SIMMONS FIRST NATIONAL CORPORATION Financial Statements (Form 10-Q) September 30, 1998
See Notes to Consolidated Financial Statements. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1998 Commission File Number 06253 ------------------ ----- SIMMONS FIRST NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Arkansas 71-0407808 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 501 Main Street, Pine Bluff, Arkansas 71601 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 870-541-1350 Not Applicable Former name, former address and former fiscal year, if changed since last report 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) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of issuer's classes of common stock. Class A, Common 5,742,924 Class B, Common None
SIMMONS FIRST NATIONAL CORPORATION INDEX Page No. Part I: Summarized Financial Information Consolidated Balance Sheets -- September 30, 1998 and December 31, 1997 3-4 Consolidated Statements of Income -- Three months and nine months ended September 30, 1998 and 1997 5 Consolidated Statements of Cash Flows -- Nine months ended September 30, 1998 and 1997 6 Consolidated Statements of Changes in Stockholders' Equity Nine months ended September 30, 1998 and 1997 7 Notes to Consolidated Financial Statements 8-18 Management's Discussion and Analysis of Financial Condition and Results of Operations 19-22 Review by Independent Certified Public Accountants 23 Part II: Other Information 24-25
Part I: Summarized Financial Information <TABLE> Simmons First National Corporation Consolidated Balance Sheets September 30, 1998 and December 31, 1997 ASSETS <CAPTION> September 30, December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> Cash and non-interest bearing balances due from banks $ 33,153 $ 58,327 Interest bearing balances due from banks 3,777 4,106 Federal funds sold and securities purchased under agreements to resell 33,300 64,565 ----------- ---------- Cash and cash equivalents 70,230 126,998 Investment securities 306,728 316,365 Mortgage loans held for sale 9,203 8,758 Assets held in trading accounts 10,361 449 Loans 851,762 794,183 Allowance for loan losses (14,922) (12,628) ----------- ------------ Net loans 836,840 781,555 Premises and equipment 31,140 28,621 Foreclosed assets held for sale, net 820 1,099 Interest receivable 12,670 12,047 Mortgage servicing rights, net -- 6,703 Intangible assets, net 29,186 30,834 Other assets 11,387 12,716 ----------- ---------- TOTAL ASSETS $ 1,318,565 $ 1,326,145 ========== ========== </TABLE> The December 31, 1997 Consolidated Balance Sheet is as reported in the Company's 1997 Annual Report to the Stockholders.
<TABLE> Simmons First National Corporation Consolidated Balance Sheets September 30, 1998 and December 31, 1997 LIABILITIES AND STOCKHOLDERS' EQUITY <CAPTION> September 30, December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> LIABILITIES Non-interest bearing transaction accounts $ 141,204 $ 154,544 Interest bearing transaction accounts and savings deposits 339,811 337,133 Time deposits 609,609 612,824 ----------- ----------- Total deposits 1,090,624 1,104,501 Federal funds purchased and securities sold under agreements to repurchase 43,302 40,733 Short-term debt 1,669 4,589 Long-term debt 46,214 50,281 Accrued interest and other liabilities 16,491 13,959 ----------- ----------- Total liabilities 1,198,300 1,214,063 ----------- ----------- STOCKHOLDERS' EQUITY Capital stock Class A, common, par value $1 a share, authorized 30,000,000 shares (authorized 10,000,000 shares in 1997), 5,742,924 issued and outstanding at 1998 and 5,726,212 at 1997 5,743 5,726 Surplus 45,320 45,059 Undivided profits 67,222 59,891 Unrealized appreciation on available-for-sale securities, net of income taxes of $1,126 at 1998 and $799 at 1997 1,980 1,406 ----------- --------- Total stockholders' equity 120,265 112,082 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,318,565 $ 1,326,145 ========== =========== </TABLE> The December 31, 1997 Consolidated Balance Sheetis as reported in the Company's 1997 Annual Report to the Stockholders.
