans
|
1,924,317 | 113,846 | 5.92 | 1,891,357 | 126,324 | 6.68 | 1,822,777 | 141,999 | 7.79 | |||||||||||||||||||||||||||
|
Total
interest earning assets
|
2,713,330 | 141,468 | 5.21 | 2,617,506 | 160,201 | 6.12 | 2,412,218 | 171,999 | 7.13 | |||||||||||||||||||||||||||
|
Non-earning
assets
|
251,282 | 250,675 | 254,656 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 2,964,612 | $ | 2,868,181 | $ | 2,666,874 | ||||||||||||||||||||||||||||||
|
LIABILITIES AND
|
||||||||||||||||||||||||||||||||||||
|
STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing transaction
|
||||||||||||||||||||||||||||||||||||
|
and
savings deposits
|
$ | 1,091,960 | $ | 8,252 | 0.76 | $ | 959,567 | $ | 14,924 | 1.56 | $ | 736,160 | $ | 13,089 | 1.78 | |||||||||||||||||||||
|
Time
deposits
|
939,358 | 22,794 | 2.43 | 1,021,427 | 38,226 | 3.74 | 1,124,557 | 52,385 | 4.66 | |||||||||||||||||||||||||||
|
Total
interest bearing deposits
|
2,031,318 | 31,046 | 1.53 | 1,980,994 | 53,150 | 2.68 | 1,860,717 | 65,474 | 3.52 | |||||||||||||||||||||||||||
|
Federal
funds purchased and
|
||||||||||||||||||||||||||||||||||||
|
securities
sold under agreement
|
||||||||||||||||||||||||||||||||||||
|
to
repurchase
|
107,975 | 769 | 0.71 | 113,964 | 2,110 | 1.85 | 113,167 | 5,371 | 4.75 | |||||||||||||||||||||||||||
|
Other
borrowed funds
|
||||||||||||||||||||||||||||||||||||
|
Short-term
debt
|
2,583 | 33 | 1.28 | 4,333 | 111 | 2.56 | 14,757 | 804 | 5.45 | |||||||||||||||||||||||||||
|
Long-term
debt
|
160,963 | 6,958 | 4.32 | 146,218 | 6,753 | 4.62 | 81,408 | 4,771 | 5.86 | |||||||||||||||||||||||||||
|
Total
interest bearing liabilities
|
2,302,839 | 38,806 | 1.69 | 2,245,509 | 62,124 | 2.77 | 2,070,049 | 76,420 | 3.69 | |||||||||||||||||||||||||||
|
Non-interest
bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
Non-interest
bearing deposits
|
332,998 | 317,772 | 307,041 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
23,565 | 22,714 | 23,156 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
2,659,402 | 2,585,995 | 2,400,246 | |||||||||||||||||||||||||||||||||
|
Stockholders’
equity
|
305,210 | 282,186 | 266,628 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||||||||||||||||||
|
stockholders’
equity
|
$ | 2,964,612 | $ | 2,868,181 | $ | 2,666,874 | ||||||||||||||||||||||||||||||
|
Net
interest spread
|
3.52 | 3.35 | 3.44 | |||||||||||||||||||||||||||||||||
|
Net
interest margin
|
$ | 102,662 | 3.78 | $ | 98,077 | 3.75 | $ | 95,579 | 3.96 | |||||||||||||||||||||||||||
26
Table 4
shows changes in interest income and interest expense, resulting from changes in
volume and changes in interest rates for each of the years ended December 31,
2009 and 2008, as compared to prior years. The changes in interest
rate and volume have been allocated to changes in average volume and changes in
average rates in proportion to the relationship of absolute dollar amounts of
the changes in rates and volume.
Table
4:
Volume/Rate Analysis
|
|
Years Ended December 31
|
|||||||||||||||||||||||
|
|
2009 over 2008
|
2008 over 2007
|
||||||||||||||||||||||
|
(In
thousands, on a fully
|
Yield/
|
Yield/
|
||||||||||||||||||||||
|
taxable equivalent
basis)
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||||||
|
Increase
(decrease) in
|
||||||||||||||||||||||||
|
Interest
income
|
||||||||||||||||||||||||
|
Interest
bearing balances
|
||||||||||||||||||||||||
|
due
from banks
|
$ | 451 | $ | (1,427 | ) | $ | (976 | ) | $ | 1,436 | $ | (1,182 | ) | $ | 254 | |||||||||
|
Federal
funds sold
|
(399 | ) | (322 | ) | (721 | ) | 332 | (1,002 | ) | (670 | ) | |||||||||||||
|
Investment
securities - taxable
|
531 | (7,692 | ) | (7,161 | ) | 2,094 | 571 | 2,665 | ||||||||||||||||
|
Investment
securities - non-taxable
|
2,485 | (26 | ) | 2,459 | 1,704 | 15 | 1,719 | |||||||||||||||||
|
Mortgage
loans held for sale
|
281 | (84 | ) | 197 | (64 | ) | (30 | ) | (94 | ) | ||||||||||||||
|
Assets
held in trading accounts
|
6 | (59 | ) | (53 | ) | 2 | 1 | 3 | ||||||||||||||||
|
Loans
|
2,168 | (14,646 | ) | (12,478 | ) | 5,184 | (20,859 | ) | (15,675 | ) | ||||||||||||||
|
Total
|
5,523 | (24,256 | ) | (18,733 | ) | 10,688 | (22,486 | ) | (11,798 | ) | ||||||||||||||
|
Interest
expense
|
||||||||||||||||||||||||
|
Interest
bearing transaction and
|
||||||||||||||||||||||||
|
savings
deposits
|
1,835 | (8,507 | ) | (6,672 | ) | 3,620 | (1,785 | ) | 1,835 | |||||||||||||||
|
Time
deposits
|
(2,870 | ) | (12,562 | ) | (15,432 | ) | (4,504 | ) | (9,655 | ) | (14,159 | ) | ||||||||||||
|
Federal
funds purchased
|
||||||||||||||||||||||||
|
and
securities sold under
|
||||||||||||||||||||||||
|
agreements
to repurchase
|
(106 | ) | (1,235 | ) | (1,341 | ) | 38 | (3,299 | ) | (3,261 | ) | |||||||||||||
|
Other
borrowed funds
|
||||||||||||||||||||||||
|
Short-term
debt
|
(35 | ) | (43 | ) | (78 | ) | (396 | ) | (297 | ) | (693 | ) | ||||||||||||
|
Long-term
debt
|
654 | (449 | ) | 205 | 3,162 | (1,180 | ) | 1,982 | ||||||||||||||||
|
Total
|
(522 | ) | (22,796 | ) | (23,318 | ) | 1,920 | (16,216 | ) | (14,296 | ) | |||||||||||||
|
Increase
(decrease) in
|
||||||||||||||||||||||||
|
net
interest income
|
$ | 6,045 | $ | (1,460 | ) | $ | 4,585 | $ | 8,768 | $ | (6,270 | ) | $ | 2,498 | ||||||||||
Provision for Loan Losses
The
provision for loan losses represents management's determination of the amount
necessary to be charged against the current period's earnings in order to
maintain the allowance for loan losses at a level considered adequate in
relation to the estimated risk inherent in the loan portfolio. The
level of provision to the allowance is based on management's judgment, with
consideration given to the composition, maturity and other qualitative
characteristics of the portfolio, historical loan loss experience, assessment of
current economic conditions, past due and non-performing loans and net loan loss
experience. It is management's practice to review the allowance on at
least a quarterly basis, but generally on a monthly basis, and, after
considering the factors previously noted, to determine the level of provision
made to the allowance.
The
provision for loan losses for 2009, 2008 and 2007, was $10.3 million, $8.6
million and $4.2 million, respectively. During 2009, we increased our
provision by approximately $1.7 million, primarily due to increases in net
credit card charge-offs, increases in non-performing loans and a continued
deterioration of the real estate market in the Northwest Arkansas
region. The 2008 increase was related to special provisions totaling
approximately $2.4 million for possible loan losses in the Northwest Arkansas
region and credit card charge-off increases from the historical lows we
experienced in 2007 and 2006.
27
Non-Interest Income
Total non-interest income was $52.7 million in 2009, compared to $49.3 million in 2008 and $46.0 million in 2007. Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and credit card fees. Non-interest income also includes income on the sale of mortgage loans, investment banking income, premiums on sale of student loans, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities.
Total non-interest income was $52.7 million in 2009, compared to $49.3 million in 2008 and $46.0 million in 2007. Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and credit card fees. Non-interest income also includes income on the sale of mortgage loans, investment banking income, premiums on sale of student loans, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities.
Table 5
shows non-interest income for the years ended December 31, 2009, 2008 and 2007,
respectively, as well as changes in 2009 from 2008 and in 2008 from
2007.
Table
5: Non-Interest
Income
|
2009
|
2008
|
|||||||||||||||||||||||||||
|
Years Ended December 31
|
Change
from
|
Change
from
|
||||||||||||||||||||||||||
|
(In thousands)
|
2009
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||
|
Trust
income
|
$ | 5,227 | $ | 6,230 | $ | 6,218 | $ | (1,003 | ) | -16.10 | % | $ | 12 | 0.19 | % | |||||||||||||
|
Service
charges on deposit accounts
|
17,944 | 15,145 | 14,794 | 2,799 | 18.48 | 351 | 2.37 | |||||||||||||||||||||
|
Other
service charges and fees
|
2,668 | 2,681 | 3,016 | (13 | ) | -0.48 | (335 | ) | -11.11 | |||||||||||||||||||
|
Income
on sale of mortgage loans,
|
||||||||||||||||||||||||||||
|
net
of commissions
|
4,032 | 2,606 | 2,766 | 1,426 | 54.72 | (160 | ) | -5.78 | ||||||||||||||||||||
|
Income
on investment banking,
|
||||||||||||||||||||||||||||
|
net
of commissions
|
2,153 | 1,025 | 623 | 1,128 | 110.05 | 402 | 64.53 | |||||||||||||||||||||
|
Credit
card fees
|
14,392 | 13,579 | 12,217 | 813 | 5.99 | 1,362 | 11.15 | |||||||||||||||||||||
|
Premiums
on sale of student loans
|
2,333 | 1,134 | 2,341 | 1,199 | 105.73 | (1,207 | ) | -51.56 | ||||||||||||||||||||
|
Bank
owned life insurance income
|
1,270 | 1,547 | 1,493 | (277 | ) | -17.91 | 54 | 3.62 | ||||||||||||||||||||
|
Gain
on mandatory partial
|
||||||||||||||||||||||||||||
|
redemption
of Visa shares
|
-- | 2,973 | -- | (2,973 | ) | -100.00 | 2,973 | -- | ||||||||||||||||||||
|
Other
income
|
2,548 | 2,406 | 2,535 | 142 | 5.90 | (129 | ) | -5.09 | ||||||||||||||||||||
|
Gain
(loss) on sale of securities, net
|
144 | -- | -- | 144 | -- | -- | -- | |||||||||||||||||||||
|
Total
non-interest income
|
$ | 52,711 | $ | 49,326 | $ | 46,003 | $ | 3,385 | 6.86 | % | $ | 3,323 | 7.22 | % | ||||||||||||||
Recurring
fee income for 2009 was $40.2 million, an increase of $2.6 million, or 6.9%,
when compared with the 2008 amounts. Service charges on deposit
accounts increased by $2.8 million, principally due to changes in our fee
structure, along with core deposit growth. Credit card fees increased
$814, 000, primarily due to a higher volume of credit and debit card
transactions, with the credit card volume increase a direct result of the
addition of new credit card accounts in 2007 through 2009. Trust
income decreased $1.0 million, primarily due to the sharp decline seen in our
money fund shareholder service fees in the corporate trust area as money market
rates have gone to near zero. We anticipate those revenues will
return when rates begin to rise. Also, we had some large one-time
estate administration fees in 2008 that impacted the decrease in fees in
2009.
Recurring
fee income for 2008 was $37.6 million, an increase of $1.4 million, or 3.8%,
when compared with the 2007 amounts. Service charges on deposit
accounts increased by $351,000, principally due improvement in our fee
structure, along with core deposit growth. Other service charges and
fees decreased by $335,000, primarily due to a decrease in commission revenue
from a third party official check vendor as a result of a contract expiration
and the change in business related to Check 21. Credit card fees
increased $1.4 million, primarily due to a higher volume of credit and debit
card transactions, with the credit card volume increase a direct result of the
addition of new credit card accounts in 2007 and 2008.
Income on
sale of mortgage loans increased by $1.4 million, or 54.7%, in 2009 compared to
2008. Lower mortgage rates led to a significant increase in
residential financing and refinancing volume. Like the rest of
the industry, a significant portion of the increase came from
refinancing. However, the federal first time buyer program was also a
major stimulus for our overall mortgage production.
During the
year ended December 31, 2009, income on investment banking increased $1.1
million, or 110%, from the year ended 2008. This improvement was
primarily due to a volume-driven revenue increase in our dealer bank operation,
which carried over from 2008. During 2008, income on investment
banking increased $402,000, or 64.5%, from 2007, due to additional sales volume
driven by the interest rate environment, called securities and customer
liquidity.
28
Premiums
on sale of student loans increased by $1.2 million, or 106%, for the year ended
December 31, 2009, compared to 2008. Premiums on sale of student
loans had decreased by $1.2 million from 2007 to 2008. These
fluctuations in income from student loan sales are due to timing of sales and do
not reflect historical levels of income.
During
2008, the student loan industry began going through major challenges related to
secondary market liquidity, leaving the Company with no private market to sell
student loans at a premium. In July 2008, the United States
Department of Education announced a one-year program to create temporary
stability and liquidity in the student loan market. We sold one
package of student loans into the government program during the second quarter
of 2009, and, during the third quarter of 2009, sold the remaining student loans
originated and fully funded during the 2008-2009 school year. The federal
government has announced a one-year extension of its program to purchase student
loans. For the immediate future, it is our intention, and we have the
liquidity, to continue to fund new loans and hold those loans that normally
would be sold into the secondary market through the 2009-2010 school
year. Those loans would all be sold into the government program
during the second and third quarters of 2010. Under the terms of the
government program, the loans are sold at par plus reimbursement of the 1%
lender fee and a premium of $75 per loan.
We expect
to record a total of approximately $2.5 million of non-interest income from
premiums on sale of student loans during the second and third quarters of 2010,
when the loans are sold. We will continue to evaluate the
profitability and viability of this strategic business unit going
forward.
During the
first quarter of 2008, we recognized a nonrecurring $3.0 million gain from the
cash proceeds received on the mandatory partial redemption of our equity
interest in Visa, which was the result of Visa’s IPO completed in March
2008.
We
recorded net gains of $144,000 from the sale of securities during
2009. There were no gains or losses on sale of securities during 2008
and 2007.
Non-Interest Expense
Non-interest
expense consists of salaries and employee benefits, occupancy, equipment,
foreclosure losses and other expenses necessary for the operation of the
Company. Management remains committed to controlling the level of
non-interest expense through the continued use of expense control measures that
have been installed. We utilize an extensive profit planning and
reporting system involving all subsidiaries. Based on a needs
assessment of the business plan for the upcoming year, monthly and annual profit
plans are developed, including manpower and capital expenditure
budgets. These profit plans are subject to extensive initial reviews
and monitored by management on a monthly basis. Variances from the
plan are reviewed monthly and, when required, management takes corrective action
intended to ensure financial goals are met. We also regularly monitor
staffing levels at each affiliate to ensure productivity and overhead are in
line with existing workload requirements.
Non-interest
expense for 2009 was $104.7 million, an increase of $8.4 million or 8.7%, from
2008. Included in non-interest expense for 2008 was a $1.2 million
nonrecurring item related to the reversal of the Company’s portion of Visa’s
contingent litigation liabilities. We established the liability and
recorded a $1.2 million nonrecurring expense item during the fourth quarter
of 2007. This liability represented our share of legal judgments and
settlements related to Visa’s litigation, which was satisfied by the $3 billion
escrow account funded by the proceeds from Visa’s IPO, which was completed
during the quarter ended March 31, 2008. When normalized for the Visa
litigation expense reversal, non-interest expense for 2009 increased by 7.3%
over 2008.
Deposit
insurance expense during 2009 increased to $4.6 million from $793,000 in 2008,
an increase of $3.8 million, or 485%. The increase in deposit insurance
expense was due to increases in the fee assessment rates during 2009, the
utilization of available credits to offset assessments during 2008 and a special
assessment applied to all insured institutions as of June 30, 2009.
In May
2009, the FDIC issued a final rule which levied a special assessment applicable
to all insured depository institutions totaling 5 basis points of each
institution’s total assets less Tier 1 capital as of June 30, 2009, not to
exceed 10 basis points of domestic deposits. The special assessment
is part of the FDIC’s efforts to rebuild the Deposit Insurance Fund
(“DIF”). Deposit insurance expense during 2009 included $1.5 million
related to the special assessment. The amended rule also permits the
FDIC to impose an additional emergency special assessment after June 30, 2009,
of up to five basis points if necessary to maintain public confidence in federal
deposit insurance. We cannot provide any assurance as to the ultimate
amount or timing of any such special assessments, should such special
assessments occur, as such special assessments depend upon a variety of factors
which are beyond our control. The imposed special assessment, as well
as any future increases in assessments, adversely affects our noninterest
expense and results of operations.
29
In
September 2009, the FDIC announced that it would require insured banks to prepay
their estimated FDIC assessments for the fourth quarter of 2009 and for the next
three years on December 30, 2009. The FDIC also adopted a uniform three basis
point increase in assessment rates effective on January 1, 2011. The
total amount of our prepaid assessment at was approximately $11.2
million.
Fees paid
for professional services increased by $819,000, or 29.0%, in 2009 over
2008. The increase in professional services, which consist of audit,
accounting, legal and consulting fees, was primarily due to the following
proactive ititiatives that we undertook in 2009. First, we expensed
legal and accounting fees associated with the CPP approval process and the
filing of our $175 million shelf registration. Next, as part of our
strategic acquisition initiatives, we contracted a consultant to help us prepare
for potential opportunities related to FDIC-assisted
transactions. Finally, during the last half of 2009, we began to
expense costs, associated with our ongoing efficiency initiatives, which we
expect to produce significant savings and revenue enhancements in 2010 and
beyond. See Item 1. Business – Efficiency Initiatives for additional
information on our efficiency initiatives.
Credit
card expense for 2009 increased $380,000, or 8.14%, over 2008, primarily due to
increased card usage, interchange fees and other related expense resulting from
initiatives we have taken to grow our credit card portfolio. See Loan
Portfolio section for additional information on our credit card
portfolio.
Non-interest
expense for 2008 was $96.4 million, an increase of $2.2 million or 2.3%, from
2007. The increase in non-interest expense during 2008 compared to
2007 is primarily attributed to normal on-going operating expenses and the
incremental expenses of approximately $1.6 million associated with the operation
of new financial centers opened during 2008.
As
previously mentioned, also included in non-interest expense for 2008 is a $1.2
million nonrecurring item related to the reversal of the Company’s portion of
Visa’s contingent litigation liabilities, originally established and recorded as
a $1.2 million nonrecurring expense item during the fourth quarter of
2007. When normalized for the Visa litigation expense, its reversal
and the additional expenses from the expansion, non-interest expense for 2008
increased by 3.2% over 2007.
Deposit
insurance expense increased by $465,000 in 2008, or 142%, over
2007. During 2007, the FDIC issued credits based on historical
deposit levels to be used in offsetting deposit insurance assessments; our
subsidiary banks received approximately $1.8 million of these
credits. The majority of the credits were exhausted by the third
quarter of 2008. As these credits were used, FDIC insurance expense
increased.
Credit
card expense for 2008 increased $576,000, or 14.1%, over 2007, primarily due to
increased card usage, interchange fees and other related expense resulting from
initiatives the Company has taken to grow its credit card
portfolio.
Other
non-interest expense for 2008 includes an increase of $289,000 for compensation
expense. In 2008, as required by ASC Topic 715, Compensation – Retirement
Benefits, we began to recognize the expense for endorsement split-dollar
life insurance policies that provide benefits to employees that extend to
post-retirement periods.
Core
deposit premium amortization expense recorded for the years ended December 31,
2009, 2008 and 2007, was $805,000, $807,000 and $817,000,
respectively. The Company’s estimated amortization expense for each
of the following five years is: 2010 – $702,000; 2011 – $451,000;
2012 – $321,000; 2013 – $268,000; and 2014 – $28,000. The estimated
amortization expense decreases as core deposit premiums fully amortize in future
years.
30
Table 6
below shows non-interest expense for the years ended December 31, 2009, 2008 and
2007, respectively, as well as changes in 2009 from 2008 and in 2008 from
2007.
Table
6: Non-Interest
Expense
|
2009
|
2008
|
|||||||||||||||||||||||||||
|
Years Ended December 31
|
Change
from
|
Change
from
|
||||||||||||||||||||||||||
|
(In thousands)
|
2009
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||
|
Salaries
and employee benefits
|
$ | 58,317 | $ | 57,050 | $ | 54,865 | $ | 1,267 | 2.22 | % | $ | 2,185 | 3.98 | % | ||||||||||||||
|
Occupancy
expense, net
|
7,457 | 7,383 | 6,674 | 74 | 1.00 | 709 | 10.62 | |||||||||||||||||||||
|
Furniture
and equipment expense
|
6,195 | 5,967 | 5,865 | 228 | 3.82 | 102 | 1.74 | |||||||||||||||||||||
|
Loss
on foreclosed assets
|
453 | 239 | 212 | 214 | 89.54 | 27 | 12.74 | |||||||||||||||||||||
|
Deposit
insurance
|
4,642 | 793 | 328 | 3,849 | 485.37 | 465 | 141.77 | |||||||||||||||||||||
|
Other
operating expenses
|
||||||||||||||||||||||||||||
|
Professional
services
|
3,643 | 2,824 | 2,780 | 819 | 29.00 | 44 | 1.62 | |||||||||||||||||||||
|
Postage
|
2,409 | 2,256 | 2,309 | 153 | 6.78 | (53 | ) | -2.30 | ||||||||||||||||||||
|
Telephone
|
2,113 | 1,868 | 1,820 | 245 | 13.12 | 48 | 2.64 | |||||||||||||||||||||
|
Credit
card expense
|
5,051 | 4,671 | 4,095 | 380 | 8.14 | 576 | 14.07 | |||||||||||||||||||||
|
Operating
supplies
|
1,470 | 1,588 | 1,669 | (118 | ) | -7.43 | (81 | ) | -4.85 | |||||||||||||||||||
|
Amortization
of core deposits
|
805 | 807 | 817 | (2 | ) | -0.25 | (10 | ) | -1.22 | |||||||||||||||||||
|
Visa
litigation liability expense
|
-- | (1,220 | ) | 1,220 | 1,220 | -100.00 | (2,440 | ) | -- | |||||||||||||||||||
|
Other
expense
|
12,167 | 12,134 | 11,543 | 33 | 0.27 | 591 | 5.11 | |||||||||||||||||||||
|
Total
non-interest expense
|
$ | 104,722 | $ | 96,360 | $ | 94,197 | $ | 8,362 | 8.68 | % | $ | 2,163 | 2.30 | % | ||||||||||||||
Income Taxes
The provision for income taxes for 2009 was $10.2 million, compared to $11.4 million in 2008 and $12.4 million in 2007. The effective income tax rates for the years ended 2009, 2008 and 2007 were 28.8%, 29.8% and 31.2%, respectively.
The provision for income taxes for 2009 was $10.2 million, compared to $11.4 million in 2008 and $12.4 million in 2007. The effective income tax rates for the years ended 2009, 2008 and 2007 were 28.8%, 29.8% and 31.2%, respectively.
Loan Portfolio
Our loan
portfolio averaged $1.924 billion during 2009 and $1.891 billion during
2008. As of December 31, 2009, total loans were $1.875 billion,
compared to $1.933 billion on December 31, 2008. The most significant
components of the loan portfolio were loans to businesses (commercial loans,
commercial real estate loans and agricultural loans) and individuals (consumer
loans, credit card loans and single-family residential real estate
loans).
We seek to
manage our credit risk by diversifying the loan portfolio, determining that
borrowers have adequate sources of cash flow for loan repayment without
liquidation of collateral, obtaining and monitoring collateral, providing an
adequate allowance for loan losses and regularly reviewing loans through the
internal loan review process. The loan portfolio is diversified by
borrower, purpose and industry and, in the case of credit card loans, which are
unsecured, by geographic region. We seek to use diversification
within the loan portfolio to reduce credit risk, thereby minimizing the adverse
impact on the portfolio, if weaknesses develop in either the economy or a
particular segment of borrowers. Collateral requirements are based on
credit assessments of borrowers and may be used to recover the debt in case of
default. We use the allowance for loan losses as a method to value
the loan portfolio at its estimated collectable amount. Loans are
regularly reviewed to facilitate the identification and monitoring of
deteriorating credits.
Consumer
loans consist of credit card loans, student loans and other consumer
loans. Consumer loans were $443.1 million at December 31, 2009,
or 23.6% of total loans, compared to $419.3 million, or 21.7% of total loans at
December 31, 2008. The $23.8 million consumer loan increase from 2008
to 2009 is primarily due to an increase in the credit card
portfolio.
