UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2003 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 870-541-1000
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 14,083,109 Class B, Common None
Page No.
Part I: Summarized Financial Information
Consolidated Balance Sheets — September 30, 2003 and December 31, 2002 3-4
Consolidated Statements of Income — Three months and nine months ended September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows— Nine months ended September 30, 2003 and 2002 6
Consolidated Statements of Stockholders' Equity Nine months ended September 30, 2003 and 2002 7
Condensed Notes to Consolidated Financial Statements 8-19
Management's Discussion and Analysis of Financial Condition and Results of Operations 20-46
Review by Independent Certified Public Accountants 47
Part II: Other Information 48-52
Simmons First National CorporationConsolidated Balance SheetsSeptember 30, 2003 and December 31, 2002
See Condensed Notes to Consolidated Financial Statements.
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Simmons First National CorporationConsolidated Statements of IncomeThree Months and Nine Months Ended September 30, 2003 and 2002
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(Unaudited)
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 results of operations for the period are not necessarily indicative of the results to be expected for the full year.
Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2002 filed with the Securities and Exchange Commission.
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. Effective January 1, 2001, the Company adopted the requirements of SFAS No. 133, ” Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133,” and SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” These statements require all derivatives to be recorded 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 entered into its first fair value hedge during the second quarter of 2003. 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 (gain or loss) is recognized in earnings in the period of change together with the offsetting gain or loss 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 $2.1 million at September 30, 2003.
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Basic earnings per share is computed based on the weighted average number of common 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 following is the computation of per share earnings for the nine months ended September 30, 2003 and 2002. All share and per share data reflect the effect of the Company’s two for one stock split effective May 1, 2003.
On May 1, 2003, the Company completed a two for one stock split by issuing one additional share to shareholders of record as of April 18, 2003. As a result of the stock split, the accompanying consolidated financial statements reflect an increase in the number of outstanding shares of common stock and the transfer of the par value of these additional shares from surplus. All share and per share amounts have been restated to reflect the retroactive effect of the stock split, except for the capitalization of the Company.
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On July 19, 2002, the Company expanded its coverage in South Arkansas with the purchase of the Monticello location from HEARTLAND Community Bank. Simmons First Bank of South Arkansas, a wholly owned subsidiary of the Company, acquired the Monticello office. As of July 19, 2002, the new location had total loans of $8 million and total deposits of $13 million. As a result of this transaction, the Company recorded additional goodwill and core deposits of $1,058,000 and $217,000, respectively.
On September 8, 2003, the Company announced the execution of a definitive agreement to purchase nine branch banking locations from Union Planters Bank, N.A. Six locations in North Central Arkansas include Clinton, Marshall, Mountain View, Fairfield Bay, Leslie and Bee Branch. Three locations in Northeast Arkansas communities include Hardy, Cherokee Village and Mammoth Spring. The nine locations have combined deposits of $140 million with estimated acquired assets of $126 million including selected loans, premises, cash and other assets. The transaction is subject to regulatory approval and is expected to close during the fourth quarter of 2003.
The amortized cost and fair value of investment securities that are classified as held-to-maturity and available-for-sale are as follows:
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The carrying value, which approximates the market value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $346,137,000 at September 30, 2003 and $306,082,000 at December 31, 2002.
The book value of securities sold under agreements to repurchase amounted to $57,236,000 and $43,060,000 at September 30, 2003 and December 31, 2002, respectively.
Income earned on securities for the nine months ended September 30, 2003 and 2002, is as follows:
Maturities of investment securities at September 30, 2003 are as follows:
There were no gross realized gains or losses as of September 30, 2003 and 2002.
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.
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The various categories are summarized as follows:
During the first nine months of 2003, foreclosed assets held for sale increased $69,000 to $2,774,000 and are carried at the lower of cost or fair market value. Other non-performing assets, non-accrual loans and other non-performing loans for the Company at September 30, 2003, were $396,000, $10,590,000 and $1,770,000, respectively, bringing the total of non-performing assets to $15,530,000.