<TABLE> Simmons First National Corporation Consolidated Statements of Income Three Months and Nine Months Ended September 30, 1998 and 1997 <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share data) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> <C> <C> INTEREST INCOME Loans $ 19,979 $ 16,593 $ 56,474 $ 40,272 Federal funds sold and securities purchased under agreements to resell 499 321 2,351 1,431 Investment securities 4,702 4,374 14,530 11,791 Mortgage loans held for sale, net of unrealized gains (losses) 148 81 381 277 Assets held in trading accounts 11 76 71 124 Interest bearing balances due from banks 79 46 283 184 ---------- --------- --------- -------- TOTAL INTEREST INCOME 25,418 21,491 74,090 54,079 ---------- --------- --------- -------- INTEREST EXPENSE Deposits 11,015 9,397 32,774 22,793 Federal funds purchased and securities sold under agreements to repurchase 598 367 1,908 1,315 Short-term debt 27 228 74 292 Long-term debt 978 663 2,949 745 ---------- --------- --------- -------- TOTAL INTEREST EXPENSE 12,618 10,655 37,705 25,145 ---------- --------- --------- -------- NET INTEREST INCOME 12,800 10,836 36,385 28,934 Provision for loan losses 1,249 1,111 6,098 2,756 ---------- --------- --------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,551 9,725 30,287 26,178 ---------- --------- --------- -------- NON-INTEREST INCOME Trust income 851 706 2,412 1,833 Service charges on deposit accounts 1,412 1,159 4,087 2,763 Other service charges and fees 415 277 1,114 976 Income on sale of mortgage loans, net of commissions 147 119 351 342 Income on investment banking, net of commissions (38) 344 779 746 Credit card fees 2,463 2,406 6,981 6,893 Mortgage servicing and mortgage-related fees 932 1,779 4,599 5,243 Other income 477 424 1,018 948 Gain on sale of mortgage servicing -- -- 3,273 -- Gains on sale of securities, net -- (1) 4 (1) ---------- --------- --------- -------- TOTAL NON-INTEREST INCOME 6,659 7,213 24,618 19,743 ---------- --------- --------- -------- NON-INTEREST EXPENSE Salaries and employee benefits 6,813 6,083 20,792 17,232 Occupancy expense, net 850 751 2,509 1,969 Furniture and equipment expense 927 864 2,757 2,333 Loss on foreclosed assets 131 156 563 735 Other operating expenses 4,226 4,278 14,164 11,259 ---------- --------- --------- -------- TOTAL NON-INTEREST EXPENSE 12,947 12,132 40,785 33,528 ---------- -------- --------- -------- INCOME BEFORE INCOME TAXES 5,263 4,806 14,120 12,393 Provision for income taxes 1,506 1,420 4,093 3,605 ---------- -------- --------- -------- NET INCOME $ 3,757 $ 3,386 $ 10,027 $ 8,788 ========= ======== ======== ======= BASIC EARNINGS PER SHARE $ 0.65 $ 0.59 $ 1.74 $ 1.53 ========= ======== ======== ======= DILUTED EARNINGS PER SHARE $ 0.64 $ 0.58 $ 1.71 $ 1.51 ========= ======== ======== ======= </TABLE>
<TABLE> Simmons First National Corporation Consolidated Statements of Cash Flows Nine Months Ended September 30, 1998 and 1997 <CAPTION> September 30, September 30, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,027 $ 8,788 Items not requiring (providing) cash Depreciation and amortization 4,845 4,090 Provision for loan losses 6,098 2,756 Net (accretion) amortization of investment securities (372) 104 Deferred income taxes (1,455) (280) Provision for foreclosed assets 239 97 Gain on sale of mortgage servicing (3,273) -- (Gains) losses on sale of securities, net (4) 1 Gains on sale of premises and equipment -- (1) Changes in Interest receivable (623) 622 Mortgage loans held for sale (445) 5,124 Assets held in trading accounts (9,912) 92 Other assets (325) 6,595 Accrued interest and other liabilities 2,896 891 Income taxes payable (179) 562 --------- --------- Net cash provided by operating activities 7,517 29,441 --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Net originations of loans (61,792) (74,495) Sale of mortgage servicing 11,677 -- Purchase of institutions, net of funds acquired -- (16,040) Purchase of premises and equipment (4,578) (2,392) Proceeds from sale of premises and equipment 85 859 Proceeds from sale of foreclosed assets 449 147 Proceeds from sale of available-for-sale securities -- 849 Proceeds from maturities of available-for-sale securities 144,079 182,597 Purchases of available-for-sale securities (140,221) (179,642) Proceeds from maturities of held-to-maturity securities 45,048 23,091 Purchases of held-to-maturity securities (38,319) (10,540) ---------- ----------- Net cash used in investing activities (43,572) (75,566) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in deposits (13,877) 31,775 Net (repayments) advances of short-term debt (2,920) 14,195 Dividends paid (2,696) (2,345) Proceeds from issuance of long-term debt -- 37,250 Repayments of long-term debt (4,067) (263) Net increase in federal funds purchased and securities sold under agreements to repurchase 2,569 (4,843) Issuance of common stock, net 278 114 --------- ---------- Net cash (used in) provided by financing activities (20,713) 75,883 --------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (56,768) 29,758 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 126,998 69,281 --------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 70,230 $ 99,039 ========= ========== </TABLE>