The credit
card portfolio balance at December 31, 2009, increased by $19.5 million, or
11.5%, when compared to the same period in 2008. This follows a $3.5
million, or 2.2% growth during the previous year. The growth in
outstanding credit card balances is primarily the result of an increase in net
new accounts. We added over 15,000 net new accounts in 2009, compared
to approximately 5,000 net new accounts in 2008. We believe the
increase in outstanding balances and the addition of new accounts are the result
of the introduction of several initiatives over the past few years to make our
credit card products more competitive, while maintaining extremely high
underwriting standards.
31
The
student loan portfolio balance at December 31, 2009 was $114.3 million, an
increase of $2.7 million, or 2.43%, from December 31, 2008. The
student loan portfolio balance at December 31, 2008 was $111.6 million, an
increase of $35.3 million, or 46.3%, from December 31, 2007. The
significant increase in student loan balances from 2007 to 2008 was due to the
lack of a secondary student loan market and our decision to hold loans normally
sold in the secondary market until we could sell them at a premium into the
government program. See Non-Interest Income section for
additional information.
Real
estate loans consist of construction loans, single family residential loans and
commercial loans. Real estate loans were $1.169 billion at December
31, 2009, or 62.4% of total loans, compared to $1.219 billion, or 63.1% of total
loans at December 31, 2008, a decrease of $49.8 million. Our
construction and development (“C&D”) loans decreased by $44.2 million, with
approximately $11.7 million migrating to our commercial real estate (“CRE”)
loans and the balance being liquidated or refinanced
elsewhere. Considering the challenges in the economy, we believe it
is important to note that we have no significant concentrations in our real
estate loan portfolio mix. Our C&D loans represent only 9.6% of
our loan portfolio and, CRE loans (excluding C&D) represent 31.8% of our
loan portfolio, both of which compare very favorably to our peers.
Commercial loans consist of commercial loans, agricultural loans and loans to financial institutions. Commercial loans were $257.0 million at December 31, 2009, or 13.7% of total loans, compared to the $284.2 million, or 14.7% of total loans at December 31, 2008. This $27.2 million decrease in commercial loans is primarily due to a $24.3 million decrease in commercial loans and $3.4 million decrease in agricultural loans.
The
amounts of loans outstanding at the indicated dates are reflected in table 7,
according to type of loan.
Table
7: Loan
Portfolio
|
|
Years Ended December 31
|
|||||||||||||||||||
|
(In thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Consumer
|
||||||||||||||||||||
|
Credit
cards
|
$ | 189,154 | $ | 169,615 | $ | 166,044 | $ | 143,359 | $ | 143,058 | ||||||||||
|
Student
loans
|
114,296 | 111,584 | 76,277 | 84,831 | 89,818 | |||||||||||||||
|
Other
consumer
|
139,647 | 138,145 | 137,624 | 142,596 | 138,051 | |||||||||||||||
|
Total
consumer
|
443,097 | 419,344 | 379,945 | 370,786 | 370,927 | |||||||||||||||
|
Real
Estate
|
||||||||||||||||||||
|
Construction
|
180,759 | 224,924 | 260,924 | 277,411 | 238,898 | |||||||||||||||
|
Single
family residential
|
392,208 | 409,540 | 382,676 | 364,450 | 340,839 | |||||||||||||||
|
Other
commercial
|
596,517 | 584,843 | 542,184 | 512,404 | 479,684 | |||||||||||||||
|
Total
real estate
|
1,169,484 | 1,219,307 | 1,185,784 | 1,154,265 | 1,059,421 | |||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Commercial
|
168,206 | 192,496 | 193,091 | 178,028 | 184,920 | |||||||||||||||
|
Agricultural
|
84,866 | 88,233 | 73,470 | 62,293 | 68,761 | |||||||||||||||
|
Financial
institutions
|
3,885 | 3,471 | 7,440 | 4,766 | 20,499 | |||||||||||||||
|
Total
commercial
|
256,957 | 284,200 | 274,001 | 245,087 | 274,180 | |||||||||||||||
|
Other
|
5,451 | 10,223 | 10,724 | 13,357 | 13,579 | |||||||||||||||
|
Total
loans
|
$ | 1,874,989 | $ | 1,933,074 | $ | 1,850,454 | $ | 1,783,495 | $ | 1,718,107 | ||||||||||
32
Table 8
reflects the remaining maturities and interest rate sensitivity of loans at
December 31, 2009.
Table
8: Maturity
and Interest Rate Sensitivity of Loans
|
Over
1
|
||||||||||||||||
|
year
|
||||||||||||||||
|
1
year
|
through
|
Over
|
||||||||||||||
|
(In thousands)
|
or less
|
5 years
|
5 years
|
Total
|
||||||||||||
|
Consumer
|
$ | 364,232 | $ | 78,234 | $ | 631 | $ | 443,097 | ||||||||
|
Real
estate
|
746,924 | 395,216 | 27,344 | 1,169,484 | ||||||||||||
|
Commercial
|
198,464 | 57,024 | 1,469 | 256,957 | ||||||||||||
|
Other
|
4,569 | 608 | 274 | 5,451 | ||||||||||||
|
Total
|
$ | 1,314,189 | $ | 531,082 | $ | 29,718 | $ | 1,874,989 | ||||||||
|
Predetermined
rate
|
$ | 684,919 | $ | 479,559 | $ | 26,711 | $ | 1,191,189 | ||||||||
|
Floating
rate
|
629,270 | 51,523 | 3,007 | 683,800 | ||||||||||||
|
Total
|
$ | 1,314,189 | $ | 531,082 | $ | 29,718 | $ | 1,874,989 | ||||||||
Asset Quality
A loan is
considered impaired when it is probable that we will not receive all amounts due
according to the contractual terms of the loans. Impaired loans
include non-performing loans (loans past due 90 days or more and nonaccrual
loans) and certain other loans identified by management that are still
performing.
Non-performing
loans are comprised of (a) nonaccrual loans, (b) loans that are contractually
past due 90 days and (c) other loans for which terms have been restructured to
provide a reduction or deferral of interest or principal, because of
deterioration in the financial position of the borrower. The
subsidiary banks recognize income principally on the accrual basis of
accounting. When loans are classified as nonaccrual, generally, the
accrued interest is charged off and no further interest is
accrued. Loans, excluding credit card loans, are placed on a
nonaccrual basis either: (1) when there are serious doubts regarding the
collectability of principal or interest, or (2) when payment of interest or
principal is 90 days or more past due and either (i) not fully secured or
(ii) not in the process of collection. If a loan is determined by
management to be uncollectible, the portion of the loan determined to be
uncollectible is then charged to the allowance for loan losses.
Credit
card loans are classified as impaired when payment of interest or principal is
90 days past due. Litigation accounts are placed on nonaccrual until such time
as deemed uncollectible. Credit card loans are generally charged off
when payment of interest or principal exceeds 180 days past due, but are turned
over to the credit card recovery department, to be pursued until such time as
they are determined, on a case-by-case basis, to be uncollectible.
The
increase in nonaccrual loans from December 2008 to December 2009 is primarily
attributable to the downgrade and subsequent nonaccrual status of one commercial
real estate facility in the Northwest Arkansas region. This credit
represents $8.1 million of the $22.0 million nonaccrual loans at
year-end.
Historically,
we have sold our student loans into the secondary market before they reached
payout status, thus requiring no servicing by the Company. Currently,
with the banking industry no longer able to access the secondary market, and
because the temporary federal government program only purchases student loans
originated in the current year, we are required to service loans that have
converted to a payout basis. Student loans are classified as impaired
when payment of interest or principal is 90 days past
due. Approximately $1.9 million of government guaranteed student
loans were over 90 days past due as of December 31, 2009. Under
existing rules, when these loans exceed 270 days past due, the Department of
Education will purchase them at 97% of principal and accrued
interest. Although these student loans remain guaranteed by the
federal government, because they are over 90 days past due they are included in
our non-performing assets.
33
Foreclosed
assets held for sale increased during 2009 by a net $6.2 million as we received
title to collateral securing approximately $10.3 million for loans previously
classified as nonaccrual, offset by proceeds from the sales of such properties
of approximately $4.1 million. The increase in foreclosed assets held
for sale during 2008 was insignificant.
Approximately
$5.7 million of the foreclosed assets held for sale as of December 31, 2009, are
related to C&D projects in the Northwest Arkansas region. These
were primarily residential real estate development ventures and associated
businesses.
Table 9
presents information concerning non-performing assets, including nonaccrual and
restructured loans and other real estate owned.
Table
9: Non-performing
Assets
|
|
Years Ended December 31
|
|||||||||||||||||||
|
(In thousands, except
ratios)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Nonaccrual
loans
|
$ | 21,994 | $ | 14,358 | $ | 9,909 | $ | 8,958 | $ | 7,296 | ||||||||||
|
Loans
past due 90 days or more
|
||||||||||||||||||||
|
(principal
or interest payments)
|
||||||||||||||||||||
|
Government
guaranteed student loans (1)
|
1,939 | -- | -- | -- | -- | |||||||||||||||
|
Other
loans
|
1,383 | 1,292 | 1,282 | 1,097 | 1,131 | |||||||||||||||
|
Total
non-performing loans
|
25,316 | 15,650 | 11,191 | 10,055 | 8,427 | |||||||||||||||
|
Other
non-performing assets
|
||||||||||||||||||||
|
Foreclosed
assets held for sale
|
9,179 | 2,995 | 2,629 | 1,940 | 1,540 | |||||||||||||||
|
Other
non-performing assets
|
20 | 12 | 17 | 52 | 16 | |||||||||||||||
|
Total
other non-performing assets
|
9,199 | 3,007 | 2,646 | 1,992 | 1,556 | |||||||||||||||
|
Total
non-performing assets
|
$ | 34,515 | $ | 18,657 | $ | 13,837 | $ | 12,047 | $ | 9,983 | ||||||||||
|
Allowance
for loan losses to
|
||||||||||||||||||||
|
non-performing
loans
|
98.81 | % | 165.12 | % | 226.10 | % | 252.46 | % | 319.48 | % | ||||||||||
|
Non-performing
loans to total loans
|
1.35 | 0.81 | 0.60 | 0.56 | 0.49 | |||||||||||||||
|
Non-performing
loans to total loans
|
||||||||||||||||||||
|
(excluding
government guaranteed student loans) (1)
|
1.25 | 0.81 | 0.60 | 0.56 | 0.49 | |||||||||||||||
|
Non-performing
assets to total assets
|
1.12 | 0.64 | 0.51 | 0.45 | 0.40 | |||||||||||||||
|
Non-performing
assets to total assets
|
||||||||||||||||||||
|
(excluding
government guaranteed student loans) (1)
|
1.05 | 0.64 | 0.51 | 0.45 | 0.40 | |||||||||||||||
|
(1)
|
|
Student
loans past due 90 days or more are included in non-performing
loans. Student loans are guaranteed by the federal government
and will be purchased at 97% of principal and accrued interest when they
exceed 270 days past due; therefore, non-performing ratios have been
calculated excluding these loans.
|
There was
no interest income on the nonaccrual loans recorded for the years ended
December 31, 2009, 2008 and 2007.
At
December 31, 2009, impaired loans, net of government guarantees, were $46.9
million compared to $15.7 million at December 31, 2008. Impaired
loans at December 31, 2009, include $1.9 million of government guaranteed
student loans. On an ongoing basis, management evaluates the
underlying collateral on all impaired loans and allocates specific reserves,
where appropriate, in order to absorb potential losses if the collateral were
ultimately foreclosed.
Allowance for Loan Losses
Overview
The
Company maintains an allowance for loan losses. This allowance is
created through charges to income and maintained at a sufficient level to absorb
expected losses in our loan portfolio. The allowance for loan losses
is determined monthly based on management’s assessment of several factors such
as (1) historical loss experience based on volumes and types, (2) reviews or
evaluations of the loan portfolio and allowance for loan losses, (3) trends in
volume, maturity and composition, (4) off balance sheet credit risk, (5) volume
and trends in delinquencies and non-accruals, (6) lending policies and
procedures including those for loan losses, collections and recoveries, (7)
national, state and local economic trends and conditions, (8) concentrations of
credit that might affect loss experience across one or more components of the
loan portfolio, (9) the experience, ability and depth of lending management and
staff and (10) other factors and trends that will affect specific loans and
categories of loans.
34
As we
evaluate the allowance for loan losses, it is categorized as follows: (1)
specific allocations, (2) allocations for classified assets with no
specific allocation, (3) general allocations for each major loan category and
(4) unallocated portion.
Specific
Allocations
Specific
allocations are made when factors are present requiring a greater reserve than
would be required when using the assigned risk rating allocation. As
a general rule, if a specific allocation is warranted, it is the result of an
analysis of a previously classified credit or relationship. Our
evaluation process in specific allocations includes a review of appraisals or
other collateral analysis. These values are compared to the remaining
outstanding principal balance. If a loss is determined to be
reasonably possible, the possible loss is identified as a specific
allocation. If the loan is not collateral dependent, the measurement
of loss is based on the expected future cash flows of the loan.
Allocations
for Classified Assets with No Specific Allocation
We
establish allocations for loans rated “watch” through “doubtful” based upon
analysis of historical loss experience by category. A percentage rate
is applied to each of these loan categories to determine the level of dollar
allocation. During the second quarter of 2009, we made adjustments to
our methodology in the evaluation of the collectability of loans, which added
quantitative factors to the internal and external influences used in determining
the credit quality of loans and the allocation of the allowance. This
adjustment in methodology resulted in an addition to impaired loans from
classified loans and a redistribution of allocated and unallocated
reserves.
It is
likely that the methodology will continue to evolve over
time. Allocated reserves are presented in table 11 below detailing
the components of the allowance for loan losses.
General
Allocations
We
establish general allocations for each major loan category. This
section also includes allocations to loans which are collectively evaluated for
loss such as credit cards, one-to-four family owner occupied residential real
estate loans and other consumer loans. The allocations in this
section are based on an analysis of historical losses for each loan
category. We give consideration to trends, changes in loan mix,
delinquencies, prior losses and other related information.
Unallocated
Portion
Allowance
allocations other than specific, classified and general are included in the
unallocated portion. While allocations are made for loans based upon
historical loss analysis, the unallocated portion is designed to cover the
uncertainty of how current economic conditions and other uncertainties may
impact the existing loan portfolio. Factors to consider include
national and state economic conditions such as increases in unemployment, the
recent real estate lending crisis, the volatility in the stock market and the
unknown impact of the Economic Stimulus package. The extent and
duration of the current economic recession remains uncertain at this
time. The unallocated reserve addresses inherent probable losses not
included elsewhere in the allowance for loan losses. The decrease in
the unallocated portion of the reserve was due to allocations for higher
historical losses and a higher percentage allocated to qualitative factors for
internal and external influences. While calculating allocated
reserve, the unallocated reserve supports uncertainties within the loan
portfolio.
Reserve
for Unfunded Commitments
In
addition to the allowance for loan losses, we have established a reserve for
unfunded commitments, classified in other liabilities. This reserve
is maintained at a level sufficient to absorb losses arising from unfunded loan
commitments. The adequacy of the reserve for unfunded commitments is
determined monthly based on methodology similar to our methodology for
determining the allowance for loan losses. Net adjustments to the
reserve for unfunded commitments are included in other non-interest
expense.
35
An
analysis of the allowance for loan losses for the last five years is shown in
table 10.
Table
10: Allowance
for Loan Losses
|
(In thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Balance,
beginning of year
|
$ | 25,841 | $ | 25,303 | $ | 25,385 | $ | 26,923 | $ | 26,508 | ||||||||||
|
Loans
charged off
|
||||||||||||||||||||
|
Credit
card
|
5,336 | 3,760 | 2,663 | 2,454 | 4,950 | |||||||||||||||
|
Other
consumer
|
2,758 | 2,105 | 1,538 | 1,242 | 1,240 | |||||||||||||||
|
Real
estate
|
4,814 | 2,987 | 1,916 | 1,868 | 1,048 | |||||||||||||||
|
Commercial
|
1,920 | 1,394 | 715 | 1,317 | 3,688 | |||||||||||||||
|
Total
loans charged off
|
14,828 | 10,246 | 6,832 | 6,881 | 10,926 | |||||||||||||||
|
Recoveries
of loans previously charged off
|
||||||||||||||||||||
|
Credit
card
|
920 | 883 | 1,024 | 1,040 | 832 | |||||||||||||||
|
Other
consumer
|
673 | 519 | 483 | 629 | 636 | |||||||||||||||
|
Real
estate
|
1,393 | 207 | 648 | 901 | 251 | |||||||||||||||
|
Commercial
|
701 | 529 | 414 | 536 | 2,096 | |||||||||||||||
|
Total
recoveries
|
3,687 | 2,138 | 2,569 | 3,106 | 3,815 | |||||||||||||||
|
Net
loans charged off
|
11,141 | 8,108 | 4,263 | 3,775 | 7,111 | |||||||||||||||
|
Reclass
to reserve for unfunded commitments (1)
|
-- | -- | -- | (1,525 | ) | -- | ||||||||||||||
|
Provision
for loan losses
|
10,316 | 8,646 | 4,181 | 3,762 | 7,526 | |||||||||||||||
|
Balance,
end of year
|
$ | 25,016 | $ | 25,841 | $ | 25,303 | $ | 25,385 | $ | 26,923 | ||||||||||
|
Net
charge-offs to average loans
|
0.58 | % | 0.43 | % | 0.23 | % | 0.22 | % | 0.43 | % | ||||||||||
|
Allowance
for loan losses to period-end loans
|
1.33 | % | 1.34 | % | 1.37 | % | 1.42 | % | 1.57 | % | ||||||||||
|
Allowance
for loan losses to net charge-offs
|
224.54 | % | 318.71 | % | 593.55 | % | 672.45 | % | 378.6 | % | ||||||||||
|
(1)
|
On
March 31, 2006, the reserve for unfunded commitments was reclassified from
the allowance for loan losses to other
liabilities.
|
Provision
for Loan Losses
The amount
of provision to the allowance each year was based on management's judgment, with
consideration given to the composition of the portfolio, historical loan loss
experience, assessment of current economic conditions, past due and
non-performing loans and net loss experience. It is management's
practice to review the allowance on at least a quarterly basis, but generally on
a monthly basis, and after considering the factors previously noted, to
determine the level of provision made to the allowance.
Allocated
Allowance for Loan Losses
We utilize
a consistent methodology in the calculation and application of the allowance for
loan losses. Because there are portions of the portfolio that have
not matured to the degree necessary to obtain reliable loss statistics from
which to calculate estimated losses, the unallocated portion of the allowance is
an integral component of the total allowance. Although unassigned to
a particular credit relationship or product segment, this portion of the
allowance is vital to safeguard against the uncertainty and imprecision inherent
when estimating credit losses, especially when trying to determine the impact
the current and unprecedented economic crisis will have on the existing loan
portfolios.
Accordingly,
several factors in the national economy, including the increase of unemployment
rates, the continuing credit crisis, the mortgage crisis, the uncertainty in the
residential and commercial real estate markets and other loan sectors which may
be exhibiting weaknesses and the unknown impact of various current and future
federal government economic stimulus programs influence our determination of the
size of unallocated reserves.
As of
December 31, 2009, the allowance for loan losses reflects a decrease of
approximately $825,000 from December 31, 2008. The decrease in the
allowance correlates directly with a $58.1 million decrease in the total loan
portfolio. The $58.1 million decrease was concentrated in our C&D
and single family residential portfolios, which declined by $44.2 million
and $17.3 million, respectively. These real estate related portfolios
have been most adversely impacted by the overall economic downturn and the
regional market saturation in Northwest Arkansas.
36
In late
2006, the economy in Northwest Arkansas, particularly in the residential real
estate market, started showing signs of deterioration which caused concerns over
the full recoverability of this portion of our loan portfolio. We
continued to monitor the Northwest Arkansas economy and, beginning in the third
quarter of 2007, specific credit relationships deteriorated to a level requiring
increased general and specific reserves. These credit relationships
continued to deteriorate, and others were identified, prompting special loan
loss provisions each quarter, beginning with the second quarter of 2008,
resulting in an increase to the allowance allocation for real estate loans
through December 31, 2008.
As the
economic downturn continued through 2009, additional problem loans were
identified and specific allocations were applied, resulting in a significant
decrease in the unallocated portion of the allowance for loan
losses. Although several non-performing loans with large specific
allocations were charged off during 2009, the identification of other
non-performing loans with specific allocations late in 2009 resulted in a
relatively small decrease in the total allocation to real estate loans as of
December 31, 2009.
Our
allocation of the allowance for loan losses to credit card loans increased by
approximately $1.9 million from December 31, 2008, to December 31, 2009, while
credit card loan balances increased by $19.5 million during the
period. Annualized net credit card charge-offs to credit card loans
increased from 2.02% at December 31, 2008, to 2.41% at December 31,
2009. Due to this increase in charge-offs, an increase in past due
balances, elevated national unemployment levels and continued economic
uncertainty, we increased the allocation to credit cards to 3.0%.
The
unallocated allowance for loan losses is based on our concerns over the
uncertainty of the national economy and the economy in Arkansas. The
impact of market pricing in the poultry, timber and catfish industries in
Arkansas remains uncertain. Excessive rains received in Arkansas
during 2009 delayed efforts to harvest and reduced the yield and quality of some
crops. We are also cautious regarding the continued softening of the
real estate market in Arkansas, specifically in the Northwest Arkansas
region. The housing industry remains one of the weakest links for
economic recovery. Although Arkansas’s unemployment rate is lagging
behind the national average, it has continued to rise. We actively
monitor the status of these industries and economic factors as they relate to
our loan portfolio and make changes to the allowance for loan losses as
necessary. Based on our analysis of loans and external uncertainties,
we believe the allowance for loan losses is adequate for the year ended December
31, 2009.
We
allocate the allowance for loan losses according to the amount deemed to be
reasonably necessary to provide for losses incurred within the categories of
loans set forth in table 11.
Table
11: Allocation
of Allowance for Loan Losses
|
|
December 31
|
|||||||||||||||||||||||||||||||||||||||
|
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||||
|
Allowance
|
%
of
|
Allowance
|
%
of
|
Allowance
|
%
of
|
Allowance
|
%
of
|
Allowance
|
%
of
|
|||||||||||||||||||||||||||||||
|
(In thousands)
|
Amount
|
loans(1)
|
Amount
|
loans(1)
|
Amount
|
loans(1)
|
Amount
|
loans(1)
|
Amount
|
loans(1)
|
||||||||||||||||||||||||||||||
|
Credit
cards
|
$ | 5,808 | 10.1 | % | $ | 3,957 | 8.8 | % | $ | 3,841 | 9.0 | % | $ | 3,702 | 8.0 | % | $ | 3,887 | 8.3 | % | ||||||||||||||||||||
|
Other
consumer
|
1,719 | 13.5 | % | 1,325 | 12.9 | % | 1,501 | 11.5 | % | 1,402 | 12.8 | % | 1,158 | 13.3 | % | |||||||||||||||||||||||||
|
Real
estate
|
11,164 | 62.4 | % | 11,695 | 63.1 | % | 10,157 | 64.1 | % | 9,835 | 64.7 | % | 9,870 | 61.7 | % | |||||||||||||||||||||||||
|
Commercial
|
2,451 | 13.7 | % | 2,255 | 14.7 | % | 2,528 | 14.8 | % | 2,856 | 13.7 | % | 5,857 | 15.9 | % | |||||||||||||||||||||||||
|
Other
|
161 | 0.3 | % | 209 | 0.5 | % | 187 | 0.6 | % | -- | 0.8 | % | -- | 0.8 | % | |||||||||||||||||||||||||
|
Unallocated
|
3,713 | 6,400 | 7,089 | 7,590 | 6,151 | |||||||||||||||||||||||||||||||||||
|
Total
|
$ | 25,016 | 100.0 | % | $ | 25,841 | 100.0 | % | $ | 25,303 | 100.0 | % | $ | 25,385 | 100.0 | % | $ | 26,923 | 100.0 | % | ||||||||||||||||||||
(1)
Percentage of loans in each category to total loans
37
Investments and Securities
Our
securities portfolio is the second largest component of earning assets and
provides a significant source of revenue. Securities within the
portfolio are classified as either held-to-maturity, available-for-sale or
trading.
Held-to-maturity
securities, which include any security for which management has the positive
intent and ability to hold until maturity, are carried at historical cost,
adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized and accreted,
respectively, to interest income using the constant yield method over the period
to maturity. Interest and dividends on investments in debt and equity
securities are included in income when earned.
Available-for-sale
securities, which include any security for which management has no immediate
plans to sell, but which may be sold in the future, are carried at fair
value. Realized gains and losses, based on amortized cost of the
specific security, are included in other income. Unrealized gains and
losses are recorded, net of related income tax effects, in stockholders'
equity. Premiums and discounts are amortized and accreted,
respectively, to interest income, using the constant yield method over the
period to maturity. Interest and dividends on investments in debt and
equity securities are included in income when earned.
Our
philosophy regarding investments is conservative based on investment type and
maturity. Investments in the portfolio primarily include U.S.
Treasury securities, U.S. Government agencies, mortgage-backed securities and
municipal securities. Our general policy is not to invest in
derivative type investments or high-risk securities, except for collateralized
mortgage-backed securities for which collection of principal and interest is not
subordinated to significant superior rights held by others.
Held-to-maturity
and available-for-sale investment securities were $464.1 million and $182.9
million, respectively, at December 31, 2009, compared to the
held-to-maturity amount of $187.3 million and available-for-sale amount of
$458.8 million at December 31, 2008. During 2009, we made a
decision to change our portfolio targets from 75% available-for-sale to 25%
available-for-sale. We chose this strategy due to our level of
pledging and our history of holding securities to maturity.
As of
December 31, 2009, $254.2 million, or 54.8%, of the held-to-maturity securities
were invested in U.S. Treasury securities and obligations of U.S. government
agencies, 50.3% of which will mature in less than five years. In the
available-for-sale securities, $165.9 million, or 90.7%, were in U.S. Treasury
and U.S. government agency securities, 62.8% of which will mature in less than
five years.
In order
to reduce our income tax burden, an additional $208.8 million, or 45.0%, of the
held-to-maturity securities portfolio, as of December 31, 2009, was invested in
tax-exempt obligations of state and political subdivisions. In the
available-for-sale securities, there was none invested in tax-exempt obligations
of state and political subdivisions. Most of the state and political
subdivision debt obligations are non-rated bonds and represent relatively small,
Arkansas issues, which are evaluated on an ongoing basis. There are
no securities of any one state or political subdivision issuer exceeding ten
percent of our stockholders' equity at December 31, 2009.
As of
December 31, 2009, $1.5 million, or 0.82%, of the available-for-sale securities
were invested in a money market mutual fund (the “AIM Fund”), included in other
securities. The AIM Fund is invested entirely in U.S. Treasury
securities and obligations of U.S. government agencies, or repurchase agreements
secured by such obligations. The AIM Fund has no stated maturity
date. Investment amounts in the Fund are adjusted by management as
needed, without penalty.
We have
approximately $90,000, or 0.02%, in mortgaged-backed securities in the
held-to-maturity portfolio at December 31, 2009. In the
available-for-sale securities, approximately $3.0 million, or 1.6% were invested
in mortgaged-backed securities.
As of
December 31, 2009, the held-to-maturity investment portfolio had gross
unrealized gains of $3.532 million and gross unrealized losses of $1.928
million.
We had
gross realized gains of $144,000 and no gross realized losses during the year
ended December 31, 2009, from the sales and/or calls of
securities. We had no gross realized gains or losses during the years
ended December 31, 2008 and 2007, resulting from the sales and/or calls of
securities.
38
Trading
securities, which include any security held primarily for near-term sale, are
carried at fair value. Gains and losses on trading securities are
included in other income. Our trading account is established and
maintained for the benefit of investment banking. The trading account
is typically used to provide inventory for resale and is not used to take
advantage of short-term price movements. As of December 31, 2009,
$5.4 million, or 78%, of the trading securities were invested in the AIM
Fund.
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment
losses, management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer and (iii) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
During the
third quarter of 2008, we determined that our investment in FNMA common stock,
held in the available-for-sale other securities category, had become
other-than-temporarily impaired. As a result of this impairment the
security was written down by $75,000. We had accumulated this stock
over several years in the form of stock dividends from FNMA. The
remaining balance of this investment is approximately $5,000. We have
no investment in FNMA or FHLMC preferred stock.
Management
has the ability and intent to hold the securities classified as held to maturity
until they mature, at which time we expect to receive full value for the
securities. Furthermore, as of December 31, 2009, management also had
the ability and intent to hold the securities classified as available-for-sale
for a period of time sufficient for a recovery of cost. The
unrealized losses are largely due to increases in market interest rates over the
yields available at the time the underlying securities were
purchased. The fair value is expected to recover as the bonds
approach their maturity date or repricing date or if market yields for such
investments decline. Management does not believe any of the
securities are impaired due to reasons of credit
quality. Accordingly, as of December 31, 2009, management
believes the impairments detailed in the table below are temporary.
Table 12
presents the carrying value and fair value of investment securities for each of
the years indicated.
Table
12: Investment
Securities
|
|
Years Ended December 31
|
|||||||||||||||||||||||||||||||
|
|
2009
|
2008
|
||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
Gross |
Estimated
|
Gross
|
Gross
|
Estimated
|
||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||||||||||||
|
(In thousands)
|
Cost
|
Gains
|
(Losses)
|
Value
|
Cost
|
Gains
|
(Losses)
|
Value
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
$ | 254,229 | $ | 799 | $ | (1,348 | ) | $ | 253,680 | $ | 18,000 | $ | 629 | $ | -- | $ | 18,629 | |||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
90 | 5 | -- | 95 | 109 | 2 | -- | 111 | ||||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
208,812 | 2,728 | (580 | ) | 210,960 | 168,262 | 1,264 | (1,876 | ) | 167,650 | ||||||||||||||||||||||
|
Other
securities
|
930 | -- | -- | 930 | 930 | -- | -- | 930 | ||||||||||||||||||||||||
|
Total
|
$ | 464,061 | $ | 3,532 | $ | (1,928 | ) | $ | 465,665 | $ | 187,301 | $ | 1,895 | $ | (1,876 | ) | $ | 187,320 | ||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 4,297 | $ | 32 | $ | -- | $ | 4,329 | $ | 5,976 | $ | 113 | $ | -- | $ | 6,089 | ||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
160,807 | 953 | (236 | ) | 161,524 | 346,585 | 5,444 | (868 | ) | 351,161 | ||||||||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
2,896 | 78 | (2 | ) | 2,972 | 2,909 | 37 | (67 | ) | 2,879 | ||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
-- | -- | -- | -- | 635 | 2 | -- | 637 | ||||||||||||||||||||||||
|
Other
securities
|
13,633 | 399 | (3 | ) | 14,029 | 97,625 | 448 | (6 | ) | 98,067 | ||||||||||||||||||||||
|
Total
|
$ | 181,633 | $ | 1,462 | $ | (241 | ) | $ | 182,854 | $ | 453,730 | $ | 6,044 | $ | (941 | ) | $ | 458,833 | ||||||||||||||
39
Table 13
reflects the amortized cost and estimated fair value of securities at December
31, 2009, by contractual maturity and the weighted average yields (for
tax-exempt obligations on a fully taxable equivalent basis, assuming a 37.5% tax
rate) of such securities. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties.
Table
13: Maturity
Distribution of Investment Securities
|
|
December 31, 2009
|
|||||||||||||||||||||||||||||||
|
Over
|
Over
|
|||||||||||||||||||||||||||||||
|
1
year
|
5
years
|
Total
|
||||||||||||||||||||||||||||||
|
1
year
|
through
|
through
|
Over
|
No
fixed
|
Amortized
|
Par
|
Fair
|
|||||||||||||||||||||||||
|
(In thousands)
|
or less
|
5 years
|
10 years
|
10 years
|
maturity
|
Cost
|
Value
|
Value
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
$ | -- | $ | 127,929 | $ | 126,300 | $ | -- | $ | -- | $ | 254,229 | $ | 254,245 | $ | 253,681 | ||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
-- | 7 | 59 | 25 | -- | 91 | 90 | 95 | ||||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
9,833 | 62,255 | 55,375 | 81,348 | -- | 208,811 | 209,123 | 210,959 | ||||||||||||||||||||||||
|
Other
securities
|
-- | -- | -- | 930 | -- | 930 | 930 | 930 | ||||||||||||||||||||||||
|
Total
|
$ | 9,833 | $ | 190,191 | $ | 181,734 | $ | 82,303 | $ | -- | $ | 464,061 | $ | 464,388 | $ | 465,665 | ||||||||||||||||
|
Percentage
of total
|
2.1 | % | 41.0 | % | 39.2 | % | 17.7 | % | 0.0 | % | 100.0 | % | ||||||||||||||||||||
|
Weighted
average yield
|
4.4 | % | 2.3 | % | 4.1 | % | 4.1 | % | 0.0 | % | 3.4 | % | ||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 4,297 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 4,297 | $ | 4,300 | $ | 4,329 | ||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
7,000 | 92,938 | 60,869 | -- | -- | 160,807 | 160,815 | 161,524 | ||||||||||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
-- | 1,221 | 1,667 | 8 | -- | 2,896 | 2,930 | 2,972 | ||||||||||||||||||||||||
|
Other
securities
|
-- | -- | -- | -- | 13,633 | 13,633 | 13,633 | 14,029 | ||||||||||||||||||||||||
|
Total
|
$ | 11,297 | $ | 94,159 | $ | 62,536 | $ | 8 | $ | 13,633 | $ | 181,633 | $ | 181,678 | $ | 182,854 | ||||||||||||||||
|
Percentage
of total
|
6.2 | % | 51.8 | % | 34.4 | % | 0.0 | % | 7.5 | % | 100.0 | % | ||||||||||||||||||||
|
Weighted
average yield
|
3.9 | % | 1.6 | % | 5.1 | % | 3.0 | % | 0.6 | % | 2.9 | % | ||||||||||||||||||||
Deposits
Deposits are our primary source of funding for earning assets and are primarily developed through our network of 84 financial centers. We offer a variety of products designed to attract and retain customers with a continuing focus on developing core deposits. Our core deposits consist of all deposits excluding time deposits of $100,000 or more and brokered deposits. As of December 31, 2009, core deposits comprised 81.8% of our total deposits.
Deposits are our primary source of funding for earning assets and are primarily developed through our network of 84 financial centers. We offer a variety of products designed to attract and retain customers with a continuing focus on developing core deposits. Our core deposits consist of all deposits excluding time deposits of $100,000 or more and brokered deposits. As of December 31, 2009, core deposits comprised 81.8% of our total deposits.
We
continually monitor the funding requirements at each subsidiary bank along with
competitive interest rates in the markets it serves. Because of our
community banking philosophy, subsidiary bank executives in the local markets
establish the interest rates offered on both core and non-core
deposits. This approach ensures that the interest rates being paid
are competitively priced for each particular deposit product and structured to
meet the funding requirements. We believe we are paying a competitive
rate when compared with pricing in those markets.
40
We manage
our interest expense through deposit pricing and do not anticipate a significant
change in total deposits. We believe that additional funds can be attracted and
deposit growth can be accelerated through deposit pricing if it experiences
increased loan demand or other liquidity needs. We also utilize
brokered deposits as an additional source of funding to meet liquidity
needs.
Our total
deposits as of December 31, 2009 were $2.432 billion, an internal deposit growth
of $96 million, or 4.1%, from $2.336 billion at December 31, 2008. We
introduced a new high yield investment deposit account during the first quarter
of 2008 as part of our strategy to enhance liquidity. While
attracting new customers, the account has also resulted in existing customers
moving more volatile, expensive time deposits to the high yield investment
account.
Interest
bearing transaction and savings accounts were $1.156 billion at December 31,
2009, a $129.4 million increase compared to $1.027 billion on December 31,
2008. Total time deposits decreased approximately $61.8 million to
$912.75 million at December 31, 2009, from $974.56 million at December 31,
2008.
Non-interest
bearing transaction accounts increased $28.2 million to $363.2 million at
December 31, 2009, compared to $335.0 million at December 31,
2008. We had $21 million and $33 million of brokered deposits at
December 31, 2009 and 2008, respectively.
Table 14
reflects the classification of the average deposits and the average rate paid on
each deposit category, which are in excess of 10 percent of average total
deposits for the three years ended December 31, 2009.
Table
14:
Average Deposit Balances and Rates
|
|
December 31
|
|||||||||||||||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
|
(In thousands)
|
Amount
|
Rate Paid
|
Amount
|
Rate Paid
|
Amount
|
Rate Paid
|
||||||||||||||||||
|
Non-interest
bearing transaction
|
||||||||||||||||||||||||
|
accounts
|
$ | 332,998 | -- | $ | 317,772 | -- | $ | 307,041 | -- | |||||||||||||||
|
Interest
bearing transaction and
|
||||||||||||||||||||||||
|
savings
deposits
|
1,091,960 | 0.76 | % | 959,567 | 1.56 | % | 736,160 | 1.78 | % | |||||||||||||||
|
Time
deposits
|
||||||||||||||||||||||||
|
$100,000
or more
|
406,924 | 2.43 | % | 426,304 | 3.80 | % | 441,854 | 4.81 | % | |||||||||||||||
|
Other
time deposits
|
532,434 | 2.42 | % | 595,123 | 3.70 | % | 682,703 | 3.55 | % | |||||||||||||||
|
Total
|
$ | 2,364,316 | 1.31 | % | $ | 2,298,766 | 2.31 | % | $ | 2,167,758 | 3.02 | % | ||||||||||||
The
Company's maturities of large denomination time deposits at December 31, 2009
and 2008 are presented in table 15.
Table
15: Maturities
of Large Denomination Time Deposits
|
Time
Certificates of Deposit
|
||||||||||||||||
|
($100,000
or more)
|
||||||||||||||||
|
|
December 31
|
|||||||||||||||
|
|
2009
|
2008
|
||||||||||||||
|
(In thousands)
|
Balance
|
Percent
|
Balance
|
Percent
|
||||||||||||
|
Maturing
|
||||||||||||||||
|
Three
months or less
|
$ | 161,762 | 38.5 | % | $ | 144,982 | 34.6 | % | ||||||||
|
Over
3 months to 6 months
|
102,670 | 24.4 | % | 107,093 | 25.6 | % | ||||||||||
|
Over
6 months to 12 months
|
120,162 | 28.6 | % | 119,186 | 28.5 | % | ||||||||||
|
Over
12 months
|
35,943 | 8.5 | % | 47,133 | 11.3 | % | ||||||||||
|
Total
|
$ | 420,537 | 100.00 | % | $ | 418,394 | 100.00 | % | ||||||||
41
Short-Term Debt
Federal funds purchased and securities sold under agreements to repurchase were $105.9 million at December 31, 2009, as compared to $115.4 million at December 31, 2008. Other short-term borrowings, consisting of U.S. TT&L Notes and short-term FHLB borrowings, were $3.6 million at December 31, 2009, as compared to $1.1 million at December 31, 2008.
Federal funds purchased and securities sold under agreements to repurchase were $105.9 million at December 31, 2009, as compared to $115.4 million at December 31, 2008. Other short-term borrowings, consisting of U.S. TT&L Notes and short-term FHLB borrowings, were $3.6 million at December 31, 2009, as compared to $1.1 million at December 31, 2008.
We have
historically funded our growth in earning assets through the use of core
deposits, large certificates of deposits from local markets, FHLB borrowings and
Federal funds purchased. Management anticipates that these sources
will provide necessary funding in the foreseeable future.
Long-Term Debt
Our long-term debt was $159.8 million and $158.7 million at December 31, 2009 and 2008, respectively. The outstanding balance for December 31, 2009 includes $128.9 million in FHLB long-term advances and $30.9 million of trust preferred securities. The outstanding balance for December 31, 2008, includes $127.8 million in FHLB long-term advances and $30.9 million of trust preferred securities.
Our long-term debt was $159.8 million and $158.7 million at December 31, 2009 and 2008, respectively. The outstanding balance for December 31, 2009 includes $128.9 million in FHLB long-term advances and $30.9 million of trust preferred securities. The outstanding balance for December 31, 2008, includes $127.8 million in FHLB long-term advances and $30.9 million of trust preferred securities.
During the
year ended December 31, 2009, we increased long-term debt by $1.2 million,
or 0.73% from December 31, 2008.
Aggregate
annual maturities of long-term debt at December 31, 2009 are presented in table
16.
Table
16: Maturities
of Long-Term Debt
|
Annual
|
|||||
|
(In thousands)
|
Year
|
Maturities
|
|||
|
2010
|
$ | 29,013 | |||
|
2011
|
43,766 | ||||
|
2012
|
6,713 | ||||
|
2013
|
16,658 | ||||
|
2014
|
4,985 | ||||
|
Thereafter
|
58,688 | ||||
|
|
Total
|
$ | 159,823 | ||
Capital
Overview
At
December 31, 2009, total capital reached $371.2 million. Capital
represents shareholder ownership in the Company – the book value of assets in
excess of liabilities. At December 31, 2009, our equity to asset
ratio was 12.0% compared to 9.88% at year-end 2008.
Capital
Stock
On
February 27, 2009, at a special meeting, our shareholders approved an amendment
to the Articles of Incorporation to establish 40,040,000 authorized shares of
preferred stock, $0.01 par value. The aggregate liquidation
preference of all shares of preferred stock cannot exceed
$80,000,000. As of December 31, 2009, no preferred stock has been
issued.
On August
26, 2009, we filed a shelf registration statement with the Securities and
Exchange Commission (“SEC”). The shelf registration statement, which
was declared effective on September 9, 2009, will allow us to raise capital from
time to time, up to an aggregate of $175 million, through the sale of common
stock, preferred stock, or a combination thereof, subject to market
conditions. Specific terms and prices will be determined at the time
of any offering under a separate prospectus supplement that we will be required
to file with the SEC at the time of the specific offering.
42
In
November 2009, the Company raised common equity through an underwritten public
offering by issuing 2,650,000 shares of common stock at a price of $24.50 per
share, less underwriting discounts and commissions. The net proceeds
of the offering after deducting underwriting discounts and commissions and
offering expenses were $61.3 million. In December 2009, the
underwriters of our stock offering exercised and completed their option to
purchase an additional 397,500 shares of common stock at $24.50 to cover
over-allotments. The net proceeds of the exercise of the
over-allotment option after deducting underwriting discounts and commissions
were $9.2 million. The total net proceeds of the offering after deducting
underwriting discounts and commissions and offering expenses were approximately
$70.5 million.
Stock
Repurchase
On
November 28, 2007, we 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 we intend to
repurchase. 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. We intend to use the
repurchased shares to satisfy stock option exercises, for payment of future
stock dividends and for general corporate purposes. We may
discontinue purchases at any time that management determines additional
purchases are not warranted. As part of our strategic focus on
building capital, we suspended our stock repurchase program in July
2008. We made no purchases of our common stock during the three
months or year ended December 31, 2009. Because of the
recently completed stock offering and based on our strategy to retain capital,
we do not anticipate resuming our stock repurchase during 2010.
Cash
Dividends
We
declared cash dividends on our common stock of $0.76 per share for the twelve
months ended December 31, 2009, compared to $0.76 per share for the twelve
months ended December 31, 2008. The timing and amount of future
dividends are at the discretion of our Board of Directors and will depend upon
our consolidated earnings, financial condition, liquidity and capital
requirements, the amount of cash dividends paid to us by our subsidiaries,
applicable government regulations and policies and other factors considered
relevant by our Board of Directors. Our Board of Directors anticipates that we
will continue to pay quarterly dividends in amounts determined based on the
factors discussed above. However, there can be no assurance that we
will continue to pay dividends on our common stock at the current levels or at
all. See Item 5, Market for Registrant’s Common Equity and Related Stockholder
Matters, for additional information regarding cash dividends.
Parent
Company Liquidity
The
primary liquidity needs of the Parent Company are the payment of dividends to
shareholders, the funding of debt obligations and the share repurchase
plan. The primary sources for meeting these liquidity needs are the
current cash on hand at the parent company and the future dividends received
from the eight affiliate banks. Payment of dividends by the eight
subsidiary banks is subject to various regulatory limitations. See
Item 7A, Liquidity and Qualitative Disclosures About Market Risk, for additional
information regarding the parent company’s liquidity.
43
Risk-Based
Capital
Our
subsidiaries are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on our financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, we must
meet specific capital guidelines that involve quantitative measures of our
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Our capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require us to
maintain minimum amounts and ratios (set forth in the table below) of total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined) and of Tier 1 capital (as defined) to average assets (as
defined). Management believes that, as of December 31, 2009, we meet
all capital adequacy requirements to which we are subject.
As of the
most recent notification from regulatory agencies, the subsidiaries were well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Company and
subsidiaries must maintain minimum total risk-based, Tier 1 risk-based and Tier
1 leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
institutions’ categories.
Our
risk-based capital ratios at December 31, 2009 and 2008, are presented in table
17 below:
Table
17: Risk-Based
Capital
|
|
December 31
|
|||||||
|
(In thousands, except
ratios)
|
2009
|
2008
|
||||||
|
Tier
1 capital
|
||||||||
|
Stockholders’
equity
|
$ | 371,247 | $ | 288,792 | ||||
|
Trust
preferred securities
|
30,000 | 30,000 | ||||||
|
Goodwill
and core deposit premiums (1)
|
(51,128 | ) | (53,034 | ) | ||||
|
Unrealized
gain (loss) on available-for-sale
|
||||||||
|
securities,
net of income taxes
|
(762 | ) | (3,190 | ) | ||||
|
Total
Tier 1 capital
|
349,357 | 262,568 | ||||||
|
Tier
2 capital
|
||||||||
|
Qualifying
unrealized gain on
|
||||||||
|
available-for-sale
equity securities
|
5 | 179 | ||||||
|
Qualifying
allowance for loan losses
|
24,405 | 24,827 | ||||||
|
|
||||||||
|
Total
Tier 2 capital
|
24,410 | 25,006 | ||||||
|
Total
risk-based capital
|
$ | 373,767 | $ | 287,574 | ||||
|
Risk
weighted assets
|
$ | 1,950,227 | $ | 1,983,654 | ||||
|
Ratios
at end of year
|
||||||||
|
Leverage
ratio
|
11.64 | % | 9.15 | % | ||||
|
Tier
1 capital
|
17.91 | % | 13.24 | % | ||||
|
Total
risk-based capital
|
19.17 | % | 14.50 | % | ||||
|
Minimum
guidelines
|
||||||||
|
Leverage
ratio
|
4.00 | % | 4.00 | % | ||||
|
Tier
1 capital
|
4.00 | % | 4.00 | % | ||||
|
Total
risk-based capital
|
8.00 | % | 8.00 | % | ||||
|
(1)
|
For
December 31, 2009 and 2008, in accordance with an Interagency Final Rule,
goodwill deducted from Tier 1 capital has been reduced by the amount of
any deferred tax liability associated with that
goodwill.
|
44
Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations
In the
normal course of business, the Company enters into a number of financial
commitments. Examples of these commitments include but are not
limited to long-term debt financing, operating lease obligations, unfunded loan
commitments and letters of credit.
Our
long-term debt at December 31, 2009, includes notes payable, FHLB long-term
advances and trust preferred securities, all of which we are contractually
obligated to repay in future periods.
Operating
lease obligations entered into by the Company are generally associated with the
operation of a few of our financial centers located throughout the state of
Arkansas. Our financial obligation on these locations is considered
immaterial due to the limited number of financial centers that operate under an
agreement of this type.
Commitments
to extend credit and letters of credit are legally binding, conditional
agreements generally having fixed expiration or termination
dates. These commitments generally require customers to maintain
certain credit standards and are established based on management’s credit
assessment of the customer. The commitments may expire without being
drawn upon. Therefore, the total commitment does not necessarily
represent future funding requirements.
The
funding requirements of the Company's most significant financial commitments, at
December 31, 2009, are shown in table 18.
Table
18: Funding
Requirements of Financial Commitments
|
Payments due by period
|
||||||||||||||||||||
|
Less
than
|
1-3 | 3-5 |
Greater
than
|
|||||||||||||||||
|
(In thousands)
|
1 Year
|
Years
|
Years
|
5 Years
|
Total
|
|||||||||||||||
|
Long-term
debt
|
$ | 29,013 | $ | 50,479 | $ | 21,643 | $ | 58,688 | $ | 159,823 | ||||||||||
|
Credit
card loan commitments
|
262,257 | -- | -- | -- | 262,257 | |||||||||||||||
|
Other
loan commitments
|
393,437 | -- | -- | -- | 393,437 | |||||||||||||||
|
Letters
of credit
|
10,391 | -- | -- | -- | 10,391 | |||||||||||||||
Reconciliation of Non-GAAP Measures
We have
$62.4 million and $63.2 million total goodwill and core deposit premiums for the
periods ended December 31, 2009 and December 31, 2008,
respectively. Because of our high level of these two intangible
assets, management believes a useful calculation is return on tangible equity
(non-GAAP). This non-GAAP calculation for the twelve months ended
December 31, 2009, 2008, 2007, 2006 and 2005, which is similar to the GAAP
calculation of return on average stockholders’ equity, is presented in table
19.
Table
19: Return
on Tangible Equity
|
(In thousands, except
ratios)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Twelve months ended
|
||||||||||||||||||||
|
Return
on average stockholders equity: (A/C)
|
8.26 | % | 9.54 | % | 10.26 | % | 10.93 | % | 11.24 | % | ||||||||||
|
Return
on tangible equity (non-GAAP): (A+B)/(C-D)
|
10.61 | % | 12.54 | % | 13.78 | % | 15.03 | % | 15.79 | % | ||||||||||
|
(A) Net
income
|
$ | 25,210 | $ | 26,910 | $ | 27,360 | $ | 27,481 | $ | 26,962 | ||||||||||
|
(B)
Amortization of intangibles, net of taxes
|
503 | 504 | 511 | 519 | 522 | |||||||||||||||
|
(C)
Average stockholders' equity
|
305,210 | 282,186 | 266,628 | 251,518 | 239,976 | |||||||||||||||
|
(D)
Average goodwill and core deposits, net
|
62,789 | 63,600 | 64,409 | 65,233 | 65,913 | |||||||||||||||
The table
below presents computations of core earnings (net income excluding nonrecurring
items {Visa litigation expense and reversal, gain from the cash proceeds on
mandatory Visa stock redemption and the write-off of deferred debt issuance
costs}) and diluted core earnings per share (non-GAAP). Nonrecurring
items are included in financial results presented in accordance with generally
accepted accounting principles (GAAP).