<TABLE> Simmons First National Corporation Consolidated Statements of Changes in Stockholders' Equity Nine Months Ended September 30, 1998 and 1997 <CAPTION> Unrealized Appreciation On Available- Common For-Sale Undivided (In thousands) Stock Surplus Securities, Net Profits Total - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Balance, December 31, 1996 $ 28,527 $ 22,040 $ 1,152 $ 51,106 $ 102,825 Comprehensive income Net income 8,788 8,788 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $82 145 145 ---------- Comprehensive income 8,933 Common stock par value change (22,822) 22,822 Exercise of stock options--21,300 shares 21 156 177 Securities exchanged under stock option plan (2) (61) (63) Cash dividends declared ($0.41 per share) (2,345) (2,345) -------- -------- ---------- -------- ---------- Balance, September 30, 1997 5,724 44,957 1,297 57,549 109,527 Comprehensive income Net income 3,201 3,201 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $62 109 109 ---------- Comprehensive income 3,310 Exercise of stock options--1,800 shares 2 102 104 Cash dividends declared ($0.15 per share) (859) (859) -------- -------- ---------- -------- --------- Balance, December 31, 1997 5,726 45,059 1,406 59,891 112,082 Comprehensive income Net income 10,027 10,027 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $327 574 574 ---------- Comprehensive income 10,601 Exercise of stock options--17,200 shares 17 284 301 Securities exchanged under stock option plan (23) (23) Cash dividends declared ($0.47 per share) (2,696) (2,696) -------- -------- ---------- -------- --------- Balance, September 30, 1998 $ 5,743 $ 45,320 $ 1,980 $ 67,222 $ 120,265 ======== ======== ========== ======== ========= </TABLE>
SIMMONS FIRST NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: ACCOUNTING POLICIES 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. All adjustments made to the unaudited financial statements were of a normal recurring nature. In the opinion of management, all adjustments necessary for a fair presentation of the results of interim periods have been made. Certain prior year amounts are reclassified to conform to current year classification. The accounting policies followed in the presentation of interim financial results are presented on pages 24-27 of the 1997 Annual Report to shareholders. Earnings Per Share Effective December 15, 1997, the Company adopted the provisions of SFAS No. 128, Earnings Per Share (EPS), which requires dual presentation of basic and diluted EPS for all entities with complex capital structures. Basic earnings per share is computed based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is computed using the weighted average common shares and all potential dilutive common shares outstanding during the period. The computation of per share earnings for the nine months ended September 30, 1998 and 1997 is as follows: <TABLE> <CAPTION> (In thousands, except per share data) 1998 1997 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net Income $ 10,027 $ 8,788 --------- -------- Average common shares outstanding 5,736 5,717 Average common share stock options outstanding 117 80 --------- ------- Average diluted common shares 5,853 5,797 --------- ------- Basic earnings per share $ 1.74 $ 1.53 ======== ======= Diluted earnings per share $ 1.71 $ 1.51 ======== ======= </TABLE>
NOTE 2: ACQUISITIONS On August 1, 1997, Simmons First National Corporation acquired all the outstanding capital stock of First Bank of Arkansas, Searcy, Arkansas and First Bank of Arkansas, Russellville, Arkansas, in a cash purchase transaction of $53 million. The banks acquired had consolidated assets, as adjusted of $362 million, as of August 1, 1997. On July 24, 1998, an announcement was made jointly by the Chief Executive Officers of both the Company and American Bancshares of Arkansas, Inc. ("ABA") regarding the execution of a definitive agreement under the terms of which ABA will be merged into the Company in a transaction valued at approximately $21,850,000. Stockholders of ABA will receive Simmons First National Corporation stock in exchange for ABA shares in the transaction. The transaction is expected to close in late 1998. ABA owns American State Bank ("ASB"), Charleston, Arkansas with consolidated assets, as of June 30, 1998, of $87 million. As a part of the transaction ASB will be merged into Simmons First National Bank during early 1999. On August 25, 1998, an announcement was made jointly by the Chief Executive Officers of both the Company and Lincoln Bankshares, Inc. ("LBI") regarding the execution of a definitive agreement under the terms of which LBI will be merged into the Company. Stockholders of LBI will receive 301,833 shares of Simmons First National Corporation stock in exchange for LBI shares in the transaction. The transaction is expected to close in early 1999. LBI owns Bank of Lincoln, Lincoln, Arkansas with consolidated assets, as of June 30, 1998, of $75 million. As a part of the transaction Bank of Lincoln will be merged into Simmons First Bank of Northwest Arkansas during early 1999.
NOTE 3: 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: <TABLE> <CAPTION> September 30, December 31, 1998 1997 Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair (In thousands) Cost Gains (Losses) Value Cost Gains (Losses) Value - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Held-to-Maturity U.S. Treasury $ 14,950 $ 295 $ -- $ 15,245 $ 17,610 $ 158 $ (37) $ 17,731 U.S. Government agencies 44,745 594 (3) 45,336 55,662 462 (61) 56,063 Mortgage-backed securities 2,562 34 (3) 2,593 3,350 14 (30) 3,334 State and political subdivisions 87,001 2,275 (131) 89,145 79,039 1,638 (284) 80,393 Other securities 94 3 -- 97 229 2 -- 231 --------- ------ ----- --------- --------- ------ ------ --------- $ 149,352 $ 3,201 $ (137) $ 152,416 $ 155,890 $ 2,274 $ (412) $ 157,752 ========= ====== ====== ========= ========= ====== ======= ========= Available-for-Sale U.S. Treasury $ 53,413 $ 1,197 $ -- $ 54,610 $ 70,402 $ 763 $ (24) $ 71,141 U.S. Government agencies 94,331 563 (6) 94,888 80,812 298 (50) 81,060 State and political subdivisions 442 4 -- 446 451 -- -- 451 Other securities 6,083 1,349 -- 7,432 6,601 1,222 -- 7,823 --------- ------ ----- --------- --------- ------ ------ --------- $ 154,269 $ 3,113 $ (6) $ 157,376 $ 158,266 $ 2,283 $ (74) $ 160,475 ========= ====== ====== ========= ========= ====== ======= ========= </TABLE> The carrying value, which approximates the market value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $192,162,000 at September 30, 1998 and $170,047,000 at December 31, 1997. The book value of securities sold under agreements to repurchase amounted to $17,182,000 and $8,413,000 for September 30, 1998 and December 31, 1997, respectively.