45
We believe
the exclusion of these nonrecurring items in expressing earnings and certain
other financial measures, including “core earnings,” provides a meaningful base
for period-to-period and company-to-company comparisons, which management
believes will assist investors and analysts in analyzing the core financial
measures of the Company and predicting future performance. This non-GAAP
financial measure is also used by management to assess the performance of the
Company’s business because management does not consider these nonrecurring items
to be relevant to ongoing financial performance. Management and the
Board of Directors utilize “core earnings” (non-GAAP) for the following
purposes:
• Preparation
of the Company’s operating budgets
• Monthly
financial performance reporting
• Monthly
“flash” reporting of consolidated results (management only)
• Investor
presentations of Company performance
We believe
the presentation of “core earnings” on a diluted per share basis, “diluted core
earnings per share” (non-GAAP), provides a meaningful base for period-to-period
and company-to-company comparisons, which management believes will assist
investors and analysts in analyzing the core financial measures of the Company
and predicting future performance. This non-GAAP financial measure is
also used by management to assess the performance of the Company’s business,
because management does not consider these nonrecurring items to be relevant to
ongoing financial performance on a per share basis. Management and
the Board of Directors utilize “diluted core earnings per share” (non-GAAP) for
the following purposes:
• Calculation
of annual performance-based incentives for certain executives
• Calculation
of long-term performance-based incentives for certain executives
• Investor
presentations of Company performance
We believe
that presenting these non-GAAP financial measures will permit investors and
analysts to assess the performance of the Company on the same basis as that
applied by management and the Board of Directors.
“Core
earnings” and “diluted core earnings per share” (non-GAAP) have inherent
limitations, are not required to be uniformly applied and are not
audited. To mitigate these limitations, we have procedures in place
to identify and approve each item that qualifies as nonrecurring to ensure that
the Company’s “core” results are properly reflected for period-to-period
comparisons. Although these non-GAAP financial measures are
frequently used by stakeholders in the evaluation of a company, they have
limitations as analytical tools and should not be considered in isolation or as
a substitute for analyses of results as reported under GAAP. In
particular, a measure of earnings that excludes nonrecurring items does not
represent the amount that effectively accrues directly to stockholders (i.e.,
nonrecurring items are included in earnings and stockholders’
equity).
During the
first quarter 2008, we recorded a nonrecurring $1.8 million after tax gain, or
$0.13 per diluted earnings per share, from the cash proceeds on the mandatory
partial redemption of our equity interest in Visa. Also during the
first quarter 2008, we recorded nonrecurring after tax earnings of $744,000, or
$0.05 per diluted earnings per share, from the reversal of the Visa
contingent liability established in the fourth quarter 2007. During
the fourth quarter 2007, we recorded a nonrecurring $744,000 after tax charge,
or a $0.05 reduction in diluted earnings per share, to establish a
contingent liability related to indemnification obligations with Visa U.S.A.
litigation, which was reversed in 2008. For further discussion
related to the Visa U.S.A. litigation, see the analysis of Non-Interest Expense
included elsewhere in this section.
46
See table
20 below for the reconciliation of non-GAAP financial measures, which exclude
nonrecurring items for the periods presented.
Table
20: Reconciliation
of Core Earnings (non-GAAP)
|
(In thousands, except share
data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Twelve months ended
|
||||||||||||||||||||
|
Net
Income
|
$ | 25,210 | $ | 26,910 | $ | 27,360 | $ | 27,481 | $ | 26,962 | ||||||||||
|
Nonrecurring
items
|
||||||||||||||||||||
|
Mandatory
stock redemption gain (Visa)
|
-- | (2,973 | ) | -- | -- | -- | ||||||||||||||
|
Litigation
liability expense/reversal (Visa)
|
-- | (1,220 | ) | 1,220 | -- | -- | ||||||||||||||
|
Tax
effect (39%)
|
-- | 1,635 | (476 | ) | -- | -- | ||||||||||||||
|
Net
nonrecurring items
|
-- | (2,558 | ) | 744 | -- | -- | ||||||||||||||
|
Core
earnings (non-GAAP)
|
$ | 25,210 | $ | 24,352 | $ | 28,104 | $ | 27,481 | $ | 26,962 | ||||||||||
|
Diluted
earnings per share
|
$ | 1.74 | $ | 1.91 | $ | 1.92 | $ | 1.90 | $ | 1.84 | ||||||||||
|
Nonrecurring
items
|
||||||||||||||||||||
|
Mandatory
stock redemption gain (Visa)
|
-- | (0.21 | ) | -- | -- | -- | ||||||||||||||
|
Litigation
liability expense/reversal (Visa)
|
-- | (0.09 | ) | 0.09 | -- | -- | ||||||||||||||
|
Tax
effect (39%)
|
-- | 0.12 | (0.04 | ) | -- | -- | ||||||||||||||
|
Net
nonrecurring items
|
-- | (0.18 | ) | 0.05 | -- | -- | ||||||||||||||
|
Diluted
core earnings per share (non-GAAP)
|
$ | 1.74 | $ | 1.73 | $ | 1.97 | $ | 1.90 | $ | 1.84 | ||||||||||
Quarterly Results
Selected unaudited quarterly financial information for the last eight quarters is shown in table 21.
Selected unaudited quarterly financial information for the last eight quarters is shown in table 21.
Table
21: Quarterly
Results
|
|
Quarter
|
|||||||||||||||||||
|
(In thousands, except per share
data)
|
First
|
Second
|
Third
|
Fourth
|
Total
|
|||||||||||||||
|
2009
|
||||||||||||||||||||
|
Net
interest income
|
$ | 23,393 | $ | 23,720 | $ | 25,393 | $ | 25,221 | $ | 97,727 | ||||||||||
|
Provision
for loan losses
|
2,138 | 2,622 | 2,789 | 2,767 | 10,316 | |||||||||||||||
|
Non-interest
income
|
11,459 | 13,358 | 14,963 | 12,931 | 52,711 | |||||||||||||||
|
Non-interest
expense
|
25,658 | 26,951 | 26,307 | 25,806 | 104,722 | |||||||||||||||
|
Net
income
|
5,236 | 5,509 | 7,660 | 6,805 | 25,210 | |||||||||||||||
|
Basic
earnings per share
|
0.37 | 0.40 | 0.54 | 0.44 | 1.75 | |||||||||||||||
|
Diluted
earnings per share
|
0.37 | 0.39 | 0.54 | 0.44 | 1.74 | |||||||||||||||
|
2008
|
||||||||||||||||||||
|
Net
interest income
|
$ | 22,792 | $ | 23,098 | $ | 24,347 | $ | 23,780 | $ | 94,017 | ||||||||||
|
Provision
for loan losses
|
1,467 | 2,214 | 2,214 | 2,751 | 8,646 | |||||||||||||||
|
Non-interest
income
|
14,992 | 11,720 | 11,288 | 11,326 | 49,326 | |||||||||||||||
|
Non-interest
expense
|
23,130 | 24,209 | 24,441 | 24,580 | 96,360 | |||||||||||||||
|
Net
income
|
8,816 | 5,994 | 6,474 | 5,626 | 26,910 | |||||||||||||||
|
Basic
earnings per share
|
0.63 | 0.43 | 0.47 | 0.40 | 1.93 | |||||||||||||||
|
Diluted
earnings per share
|
0.63 | 0.42 | 0.46 | 0.40 | 1.91 | |||||||||||||||
47
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Liquidity and Market Risk Management
Parent
Company
The
Company has leveraged its investment in subsidiary banks and depends upon the
dividends paid to it, as the sole shareholder of the subsidiary banks, as a
principal source of funds for dividends to shareholders, stock repurchases and
debt service requirements. At December 31, 2009, undivided profits of
the Company's subsidiary banks were approximately $164.8 million, of which
approximately $15.2 million was available for the payment of dividends to the
Company without regulatory approval. In addition to dividends, other
sources of liquidity for the Company are the sale of equity securities and the
borrowing of funds.
Subsidiary
Banks
Generally
speaking, the Company's subsidiary banks rely upon net inflows of cash from
financing activities, supplemented by net inflows of cash from operating
activities, to provide cash used in investing activities. Typical of
most banking companies, significant financing activities include: deposit
gathering; use of short-term borrowing facilities, such as federal funds
purchased and repurchase agreements; and the issuance of long-term
debt. The subsidiary banks' primary investing activities include loan
originations and purchases of investment securities, offset by loan payoffs and
investment maturities.
Liquidity
represents an institution's ability to provide funds to satisfy demands from
depositors and borrowers by either converting assets into cash or accessing new
or existing sources of incremental funds. A major responsibility of
management is to maximize net interest income within prudent liquidity
constraints. Internal corporate guidelines have been established to
constantly measure liquid assets as well as relevant ratios concerning earning
asset levels and purchased funds. The management and board of
directors of each subsidiary bank monitor these same indicators and make
adjustments as needed.
In
response to tightening credit markets in 2007 and anticipating potential
liquidity pressures in 2008, the Company’s management strategically planned to
enhance the liquidity of each of its subsidiary banks during 2008. We
introduced a new high yield investment deposit account during the first quarter
of 2008 as part of this strategy to enhance liquidity. The new
account generated approximately $146 million in new core deposits during
2008. We built additional liquidity in each of our subsidiary banks
by securing approximately $55 million in additional long-term funding from FHLB
borrowings during 2008. We managed our liquidity during 2009 at
similar levels as in 2008. At December 31, 2009, each subsidiary bank
was within established guidelines and total corporate liquidity remains
strong. At December 31, 2009, cash and cash equivalents,
trading and available-for-sale securities and mortgage loans held for sale were
17.8% of total assets, as compared to 21.0% at December 31, 2008.
Liquidity Management
The
objective of our liquidity management is to access adequate sources of funding
to ensure that cash flow requirements of depositors and borrowers are met in an
orderly and timely manner. Sources of liquidity are managed so that
reliance on any one funding source is kept to a minimum. Our
liquidity sources are prioritized for both availability and time to
activation.
Our
liquidity is a primary consideration in determining funding needs and is an
integral part of asset/liability management. Pricing of the liability
side is a major component of interest margin and spread
management. Adequate liquidity is a necessity in addressing this
critical task. There are five primary and secondary sources of
liquidity available to the Company. The particular liquidity need and
timeframe determine the use of these sources.
The first
source of liquidity available to the Company is Federal
funds. Federal funds, primarily from downstream correspondent banks,
are available on a daily basis and are used to meet the normal fluctuations of a
dynamic balance sheet. In addition, the Company and its subsidiary
banks have approximately $104 million in Federal funds lines of credit from
upstream correspondent banks that can be accessed, when needed. In
order to ensure availability of these upstream funds, we have a plan for
rotating the usage of the funds among the upstream correspondent banks, thereby
providing approximately $40 million in funds on a given
day. Historical monitoring of these funds has made it possible for us
to project seasonal fluctuations and structure our funding requirements on a
month-to-month basis.
48
A second
source of liquidity is the retail deposits available through our network of
subsidiary banks throughout Arkansas. Although this method can be a
somewhat more expensive alternative to supplying liquidity, this source can be
used to meet intermediate term liquidity needs.
Third, our
subsidiary banks have lines of credits available with the Federal Home Loan
Bank. While we use portions of those lines to match off longer-term
mortgage loans, we also use those lines to meet liquidity
needs. Approximately $389 million of these lines of credit are
currently available, if needed.
Fourth, we
use a laddered investment portfolio that ensures there is a steady source of
intermediate term liquidity. These funds can be used to meet seasonal
loan patterns and other intermediate term balance sheet
fluctuations. Approximately 28% of the investment portfolio is
classified as available-for-sale. We also use securities held in the
securities portfolio to pledge when obtaining public funds.
Finally,
we have the ability to access large deposits from both the public and private
sector to fund short-term liquidity needs.
We believe
the various sources available are ample liquidity for short-term,
intermediate-term and long-term liquidity.
Market
Risk Management
Market
risk arises from changes in interest rates. We have risk management
policies to monitor and limit exposure to market risk. In asset and
liability management activities, policies designed to minimize structural
interest rate risk are in place. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified.
Interest
Rate Sensitivity
Interest
rate risk represents the potential impact of interest rate changes on net income
and capital resulting from mismatches in repricing opportunities of assets and
liabilities over a period of time. A number of tools are used to
monitor and manage interest rate risk, including simulation models and interest
sensitivity gap analysis. Management uses simulation models to
estimate the effects of changing interest rates and various balance sheet
strategies on the level of the Company’s net income and capital. As a
means of limiting interest rate risk to an acceptable level, management may
alter the mix of floating and fixed-rate assets and liabilities, change pricing
schedules and manage investment maturities during future security
purchases.
The
simulation model incorporates management’s assumptions regarding the level of
interest rates or balance changes for indeterminate maturity deposits for a
given level of market rate changes. These assumptions have been
developed through anticipated pricing behavior. Key assumptions in
the simulation models include the relative timing of prepayments, cash flows and
maturities. These assumptions are inherently uncertain and, as a
result, the model cannot precisely estimate net interest income or precisely
predict the impact of a change in interest rates on net income or
capital. Actual results will differ from simulated results due to the
timing, magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.
49
The table
below presents our interest rate sensitivity position at December 31,
2009. This analysis is based on a point in time and may not be
meaningful because assets and liabilities are categorized according to
contractual maturities, repricing periods and expected cash flows rather than
estimating more realistic behaviors as is done in the simulation
models. Also, this analysis does not consider subsequent changes in
interest rate level or spreads between asset and liability
categories.
Table: 22 Interest
Rate Sensitivity
|
Interest Rate Sensitivity
Period
|
||||||||||||||||||||||||||||||||
| 0-30 | 31-90 | 91-180 | 181-365 | 1-2 | 2-5 |
Over
5
|
||||||||||||||||||||||||||
|
(In thousands, except
ratios)
|
Days
|
Days
|
Days
|
Days
|
Years
|
Years
|
Years
|
Total
|
||||||||||||||||||||||||
|
Earning
assets
|
||||||||||||||||||||||||||||||||
|
Short-term
investments
|
$ | 282,010 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | 282,010 | ||||||||||||||||
|
Assets
held in trading
|
||||||||||||||||||||||||||||||||
|
accounts
|
6,886 | -- | -- | -- | -- | -- | -- | 6,886 | ||||||||||||||||||||||||
|
Investment
securities
|
84,464 | 80,470 | 40,276 | 68,621 | 168,775 | 166,727 | 37,582 | 646,915 | ||||||||||||||||||||||||
|
Mortgage
loans held for sale
|
8,397 | -- | -- | -- | -- | -- | -- | 8,397 | ||||||||||||||||||||||||
|
Loans
|
647,213 | 252,277 | 185,912 | 221,193 | 276,742 | 254,340 | 37,312 | 1,874,989 | ||||||||||||||||||||||||
|
Total
earning assets
|
1,028,970 | 332,747 | 226,188 | 289,814 | 445,517 | 421,067 | 74,894 | 2,819,197 | ||||||||||||||||||||||||
|
Interest
bearing liabilities
|
||||||||||||||||||||||||||||||||
|
Interest
bearing transaction
|
||||||||||||||||||||||||||||||||
|
and
savings deposits
|
755,906 | -- | -- | -- | 80,072 | 240,215 | 80,071 | 1,156,264 | ||||||||||||||||||||||||
|
Time
deposits
|
132,452 | 193,212 | 226,858 | 252,144 | 89,323 | 18,765 | -- | 912,754 | ||||||||||||||||||||||||
|
Short-term
debt
|
109,550 | -- | -- | -- | -- | -- | -- | 109,550 | ||||||||||||||||||||||||
|
Long-term
debt
|
17,485 | 14,662 | 2,385 | 15,403 | 43,133 | 28,853 | 37,902 | 159,823 | ||||||||||||||||||||||||
|
Total
interest bearing
|
||||||||||||||||||||||||||||||||
|
liabilities
|
1,015,393 | 207,874 | 229,243 | 267,547 | 212,528 | 287,833 | 117,973 | 2,338,391 | ||||||||||||||||||||||||
|
Interest
rate sensitivity Gap
|
$ | 13,577 | $ | 124,873 | $ | (3,055 | ) | $ | 22,267 | $ | 232,989 | $ | 133,234 | $ | (43,079 | ) | $ | 480,806 | ||||||||||||||
|
Cumulative
interest rate
|
||||||||||||||||||||||||||||||||
|
sensitivity
Gap
|
$ | 13,577 | $ | 138,450 | $ | 135,395 | $ | 157,662 | $ | 390,651 | $ | 523,885 | $ | 480,806 | ||||||||||||||||||
|
Cumulative
rate sensitive assets
|
||||||||||||||||||||||||||||||||
|
to
rate sensitive liabilities
|
101.3 | % | 111.3 | % | 109.3 | % | 109.2 | % | 120.2 | % | 123.6 | % | 120.6 | % | ||||||||||||||||||
|
Cumulative
Gap as a % of
|
||||||||||||||||||||||||||||||||
|
earning
assets
|
0.5 | % | 4.9 | % | 4.8 | % | 5.6 | % | 13.9 | % | 18.6 | % | 17.1 | % | ||||||||||||||||||
50
|
CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
|
INDEX
|
||||
| 52 | ||||
| 53 | ||||
| 54 | ||||
| 55 | ||||
| 56 | ||||
| 57 | ||||
| 58 | ||||
| 59 | ||||
|
Note:
|
Supplementary
Data may be found in Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Quarterly Results” on page
47 hereof.
|
51
Management’s Report on Internal Control Over Financial
Reporting
The
management of Simmons First National Corporation (the “Company”) is responsible
for establishing and maintaining adequate internal control over financial
reporting. The Company’s internal control over financial reporting is a process
designed under the supervision of the Company’s Chief Executive Officer and
Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company’s
financial statements for external purposes in accordance with generally accepted
accounting principles.
As of
December 31, 2009, management assessed the effectiveness of the Company’s
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on the assessment, management determined that
the Company maintained effective internal control over financial reporting as of
December 31, 2009, based on those criteria.
BKD, LLP,
the independent registered public accounting firm that audited the consolidated
financial statements of the Company included in this Annual Report on Form 10-K,
has issued an attestation report on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. The report,
which expresses an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009, immediately
follows.
52
Audit
Committee, Board of Directors and Stockholders
Simmons
First National Corporation
Pine
Bluff, Arkansas
We have
audited Simmons First National Corporation’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenances of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Simmons First National Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of
Simmons First National Corporation and our report dated March 2, 2010, expressed
an unqualified opinion thereon.
BKD,
LLP
/s/ BKD,
LLP
Pine
Bluff, Arkansas
March 2,
2010
53
Audit
Committee, Board of Directors and Stockholders
Simmons
First National Corporation
Pine
Bluff, Arkansas
We have
audited the accompanying consolidated balance sheets of Simmons First National
Corporation as of December 31, 2009, and 2008, and the related consolidated
statements of income, cash flows, and stockholders’ equity for each of the years
in the three-year period ended December 31, 2009. The Company’s management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Simmons First National
Corporation as of December 31, 2009, and 2008, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2009, in conformity with accounting principles generally accepted in the
United States of America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Simmons First National Corporation’s internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated March 2, 2010,
expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
BKD,
LLP
/s/ BKD,
LLP
Pine
Bluff, Arkansas
March 2,
2010
54
|
Consolidated
Balance Sheets
|
||||||||
|
December
31, 2009 and 2008
|
||||||||
|
|
||||||||
|
(In thousands, except share
data)
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Cash
and non-interest bearing balances due from banks
|
$ | 71,575 | $ | 71,801 | ||||
|
Interest
bearing balances due from banks
|
282,010 | 61,085 | ||||||
|
Federal
funds sold
|
-- | 6,650 | ||||||
|
Cash
and cash equivalents
|
353,585 | 139,536 | ||||||
|
Investment
securities
|
646,915 | 646,134 | ||||||
|
Mortgage
loans held for sale
|
8,397 | 10,336 | ||||||
|
Assets
held in trading accounts
|
6,886 | 5,754 | ||||||
|
Loans
|
1,874,989 | 1,933,074 | ||||||
|
Allowance
for loan losses
|
(25,016 | ) | (25,841 | ) | ||||
|
Net
loans
|
1,849,973 | 1,907,233 | ||||||
|
Premises
and equipment
|
78,126 | 78,904 | ||||||
|
Foreclosed
assets held for sale, net
|
9,179 | 2,995 | ||||||
|
Interest
receivable
|
17,881 | 20,930 | ||||||
|
Bank
owned life insurance
|
40,920 | 39,617 | ||||||
|
Goodwill
|
60,605 | 60,605 | ||||||
|
Core
deposit premiums
|
1,769 | 2,575 | ||||||
|
Other
assets
|
19,086 | 8,490 | ||||||
|
Total
assets
|
$ | 3,093,322 | $ | 2,923,109 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest
bearing transaction accounts
|
$ | 363,154 | $ | 334,998 | ||||
|
Interest
bearing transaction accounts and savings deposits
|
1,156,264 | 1,026,824 | ||||||
|
Time
deposits
|
912,754 | 974,511 | ||||||
|
Total
deposits
|
2,432,172 | 2,336,333 | ||||||
|
Federal
funds purchased and securities sold
|
||||||||
|
under
agreements to repurchase
|
105,910 | 115,449 | ||||||
|
Short-term
debt
|
3,640 | 1,112 | ||||||
|
Long-term
debt
|
159,823 | 158,671 | ||||||
|
Accrued
interest and other liabilities
|
20,530 | 22,752 | ||||||
|
Total
liabilities
|
2,722,075 | 2,634,317 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $0.01 par value; 40,040,000 shares authorized and
|
||||||||
|
unissued
at December 31, 2009; no shares authorized
|
||||||||
|
at
December 31, 2008
|
-- | -- | ||||||
|
Common
stock, Class A, $0.01 par value; 60,000,000 shares
authorized:
|
||||||||
|
17,093,931and
13,960,680 shares issued and outstanding
|
||||||||
|
at
December 31, 2009 and 2008, respectively
|
171 | 140 | ||||||
|
Surplus
|
111,694 | 40,807 | ||||||
|
Undivided
profits
|
258,620 | 244,655 | ||||||
|
Accumulated
other comprehensive income
|
||||||||
|
Unrealized
appreciation on available-for-sale securities,
|
||||||||
|
net
of income taxes of $457 and $1,913 at December 31,2009
|
||||||||
|
and
2008, respectively
|
762 | 3,190 | ||||||
|
Total
stockholders’ equity
|
371,247 | 288,792 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 3,093,322 | $ | 2,923,109 | ||||
See Notes
to Consolidated Financial Statements.
55
|
Consolidated
Statements of Income
|
||||||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
||||||||||||
|
(In thousands, except per share
data)
|
2009
|
2008
|
2007
|
|||||||||
|
INTEREST
INCOME
|
||||||||||||
|
Loans
|
$ | 113,648 | $ | 126,079 | $ | 141,706 | ||||||
|
Federal
funds sold
|
27 | 748 | 1,418 | |||||||||
|
Investment
securities
|
21,791 | 27,415 | 23,646 | |||||||||
|
Mortgage
loans held for sale
|
608 | 411 | 505 | |||||||||
|
Assets
held in trading accounts
|
20 | 73 | 100 | |||||||||
|
Interest
bearing balances due from banks
|
439 | 1,415 | 1,161 | |||||||||
|
TOTAL
INTEREST INCOME
|
136,533 | 156,141 | 168,536 | |||||||||
|
INTEREST
EXPENSE
|
||||||||||||
|
Deposits
|
31,046 | 53,150 | 65,474 | |||||||||
|
Federal
funds purchased and securities sold
|
||||||||||||
|
under
agreements to repurchase
|
769 | 2,110 | 5,371 | |||||||||
|
Short-term
debt
|
33 | 111 | 804 | |||||||||
|
Long-term
debt
|
6,958 | 6,753 | 4,771 | |||||||||
|
TOTAL
INTEREST EXPENSE
|
38,806 | 62,124 | 76,420 | |||||||||
|
NET
INTEREST INCOME
|
97,727 | 94,017 | 92,116 | |||||||||
|
Provision
for loan losses
|
10,316 | 8,646 | 4,181 | |||||||||
|
NET
INTEREST INCOME AFTER PROVISION
|
||||||||||||
|
FOR LOAN
LOSSES
|
87,411 | 85,371 | 87,935 | |||||||||
|
NON-INTEREST
INCOME
|
||||||||||||
|
Trust
income
|
5,227 | 6,230 | 6,218 | |||||||||
|
Service
charges on deposit accounts
|
17,944 | 15,145 | 14,794 | |||||||||
|
Other
service charges and fees
|
2,668 | 2,681 | 3,016 | |||||||||
|
Income
on sale of mortgage loans, net of commissions
|
4,032 | 2,606 | 2,766 | |||||||||
|
Income
on investment banking, net of commissions
|
2,153 | 1,025 | 623 | |||||||||
|
Credit
card fees
|
14,392 | 13,579 | 12,217 | |||||||||
|
Premiums
on sale of student loans
|
2,333 | 1,134 | 2,341 | |||||||||
|
Bank
owned life insurance income
|
1,270 | 1,547 | 1,493 | |||||||||
|
Gain
on mandatory partial redemption of Visa shares
|
-- | 2,973 | -- | |||||||||
|
Other
income
|
2,548 | 2,406 | 2,535 | |||||||||
|
Gain
on sale of securities
|
144 | -- | -- | |||||||||
|
TOTAL
NON-INTEREST INCOME
|
52,711 | 49,326 | 46,003 | |||||||||
|
NON-INTEREST
EXPENSE
|
||||||||||||
|
Salaries
and employee benefits
|
58,317 | 57,050 | 54,865 | |||||||||
|
Occupancy
expense, net
|
7,457 | 7,383 | 6,674 | |||||||||
|
Furniture
and equipment expense
|
6,195 | 5,967 | 5,865 | |||||||||
|
Other
real estate and foreclosure expense
|
453 | 239 | 212 | |||||||||
|
Deposit
insurance
|
4,642 | 793 | 328 | |||||||||
|
Other
operating expenses
|
27,658 | 24,928 | 26,253 | |||||||||
|
TOTAL
NON-INTEREST EXPENSE
|
104,722 | 96,360 | 94,197 | |||||||||
|
INCOME
BEFORE INCOME TAXES
|
35,400 | 38,337 | 39,741 | |||||||||
|
Provision
for income taxes
|
10,190 | 11,427 | 12,381 | |||||||||
|
NET
INCOME
|
$ | 25,210 | $ | 26,910 | $ | 27,360 | ||||||
|
BASIC
EARNINGS PER SHARE
|
$ | 1.75 | $ | 1.93 | $ | 1.95 | ||||||
|
DILUTED
EARNINGS PER SHARE
|
$ | 1.74 | $ | 1.91 | $ | 1.92 | ||||||
See Notes
to Consolidated Financial Statements.