Income earned on securities for the nine months ended September 30, 1998 and 1997 is as follows: <TABLE> <CAPTION> (In thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> Taxable Held-to-maturity $ 3,592 $ 3,310 Available-for-sale 7,796 5,929 Non-taxable Held-to-maturity 3,128 2,549 Available-for-sale 14 3 -------- ----- Total $ 14,530 $ 11,791 ======== ======= </TABLE> Maturities of investment securities at September 30, 1998 are as follows: <TABLE> <CAPTION> Held-to-Maturity Available-for-Sale Amortized Fair Amortized Fair (In thousands) Cost Value Cost Value <S> <C> <C> <C> <C> One year or less $ 19,531 $ 19,600 $ 41,904 $ 42,169 After one through five years 71,750 72,935 79,364 80,377 After five through ten years 48,121 49,135 26,918 27,398 After ten years 7,294 8,056 -- -- Mortgage-backed securities not due on a single date 2,562 2,593 -- -- Other securities 94 97 6,083 7,432 ---------- ---------- ---------- --------- Total $ 149,352 $ 152,416 $ 154,269 $ 157,376 ========== ========== ========== ========= </TABLE> The gross realized gains of $4,000 and $2,000 and gross realized losses of $0 and $3,000 at September 30, 1998 and 1997, respectively, were the result of called bonds in 1998 and sold available-for-sale securities in 1997. Proceeds from sales of available-for-sale securities in 1997 were $849,000. Most of the state and political subdivision debt obligations are non-rated bonds and represent small, Arkansas issues, which are evaluated on an ongoing basis.
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES The various categories are summarized as follows: <TABLE> <CAPTION> September 30, December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> Consumer Credit cards $ 161,152 $ 179,828 Student loans 62,726 63,291 Other consumer 127,806 112,754 Real estate Construction 52,394 43,212 Single family residential 132,633 122,581 Other commercial 140,750 118,112 Commercial Commercial 108,930 110,480 Agricultural 50,885 31,161 Financial institutions 6,323 6,073 Other 8,163 6,691 ------------ ----------- Total loans before allowance for loan losses $ 851,762 $ 794,183 ============ =========== </TABLE> During the first nine months of 1998, foreclosed assets held for sale decreased $279,000 to $820,000 and are carried at the lower of cost or fair market value. Non-performing assets, non-accrual loans and other non-performing loans for the Company at September 30, 1998, were $61,000, $4,215,000 and $2,450,000, respectively, bringing the total of non-performing assets to $7,546,000.
Transactions in the allowance for loan losses are as follows: <TABLE> <CAPTION> September 30, December 31, (In thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> Balance, beginning of year $ 12,628 $ 8,366 Additions Allowance for loan losses of acquired institutions -- 4,028 Provision charged to expense 6,098 2,756 --------- -------- 18,726 15,150 Deductions Losses charged to allowance, net of recoveries of $478 and $442 for the first nine months of 1998 and 1997, respectively 3,804 2,524 -------- ------- Balance, September 30 $ 14,922 $ 12,626 ========= ------- Additions Provision charged to expense 1,257 Deductions Losses charged to allowance, net of recoveries of $138 for the last nine months of 1997 1,255 ------- Balance, end of year $ 12,628 ======= </TABLE> At September 30, 1998 and December 31, 1997, impaired loans totaled $8,381,000 and $7,972,000, respectively, all of which had reserves allocated. An allowance of $2,453,000 and $2,033,000 for possible losses related to those loans at September 30, 1998 and December 31, 1997, respectively. Interest of $261,000 and $215,000 was recognized on average impaired loans of $8,586,000 and $5,776,000 as of September 30, 1998 and 1997, respectively. Interest recognized on impaired loans on a cash basis during the first nine months of 1998 and 1997 was immaterial.
NOTE 5: TIME DEPOSITS Time deposits include approximately $186,356,000 and $188,522,000 of certificates of deposit of $100,000 or more at September 30, 1998, and December 31, 1997, respectively. NOTE 6: INCOME TAXES The provision for income taxes is comprised of the following components: <TABLE> <CAPTION> September 30, September 30, (In thousands) 1998 1997 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> Income taxes currently payable $ 5,548 $ 3,885 Deferred income taxes (1,455) (280) --------------- --------------- Provision for income taxes $ 4,093 $ 3,605 =============== =============== </TABLE> The tax effects of temporary differences related to deferred taxes shown on the balance sheet are shown below: <TABLE> <CAPTION> September 30, December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> Deferred tax assets Allowance for loan losses $ 4,677 $ 3,432 Valuation of foreclosed assets held for sale 182 286 Deferred compensation payable 468 436 Deferred loan fee income 502 622 Mortgage servicing reserves 460 -- Other 745 812 --------------- --------------- Total deferred tax assets 7,034 5,588 --------------- --------------- Deferred tax liabilities Accumulated depreciation (868) (868) Available-for-sale securities (1,126) (799) Other (472) (481) --------------- --------------- Total deferred tax liabilities (2,466) (2,148) --------------- --------------- Net deferred tax assets included in other assets on balance sheets $ 4,568 $ 3,440 =============== =============== </TABLE>
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below: <TABLE> <CAPTION> September 30, September 30, (In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> Computed at the statutory rate (34%) $ 4,801 $ 4,214 Increase (decrease) resulting from: Tax exempt income (1,068) (926) Other differences, net 360 317 --------------- --------------- Actual tax provision $ 4,093 $ 3,605 =============== =============== </TABLE> NOTE 7: LONG-TERM DEBT Long-term debt at September 30, 1998 and December 31, 1997, consisted of the following components, <TABLE> <CAPTION> September 30, December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> 7.32% note due 2007, unsecured $ 18,000 $ 20,000 9.75% note due 2008, secured by land and building 985 1,021 5.62% to 8.41% FHLB advances due 1998 to 2015, secured by residential real estate loans 9,979 12,010 Trust preferred securities 17,250 17,250 --------------- --------------- $ 46,214 $ 50,281 =============== =============== </TABLE> During the second quarter of 1997, the Company formed a wholly owned grantor trust subsidiary (the Trust) to issue preferred securities representing undivided beneficial interests in the assets of the respective Trust and to invest the gross proceeds of such preferred securities into notes of the Company. The sole assets of the Trust are $17.8 million aggregate principal amount of the Company's 9.12% Subordinated Debenture Notes due 2027 which are redeemable beginning in 2002. Such securities qualify as Tier 1 Capital for regulatory purposes.
Aggregate annual maturities of long-term debt at September 30, 1998 are: <TABLE> <CAPTION> Annual (In thousands) Year Maturities - ------------------------------------------------------------------------------------------------------- <S> <C> <C> 1998 $ 258 1999 3,259 2000 3,257 2001 3,170 2002 3,088 Thereafter 33,182 Total $ 46,214 </TABLE> NOTE 8: CONTINGENT LIABILITIES A number of legal proceedings exist in which the Company and/or its subsidiaries are either plaintiffs or defendants or both. Most of the lawsuits involve loan foreclosure activities. The various unrelated legal proceedings pending against the subsidiary banks in the aggregate are not expected to have a material adverse effect on the financial position of the Company and its subsidiaries. NOTE 9: UNDIVIDED PROFITS The subsidiary banks 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 Comptroller of the Currency is required, if the total of all 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 current year earnings plus 75% of the retained net earnings of the preceding year. At September 30, 1998, the bank subsidiaries had approximately $5 million available for payment of dividends to the Company without prior approval of the regulatory agencies. The Federal Reserve Board's risk-based capital guidelines include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. The criteria for a well-capitalized institution are: a 5% "Tier l leverage capital" ratio, a 6% "Tier 1 risk-based capital" ratio, and a 10% "total risk-based capital" ratio. As of September 30, 1998, each of the seven subsidiary banks met the capital standards for a well-capitalized institution. The Company's "total risk-based capital" ratio was 13.27% at September 30, 1998.
NOTE 10: STOCK OPTIONS AND RESTRICTED STOCK As of September 30, 1998, 288,050 shares of common stock of the Company had been granted through an employee stock option incentive plan. There were 120,500 exercisable options at the end of the third quarter of 1998. Fifty-three thousand eight hundred shares have been issued upon exercise of options. As of September 30, 1998, six thousand shares of common stock of the Company had been granted and issued as Bonus Shares of restricted stock. NOTE 11: ADDITIONAL CASH FLOW INFORMATION <TABLE> <CAPTION> Nine Months Ended September 30, (In thousands) 1998 1997 - --------------------------------------------------------------------------------------- <S> <C> <C> Interest paid $ 37,921 $ 24,846 Income taxes paid $ 6,637 $ 3,313 </TABLE> NOTE 12: CERTAIN TRANSACTIONS From time to time the Company and its subsidiaries have made loans and other extensions of credit to directors, officers, their associates and members of their immediate families, and from time to time directors, officers and their associates and members of their immediate families have placed deposits with Simmons First National Bank, Simmons First Bank of South Arkansas, Simmons First Bank of Jonesboro, Simmons First Bank of Dumas, Simmons First Bank of Northwest Arkansas, Simmons First Bank of Russellville, and Simmons First Bank of Searcy. Such loans, other extensions of credit and deposits were made in the ordinary course of business, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features.