56
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
||||||||||||
|
|
||||||||||||
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 25,210 | $ | 26,910 | $ | 27,360 | ||||||
|
Items
not requiring (providing) cash
|
||||||||||||
|
Depreciation
and amortization
|
5,841 | 5,729 | 5,510 | |||||||||
|
Provision
for loan losses
|
10,316 | 8,646 | 4,181 | |||||||||
|
Gain
on mandatory partial redemption of Visa shares
|
-- | (2,973 | ) | -- | ||||||||
|
Net
amortization of investment securities
|
(48 | ) | 194 | 116 | ||||||||
|
Stock-based
compensation expense
|
627 | 548 | 338 | |||||||||
|
Deferred
income taxes
|
1,613 | 739 | 865 | |||||||||
|
Gain
on sale of securities, net
|
(144 | ) | -- | -- | ||||||||
|
Bank
owned life insurance income
|
(1,270 | ) | (1,547 | ) | (1,493 | ) | ||||||
|
Changes
in
|
||||||||||||
|
Interest
receivable
|
3,049 | 415 | 629 | |||||||||
|
Mortgage
loans held for sale
|
1,939 | 761 | (4,006 | ) | ||||||||
|
Assets
held in trading accounts
|
(1,132 | ) | (96 | ) | (1,171 | ) | ||||||
|
Other
assets
|
(12,417 | ) | (960 | ) | 2,603 | |||||||
|
Accrued
interest and other liabilities
|
(5,387 | ) | (2,709 | ) | 508 | |||||||
|
Income
taxes payable
|
1,552 | (768 | ) | 538 | ||||||||
|
Net
cash provided by operating activities
|
29,749 | 34,889 | 35,978 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Net
collections (originations) of loans
|
36,621 | (96,447 | ) | (75,161 | ) | |||||||
|
Purchases
of premises and equipment, net
|
(4,257 | ) | (8,353 | ) | (12,240 | ) | ||||||
|
Proceeds
from sale of foreclosed assets
|
4,139 | 5,353 | 3,250 | |||||||||
|
Proceeds
from mandatory partial redemption of Visa shares
|
-- | 2,973 | -- | |||||||||
|
Sales
(purchases) of short-term investment securities
|
84,033 | (85,536 | ) | -- | ||||||||
|
Proceeds
from sale of securities
|
361 | -- | -- | |||||||||
|
Proceeds
from maturities of available-for-sale securities
|
573,604 | 318,114 | 146,379 | |||||||||
|
Purchases
of available-for-sale securities
|
(384,080 | ) | (349,416 | ) | (136,033 | ) | ||||||
|
Proceeds
from maturities of held-to-maturity securities
|
281,986 | 41,680 | 31,123 | |||||||||
|
Purchases
of held-to-maturity securities
|
(558,921 | ) | (38,778 | ) | (41,466 | ) | ||||||
|
Purchases
of bank owned life insurance
|
(33 | ) | (32 | ) | (413 | ) | ||||||
|
Net
cash provided by (used in) investing activities
|
33,453 | (210,442 | ) | (84,561 | ) | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Net
change in deposits
|
95,839 | 153,476 | 7,326 | |||||||||
|
Net
change in short-term debt
|
2,528 | (665 | ) | (4,337 | ) | |||||||
|
Dividends
paid
|
(11,245 | ) | (10,601 | ) | (10,234 | ) | ||||||
|
Proceeds
from issuance of long-term debt
|
9,166 | 91,029 | 10,786 | |||||||||
|
Repayment
of long-term debt
|
(8,014 | ) | (14,643 | ) | (11,812 | ) | ||||||
|
Net
change in Federal funds purchased and
|
||||||||||||
|
securities
sold under agreements to repurchase
|
(9,539 | ) | (13,357 | ) | 23,770 | |||||||
|
Shares
issued from public stock offering, net of
|
||||||||||||
|
offering
costs of $4,178
|
70,486 | -- | -- | |||||||||
|
Shares
issued (exchanged) under stock
|
||||||||||||
|
compensation
plans, net
|
1,626 | 900 | 725 | |||||||||
|
Repurchase
of common stock
|
-- | (1,280 | ) | (8,562 | ) | |||||||
|
Net
cash provided by financing activities
|
150,847 | 204,859 | 7,662 | |||||||||
|
INCREASE
(DECREASE) IN CASH AND
|
||||||||||||
|
CASH
EQUIVALENTS
|
214,049 | 29,306 | (40,921 | ) | ||||||||
|
CASH
AND CASH EQUIVALENTS,
|
||||||||||||
|
BEGINNING OF
YEAR
|
139,536 | 110,230 | 151,151 | |||||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$ | 353,585 | $ | 139,536 | $ | 110,230 | ||||||
See Notes
to Consolidated Financial Statements.
57
|
Consolidated
Statements of Stockholders’ Equity
|
||||||||||||||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||
|
Other
|
||||||||||||||||||||
|
Common
|
Comprehensive
|
Undivided
|
||||||||||||||||||
|
(In thousands, except share
data)
|
Stock
|
Surplus
|
Income (Loss)
|
Profits
|
Total
|
|||||||||||||||
|
Balance,
December 31, 2006
|
$ | 142 | $ | 48,678 | $ | (2,198 | ) | $ | 212,394 | $ | 259,016 | |||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
-- | -- | -- | 27,360 | 27,360 | |||||||||||||||
|
Change
in unrealized depreciation on
|
||||||||||||||||||||
|
available-for-sale
securities, net of
|
||||||||||||||||||||
|
income
taxes of $2,356
|
-- | -- | 3,926 | -- | 3,926 | |||||||||||||||
|
Comprehensive
income
|
31,286 | |||||||||||||||||||
|
Stock
issued as bonus shares – 15,146 shares
|
-- | 419 | -- | -- | 419 | |||||||||||||||
|
Exercise
of stock options – 33,720 shares
|
-- | 509 | -- | -- | 509 | |||||||||||||||
|
Stock
granted under
|
||||||||||||||||||||
|
stock-based
compensation plans
|
-- | 178 | -- | -- | 178 | |||||||||||||||
|
Securities
exchanged under stock option plan
|
-- | (203 | ) | -- | -- | (203 | ) | |||||||||||||
|
Repurchase
of common stock
|
||||||||||||||||||||
|
–
320,726 shares
|
(3 | ) | (8,562 | ) | -- | -- | (8,565 | ) | ||||||||||||
|
Cash
dividends declared ($0.73 per share)
|
-- | -- | -- | (10,234 | ) | (10,234 | ) | |||||||||||||
|
Balance,
December 31, 2007
|
139 | 41,019 | 1,728 | 229,520 | 272,406 | |||||||||||||||
|
Cumulative
effect of adoption of a new
|
||||||||||||||||||||
|
accounting
principle, January 1, 2008 (Note 16)
|
-- | -- | -- | (1,174 | ) | (1,174 | ) | |||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
-- | -- | -- | 26,910 | 26,910 | |||||||||||||||
|
Change
in unrealized appreciation on
|
||||||||||||||||||||
|
available-for-sale
securities, net of
|
||||||||||||||||||||
|
income
taxes of $877
|
-- | -- | 1,462 | -- | 1,462 | |||||||||||||||
|
Comprehensive
income
|
28,372 | |||||||||||||||||||
|
Stock
issued as bonus shares – 17,490 shares
|
-- | 530 | -- | -- | 530 | |||||||||||||||
|
Stock
issued for employee stock
|
||||||||||||||||||||
|
purchase
plan – 5,359 shares
|
-- | 135 | -- | -- | 135 | |||||||||||||||
|
Exercise
of stock options – 97,497 shares
|
1 | 1,207 | -- | -- | 1,208 | |||||||||||||||
|
Stock
granted under
|
||||||||||||||||||||
|
stock-based
compensation plans
|
-- | 169 | -- | -- | 169 | |||||||||||||||
|
Securities
exchanged under stock option plan
|
-- | (973 | ) | -- | -- | (973 | ) | |||||||||||||
|
Repurchase
of common stock
|
||||||||||||||||||||
|
–
45,180 shares
|
-- | (1,280 | ) | -- | -- | (1,280 | ) | |||||||||||||
|
Cash
dividends declared ($0.76 per share)
|
-- | -- | -- | (10,601 | ) | (10,601 | ) | |||||||||||||
|
Balance,
December 31, 2008
|
140 | 40,807 | 3,190 | 244,655 | 288,792 | |||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
-- | -- | -- | 25,210 | 25,210 | |||||||||||||||
|
Change
in unrealized appreciation on
|
||||||||||||||||||||
|
available-for-sale
securities, net of
|
||||||||||||||||||||
|
income
tax credits of $1,456
|
-- | -- | (2,428 | ) | -- | (2,428 | ) | |||||||||||||
|
Comprehensive
income
|
22,782 | |||||||||||||||||||
|
Stock
issued from public stock offering, net of
|
||||||||||||||||||||
|
offering
costs of $4,178
|
30 | 70,456 | -- | -- | 70,486 | |||||||||||||||
|
Stock
issued as bonus shares – 27,915 shares
|
-- | 702 | -- | -- | 702 | |||||||||||||||
|
Cancelled
bonus shares – 1,113 shares
|
-- | 29 | -- | -- | 29 | |||||||||||||||
|
Non-vested
bonus shares
|
-- | (1,208 | ) | -- | -- | (1,208 | ) | |||||||||||||
|
Stock
issued for employee stock
|
||||||||||||||||||||
|
purchase
plan – 5,823 shares
|
-- | 141 | -- | -- | 141 | |||||||||||||||
|
Exercise
of stock options – 56,700 shares
|
1 | 689 | -- | -- | 690 | |||||||||||||||
|
Stock
granted under
|
||||||||||||||||||||
|
stock-based
compensation plans
|
-- | 180 | -- | -- | 180 | |||||||||||||||
|
Securities
exchanged under stock option plan
|
-- | (102 | ) | -- | -- | (102 | ) | |||||||||||||
|
Cash
dividends declared ($0.76 per share)
|
-- | -- | -- | (11,245 | ) | (11,245 | ) | |||||||||||||
|
Balance,
December 31, 2009
|
$ | 171 | $ | 111,694 | $ | 762 | $ | 258,620 | $ | 371,247 | ||||||||||
See Notes
to Consolidated Financial Statements.
58
Notes
to Consolidated Financial Statements
|
NOTE
1:
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature
of Operations
Simmons
First National Corporation (the “Company”) is primarily engaged in providing a
full range of banking services to individual and corporate customers through its
subsidiaries and their branch banks in Arkansas. The Company is
subject to competition from other financial institutions. The Company
also is subject to the regulation of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities.
Operating
Segments
The
Company is organized on a subsidiary bank-by-bank basis upon which management
makes decisions regarding how to allocate resources and assess
performance. Each of the subsidiary banks provides a group of similar
community banking services, including such products and services as loans; time
deposits, checking and savings accounts; personal and corporate trust services;
credit cards; investment management; and securities and investment
services. The individual bank segments have similar operating and
economic characteristics and have been reported as one aggregated operating
segment.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, the valuation of real estate
acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan
losses and the valuation of foreclosed assets, management obtains independent
appraisals for significant properties.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Simmons First National
Corporation and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Reclassifications
Various
items within the accompanying consolidated financial statements for previous
years have been reclassified to provide more comparative
information. These reclassifications had no effect on net
earnings.
Cash
Equivalents
The
Company Bank considers all liquid investments with original maturities of three
months or less to be cash equivalents. The financial institutions
holding the Company’s cash accounts are participating in the FDIC’s Transaction
Account Guarantee Program. Under that program, through June 30, 2010,
all noninterest-bearing transaction accounts are fully guaranteed by the FDIC
for the entire amount in the account.
59
Interest
Bearing Deposits in Banks
Interest-bearing
deposits in banks mature within one year and are carried at cost.
Investment
Securities
Held-to-maturity
securities, which include any security for which the Company has the positive
intent and ability to hold until maturity, are carried at historical cost
adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized and accreted,
respectively, to interest income using the constant yield method over the period
to maturity.
Available-for-sale
securities, which include any security for which the Company has no immediate
plan to sell but which may be sold in the future, are carried at fair
value. Realized gains and losses, based on specifically identified
amortized cost of the individual security, are included in other
income. Unrealized gains and losses are recorded, net of related
income tax effects, in stockholders' equity. Premiums and discounts
are amortized and accreted, respectively, to interest income using the constant
yield method over the period to maturity.
Trading
securities, which include any security held primarily for near-term sale, are
carried at fair value. Gains and losses on trading securities
are included in other income.
Effective
April 1, 2009, the Company adopted new accounting guidance related to
recognition and presentation of other-than-temporary impairment, ASC
320-10. When the Company does not intend to sell a debt security, and
it is more likely than not, the Company will not have to sell the security
before recovery of its cost basis, it recognizes the credit component of an
other-than-temporary impairment of a debt security in earnings and the remaining
portion in other comprehensive income. For held-to-maturity debt
securities, the amount of an other-than-temporary impairment recorded in other
comprehensive income for the noncredit portion of a previous
other-than-temporary impairment is amortized prospectively over the remaining
life of the security on the basis of the timing of future estimated cash flows
of the security.
As a
result of this guidance, the Company’s consolidated statement of income as of
December 31, 2009, reflects the full impairment (that is, the difference between
the security’s amortized cost basis and fair value) on debt securities that the
Company intends to sell or would more likely than not be required to sell before
the expected recovery of the amortized cost basis. For
available-for-sale and held-to-maturity debt securities that management has no
intent to sell and believes that it more likely than not will not be required to
sell prior to recovery, only the credit loss component of the impairment is
recognized in earnings, while the noncredit loss is recognized in accumulated
other comprehensive income. The credit loss component recognized in
earnings is identified as the amount of principal cash flows not expected to be
received over the remaining term of the security as projected based on cash flow
projections. Prior to the adoption of the recent accounting guidance
on April 1, 2009, management considered, in determining whether
other-than-temporary impairment exists, (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Mortgage
Loans Held For Sale
Mortgage
loans held for sale are carried at the lower of cost or fair value, determined
using an aggregate basis. Write-downs to fair value are recognized as
a charge to earnings at the time the decline in value occurs. Forward
commitments to sell mortgage loans are acquired to reduce market risk on
mortgage loans in the process of origination and mortgage loans held for
sale. The forward commitments acquired by the Company for mortgage
loans in process of origination are not mandatory forward
commitments. These commitments are structured on a best efforts
basis; therefore, the Company is not required to substitute another loan or to
buy back the commitment if the original loan does not fund. Gains and
losses resulting from sales of mortgage loans are recognized when the respective
loans are sold to investors. Gains and losses are determined by the
difference between the selling price and the carrying amount of the loans sold,
net of discounts collected or paid. Fees received from borrowers to
guarantee the funding of mortgage loans held for sale are recognized as income
or expense when the loans are sold or when it becomes evident that the
commitment will not be used.
60
Loans
Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or pay-offs are reported at their outstanding principal adjusted
for any loans charged off and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
For loans
amortized at cost, interest income is accrued based on the unpaid principal
balance. Loan origination fees, net of certain direct origination
costs, as well as premiums and discounts, are deferred and amortized as a level
yield adjustment over the respective term of the loan.
The
accrual of interest on mortgage and commercial loans is discontinued at the time
the loan is 90 days past due unless the credit is well-secured and in process of
collection. Past due status is based on contractual terms of the
loan. In all cases, loans are placed on nonaccrual or charged off at
an earlier date if collection of principal or interest is considered
doubtful.
Discounts
and premiums on purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on
purchased consumer loans are recognized over the expected lives of the loans
using methods that approximate the interest method.
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 as of period
end. This estimate is based on management's evaluation of the loan
portfolio, as well as on prevailing and anticipated economic conditions and
historical losses by loan category. General reserves have been
established, based upon the aforementioned factors and allocated to the
individual loan categories. Allowances are accrued on specific loans
evaluated for impairment for which the basis of each loan, including accrued
interest, exceeds the discounted amount of expected future collections of
interest and principal or, alternatively, the fair value of loan
collateral. The unallocated reserve generally serves to compensate
for the uncertainty in estimating loan losses, including the possibility of
changes in risk ratings and specific reserve allocations in the loan portfolio
as a result of the Company’s ongoing risk management system.
A loan is
considered impaired when it is probable that the Company will not receive all
amounts due according to the contractual terms of the loan. This
includes loans that are delinquent 90 days or more, nonaccrual loans and certain
other loans identified by management. Certain other loans identified
by management consist of performing loans with specific allocations of the
allowance for loan losses. Specific allocations are applied when
quantifiable factors are present requiring a greater allocation than that
established by the Company based on its analysis of historical losses for each
loan category. Accrual of interest is discontinued and interest
accrued and unpaid is removed at the time such amounts are delinquent 90 days
unless management is aware of circumstances which warrant continuing the
interest accrual. Interest is recognized for nonaccrual loans only
upon receipt and only after all principal amounts are current according to the
terms of the contract.
Premises
and Equipment
Depreciable
assets are stated at cost less accumulated depreciation. Depreciation
is charged to expense using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are capitalized and
amortized by the straight-line method over the terms of the respective leases or
the estimated useful lives of the improvements, whichever is
shorter.
61
Foreclosed
Assets Held For Sale
Assets
acquired by foreclosure or in settlement of debt and held for sale are valued at
estimated fair value as of the date of foreclosure, and a related valuation
allowance is provided for estimated costs to sell the
assets. Management evaluates the value of foreclosed assets held for
sale periodically and increases the valuation allowance for any subsequent
declines in fair value. Changes in the valuation allowance are
charged or credited to other expense.
Goodwill
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, and more than annually if circumstances warrant, in
accordance with ASC Topic 350, Intangibles – Goodwill and Other. ASC
Topic 350 requires that goodwill and intangible assets that have indefinite
lives be reviewed for impairment annually, or more frequently if certain
conditions occur. Impairment losses on recorded goodwill, if any,
will be recorded as operating expenses.
Derivative
Financial Instruments
The
Company may enter into derivative contracts for the purposes of managing
exposure to interest rate risk to meet the financing needs of its
customers. The Company records all derivatives on the balance sheet
at fair value. Historically, the Company’s policy has been not to
invest in derivative type investments, but, in an effort to meet the financing
needs of its customers, the Company has entered into one fair value
hedge. Fair value hedges include interest rate swap agreements on
fixed rate loans. For derivatives designated as hedging the exposure
to changes in the fair value of the hedged item, the gain or loss is recognized
in earnings in the period of change together with the offsetting loss or gain of
the hedging instrument. The fair value hedge is considered to be
highly effective and any hedge ineffectiveness was deemed not
material. The notional amount of the loan being hedged was $1.7
million at December 31, 2009, and $1.8 million at December 31,
2008.
Securities
Sold Under Agreements to Repurchase
The
Company sells securities under agreements to repurchase to meet customer needs
for sweep accounts. At the point funds deposited by customers become
investable, those funds are used to purchase securities owned by the Company and
held in its general account with the designation of Customers’
Securities. A third party maintains control over the securities
underlying overnight repurchase agreements. The securities involved
in these transactions are generally U.S. Treasury or Federal Agency
issues. Securities sold under agreements to repurchase generally
mature on the banking day following that on which the investment was initially
purchased and are treated as collateralized financing transactions which are
recorded at the amounts at which the securities were sold plus accrued
interest. Interest rates and maturity dates of the securities
involved vary and are not intended to be matched with funds from
customers.
Fee
Income
Periodic
bankcard fees, net of direct origination costs, are recognized as revenue on a
straight-line basis over the period the fee entitles the cardholder to use the
card. Origination fees and costs for other loans are being amortized
over the estimated life of the loan.
62
Income
Taxes
The
Company accounts for income taxes in accordance with income tax accounting
guidance in ASC 740, Income
Taxes. The income tax accounting guidance results in two
components of income tax expense: current and
deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period by applying the provisions of the enacted tax
law to the taxable income or excess of deductions over revenues. The
Company determines deferred income taxes using the liability (or balance sheet)
method. Under this method, the net deferred tax asset or liability is
based on the tax effects of the differences between the book and tax bases of
assets and liabilities, and enacted changes in tax rates and laws are recognized
in the period in which they occur.
Deferred
income tax expense results from changes in deferred tax assets and liabilities
between periods. Deferred tax assets are recognized if it is more
likely than not, based on the technical merits, that the tax position will be
realized or sustained upon examination. The term more likely than not
means a likelihood of more than 50 percent; the terms examined and upon
examination also include resolution of the related appeals or litigation
processes, if any. A tax position that meets the more-likely-than-not
recognition threshold is initially and subsequently measured as the largest
amount of tax benefit that has a greater than 50 percent likelihood of being
realized upon settlement with a taxing authority that has full knowledge of all
relevant information. The determination of whether or not a tax
position has met the more-likely-than-not recognition threshold considers the
facts, circumstances and information available at the reporting date and is
subject to management’s judgment. Deferred tax assets are reduced by
a valuation allowance if, based on the weight of evidence available, it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.
The
Company files consolidated income tax returns with its
subsidiaries.
Earnings
Per Share
Basic
earnings per share are computed based on the weighted average number of shares
outstanding during each year. Diluted earnings per share are computed
using the weighted average common shares and all potential dilutive common
shares outstanding during the period.
The
computation of per share earnings is as follows:
|
(In thousands, except per share
data)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
Income
|
$ | 25,210 | $ | 26,910 | $ | 27,360 | ||||||
|
Average
common shares outstanding
|
14,375 | 13,945 | 14,044 | |||||||||
|
Average
common share stock options outstanding
|
90 | 163 | 197 | |||||||||
|
Average
diluted common shares
|
14,465 | 14,108 | 14,241 | |||||||||
|
Basic
earnings per share
|
$ | 1.75 | $ | 1.93 | $ | 1.95 | ||||||
|
Diluted
earnings per share
|
$ | 1.74 | $ | 1.91 | $ | 1.92 | ||||||
Stock
options to purchase 100,290 and 57,000 shares, respectively, for the years ended
December 31, 2009 and 2007, were not included in the earnings per share
calculation because the exercise price exceeded the average market
price. All stock options were included in the earnings per share
calculation for the year ended December 31, 2008.
Stock-Based
Compensation
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.
63
In
accordance with ASC Topic 718, Compensation – Stock Compensation, 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.
NOTE
2: INVESTMENT SECURITIES
The amortized cost and fair value of investment securities that are classified as held-to-maturity and available-for-sale are as follows:
|
|
Years Ended December 31
|
|||||||||||||||||||||||||||||||
|
|
2009
|
2008
|
||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
Gross
|
Gross
|
Estimated
|
|||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||||||||||||
|
(In thousands)
|
Cost
|
Gains
|
(Losses)
|
Value
|
Cost
|
Gains
|
(Losses)
|
Value
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
$ | 254,229 | $ | 799 | $ | (1,348 | ) | $ | 253,680 | $ | 18,000 | $ | 629 | $ | -- | $ | 18,629 | |||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
90 | 5 | -- | 95 | 109 | 2 | -- | 111 | ||||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
208,812 | 2,728 | (580 | ) | 210,960 | 168,262 | 1,264 | (1,876 | ) | 167,650 | ||||||||||||||||||||||
|
Other
securities
|
930 | -- | -- | 930 | 930 | -- | -- | 930 | ||||||||||||||||||||||||
|
Total
|
$ | 464,061 | $ | 3,532 | $ | (1,928 | ) | $ | 465,665 | $ | 187,301 | $ | 1,895 | $ | (1,876 | ) | $ | 187,320 | ||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 4,297 | $ | 32 | $ | -- | $ | 4,329 | $ | 5,976 | $ | 113 | $ | -- | $ | 6,089 | ||||||||||||||||
|
U.S.