NOTE 13: COMMITMENTS AND CREDIT RISK The seven affiliate banks of the Company grant agribusiness, commercial, consumer, and residential loans to their customers. Included in the Company's diversified loan portfolio is unsecured debt in the form of credit card receivables that comprised approximately 18.9% and 22.6% of the portfolio, as of September 30, 1998 and December 31, 1997, respectively. 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 September 30, 1998, the Company had outstanding commitments to extend credit aggregating approximately $190,769,000 and $106,472,000 for credit card commitments and other loan commitments, respectively. At December 31, 1997, the Company had outstanding commitments to extend credit aggregating approximately $154,759,000 and $90,164,000 for credit card commitments and other loan commitments, respectively. Letters of credit are conditional commitments issued by the bank subsidiaries of 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 $9,171,000 and $6,775,000 at September 30, 1998 and December 31, 1997, respectively, with terms ranging from 90 days to one year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net income for the quarter ended September 30, 1998, was $3,757,000, an increase of $371,000, or 11.0%, over the same period in 1997. Basic earnings per share for the three-month periods ended September 30, 1998 and 1997, were $0.65 and $0.59, respectively. Diluted earnings per share for the three-month periods ended September 30, 1998 and 1997, were $0.64 and $0.58, respectively. Earnings for the nine-month period ended September 30, 1998, were $10,027,000 or an increase of $1,239,000 over the September 30, 1997 earnings of $8,788,000. Year-to-date basic earnings on a per share basis as of September 30, 1998 were $1.74 compared to $1.53 at September 30, 1997, reflecting a 13.7% increase. Year-to-date diluted earnings on a per share basis as of September 30, 1998 were $1.71 compared to $1.51 at September 30, 1997, reflecting a 13.2% increase. Year-to-date net income for 1998 includes several non-recurring items. A gain of $3.3 million, or $0.36 per share after tax, was recognized from the sale of its $1.2 billion residential mortgage-servicing portfolio. Also, the Company increased its allowance for loan losses by $2.5 million, or $0.28 per share after tax. This was the result of continued cautions to the financial services industry from regulators regarding reserve levels and rising consumer bankruptcies effecting the credit card industry. Additionally, the Company expensed $500,000 or $0.05 per share after tax for software testing and hardware replacement related to the Year 2000 issue. If year-to-date earnings for 1998 were adjusted for the non-recurring items, earnings would have been $1.71 per share. The Company's return on average assets and return on average stockholder's equity for the three-month period ended September 30, 1998 was 1.11% and 12.50%, compared to 1.17% and 12.51%, respectively, for the same period in 1997. The Company's return on average assets and return on average stockholder's equity for the nine-month period ended September 30, 1998 was 1.00% and 11.52%, compared to 1.19% and 11.00%, respectively, for the same period in 1997. Basic cash earnings (net income excluding amortization of intangibles) for the third quarter of 1998 were $0.72 per share compared with $0.64 for the third quarter of 1997, reflecting a 12.5% increase. Year-to-date basic cash earnings on a per share basis as of September 30, 1998 were $1.95 compared to $1.61 at September 30, 1997, reflecting a 21.1% increase. Cash return on average assets was 1.14% and cash return on average stockholders' equity was 12.83% for the nine-month period ended September 30, 1998, compared with 1.26% and 11.53%, respectively, for the same period in 1997. On August 1, 1997, the Company completed the acquisition of First Bank of Arkansas (FBAR), Russellville, Arkansas and First Bank of Arkansas (FBAS), Searcy, Arkansas in a cash purchase transaction of $53 million. This transaction was partially financed through the issuance of $20 million in long-term debt and $17 million in trust preferred securities. On August 1, 1997, the banks acquired had consolidated assets, as adjusted, of $362 million. Net interest income, the difference between interest income and interest expense, for the three-month period ended September 30, 1998, increased $1,964,000, or 18.1%, when compared to the same period in 1997. During the third quarter, interest income increased $3,927,000, or 18.3%, while interest expense increased $1,963,000, or 18.4%, when compared to the same period in 1997. For the nine-months ended September 30, 1998 and 1997, net interest income was $36,385,000 and $28,934,000, respectively. This represents an increase of $7,451,000, or 25.8%. Year-to-date interest income for the nine-month periods ended September 30, 1998 and 1997 was up $20,011,000, to $74,090,000, over the $54,079,000 reported as for September 30, 1997, which signifies a 37.0% increase. Year-to-date interest expense at September 30, 1998 and 1997, was $37,705,000 and $25,145,000, respectively, which equates to a 49.9% increase. These figures reflect an increase in fees on loans and the acquisition of FBAR and FBAS and the long-term debt associated with these acquisitions. The provision for loan losses for the third quarter of 1998 was $1,249,000, compared to $1,111,000 for the same period of 1997, resulting