Government
|
||||||||||||||||||||||||||||||||
|
agencies
|
160,807 | 953 | (236 | ) | 161,524 | 346,585 | 5,444 | (868 | ) | 351,161 | ||||||||||||||||||||||
|
Mortgage-backed
|
||||||||||||||||||||||||||||||||
|
securities
|
2,896 | 78 | (2 | ) | 2,972 | 2,909 | 37 | (67 | ) | 2,879 | ||||||||||||||||||||||
|
State
and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
-- | -- | -- | -- | 635 | 2 | -- | 637 | ||||||||||||||||||||||||
|
Other
securities
|
13,633 | 399 | (3 | ) | 14,029 | 97,625 | 448 | (6 | ) | 98,067 | ||||||||||||||||||||||
|
Total
|
$ | 181,633 | $ | 1,462 | $ | (241 | ) | $ | 182,854 | $ | 453,730 | $ | 6,044 | $ | (941 | ) | $ | 458,833 | ||||||||||||||
Certain
investment securities are valued at less than their historical
cost. Total fair value of these investments at December 31, 2009
and 2008, was $256.6 million and $167.8 million, which is approximately 39.7%
and 25.9%, respectively, of the Company’s available-for-sale and
held-to-maturity investment portfolio.
64
The
following table shows the gross unrealized losses and fair value of the
Company’s investments with unrealized losses, aggregated by investment category
and length of time that individual securities have been in a continuous
unrealized loss position at December 31:
|
|
Less Than 12 Months
|
12 Months or More
|
Total
|
|||||||||||||||||||||
|
Estimated
|
Gross
|
Estimated
|
Gross
|
Estimated
|
Gross
|
|||||||||||||||||||
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||||||
|
(In thousands)
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
|
December
31, 2009
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 161,081 | $ | 1,348 | $ | -- | $ | -- | $ | 161,081 | $ | 1,348 | ||||||||||||
|
Mortgage-backed
securities
|
2,188 | -- | -- | -- | 2,188 | -- | ||||||||||||||||||
|
State
and political subdivisions
|
24,140 | 321 | 5,075 | 259 | 29,215 | 580 | ||||||||||||||||||
|
Total
|
$ | 187,409 | $ | 1,669 | $ | 5,075 | $ | 259 | $ | 192,484 | $ | 1,928 | ||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 62,822 | $ | 236 | $ | -- | $ | -- | $ | 62,822 | $ | 236 | ||||||||||||
|
Mortgage-backed
securities
|
1,195 | 1 | 128 | 1 | 1,323 | 2 | ||||||||||||||||||
|
Other
securities
|
4 | 3 | -- | -- | 4 | 3 | ||||||||||||||||||
|
Total
|
$ | 64,021 | $ | 240 | $ | 128 | $ | 1 | $ | 64,149 | $ | 241 | ||||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||
|
Mortgage-backed
securities
|
$ | 3,623 | $ | -- | $ | -- | $ | -- | $ | 3,623 | $ | -- | ||||||||||||
|
State
and political subdivisions
|
58,790 | 1,673 | 3,854 | 203 | 62,644 | 1,876 | ||||||||||||||||||
|
Total
|
$ | 62,413 | $ | 1,673 | $ | 3,854 | $ | 203 | $ | 66,267 | $ | 1,876 | ||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 99,424 | $ | 868 | $ | -- | $ | -- | $ | 99,424 | $ | 868 | ||||||||||||
|
Mortgage-backed
securities
|
1,571 | 46 | 493 | 21 | 2,064 | 67 | ||||||||||||||||||
|
Other
securities
|
49 | 6 | -- | -- | 49 | 6 | ||||||||||||||||||
|
Total
|
$ | 101,044 | $ | 920 | $ | 493 | $ | 21 | $ | 101,537 | $ | 941 | ||||||||||||
U.S.
Government Agencies
The
unrealized losses on the Company’s investments in direct obligations of U.S.
government agencies were caused by interest rate increases. The
contractual terms of those investments do not permit the issuer to settle the
securities at a price less than the amortized cost bases of the
investments. Because the Company does not intend to sell the
investments and it is not more likely than not the Company will be required to
sell the investments before recovery of their amortized cost bases, which may be
maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2009.
State
and Political Subdivisions
The
unrealized losses on the Company’s investments in securities of state and
political subdivisions were caused by interest rate increases. The
contractual terms of those investments do not permit the issuer to settle the
securities at a price less than the amortized cost bases of the
investments. Because the Company does not intend to sell the
investments and it is not more likely than not the Company will be required to
sell the investments before recovery of their amortized cost bases, which may be
maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2009.
65
Should the
impairment of any of these securities become other than temporary, the cost
basis of the investment will be reduced and the resulting loss recognized in net
income in the period the other-than-temporary impairment is
identified.
During the
third quarter of 2008, the Company determined that its investment in FNMA common
stock, held in the available-for-sale other securities category, had become
other-than-temporarily impaired. As a result of this impairment the
security was written down by $75,000. The Company had accumulated
this stock over several years in the form of stock dividends from
FNMA. The remaining balance of this investment is approximately
$5,000. The Company has no investment in FNMA or FHLMC preferred
stock.
Management
has the ability and intent to hold the securities classified as held to maturity
until they mature, at which time the Company expects to receive full value for
the securities. Furthermore, as of December 31, 2009, management also
had the ability and intent to hold the securities classified as
available-for-sale for a period of time sufficient for a recovery of
cost. The unrealized losses are largely due to increases in market
interest rates over the yields available at the time the underlying securities
were purchased. The fair value is expected to recover as the bonds
approach their maturity date or repricing date or if market yields for such
investments decline. Management does not believe any of the
securities are impaired due to reasons of credit
quality. Accordingly, as of December 31, 2009, management believes
the impairments detailed in the table above are temporary.
Income
earned on the above securities for the years ended December 31, 2009, 2008 and
2007, is as follows:
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Taxable
|
||||||||||||
|
Held-to-maturity
|
$ | 2,880 | $ | 1,444 | $ | 2,521 | ||||||
|
Available-for-sale
|
11,016 | 19,613 | 15,841 | |||||||||
|
Non-taxable
|
||||||||||||
|
Held-to-maturity
|
7,874 | 6,323 | 5,228 | |||||||||
|
Available-for-sale
|
21 | 35 | 56 | |||||||||
|
Total
|
$ | 21,791 | $ | 27,415 | $ | 23,646 | ||||||
The
Statement of Stockholders’ Equity includes other comprehensive
income. Other comprehensive income for the Company includes the
change in the unrealized appreciation on available-for-sale
securities. The changes in the unrealized appreciation on
available-for-sale securities for the years ended December 31, 2009, 2008
and 2007, are as follows:
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Unrealized
holding gains (losses) arising during the period
|
$ | (3,740 | ) | $ | 2,339 | $ | 6,282 | |||||
|
Gains
realized in net income
|
144 | -- | -- | |||||||||
|
|
(3,884 | ) | 2,339 | 6,282 | ||||||||
|
Income
tax expense (benefit)
|
(1,456 | ) | 877 | 2,356 | ||||||||
|
Net
change in unrealized appreciation
|
||||||||||||
|
on
available-for-sale securities
|
$ | (2,428 | ) | $ | 1,462 | $ | 3,926 | |||||
66
The
amortized cost and estimated fair value by maturity of securities are shown in
the following table. Securities are classified according to their
contractual maturities without consideration of principal amortization,
potential prepayments or call options. Accordingly, actual maturities
may differ from contractual maturities.
|
|
Held-to-Maturity
|
Available-for-Sale
|
||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
|
(In thousands)
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||
|
One
year or less
|
$ | 9,833 | $ | 9,967 | $ | 11,297 | $ | 11,336 | ||||||||
|
After
one through five years
|
190,191 | 190,989 | 94,159 | 94,066 | ||||||||||||
|
After
five through ten years
|
181,734 | 181,846 | 62,536 | 63,415 | ||||||||||||
|
After
ten years
|
82,303 | 82,863 | 8 | 8 | ||||||||||||
|
Other
securities
|
-- | -- | 13,633 | 14,029 | ||||||||||||
|
Total
|
$ | 464,061 | $ | 465,665 | $ | 181,633 | $ | 182,854 | ||||||||
The
carrying value, which approximates the fair value, of securities pledged as
collateral, to secure public deposits and for other purposes, amounted to
$446,189,000 at December 31, 2009 and $435,120,000 at
December 31, 2008.
The book
value of securities sold under agreements to repurchase amounted to $80,050,000
and $87,514,000 for December 31, 2009 and 2008, respectively.
The
Company had gross realized gains of $144,000 and no gross realized losses during
the year ended December 31, 2009, from the sale of available for sale
securities. There were no gross realized gains or losses from the
sale of available for sale securities during the years ended December 31, 2008
and 2007. The income tax expense related to security gains was
39.225% of the gross amounts.
The state
and political subdivision debt obligations are primarily non-rated bonds and
represent small, Arkansas issues, which are evaluated on an ongoing
basis.
NOTE
3: LOANS AND ALLOWANCE FOR LOAN LOSSES
The various categories of loans are summarized as follows:
|
(In thousands)
|
2009
|
2008
|
||||||
|
Consumer
|
||||||||
|
Credit
cards
|
$ | 189,154 | $ | 169,615 | ||||
|
Student
loans
|
114,296 | 111,584 | ||||||
|
Other
consumer
|
139,647 | 138,145 | ||||||
|
Total
consumer
|
443,097 | 419,344 | ||||||
|
Real
estate
|
||||||||
|
Construction
|
180,759 | 224,924 | ||||||
|
Single
family residential
|
392,208 | 409,540 | ||||||
|
Other
commercial
|
596,517 | 584,843 | ||||||
|
Total
real estate
|
1,169,484 | 1,219,307 | ||||||
|
Commercial
|
||||||||
|
Commercial
|
168,206 | 192,496 | ||||||
|
Agricultural
|
84,866 | 88,233 | ||||||
|
Financial
institutions
|
3,885 | 3,471 | ||||||
|
Total
commercial
|
256,957 | 284,200 | ||||||
|
Other
|
5,451 | 10,223 | ||||||
|
Total
loans before allowance for loan losses
|
$ | 1,874,989 | $ | 1,933,074 | ||||
67
As of
December 31, 2009, credit card loans, which are unsecured, were $189,154,000 or
10.1% of total loans, versus $169,615,000, or 8.8% of total loans at December
31, 2008. The credit card loans are diversified by geographic region
to reduce credit risk and minimize any adverse impact on the
portfolio. Credit card loans are regularly reviewed to facilitate the
identification and monitoring of creditworthiness.
At
December 31, 2009 and 2008, impaired loans, net of Government guarantees,
totaled $46,859,000 and $15,689,000, respectively. Allocations of the
allowance for loan losses relative to impaired loans were $8,343,000 and
$4,238,000 at December 31, 2009 and 2008, respectively. During the
second quarter of 2009, the Company made adjustments to its methodology in the
evaluation of the collectability of loans, which added quantitative factors to
the internal and external influences used in determining the credit quality of
loans and the allocation of the allowance. This adjustment in
methodology resulted in an addition to impaired loans from classified loans and
a redistribution of allocated and unallocated reserves. Approximately
$1,398,000, $198,000 and $203,000 of interest income was recognized on average
impaired loans of $36,843,000, $15,315,000 and $11,724,000 for 2009, 2008 and
2007, respectively. Interest recognized on impaired loans on a cash
basis during 2009, 2008 and 2007 was immaterial.
At
December 31, 2009 and 2008, accruing loans delinquent 90 days or more totaled
$3,322,000 and $1,292,000, respectively. Nonaccruing loans at
December 31, 2009 and 2008 were $21,994,000 and $14,358,000,
respectively.
Transactions
in the allowance for loan losses are as follows:
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Balance,
beginning of year
|
$ | 25,841 | $ | 25,303 | $ | 25,385 | ||||||
|
Additions
|
||||||||||||
|
Provision
for loan losses
|
10,316 | 8,646 | 4,181 | |||||||||
| 36,157 | 33,949 | 29,566 | ||||||||||
|
Deductions
|
||||||||||||
|
Losses
charged to allowance, net of recoveries
|
||||||||||||
|
of
$3,687 for 2009, $2,138 for 2008 and $2,569 for 2007
|
11,141 | 8,108 | 4,263 | |||||||||
|
Balance,
end of year
|
$ | 25,016 | $ | 25,841 | $ | 25,303 | ||||||
NOTE
4: GOODWILL AND CORE DEPOSIT PREMIUMS
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill totaled $60.6 million at December 31, 2009, unchanged from December 31, 2008, as the Company made no acquisitions during the year ended December 31, 2009, and no goodwill impairment was recorded.
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill totaled $60.6 million at December 31, 2009, unchanged from December 31, 2008, as the Company made no acquisitions during the year ended December 31, 2009, and no goodwill impairment was recorded.
Core
deposit premiums are periodically evaluated as to the recoverability of their
carrying value. The carrying basis and accumulated amortization of
core deposit premiums (net of core deposit premiums that were fully amortized)
at December 31, 2009 and 2008, were as follows:
|
|
December 31, 2009 |
December 31, 2008
|
|||||||||||||||
|
|
Gross
|
|
Gross
|
||||||||||||||
|
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||
|
(In thousands)
|
Amount
|
Amortization
|
Net
|
Amount
|
Amortization
|
Net
|
|||||||||||
|
Core
deposit premiums
|
$ |
6,822
|
$ |
5,053
|
$ |
1,769
|
$ |
6,822
|
$ |
4,247
|
$ |
2,575
|
|||||
Core
deposit premium amortization expense recorded for the years ended December 31,
2009, 2008 and 2007, was $805,000, $807,000 and $817,000,
respectively. The Company’s estimated amortization expense for each
of the following five years is: 2010 – $701,000; 2011 – $451,000;
2012 – $321,000; 2013 – $268,000; and 2014 – $28,000.
68
NOTE
5: TIME DEPOSITS
Time deposits included approximately $420,537,000 and $418,394,000 of certificates of deposit of $100,000 or more, at December 31, 2009 and 2008, respectively. Brokered deposits were $21,443,000 and $33,155,000 at December 31, 2009 and 2008, respectively. At December 31, 2009, time deposits with a remaining maturity of one year or more amounted to $114,447,000. Maturities of all time deposits are as follows: 2010 – $798,307,000; 2011 – $89,323,000; 2012– $24,472,000; 2013 – $442,000; 2014 – $210,000 and none thereafter.
Time deposits included approximately $420,537,000 and $418,394,000 of certificates of deposit of $100,000 or more, at December 31, 2009 and 2008, respectively. Brokered deposits were $21,443,000 and $33,155,000 at December 31, 2009 and 2008, respectively. At December 31, 2009, time deposits with a remaining maturity of one year or more amounted to $114,447,000. Maturities of all time deposits are as follows: 2010 – $798,307,000; 2011 – $89,323,000; 2012– $24,472,000; 2013 – $442,000; 2014 – $210,000 and none thereafter.
Deposits
are the Company's primary funding source for loans and investment
securities. The mix and repricing alternatives can significantly
affect the cost of this source of funds and, therefore, impact the interest
margin.
NOTE
6: INCOME TAXES
The
provision for income taxes is comprised of the following
components:
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Income
taxes currently payable
|
$ | 8,577 | $ | 10,688 | $ | 11,516 | ||||||
|
Deferred
income taxes
|
1,613 | 739 | 865 | |||||||||
|
Provision
for income taxes
|
$ | 10,190 | $ | 11,427 | $ | 12,381 | ||||||
The tax
effects of temporary differences related to deferred taxes shown on the
consolidated balance sheets were:
|
(In thousands)
|
2009
|
2008
|
||||||
|
Deferred
tax assets
|
||||||||
|
Allowance
for loan losses
|
$ | 8,859 | $ | 9,057 | ||||
|
Valuation
of foreclosed assets
|
99 | 63 | ||||||
|
Deferred
compensation payable
|
1,603 | 1,451 | ||||||
|
FHLB
advances
|
6 | 14 | ||||||
|
Vacation
compensation
|
898 | 866 | ||||||
|
Loan
interest
|
195 | 88 | ||||||
|
Other
|
385 | 276 | ||||||
|
Gross
deferred tax assets
|
12,045 | 11,815 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Accumulated
depreciation
|
(451 | ) | (406 | ) | ||||
|
Deferred
loan fee income and expenses, net
|
(1,310 | ) | (1,229 | ) | ||||
|
FHLB
stock dividends
|
(503 | ) | (586 | ) | ||||
|
Goodwill
and core deposit premium amortization
|
(9,805 | ) | (8,643 | ) | ||||
|
Available-for-sale
securities
|
(457 | ) | (1,913 | ) | ||||
|
Other
|
(1,657 | ) | (1,019 | ) | ||||
|
Gross
deferred tax liabilities
|
(14,183 | ) | (13,796 | ) | ||||
|
Net
deferred tax liability
|
$ | (2,138 | ) | $ | (1,981 | ) | ||
69
A
reconciliation of income tax expense at the statutory rate to the Company's
actual income tax expense is shown below.
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Computed
at the statutory rate (35%)
|
$ | 12,390 | $ | 13,418 | $ | 13,910 | ||||||
|
Increase
(decrease) in taxes resulting from:
|
||||||||||||
|
State
income taxes, net of federal tax benefit
|
566 | 466 | 647 | |||||||||
|
Tax
exempt interest income
|
(2,877 | ) | (2,369 | ) | (2,020 | ) | ||||||
|
Tax
exempt earnings on BOLI
|
(444 | ) | (542 | ) | (523 | ) | ||||||
|
Other
differences, net
|
555 | 454 | 367 | |||||||||
|
Actual
tax provision
|
$ | 10,190 | $ | 11,427 | $ | 12,381 | ||||||
The
Company follows ASC Topic 740, Income Taxes, which prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax
return. Benefits from tax positions should be recognized in the
financial statements only when it is more likely than not that the tax position
will be sustained upon examination by the appropriate taxing authority that
would have full knowledge of all relevant information. A tax position
that meets the more-likely-than-not recognition threshold is measured at the
largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. Tax positions that previously
failed to meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent financial reporting period in which that
threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not recognition threshold should be derecognized in
the first subsequent financial reporting period in which that threshold is no
longer met. ASC Topic 740 also provides guidance on the accounting
for and disclosure of unrecognized tax benefits, interest and
penalties.
The amount
of unrecognized tax benefits may increase or decrease in the future for various
reasons including adding amounts for current tax year positions, expiration of
open income tax returns due to the statutes of limitation, changes in
management’s judgment about the level of uncertainty, status of examinations,
litigation and legislative activity and the addition or elimination of uncertain
tax positions.
The
Company files income tax returns in the U.S. federal
jurisdiction. The Company’s U.S. federal income tax returns are open
and subject to examinations from the 2006 tax year and forward. The
Company’s various state income tax returns are generally open from the 2003 and
later tax return years based on individual state statute of
limitations.
NOTE
7: SHORT-TERM AND LONG-TERM DEBT
Long-term
debt at December 31, 2009, and 2008 consisted of the following
components.
|
(In thousands)
|
2009
|
2008
|
||||||
|
FHLB
advances, due 2010 to 2033, 2.02% to 8.41%,
|
||||||||
|
secured
by residential real estate loans
|
$ | 128,893 | $ | 127,741 | ||||
|
Trust
preferred securities, due 12/30/2033, fixed at 8.25%,
|
||||||||
|
callable
without penalty
|
10,310 | 10,310 | ||||||
|
Trust
preferred securities, due 12/30/2033, floating rate
|
||||||||
|
of
2.80% above the three-month LIBOR rate,
|
||||||||
|
reset
quarterly, callable without penalty
|
10,310 | 10,310 | ||||||
|
Trust
preferred securities, due 12/30/2033, fixed rate
|
||||||||
|
of
6.97% through 2010, thereafter, at a floating rate of
|
||||||||
|
2.80%
above the three-month LIBOR rate, reset
|
||||||||
|
quarterly,
callable in 2010 without penalty
|
10,310 | 10,310 | ||||||
|
Total
long-term debt
|
$ | 159,823 | $ | 158,671 | ||||
70
At
December 31, 2009 the Company had Federal Home Loan Bank (“FHLB”) advances with
original maturities of one year or less of $2.0 million with a weighted average
rate of 0.65% which are not included in the above table.
The
Company had total FHLB advances of $128.9 million at December 31, 2009, with
approximately $388.8 million of additional advances available from the
FHLB.
The trust
preferred securities are tax-advantaged issues that qualify for Tier 1 capital
treatment. Distributions on these securities are included in interest
expense on long-term debt. Each of the trusts is a statutory business
trust organized for the sole purpose of issuing trust securities and investing
the proceeds thereof in junior subordinated debentures of the Company, the sole
asset of each trust. The preferred trust securities of each trust
represent preferred beneficial interests in the assets of the respective trusts
and are subject to mandatory redemption upon payment of the junior subordinated
debentures held by the trust. The common securities of each trust are
wholly-owned by the Company. Each trust’s ability to pay amounts due
on the trust preferred securities is solely dependent upon the Company making
payment on the related junior subordinated debentures. The Company’s
obligations under the junior subordinated securities and other relevant trust
agreements, in aggregate, constitute a full and unconditional guarantee by the
Company of each respective trust’s obligations under the trust securities issued
by each respective trust.
Aggregate
annual maturities of long-term debt at December 31, 2009 are as
follows:
|
|
Annual
|
||||
|
(In thousands)
|
Year
|
Maturities
|
|||
|
2010
|
$ | 29,013 | |||
|
2011
|
43,766 | ||||
|
2012
|
6,713 | ||||
|
2013
|
16,658 | ||||
|
2014
|
4,985 | ||||
|
Thereafter
|
58,688 | ||||
|
Total
|
$ | 159,823 | |||
NOTE
8: CAPITAL STOCK
On February 27, 2009, at a special meeting, the Company’s shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock, $0.01 par value. The aggregate liquidation preference of all shares of preferred stock cannot exceed $80,000,000. As of December 31, 2009, no preferred stock has been issued.
On February 27, 2009, at a special meeting, the Company’s shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock, $0.01 par value. The aggregate liquidation preference of all shares of preferred stock cannot exceed $80,000,000. As of December 31, 2009, no preferred stock has been issued.
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 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 exercises, for payment of future stock dividends and for
general corporate purposes. The Company may discontinue purchases at
any time that management determines additional purchases are not
warranted.
As part of
its strategic focus on building capital, management suspended the Company’s
stock repurchase program in July 2008. During the year ended December
31, 2008, by June 30, the Company repurchased a total of 45,180 shares of stock
with a weighted average repurchase price of $28.38 per share. The
Company made no purchases of its common stock during the three months or year
ended December 31, 2009. Under the current stock repurchase
plan, the Company can repurchase an additional 645,672
shares. However, because of the recently completed stock offering and
based on management’s strategy to retain capital, the Company does not
anticipate resuming its stock repurchases during 2010.
71
On August
26, 2009, the Company filed a shelf registration statement with the Securities
and Exchange Commission (“SEC”). The shelf registration statement,
which was declared effective on September 9, 2009, will allow the Company to
raise capital from time to time, up to an aggregate of $175 million, through the
sale of common stock, preferred stock, or a combination thereof, subject to
market conditions. Specific terms and prices will be determined at
the time of any offering under a separate prospectus supplement that the Company
will be required to file with the SEC at the time of the specific
offering.
In
November 2009, the Company raised common equity through an underwritten public
offering by issuing 2,650,000 shares of common stock at a price of $24.50 per
share, less underwriting discounts and commissions. The net proceeds
of the offering after deducting underwriting discounts and commissions and
offering expenses were $61.3 million. In December 2009, the underwriters of the
Company’s stock offering exercised and completed their option to purchase an
additional 397,500 shares of common stock at $24.50 to cover
over-allotments. The net proceeds of the exercise of the
over-allotment option after deducting underwriting discounts and commissions
were $9.2 million. The total net proceeds of the offering after deducting
underwriting discounts and commissions and offering expenses were approximately
$70.5 million.
NOTE
9: TRANSACTIONS WITH RELATED PARTIES
At
December 31, 2009 and 2008, the subsidiary banks had extensions of credit to
executive officers and directors and to companies in which the subsidiary banks'
executive officers or directors were principal owners in the amount of
$23.5 million in 2009 and $35.3 million in 2008.
|
(In thousands)
|
2009
|
2008
|
||||||
|
Balance,
beginning of year
|
$ | 35,311 | $ | 30,445 | ||||
|
New
extensions of credit
|
9,240 | 14,808 | ||||||
|
Repayments
|
(21,064 | ) | (9,942 | ) | ||||
|
Balance,
end of year
|
$ | 23,487 | $ | 35,311 | ||||
In
management's opinion, such loans and other extensions of credit and deposits
(which were not material) were made in the ordinary course of business and were
made on substantially the same terms (including interest rates and collateral)
as those prevailing at the time for comparable transactions with other
persons. Further, in management's opinion, these extensions of credit
did not involve more than the normal risk of collectability or present other
unfavorable features.
NOTE
10: EMPLOYEE BENEFIT PLANS
Retirement Plans
Retirement Plans
The
Company’s 401(k) retirement plan covers substantially all
employees. Contribution expense totaled $578,000, $575,000 and
$550,000, in 2009, 2008 and 2007, respectively.
The
Company has a discretionary profit sharing and employee stock ownership plan
covering substantially all employees. Contribution expense totaled
$2,640,000 for 2009, $2,565,000 for 2008 and $2,490,000 for 2007.
The
Company also provides deferred compensation agreements with certain active and
retired officers. The agreements provide monthly payments which,
together with payments from the deferred annuities issued pursuant to the
terminated pension plan equal 50 percent of average compensation prior to
retirement or death. The charges to income for the plans were $65,000
for 2009, $12,000 for 2008 and $358,000 for 2007. Such charges
reflect the straight-line accrual over the employment period of the present
value of benefits due each participant, as of their full eligibility date, using
an 8 percent discount factor.
72
Employee
Stock Purchase Plan
The
Company established an Employee Stock Purchase Plan in 2007 which generally
allows participants to make contributions of up 3% of the employee’s salary, up
to a maximum of $7,500 per year, for the purpose of acquiring the Company’s
stock. Substantially all employees with at least two years of service
are eligible for the plan. At the end of each plan year, full shares
of the Company’s stock are purchased for each employee based on that employee’s
contributions. The stock is purchased for an amount equal to 95% of
its fair market value at the end of the plan year, or, if lower, 95% of its fair
market value at the beginning of the plan year.
Stock-Based
Compensation Plans
The
Company’s Board of Directors has adopted various stock-based compensation
plans. The plans provide for the grant of incentive stock options,
nonqualified stock options, stock appreciation rights, and bonus stock
awards. Pursuant to the plans, shares are reserved for future
issuance by the Company upon exercise of stock options or awarding of bonus
shares granted to directors, officers and other key employees.
Stock-based
compensation expense for all stock-based compensation awards granted after
January 1, 2006, is based on the grant date fair value. For all
awards except stock option awards, the grant date fair value is the market value
per share as of the grant date. For stock option awards, the fair
value is estimated at the date of grant using the Black-Scholes option-pricing
model. This model requires the input of highly subjective
assumptions, changes to which can materially affect the fair value
estimate. Additionally, there may be other factors that would
otherwise have a significant effect on the value of employee stock options
granted but are not considered by the model. Accordingly, while
management believes that the Black-Scholes option-pricing model provides a
reasonable estimate of fair value, the model does not necessarily provide the
best single measure of fair value for the Company's employee stock
options.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model that uses various
assumptions. Expected volatility is based on historical volatility of
the Company’s stock and other factors. The Company uses historical
data to estimate option exercise and employee termination within the valuation
model. The expected term of options granted is derived from the
output of the option valuation model and represents the period of time that
options granted are expected to be outstanding. The risk-free rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. Forfeitures are
estimated at the time of grant, and are based partially on historical
experience.
73
The table
below summarizes the transactions under the Company's active stock compensation
plans at December 31, 2009, 2008 and 2007, and changes during the years then
ended:
|
Stock
Options
|
Non-Vested
Stock
|
|||||||||||||||
|
|
Outstanding
|
Awards Outstanding
|
||||||||||||||
|
|
Weighted
|
Weighted
|
||||||||||||||
|
|
Number
|
Average
|
Number
|
Average
|
||||||||||||
|
|
of
Shares
|
Exercise
|
of
Shares
|
Grant-Date
|
||||||||||||
| (000) |
Price
|
(000) |
Fair-Value
|
|||||||||||||
|
Balance,
December 31, 2006
|
517 | $ 16.32 | 22 | $ 25.69 | ||||||||||||
|
Granted
|
57 | 28.42 | 15 | 27.68 | ||||||||||||
|
Stock
Options Exercised
|
(34 | ) | 15.11 | -- | -- | |||||||||||
|
Stock
Awards Vested
|
-- | -- | (6 | ) | 25.31 | |||||||||||
|
Forfeited/Expired
|
(4 | ) | 12.13 | -- | -- | |||||||||||
|
Balance,
December 31, 2007
|
536 | 17.71 | 31 | 26.72 | ||||||||||||
|
Granted
|
49 | 30.31 | 18 | 30.31 | ||||||||||||
|
Stock
Options Exercised
|
(98 | ) | 12.38 | -- | -- | |||||||||||
|
Stock
Awards Vested
|
-- | -- | (12 | ) | 27.16 | |||||||||||
|
Forfeited/Expired
|
(35 | ) | 14.77 | -- | -- | |||||||||||
|
Balance,
December 31, 2008
|
452 | 20.46 | 37 | 28.28 | ||||||||||||
|
Granted
|
-- | -- | 28 | 25.15 | ||||||||||||
|
Stock
Options Exercised
|
(57 | ) | 12.17 | -- | -- | |||||||||||
|
Stock
Awards Vested
|
-- | -- | (15 | ) | 26.90 | |||||||||||
|
Forfeited/Expired
|
(21 | ) | 19.36 | (1 | ) | 26.22 | ||||||||||
|
Balance,
December 31, 2009
|
374 | $ 21.78 | 49 | $ 26.96 | ||||||||||||
|
|
||||||||||||||||
|
Exercisable,
December 31, 2009
|
289 | $ 19.72 | ||||||||||||||
The
following table summarizes information about stock options under the plans
outstanding at December 31, 2009:
|
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
|
Weighted
|
||||||||||||||||||||||
|
Average
|
Weighted
|
Weighted
|
||||||||||||||||||||
|
Number
|
Remaining
|
Average
|
Number
|
Average
|
||||||||||||||||||
|
Range
of
|
of
Shares
|
Contractual
|
Exercise
|
of
Shares
|
Exercise
|
|||||||||||||||||
|
Exercise Prices
|
(000) |
Life (Years)
|
Price
|
(000) |
Price
|
|||||||||||||||||
| $12.13 - $12.13 | 121 | 1.35 | $ 12.13 | 121 | $ 12.13 | |||||||||||||||||
| 23.78 - 24.50 | 91 | 4.87 | 24.05 | 91 | 24.05 | |||||||||||||||||
| 26.19 - 27.67 | 56 | 6.26 | 26.20 | 35 | 26.21 | |||||||||||||||||
| 28.42 - 28.42 | 52 | 7.41 | 28.42 | 26 | 28.42 | |||||||||||||||||
| 30.31 - 30.31 | 48 | 8.41 | 30.31 | 10 | 30.31 | |||||||||||||||||
Stock-based
compensation expense totaled $627,000 in 2009, $548,000 in 2008 and $338,000 in
2007. Stock-based compensation expense is recognized ratably over the
requisite service period for all stock-based awards. Unrecognized
stock-based compensation expense related to stock options totaled $422,000 at
December 31, 2009. At such date, the weighted-average period over
which this unrecognized expense is expected to be recognized was
1.41 years. Unrecognized stock-based compensation expense
related to non-vested stock awards was $1.2 million at December 31,
2009. At such date, the weighted-average period over which this
unrecognized expense is expected to be recognized was 2.70
years.
74
Aggregate
intrinsic value of outstanding stock options and exercisable stock options was
$2.3 million and $2.3 million, respectively, at December 31,
2009. Aggregate intrinsic value represents the difference between the
Company’s closing stock price on the last trading day of the period, which was
$27.80 at December 31, 2009, and the exercise price multiplied by the number of
options outstanding. The total intrinsic value of stock options
exercised was $886,000 in 2009, $1.7 million in 2008 and $384,000 in
2007.
The fair
value of the Company’s employee stock options granted is estimated on the date
of grant using the Black-Scholes option-pricing model. There were no
stock options granted in 2009. The weighted-average fair value of stock options
granted was $6.60 for 2008 and $5.96 for 2007. The Company estimated
expected market price volatility and expected term of the options based on
historical data and other factors. The weighted-average assumptions
used to determine the fair value of options granted are detailed in the table
below:
|
|
2009
|
2008
|
2007
|
|||||||||
|
Expected
dividend yield
|
-- | 2.51% | 2.53% | |||||||||
|
Expected
stock price volatility
|
-- | 23.00% | 19.00% | |||||||||
|
Risk-free
interest rate
|
-- | 3.68% | 5.17% | |||||||||
|
Expected
life of options
|
-- |
7
Years
|
7 -
10 Years
|
|||||||||
NOTE
11: ADDITIONAL CASH FLOW INFORMATION
The
following table presents additional information on cash payments and non-cash
items:
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Interest
paid
|
$ | 40,673 | $ | 64,302 | $ | 76,958 | ||||||
|
Income
taxes paid
|
7,040 | 11,456 | 10,563 | |||||||||
|
Transfers
of loans to other real estate
|
10,323 | 5,713 | 3,939 | |||||||||
|
Post-retirement
benefit liability established upon
|
||||||||||||
|
adoption
of EITF 06-4
|
-- | 1,174 | -- | |||||||||
NOTE
12: OTHER OPERATING EXPENSES
Other
operating expenses consist of the following:
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Professional
services
|
$ | 3,643 | $ | 2,824 | $ | 2,780 | ||||||
|
Postage
|
2,409 | 2,256 | 2,309 | |||||||||
|
Telephone
|
2,113 | 1,868 | 1,820 | |||||||||
|
Credit
card expense
|
5,051 | 4,671 | 4,095 | |||||||||
|
Operating
supplies
|
1,470 | 1,588 | 1,669 | |||||||||
|
Amortization
of core deposit premiums
|
805 | 807 | 817 | |||||||||
|
Visa
litigation liability expense
|
-- | (1,220 | ) | 1,220 | ||||||||
|
Other
expense
|
12,167 | 12,134 | 11,543 | |||||||||
|
Total
|
$ | 27,658 | $ | 24,928 | $ | 26,253 | ||||||
The
Company had aggregate annual equipment rental expense of approximately $317,000
in 2009, $356,000 in 2008 and $546,000 in 2007. The Company had
aggregate annual occupancy rental expense of approximately $1,208,000 in 2009,
$1,220,000 in 2008 and $1,168,000 in 2007.
75
NOTE 13: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective
January 1, 2008, the Company adopted ASC Topic 820, Fair Value Measurements and
Disclosures. ASC Topic 820 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Topic 820 describes three levels of inputs that may be used to measure fair value:
|
·
|
Level 1 Inputs – Quoted
prices in active markets for identical assets or
liabilities.
|
|
·
|
Level 2 Inputs –
Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities in active markets; quoted prices for similar
assets or liabilities in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
·
|
Level 3 Inputs –
Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.
|
In
general, fair value is based upon quoted market prices, where
available. If such quoted market prices are not available, fair value
is based upon internally developed models that primarily use, as inputs,
observable market-based parameters. Valuation adjustments may be made
to ensure that financial instruments are recorded at fair
value. These adjustments may include amounts to reflect counterparty
credit quality and the Company’s creditworthiness, among other things, as well
as unobservable parameters. Any such valuation adjustments are
applied consistently over time. The Company’s valuation methodologies
may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. While the use
of different methodologies or assumptions to determined the fair value of
certain financial instruments could result in a different estimate of fair value
at the reporting date. Furthermore, the reported fair value amounts
have not been comprehensively revalued since the presentation dates, and
therefore, estimates of fair value after the balance sheet date may differ
significantly from the amounts presented herein. A more detailed
description of the valuation methodologies used for assets and liabilities
measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy, is set forth
below.
Following
is a description of the financial assets and liabilities measured at fair value
on a recurring basis and recognized in the accompanying consolidated balance
sheets, as well as the general classification of such financial assets and
liabilities pursuant to the valuation hierarchy.
Available-for-sale securities
– Where quoted market prices are available in an active market,
securities are classified within Level 1 of the valuation
hierarchy. Level 1 securities would include highly liquid Government
bonds, mortgage products and exchange traded equities. Other
securities classified as available-for-sale are reported at fair value utilizing
Level 2 inputs. For these securities, the Company obtains fair value
measurements from an independent pricing service. The fair value
measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayment speeds, credit information and the
security’s terms and conditions, among other things. In certain cases
where Level 1 or Level 2 inputs are not available, securities are classified
within Level 3 of the hierarchy. The Company’s investment in a
Government money market mutual fund (the “AIM Fund”) is reported at fair value
utilizing Level 1 inputs. The remainder of the Company's
available-for-sale securities are reported at fair value utilizing Level 2
inputs.
Assets held in trading
accounts – The Company’s trading account investment in the AIM Fund is
reported at fair value utilizing Level 1 inputs. The remainder of the
Company's assets held in trading accounts are reported at fair value utilizing
Level 2 inputs.
76
The
following table sets forth the Company’s financial assets by level within the
fair value hierarchy that were measured at fair value on a recurring basis as of
December 31, 2009 and 2008.
| Fair Value Measurements Using | ||||||||||||||||
|
Quoted
Prices in
|
||||||||||||||||
|
Active
Markets for
|
Significant
Other
|
Significant
|
||||||||||||||
|
Identical
Assets
|
Observable
Inputs
|
Unobservable
Inputs
|
||||||||||||||
|
(In thousands)
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
| December 31, 2009 |
|
|||||||||||||||
|
Available-for-sale
securities
|
||||||||||||||||
|
U.S.
Treasury
|
$ | 4,329 | $ | -- | $ | 4,329 | $ | -- | ||||||||
|
U.S.
Government agencies
|
161,524 | -- | 161,524 | -- | ||||||||||||
|
Mortgage-backed
securities
|
2,972 | -- | 2,972 | -- | ||||||||||||
|
Other
securities
|
14,029 | 1,503 | 12,526 | -- | ||||||||||||
|
Assets
held in trading accounts
|
6,886 | 5,350 | 1,536 | -- | ||||||||||||
| December 31, 2008 |
|
|||||||||||||||
|
Available-for-sale
securities
|
||||||||||||||||
|
U.S.
Treasury
|
6,089 | -- | 6,089 | -- | ||||||||||||
|
U.S.
Government agencies
|
351,161 | -- | 351,161 | -- | ||||||||||||
|
Mortgage-backed
securities
|
2,879 | -- | 2,879 | -- | ||||||||||||
|
States
and political subdivisions
|
637 | -- | 637 | -- | ||||||||||||
|
Other
|
98,067 | 85,536 | 12,531 | -- | ||||||||||||
|
Assets
held in trading accounts
|
5,754 | 4,850 | 904 | -- | ||||||||||||
Certain
financial assets are measured at fair value on a nonrecurring basis; that is,
the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment). Financial assets measured at fair
value on a nonrecurring basis include the following:
Impaired loans (Collateral
Dependent) – Loan impairment is reported when full payment under the loan
terms is not expected. Allowable methods for determining the amount
of impairment include estimating fair value using the fair value of the
collateral for collateral-dependent loans. If the impaired loan is identified as
collateral dependent, then the fair value method of measuring the amount of
impairment is utilized. This method requires obtaining a current
independent appraisal of the collateral and applying a discount factor to the
value. A portion of the allowance for loan losses is allocated to
impaired loans if the value of such loans is deemed to be less than the unpaid
balance. If these allocations cause the allowance for loan losses to
require an increase, such increase is reported as a component of the provision
for loan losses. Loan losses are charged against the allowance when
management believes the uncollectability of a loan is
confirmed. Impaired loans that are collateral dependent are
classified within Level 3 of the fair value hierarchy when impairment is
determined using the fair value method.
Mortgage loans held for sale
– Mortgage loans held for sale are reported at fair value if, on an aggregate
basis, the fair value of the loans is less than cost. In determining
whether the fair value of loans held for sale is less than cost when quoted
market prices are not available, the Company may consider outstanding investor
commitments, discounted cash flow analyses with market assumptions or the fair
value of the collateral if the loan is collateral dependent. Such
loans are classified within either Level 2 or Level 3 of the fair value
hierarchy. Where assumptions are made using significant unobservable
inputs, such loans held for sale are classified as Level 3. At
December 31, 2009 and 2008, the aggregate fair value of mortgage loans held for
sale exceeded their cost. Accordingly, no mortgage loans held for
sale were marked down and reported at fair value.
77
The
following table sets forth the Company’s financial assets and liabilities by
level within the fair value hierarchy that were measured at fair value on a
non-recurring basis as of December 31, 2009 and 2008.
|
|
Fair Value Measurements Using | |||||||||||||||
|
Quoted
Prices in
|
||||||||||||||||
|
Active
Markets for
|
Significant
Other
|
Significant
|
||||||||||||||
|
Identical
Assets
|
Observable
Inputs
|
Unobservable
Inputs
|
||||||||||||||
|
(In thousands)
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
| December 31, 2009 |
|
|||||||||||||||
|
Impaired
loans
|
$ | 40,445 | $ | -- | $ | -- | $ | 40,445 | ||||||||
|
(collateral
dependent)
|
||||||||||||||||
| December 31, 2008 |
|
|||||||||||||||
|
Impaired
loans
|
12,992 | -- | -- | 12,992 | ||||||||||||
|
(collateral
dependent)
|
||||||||||||||||
ASC Topic
825, Financial
Instruments, requires disclosure in annual financial statements of the
fair value of financial assets and financial liabilities, including those
financial assets and financial liabilities that are not measured and reported at
fair value on a recurring basis or nonrecurring basis. The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments.
Cash and cash equivalents –
The carrying amount for cash and cash equivalents approximates fair
value.
Held-to-maturity securities –
Fair values for held-to-maturity securities equal quoted market prices, if
available. If quoted market prices are not available, fair values are
estimated based on quoted market prices of similar securities.
Loans – The fair value of
loans is estimated by discounting the future cash flows, using the current rates
at which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. Loans with similar
characteristics were aggregated for purposes of the calculations. The
carrying amount of accrued interest approximates its fair value.
Deposits – The fair value of
demand deposits, savings accounts and money market deposits is the amount
payable on demand at the reporting date (i.e., their carrying
amount). The fair value of fixed-maturity time deposits is estimated
using a discounted cash flow calculation that applies the rates currently
offered for deposits of similar remaining maturities. The carrying
amount of accrued interest payable approximates its fair value.
Federal Funds purchased, securities
sold under agreement to repurchase and short-term debt – The carrying
amount for Federal funds purchased, securities sold under agreement to
repurchase and short-term debt are a reasonable estimate of fair
value.
Long-term debt – Rates
currently available to the Company for debt with similar terms and remaining
maturities are used to estimate the fair value of existing debt.
Commitments to Extend Credit,
Letters of Credit and Lines of Credit – The fair value of commitments is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair values of letters of
credit and lines of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date.
78
The following table represents estimated fair values of the Company's financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows. This method involves significant judgments by management considering the uncertainties of economic conditions and other factors inherent in the risk management of financial instruments. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.
|
|
December 31, 2009 | December 31, 2008 | ||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(In thousands)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
|
Financial
assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 353,585 | $ | 353,585 | $ | 139,536 | $ | 139,536 | ||||||||
|
Held-to-maturity
securities
|
464,061 | 465,665 | 187,301 | 187,320 | ||||||||||||
|
Mortgage
loans held for sale
|
8,397 | 8,397 | 10,336 | 10,336 | ||||||||||||
|
Interest
receivable
|
17,881 | 17,881 | 20,930 | 20,930 | ||||||||||||
|
Loans,
net
|
1,849,973 | 1,844,509 | 1,907,233 | 1,904,421 | ||||||||||||
|
Financial
liabilities
|
||||||||||||||||
|
Non-interest
bearing transaction accounts
|
363,154 | 363,154 | 334,998 | 334,998 | ||||||||||||
|
Interest
bearing transaction accounts and
|
||||||||||||||||
|
savings
deposits
|
1,156,264 | 1,156,264 | 1,026,824 | 1,026,824 | ||||||||||||
|
Time
deposits
|
912,754 | 914,977 | 974,511 | 977,789 | ||||||||||||
|
Federal
funds purchased and securities
|
||||||||||||||||
|
sold
under agreements to repurchase
|
105,910 | 105,910 | 115,449 | 115,449 | ||||||||||||
|
Short-term
debt
|
3,640 | 3,640 | 1,112 | 1,112 | ||||||||||||
|
Long-term
debt
|
159,823 | 173,847 | 158,671 | 173,046 | ||||||||||||
|
Interest
payable
|
2,712 | 2,712 | 4,579 | 4,579 | ||||||||||||
The fair
value of commitments to extend credit and letters of credit is not presented
since management believes the fair value to be insignificant.
The
current economic environment presents financial institutions with continuing
circumstances and challenges which in some cases have resulted in large declines
in the fair values of investments and other assets, constraints on liquidity and
significant credit quality problems, including severe volatility in the
valuation of real estate and other collateral supporting loans. The
financial statements have been prepared using values and information currently
available to the Company.
Given the
volatility of current economic conditions, the values of assets and liabilities
recorded in the consolidated financial statements could change rapidly,
resulting in material future adjustments in asset values, the allowance for loan
losses and capital that could negatively impact the Company’s ability to meet
regulatory capital requirements and maintain sufficient liquidity.
Estimates
related to the allowance for loan losses and certain concentrations of credit
risk are reflected in Note 3, Loans and Allowance for Loan Losses, and Note 15,
Commitments and Credit Risk.
79
NOTE 15: COMMITMENTS AND CREDIT RISK
The Company grants agri-business, credit card, commercial and residential loans to customers throughout Arkansas. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
At
December 31, 2009, the Company had outstanding commitments to extend credit
aggregating approximately $262,257,000 and $393,437,000 for credit card
commitments and other loan commitments, respectively. At
December 31, 2008, the Company had outstanding commitments to extend credit
aggregating approximately $247,969,000 and $422,127,000 for credit card
commitments and other loan commitments, respectively.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Company had total
outstanding letters of credit amounting to $10,391,000 and $10,186,000 at
December 31, 2009 and 2008, respectively, with terms ranging from 90 days to
three years. The Company’s deferred revenue under standby letter of
credit agreements was approximately $46,000 and $52,000 at December 31 2009, and
2008, respectively.
At
December 31, 2009, the Company did not have concentrations of 5% or more of the
investment portfolio in bonds issued by a single municipality.
In June 2009, the Financial Accounting
Standards Board (“FASB”) issued an accounting standard which established the
Accounting Standards Codification (“Codification” or “ASC”) to become the single
source of authoritative U.S. generally accepted accounting principles (“GAAP”)
recognized by the FASB to be applied by nongovernmental entities, with the
exception of guidance issued by the SEC and its staff. All guidance
contained in the Codification carries an equal level of
authority. The Codification is not intended to change GAAP, but
rather is expected to simplify accounting research by reorganizing current GAAP
into approximately 90 accounting topics. The switch to the ASC
affects the away companies refer to GAAP in financial statements and accounting
policies. Citing particular content in the ASC involves specifying
the unique numeric path to the content through the Topic, Subtopic, Section and
Paragraph structure. The Company adopted this accounting standard in
preparing the Consolidated Financial Statements for the period ended September
30, 2009. The adoption of this accounting standard, which was
subsequently codified into ASC Topic 105, Generally Accepted Accounting
Principles, had no impact on the Company’s ongoing financial position or
results of operations.
New
authoritative accounting guidance under ASC Topic 715, Compensation – Retirement
Benefits, provides guidance related to an employer’s disclosures about
plan assets of defined benefit pension or other post-retirement benefit
plans. Under ASC Topic 715, disclosures should provide users of
financial statements with an understanding of how investment allocation
decisions are made, the factors that are pertinent to an understanding of
investment policies and strategies, the major categories of plan assets, the
inputs and valuation techniques used to measure the fair value of plan assets,
the effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period and significant concentrations of risk
within plan assets. The new authoritative accounting guidance under
ASC Topic 715 became effective for the Company’s financial statements for the
year-ended December 31, 2009, and did not have a material impact on the
Company’s ongoing financial position or results of operations.
80
Additional
new authoritative accounting guidance under ASC Topic 715, Compensation – Retirement
Benefits, requires the recognition of a liability and related
compensation expense for endorsement split-dollar life insurance policies that
provide a benefit to an employee that extends to post-retirement
periods. Under ASC Topic 715, life insurance policies purchased for
the purpose of providing such benefits do not effectively settle an entity’s
obligation to the employee. Accordingly, the entity must recognize a
liability and related compensation expense during the employee’s active service
period based on the future cost of insurance to be incurred during the
employee’s retirement. The Company adopted the new authoritative
accounting guidance under ASC Topic 715 on January 1, 2008, as a change in
accounting principle through a cumulative-effect adjustment to retained earnings
of approximately $1 million. The adoption of this guidance did not
have a material impact on the Company’s ongoing financial position or results of
operations.
New
authoritative accounting guidance under ASC Topic 810, Consolidation, amends prior
guidance to establish accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. ASC Topic 810 clarifies that a non-controlling interest
in a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among
other requirements, ASC Topic 810 requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling interest. It also requires disclosure, on the
face of the consolidated income statement, of the amounts of consolidated net
income attributable to the parent and to the non-controlling
interest. ASC Topic 810 was effective on January 1, 2009, and did not
have a significant impact on the Company’s ongoing financial position or results
of operations.
New
authoritative accounting guidance under ASC Topic 815, Derivatives and Hedging,
amends prior guidance to amend and enhance the disclosure requirements for
derivatives and hedging to provide greater transparency about (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and related
hedge items are accounted for under ASC Topic 815, and (iii) how derivative
instruments and related hedged items affect an entity’s financial position,
results of operations and cash flows. To meet those objectives, ASC
Topic 815 requires qualitative disclosures about objectives and strategies for
using derivative instruments, quantitative disclosures about fair values of
derivative instruments and their gains and losses and disclosures about
credit-risk-related contingent features of the derivative instruments and their
potential impact on an entity’s liquidity. ASC Topic 815 was
effective on January 1, 2009, and did not have a significant impact on the
Company’s ongoing financial position or results of operations.