in a $138,000, or 12.4%, increase. For the nine months ended September 30, 1998 and 1997, the provision (excluding the $2,530,000 non-recurring provision) was $3,568,000 and $2,756,000, respectively, resulting in a 29.5% increase. The increase from 1997 to 1998 is attributable to acquisitions, growth in loans and bankruptcies in the bankcard portfolio. Non-interest income for the third quarter ended September 30, 1998, was $6,659,000, a 7.7% decrease over the $7,213,000 reported for the same period in 1997. This decrease is primarily due to the sale of the Company's mortgage servicing portfolio and a loss in the investment banking division. For the nine-months ended September 30, 1997 and 1996, non-interest income (excluding the gain on sale of mortgage servicing and gain on securities sold) was $21,341,000, a 8.1% increase over the $19,744,000 reported for the same period in 1997. Total fee income for the nine-month period ended September 30, 1998 was up 8.4%. During the three months ended September 30, 1998, non-interest expense increased $815,000, or 6.7%, over the same period in 1997. This increase reflects the normal increase in the cost of doing business, coupled with acquisitions. Year-to-date non-interest expense (excluding the non-recurring Year 2000 expenses) was $40,285,000 at September 30, 1998, compared to $33,528,000, for the same period ended September 30, 1997. The increase reflects the acquisitions and the normal increase in the cost of doing business. On June 30, 1998 Simmons First National Bank sold its residential mortgage-servicing portfolio to First Commercial Mortgage Company resulting in a $3.3 million gain. The portfolio consists of approximately $1.2 billion in residential mortgage loans. The portfolio sale will not have a material impact on future earnings of the Company. FINANCIAL CONDITION Total assets for the Company at September 30, 1998, were $1.319 billion, a decrease of $8 million, or 0.67%, over the same figure at December 31, 1997. Deposits at September 30, 1998, totaled $1.091 billion, a decrease of $14 million, or 1.3% from the same figure at December 31, 1997. Stockholders' equity at the end of the third quarter was $120,265,000, an increase of $8,183,000, or 7.3%, from the December 31, 1997 figure. Asset quality remains strong with the allowance for loan losses as a percent of total loans at 1.75% as of September 30, 1998, compared to 1.59% at December 31, 1997. As of September 30, 1998, the allowance for loan losses as a percent of total loans excluding government-guaranteed student loans was 1.89%. As of September 30, 1998, non-performing loans equaled 0.78% of total loans, while the allowance for loan losses equaled 223.9% of non-performing loans. Generally speaking, the Company's banking subsidiaries rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash used in their investing activities. As is typical of most banking companies, significant financing activities include: deposit gathering; use of short-term borrowing facilities, such as federal funds purchased and repurchase agreements; and the issuance of long-term debt. The banks' primary investing activities include loan originations and purchases of investment securities, offset by loan payoffs and investment maturities. Liquidity represents an institution's ability to provide funds to satisfy demands from depositors and borrowers, by either converting assets into cash or accessing new or existing sources of incremental funds. It is a major responsibility of management 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. Each bank subsidiary is also required to monitor these same indicators and report regularly to its own senior management and board of directors. At September 30, 1998, each bank was within established guidelines and total corporate liquidity was strong. At September 30, 1998, cash and due from banks, securities available for sale and held in trading accounts, federal funds sold and securities purchased under agreements for resell, and mortgage loans held for sale were 18.7% of total assets. ACQUISITION ANNOUNCEMENTS On July 24, 1998, an announcement was made jointly by the Chief Executive Officers of both the Company and American Bancshares of Arkansas, Inc. ("ABA') regarding the execution of a definitive agreement under the terms of which ABA will be merged into the Company in a transaction valued at approximately $21,850,000. Stockholders of ABA will receive Simmons First National Corporation stock in exchange for ABA shares in the transaction. The transaction is expected to close in late 1998. ABA owns American State Bank ("ASB"), Charleston, Arkansas with consolidated assets, as of June 30, 1998, of $87 million. As a part of the transaction ASB will be merged into Simmons First National Bank during early 1999. On August 25, 1998, an announcement was made jointly by the Chief Executive Officers of both the Company and Lincoln Bankshares, Inc. ("LBI") regarding the execution of a definitive agreement under the terms of which LBI will be merged into the Company. Stockholders of LBI will receive 301,833 shares of Simmons First National Corporation stock in exchange for LBI shares in the transaction. The transaction is expected to close in early 1999. LBI owns Bank of Lincoln, Lincoln, Arkansas with consolidated assets, as of June 30, 1998, of $75 million. As a part of the transaction Bank of Lincoln will be merged into Simmons First Bank of Northwest Arkansas during early 1999.
IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. In 1996, as part of its strategic plan to provide quality customer service, introduce new products and improve operating efficiencies, the Company began converting all of its software and hardware systems to state-of-the-art technology. As a byproduct of this effort, the Year 2000 issue has been addressed. The Company has now completed the Year 2000 identification of mission critical systems, vendors, large borrowers and large depositors requiring assessment and testing. During the nine-month period ended September 30, 1998 the Company expensed $500,000 for software testing and hardware replacement related to the Year 2000 issue. The Company expects to have all of its internal mission critical systems, except for one such system, tested for Year 2000 compliance by December 31, 1998. The outside testing consultants will not complete the testing of the Company's remaining internal mission critical system until March 31, 1999. Based upon independent testing of substantially similar systems by other financial institutions and testing consultants, Management believes that the completion of internal mission critical testing by March 31, 1999 will provide the Company with ample time to correct any system deficiencies identified through testing. The testing with vendors, large borrowers and large depositors will be completed by June 30, 1999. The replacement of non-compliant systems is presently underway and will be completed in 1999. The Company is in the process of converting the two banks acquired on August 1, 1997 to the Company's systems and these conversions are scheduled for the fourth quarter of 1998. During the third quarter of 1998 the acquisition announcements of ABA and LBI were made. These transactions are expected to close in late 1998 and early 1999. The ABA and LBI acquisitions will be converted to the Company's systems during early 1999. As part of the Company's due diligence process associated with a potential acquisition, the prospect's Year 2000 compliance and readiness is thoroughly evaluated. The Company has contingency plans if the above conversions are not completed before December 31, 1999. Management believes completion of the Year 2000 modifications will not have a material effect on the Company's future consolidated results of operations or financial position.
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS BAIRD, KURTZ & DOBSON Certified Public Accountants 200 East Eleventh Pine Bluff, Arkansas Board of Directors Simmons First National Bank Pine Bluff, Arkansas We have made a review of the accompanying consolidated condensed financial statements, appearing on pages 3 to 18 of the accompanying Form 10-Q, of SIMMONS FIRST NATIONAL CORPORATION and consolidated subsidiaries as of September 30, 1998 and for the three-months and nine-months ended September 30, 1998 and 1997, in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of obtaining an understanding of the system for the preparation of interim financial information, applying analytical review procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an examination in accordance with generally accepted auditing standards, the objective which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997, and the related consolidated statements of income, cash flows and changes in stockholders' equity for the year then ended (not presented herein), and in our report dated January 30, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Baird, Kurtz & Dobson BAIRD, KURTZ & DOBSON Pine Bluff, Arkansas October 30, 1998
Part II: Other Information Item 2. Changes in Securities. Recent Sales of Unregistered Securities. The following transactions are sales of unregistered shares of Class A Common Stock of the registrant which were issued to executive and senior management officers upon the exercise of rights granted under either the Simmons First National Corporation Incentive and Non-qualified Stock Option Plan or the Simmons First National Corporation Executive Stock Incentive Plan. No underwriters were involved and no underwriter's discount or commissions were involved. Exemption from registration is claimed under Section 4(2) of the Securities Act of 1933 as private placements. Unless noted otherwise, the registrant received cash as the consideration for the transaction. <TABLE> <CAPTION> Number Identity(1) Date of Sale of Shares Price(2) Type of Transaction - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 1 Officer July, 1998 300 22.1667 Incentive Stock Option 1 Officer July, 1998 300 25.6667 Incentive Stock Option 1 Officer July, 1998 200 45.2500 Incentive Stock Option 1 Officer August, 1998 1,500 8.2917 Incentive Stock Option </TABLE> Notes: 1. The transactions are grouped to show sales of stock based upon exercises of rights by officers of the registrant or its subsidiaries under the stock plans which occurred at the same price during a calendar month. 2. The per share price paid for incentive stock options represents the fair market value of the stock as determined under the terms of the Plan on the date the incentive stock option was granted to the officer. Item 6. Reports on Form 8-K The registrant filed Form 8-K on July 1, 1998. The report contained the text of a press release issued by the registrant concerning the sale of the Company's residential mortgage-servicing portfolio to First Commercial Mortgage Company. The registrant filed Form 8-K on July 29, 1998. The report contained the text of a press release issued by the registrant concerning the acquisition of American Bancshares of Arkansas, Inc. The registrant filed Form 8-K on August 26, 1998. The report contained the text of a press release issued by the registrant concerning the acquisition of Lincoln Bancshares, Inc.
SIGNATURES Pursuant to the requirements 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. SIMMONS FIRST NATIONAL CORPORATION (Registrant) Date: November 2, 1998 /s/ J. Thomas May --------------------- -------------------------------------- J. Thomas May, Chairman, President and Chief Executive Officer Date: November 2, 1998 /s/ Barry L. Crow --------------------- -------------------------------------- Barry L. Crow, Executive Vice President and Chief Financial Officer