New
authoritative accounting guidance under ASC Topic 855, Subsequent Events,
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued. ASC Topic 855 defines (i) the period after
the balance sheet date during which a reporting entity’s management should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, (ii) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and (iii) the disclosures an entity should
make about events or transactions that occurred after the balance sheet
date. ASC Topic 855 became effective for the Company’s financial
statements for periods ending after June 15, 2009, and did not have a
significant impact on the Company’s ongoing financial position or results of
operations.
New
authoritative accounting guidance under ASC Topic 820, Fair Value Measurements and
Disclosures, affirms that the objective of fair value when the market for
an asset is not active is the price that would be received to sell the asset in
an orderly transaction, and clarifies and includes additional factors for
determining whether there has been a significant decrease in market activity for
an asset when the market for that asset is not active. ASC Topic 820
requires an entity to base its conclusion about whether a transaction was not
orderly on the weight of the evidence. The new accounting guidance
amended prior guidance to expand certain disclosure requirements. The
Company adopted the new authoritative accounting guidance under ASC Topic 820
during the first quarter of 2009. Adoption of the new guidance did
not have a significant impact on the Company’s ongoing financial position or
results of operations.
Further
new authoritative accounting guidance (Accounting Standards Update No. 2009-5)
under ASC Topic 820 provides guidance for measuring the fair value of a
liability in circumstances in which a quoted price in an active market for the
identical liability is not available. In such instances, a reporting
entity is required to measure fair value utilizing a valuation technique that
uses (i) the quoted price of the identical liability when traded as an asset,
(ii) quoted prices for similar liabilities or similar liabilities when traded as
assets, or (iii) another valuation technique that is consistent with the
existing principles of ASC Topic 820, such as an income approach or market
approach. The new authoritative accounting guidance also clarifies
that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of the
liability. The foregoing new authoritative accounting guidance under
ASC Topic 820 became effective for the Company’s financial statements beginning
October 1, 2009, and did not have a significant impact on the Company’s ongoing
financial position or results of operations.
81
New
authoritative accounting guidance under ASC Topic 825, Financial Instruments,
requires an entity to provide disclosures about the fair value of financial
instruments in interim financial information and amends prior guidance to
require those disclosures in summarized financial information at interim
reporting periods. The Company adopted this accounting standard in
preparing its financial statements for the period ended June 30,
2009. As ASC Topic 825 amended only the disclosure requirements about
the fair value of financial instruments in interim periods, the adoption had no
impact on the Company’s ongoing financial position or results of
operations.
New
authoritative accounting guidance under ASC Topic 320, Investments – Debt and Equity
Securities, amended other-than-temporary impairment (“OTTI”) guidance in
GAAP for debt securities by requiring a write-down when fair value is below
amortized cost in circumstances where: (1) an entity has the intent to sell a
security; (2) it is more likely than not that an entity will be required to sell
the security before recovery of its amortized cost basis; or (3) an entity does
not expect to recover the entire amortized cost basis of the
security. If an entity intends to sell a security or if it is more
likely than not that the entity will be required to sell the security before
recovery, an OTTI write-down is recognized in earnings equal to the entire
difference between the security’s amortized cost basis and its fair
value. If an entity does not intend to sell the security or it is not
more likely than not that it will be required to sell the security before
recovery, the OTTI write-down is separated into an amount representing credit
loss, which is recognized in earnings, and an amount related to all other
factors, which is recognized in other comprehensive income. This
accounting standard does not amend existing recognition and measurement guidance
related to OTTI write-downs of equity securities. This accounting
standard also extends disclosure requirements related to debt and equity
securities to interim reporting periods. ASC Topic 320 became
effective for the Company’s financial statements for periods ending after June
15, 2009, and did not have a significant impact on the Company’s ongoing
financial position or results of operations.
On January
1, 2009, new authoritative accounting guidance under ASC Topic 805, Business Combinations, became
applicable to the Company’s accounting for business combinations closing on or
after January 1, 2009. ASC Topic 805 applies to all transactions and
other events in which one entity obtains control over one or more other
businesses. ASC Topic 805 requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process
required under previous accounting guidance whereby the cost of an acquisition
was allocated to the individual assets acquired and liabilities assumed based on
their estimated fair value. ASC Topic 805 requires acquirers to
expense acquisition-related costs as incurred rather than allocating such costs
to the assets acquired and liabilities assumed, as was previously the case under
prior accounting guidance. Assets acquired and liabilities assumed in
a business combination that arise from contingencies are to be recognized at
fair value if fair value can be reasonably estimated. If fair value
of such an asset or liability cannot be reasonably estimated, the asset or
liability would generally be recognized in accordance with ASC Topic 450, Contingencies. Under
ASC Topic 805, the requirements of ASC Topic 420, Exit or Disposal Cost
Obligations, would have to be met in order to accrue for a restructuring
plan in purchase accounting. Pre-acquisition contingencies are to be
recognized at fair value, unless it is a non-contractual contingency that is not
likely to materialize, in which case, nothing should be recognized in purchase
accounting and, instead, that contingency would be subject to the probable and
estimable recognition criteria of ASC Topic 450, Contingencies. Although the
Company has not entered into any business combinations since adopting ASC Topic
805 on January 1, 2009, the new accounting guidance is expected to have a
significant impact on the Company’s accounting for future business
combinations.
New
authoritative accounting guidance under ASC Topic 860, Transfers and Servicing,
amends prior accounting guidance to enhance reporting about transfers of
financial assets, including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. The
new authoritative accounting guidance eliminates the concept of a “qualifying
special-purpose entity” and changes the requirements for derecognizing financial
assets. The new authoritative accounting guidance also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 will be effective January 1, 2010, and is not
expected to have a significant impact on the Company’s ongoing financial
position or results of operations.
82
Presently,
the Company is not aware of any other changes to the Accounting Standards
Codification that will have a material impact on the Company’s present or future
financial position or results of operations.
NOTE
17: CONTINGENT LIABILITIES
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 were seeking $2,000,000 in
compensatory damages and $10,000,000 in punitive damages. The Company
and the banks filed Motions to Dismiss. The plaintiffs were granted
additional time to discover any evidence for litigation, and 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 was changed to Jefferson County for the Company and
Simmons First Bank of South Arkansas. Non-binding mediation failed on
June 24, 2008. A pretrial was conducted on July 24,
2008. Several dispositive motions previously filed were heard on
April 9, 2009, and arguments were presented on June 22, 2009. On July
10, 2009, the Court issued its Order dismissing five claims, leaving only a
single claim for further pursuit in this matter. On August 18, 2009,
Plaintiffs took a nonsuit on their remaining claim of breach of good faith and
fair dealing, thereby bringing all claims set forth in this action to a
conclusion.
Plaintiffs
subsequently filed their Notice of Appeal to the appellate court, have timely
lodged the transcript with the Supreme Court Clerk, and a briefing schedule has
been issued. The Company intends to contest the appeal and seek
affirmance of the Court's dismissal of Plaintiffs' claims. At this
time, no basis for any material liability has been identified.
In October
2007, the Company, as a member of Visa U.S.A. Inc. (Visa U.S.A.), received
shares of restricted stock in Visa, Inc. (Visa) as a result of its participation
in the global restructuring of Visa U.S.A., Visa Canada Association, and Visa
International Service Association in preparation for an initial public
offering. Visa U.S.A asserts that the Company and other Visa U.S.A.
member banks are obligated to share in potential losses resulting from certain
litigation. The Company accrued $1.2 million in 2007 in connection
with the Company’s obligation to indemnify Visa U.S.A. for costs and liabilities
incurred in connection with certain litigation based on the Company’s
proportionate membership interest in Visa U.S.A.
As part of
Visa’s IPO in the first quarter of 2008, Visa set aside a cash escrow fund for
future settlement of covered litigation. As a result, in the first
quarter of 2008, the Company reversed the $1.2 million contingent liability
established in 2007. On October 27, 2008, Visa notified its U.S.A.
members that it had reached a settlement on covered litigation with Discover
Financial Services, Inc. This obligation was covered by the
litigation escrow fund through an additional dilution of Visa Class B shares in
the fourth quarter of 2008. The remaining covered litigation against
Visa is primarily with card retailers and merchants, mostly related to fees and
interchange rates. As of December 31, 2009, the Company has no
litigation liability recorded for any additional contingent indemnification
obligation. The Company believes that it will not incur litigation
expense on the remaining litigation due to the value of its Visa Class B shares;
however, additional accruals may be required in future periods should the
Company’s estimate of its obligations under the indemnification agreement
change. The Company must rely on disclosures made by Visa to the
public about the covered litigation in making estimates of this contingent
indemnification obligation.
83
NOTE 18: STOCKHOLDERS’ EQUITY
The
Company’s subsidiaries are subject to a legal limitation on dividends that can
be paid to the parent company without prior approval of the applicable
regulatory agencies. The approval of the Office of the Comptroller of
the Currency is required if the total of all the dividends declared by a
national bank in any calendar year exceeds the total of its net profits, as
defined, for that year, combined with its retained net profits of the preceding
two years. Arkansas bank regulators have specified that the maximum
dividend limit state banks may pay to the parent company without prior approval
is 75% of the current year earnings plus 75% of the retained net earnings of the
preceding year. At December 31, 2009, the Company subsidiaries
had approximately $15.2 million in undivided profits available for payment of
dividends to the Company without prior approval of the regulatory
agencies.
The
Company’s subsidiaries are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company’s assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Company’s capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company to maintain minimum amounts and ratios (set forth in the table below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier 1 capital (as defined) to average assets (as
defined). Management believes that, as of December 31, 2009, the
Company meets all capital adequacy requirements to which it is
subject.
As of the
most recent notification from regulatory agencies, the subsidiaries were well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Company and
subsidiaries must maintain minimum total risk-based, Tier 1 risk-based and Tier
1 leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
institutions’ categories.
84
The
Company’s actual capital amounts and ratios along with the Company’s most
significant subsidiaries are presented in the following table.
| To Be Well | ||||||||||||||||||||||||
| Minimum | Capitalized Under | |||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provision | ||||||||||||||||||||||
|
(In thousands)
|
Amount
|
Ratio-%
|
Amount
|
Ratio-%
|
Amount
|
Ratio-%
|
||||||||||||||||||
|
As
of December 31, 2009
|
||||||||||||||||||||||||
|
Total
Risk-Based Capital Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
$ | 373,766 | 19.2 | $ | 155,736 | 8.0 | $ | N/A | ||||||||||||||||
|
Simmons
First National Bank
|
115,945 | 12.2 | 76,030 | 8.0 | 95,037 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
29,832 | 12.0 | 19,888 | 8.0 | 24,860 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
25,726 | 21.0 | 9,800 | 8.0 | 12,250 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
29,275 | 14.9 | 15,718 | 8.0 | 19,648 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado, N.A.
|
21,056 | 14.4 | 11,698 | 8.0 | 14,622 | 10.0 | ||||||||||||||||||
|
Tier
1 Capital Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
349,357 | 17.9 | 78,069 | 4.0 | N/A | |||||||||||||||||||
|
Simmons
First National Bank
|
106,740 | 11.2 | 38,121 | 4.0 | 57,182 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
27,124 | 10.9 | 9,954 | 4.0 | 14,931 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
24,189 | 19.7 | 4,911 | 4.0 | 7,367 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
26,811 | 13.6 | 7,886 | 4.0 | 11,828 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado, N.A.
|
19,793 | 13.5 | 5,865 | 4.0 | 8,797 | 6.0 | ||||||||||||||||||
|
Leverage
Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
349,357 | 11.6 | 120,468 | 4.0 | N/A | |||||||||||||||||||
|
Simmons
First National Bank
|
106,740 | 6.8 | 62,788 | 4.0 | 78,485 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
27,124 | 8.7 | 12,471 | 4.0 | 15,589 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
24,189 | 13.2 | 7,330 | 4.0 | 9,163 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
26,811 | 9.9 | 10,833 | 4.0 | 13,541 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado, N.A.
|
19,793 | 6.9 | 11,474 | 4.0 | 14,343 | 5.0 | ||||||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Total
Risk-Based Capital Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
$ | 287,594 | 14.5 | $ | 158,673 | 8.0 | $ | N/A | ||||||||||||||||
|
Simmons
First National Bank
|
112,220 | 11.6 | 77,393 | 8.0 | 96,741 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
27,532 | 11.9 | 18,509 | 8.0 | 23,136 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
24,639 | 19.4 | 10,160 | 8.0 | 12,701 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
24,358 | 11.4 | 17,093 | 8.0 | 21,367 | 10.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado, N.A.
|
20,325 | 13.4 | 12,134 | 8.0 | 15,168 | 10.0 | ||||||||||||||||||
|
Tier
1 Capital Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
262,568 | 13.2 | 79,566 | 4.0 | N/A | |||||||||||||||||||
|
Simmons
First National Bank
|
102,412 | 10.6 | 38,646 | 4.0 | 57,969 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
24,891 | 10.7 | 9,305 | 4.0 | 13,958 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
23,051 | 18.2 | 5,066 | 4.0 | 7,599 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
21,669 | 10.1 | 8,582 | 4.0 | 12,873 | 6.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado, N.A.
|
18,790 | 12.4 | 6,061 | 4.0 | 9,092 | 6.0 | ||||||||||||||||||
|
Leverage
Ratio
|
||||||||||||||||||||||||
|
Simmons
First National Corporation
|
262,568 | 9.1 | 115,415 | 4.0 | N/A | |||||||||||||||||||
|
Simmons
First National Bank
|
102,412 | 7.3 | 56,116 | 4.0 | 70,145 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Jonesboro
|
24,891 | 8.4 | 11,853 | 4.0 | 14,816 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Russellville
|
23,051 | 11.5 | 8,018 | 4.0 | 10,022 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of Northwest Arkansas
|
21,669 | 7.7 | 11,257 | 4.0 | 14,071 | 5.0 | ||||||||||||||||||
|
Simmons
First Bank of El Dorado, N.A.
|
18,790 | 7.3 | 10,296 | 4.0 | 12,870 | 5.0 | ||||||||||||||||||
85
NOTE
19: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
CONDENSED
BALANCE SHEETS
DECEMBER
31, 2009 and 2008
|
(In thousands)
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 29,439 | $ | 19,890 | ||||
|
Investment
securities
|
62,851 | 2,401 | ||||||
|
Investments
in wholly-owned subsidiaries
|
303,183 | 291,392 | ||||||
|
Intangible
assets, net
|
147 | 158 | ||||||
|
Premises
and equipment
|
716 | 796 | ||||||
|
Other
assets
|
6,950 | 7,079 | ||||||
|
TOTAL
ASSETS
|
$ | 403,286 | $ | 321,716 | ||||
|
LIABILITIES
|
||||||||
|
Long-term
debt
|
$ | 30,930 | $ | 30,930 | ||||
|
Other
liabilities
|
1,109 | 1,994 | ||||||
|
Total
liabilities
|
32,039 | 32,924 | ||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Common
stock
|
171 | 140 | ||||||
|
Surplus
|
111,694 | 40,807 | ||||||
|
Undivided
profits
|
258,620 | 244,655 | ||||||
|
Accumulated
other comprehensive income
|
||||||||
|
Unrealized
appreciation on available-for-sale
|
||||||||
|
securities,
net of income taxes of $457 at 2009
|
||||||||
|
and
$1,913 at 2008
|
762 | 3,190 | ||||||
|
Total
stockholders’ equity
|
371,247 | 288,792 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 403,286 | $ | 321,716 | ||||
CONDENSED
STATEMENTS OF INCOME
YEARS
ENDED DECEMBER 31, 2009, 2008 and 2007
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
INCOME
|
||||||||||||
|
Dividends
from subsidiaries
|
$ | 20,082 | $ | 27,705 | $ | 21,548 | ||||||
|
Other
income
|
6,308 | 6,015 | 6,288 | |||||||||
| 26,390 | 33,720 | 27,836 | ||||||||||
|
EXPENSE
|
12,201 | 10,969 | 10,797 | |||||||||
|
Income
before income taxes and equity in
|
||||||||||||
|
undistributed
net income of subsidiaries
|
14,189 | 22,751 | 17,039 | |||||||||
|
Provision
for income taxes
|
(1,931 | ) | (1,799 | ) | (1,438 | ) | ||||||
|
Income
before equity in undistributed net
|
||||||||||||
|
income
of subsidiaries
|
16,120 | 24,550 | 18,477 | |||||||||
|
Equity
in undistributed net income of subsidiaries
|
9,090 | 2,360 | 8,883 | |||||||||
|
NET
INCOME
|
$ | 25,210 | $ | 26,910 | $ | 27,360 | ||||||
86
CONDENSED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2009, 2008 and 2007
|
(In thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 25,210 | $ | 26,910 | $ | 27,360 | ||||||
|
Items
not requiring (providing) cash
|
||||||||||||
|
Depreciation
and amortization
|
251 | 265 | 298 | |||||||||
|
Deferred
income taxes
|
(411 | ) | 1,122 | 33 | ||||||||
|
Equity
in undistributed income of bank subsidiaries
|
(9,090 | ) | (2,360 | ) | (8,883 | ) | ||||||
|
Changes
in
|
||||||||||||
|
Other
assets
|
(202 | ) | (295 | ) | 366 | |||||||
|
Other
liabilities
|
(885 | ) | (2,763 | ) | 505 | |||||||
|
Net
cash provided by operating activities
|
14,873 | 22,879 | 19,679 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Net
(purchases) sales of premises and equipment
|
(172 | ) | 1,431 | (126 | ) | |||||||
|
Additional
investment in subsidiary
|
(5,000 | ) | -- | -- | ||||||||
|
Purchase
of held-to-maturity securities
|
-- | (19 | ) | (74 | ) | |||||||
|
Purchase
of available-for-sale securities
|
(59,825 | ) | (1,511 | ) | -- | |||||||
|
Proceeds
from sale or maturity of investment securities
|
-- | 1,481 | -- | |||||||||
|
Net
cash provided by (used in) investing activities
|
(64,997 | ) | 1,382 | (200 | ) | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Principal
reduction on long-term debt
|
-- | -- | (2,000 | ) | ||||||||
|
Issuance
(repurchase) of common stock, net
|
70,918 | (212 | ) | (7,661 | ) | |||||||
|
Dividends
paid
|
(11,245 | ) | (10,601 | ) | (10,234 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
59,673 | (10,813 | ) | (19,895 | ) | |||||||
|
INCREASE (DECREASE) IN CASH
AND
|
||||||||||||
|
CASH
EQUIVALENTS
|
9,549 | 13,448 | (416 | ) | ||||||||
|
CASH
AND CASH EQUIVALENTS,
|
||||||||||||
|
BEGINNING
OF YEAR
|
19,890 | 6,442 | 6,858 | |||||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$ | 29,439 | $ | 19,890 | $ | 6,442 | ||||||
87
ITEM
9.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
No items
are reportable.
ITEM
9A. CONTROLS AND
PROCEDURES
(a)
Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and Chief Financial Officer have reviewed and evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
15 C. F. R. 240.13a-14(c) and 15 C. F. R. 240.15-14(c)) as of the end of the
period covered by this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are effective.
(b)
Changes in Internal Controls. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect those controls subsequent to the date of evaluation.
ITEM
9B. OTHER
INFORMATION
No items
are reportable.
ITEM
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 20, 2010, to be filed pursuant to
Regulation 14A on or about March 18, 2010.
ITEM
11. EXECUTIVE
COMPENSATION
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 20, 2010, to be filed pursuant to
Regulation 14A on or about March 18, 2010.
ITEM
12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 20, 2010, to be filed pursuant to
Regulation 14A on or about March 18, 2010.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 20, 2010, to be filed pursuant to
Regulation 14A on or about March 18, 2010.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held April 20, 2010, to be filed pursuant to
Regulation 14A on or about March 18, 2010.
88
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a) 1 and
2. Financial Statements and any Financial Statement
Schedules
The
financial statements and financial statement schedules listed in the
accompanying index to the consolidated financial statements and financial
statement schedules are filed as part of this report.
(b)
Listing of Exhibits
|
Exhibit
No.
|
Description
|
|
|
3.1
|
Restated
Articles of Incorporation of Simmons First National Corporation
(incorporated by reference to Exhibit 3.1 to Simmons First National
Corporation’s Quarterly Report on Form 10-Q for the Quarter ended March
31, 2009 (File No. 6253)).
|
|
|
3.2
|
Amended
By-Laws of Simmons First National Corporation (incorporated by reference
to Exhibit 3.2 to Simmons First National Corporation’s Annual Report on
Form 10-K for the Year ended December 31, 2007 (File No.
6253)).
|
|
|
10.1
|
Amended
and Restated Trust Agreement, dated as of December 16, 2003, among the
Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company
Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as
administrative trustees, with respect to Simmons First Capital Trust II
(incorporated by reference to Exhibit 10.1 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.2
|
Guarantee
Agreement, dated as of December 16, 2003, between the Company and Deutsche
Bank Trust Company Americas, as guarantee trustee, with respect to Simmons
First Capital Trust II (incorporated by reference to Exhibit 10.2 to
Simmons First National Corporation’s Annual Report on Form 10-K for the
Year ended December 31, 2003 (File No. 6253)).
|
|
|
10.3
|
Junior
Subordinated Indenture, dated as of December 16, 2003, among the Company
and Deutsche Bank Trust Company Americas, as trustee, with respect to the
junior subordinated note held by Simmons First Capital Trust II
(incorporated by reference to Exhibit 10.3 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.4
|
Amended
and Restated Trust Agreement, dated as of December 16, 2003, among the
Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company
Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as
administrative trustees, with respect to Simmons First Capital Trust III
(incorporated by reference to Exhibit 10.4 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.5
|
Guarantee
Agreement, dated as of December 16, 2003, between the Company and Deutsche
Bank Trust Company Americas, as guarantee trustee, with respect to Simmons
First Capital Trust III (incorporated by reference to Exhibit 10.5 to
Simmons First National Corporation’s Annual Report on Form 10-K for the
Year ended December 31, 2003 (File No.
6253)).
|
89
|
10.6
|
Junior
Subordinated Indenture, dated as of December 16, 2003, among the Company
and Deutsche Bank Trust Company Americas, as trustee, with respect to the
junior subordinated note held by Simmons First Capital Trust III
(incorporated by reference to Exhibit 10.6 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.7
|
Amended
and Restated Trust Agreement, dated as of December 16, 2003, among the
Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company
Delaware and each of J. Thomas May, Barry L. Crow and Bob Fehlman as
administrative trustees, with respect to Simmons First Capital Trust IV
(incorporated by reference to Exhibit 10.7 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
10.8
|
Guarantee
Agreement, dated as of December 16, 2003, between the Company and Deutsche
Bank Trust Company Americas, as guarantee trustee, with respect to Simmons
First Capital Trust IV (incorporated by reference to Exhibit 10.8 to
Simmons First National Corporation’s Annual Report on Form 10-K for the
Year ended December 31, 2003 (File No. 6253)).
|
|
|
10.9
|
Junior
Subordinated Indenture, dated as of December 16, 2003, among the Company
and Deutsche Bank Trust Company Americas, as trustee, with respect to the
junior subordinated note held by Simmons First Capital Trust IV
(incorporated by reference to Exhibit 10.9 to Simmons First National
Corporation’s Annual Report on Form 10-K for the Year ended December 31,
2003 (File No. 6253)).
|
|
|
12.1
|
Computation
of Ratios of Earnings to Fixed Charges.*
|
|
|
14
|
Code
of Ethics, dated December 2003, for CEO, CFO, controller and other
accounting officers (incorporated by reference to Exhibit 14 to Simmons
First National Corporation’s Annual Report on Form 10-K for the Year ended
December 31, 2003 (File No. 6253)).
|
|
| 23 | Consent of BKD, LLP.* | |
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification – J. Thomas May, Chairman and Chief
Executive Officer.*
|
|
|
|
||
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification – Robert A. Fehlman, Executive Vice
President and Chief Financial Officer.*
|
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 – J. Thomas May, Chairman and Chief
Executive Officer.*
|
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 – Robert A. Fehlman, Executive Vice
President and Chief Financial Officer.*
|
|
| * Filed herewith. | ||
90
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
/s/ John L. Rush
|
|
March
2, 2010
|
|
|
John
L. Rush, Secretary
|
|||
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on or about March 2, 2010.
|
Signature
|
Title
|
|
|
/s/ J. Thomas May
|
Chairman
and Chief Executive Officer
|
|
|
J.
Thomas May
|
and
Director
|
|
|
/s/ Robert A. Fehlman
|
Executive
Vice President and Chief Financial Officer
|
|
|
Robert
A. Fehlman
|
(Principal
Financial and Accounting Officer)
|
|
|
/s/ William E. Clark II
|
Director
|
|
|
William
E. Clark II
|
||
|
/s/ Steven A. Cossé
|
Director
|
|
|
Steven
A. Cossé
|
||
|
/s/ Edward Drilling
|
Director
|
|
|
Edward
Drilling
|
||
|
/s/ Eugene Hunt
|
Director
|
|
|
Eugene
Hunt
|
||
|
/s/ George A. Makris, Jr.
|
Director
|
|
|
George
A. Makris, Jr.
|
||
|
/s/ W. Scott McGeorge
|
Director
|
|
|
W.
Scott McGeorge
|
||
|
/s/ Stanley E. Reed
|
Director
|
|
|
Stanley
E. Reed
|
||
|
/s/ Harry L. Ryburn
|
Director
|
|
|
Harry
L. Ryburn
|
||
|
/s/ Robert L. Shoptaw
|
Director
|
|
|
Robert
L. Shoptaw
|
91