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Transactions in the allowance for loan losses are as follows:
At September 30, 2003 and December 31, 2002, impaired loans totaled $19,455,000 and $14,646,000, respectively. All impaired loans had designated reserves for possible loan losses. Reserves relative to impaired loans at September 30, 2003, were $4,317,000 and $2,895,000 at December 31, 2002.
Approximately, $396,000 and $319,000 of interest income was recognized on average impaired loans of $17,659,000 and $18,118,000 as of September 30, 2003 and 2002, respectively. Interest recognized on impaired loans on a cash basis during the first nine months of 2003 and 2002 was immaterial.
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The carrying basis and accumulated amortization of core deposits (net of core deposits that were fully amortized) at September 30, 2003 and December 31, 2002, were as follows:
Core deposit amortization expense recorded for the nine months ended September 30, 2003 and 2002, was $74,000 and $94,000, respectively. Excluding the recently announced acquisition, the Company’s estimated amortization expense for each of the following five years is: 2003 — $98,000; 2004 — $94,000; 2005 — $93,000; 2006 — $91,000 and 2007 — $79,000.
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.
Time deposits include approximately $311,279,000 and $310,581,000 of certificates of deposit of $100,000 or more at September 30, 2003 and December 31, 2002, respectively.
The provision for income taxes is comprised of the following components:
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The tax effects of temporary differences related to deferred taxes shown on the balance sheets are shown below:
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A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:
Long-term debt at September 30, 2003 and December 31, 2002, consisted of the following components,
The Company owns 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 currently redeemable. Trust preferred securities qualify as Tier 1 Capital for regulatory purposes.
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Aggregate annual maturities of long-term debt at September 30, 2003, are:
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. Also reference Note 16: Subsequent Events.
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, 2003, the bank subsidiaries had approximately $15 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, 2003, each of the seven subsidiary banks met the capital standards for a well-capitalized institution. The Company’s “total risk-based capital” ratio was 15.44% at September 30, 2003.
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At September 30, 2003, the Company had stock options outstanding of 721,200 shares and stock options exercisable of 528,280 shares. During the first nine months of 2003, there were 35,400 shares issued upon exercise of stock options, options for 9,700 shares expired and no additional stock options of the Company were granted. Also, no additional shares of common stock of the Company were granted or issued as bonus shares of restricted stock, during the first nine months of 2003. This information has been adjusted for the two for one stock split which was distributed to shareholders effective May 1, 2003.
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. From time to time, directors, officers and their associates and members of their immediate families have placed deposits with the Company’s subsidiary banks. 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.
The seven affiliate banks of the Company grant agribusiness, commercial, consumer, and residential loans to their customers throughout Arkansas. Included in the Company’s diversified loan portfolio is unsecured debt in the form of credit card receivables that comprised approximately 12.2% and 14.4% of the portfolio, as of September 30, 2003 and December 31, 2002, 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.
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At September 30, 2003, the Company had outstanding commitments to extend credit aggregating approximately $212,273,000 and $330,324,000 for credit card commitments and other loan commitments, respectively. At December 31, 2002, the Company had outstanding commitments to extend credit aggregating approximately $216,167,000 and $289,389,000 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 $14,816,000 and $2,474,000 at September 30, 2003 and December 31, 2002, respectively, with terms ranging from 90 days to three years. At September 30, 2003, the Company’s deferred revenue under standby letter of credit agreements of approximately $207,000. At December 31, 2002, the Company’s deferred revenue under standby letter of credit agreements was not material.
On October 8, 2003, the Company announced the execution of a definitive agreement under the terms of which, Alliance Bancorporation, Inc. will be merged into Simmons First National Corporation. Alliance Bancorporation, Inc. owns Alliance Bank of Hot Springs, Hot Springs, Arkansas with consolidated assets of approximately $140 million. The proposed transaction is subject to the approval of State and Federal regulatory agencies along with the approval of Alliance stockholders who collectively will receive $11,440,000 in cash and 545,000 shares of Simmons First common stock. The regulatory applications are expected to be filed within 30 days and the approval of the Alliance shareholders will be sought in the first quarter of 2004. The transaction is expected to close during the first quarter of 2004. After the merger, Alliance will continue to operate as a separate community bank with the same board of directors, management and staff.
On October 1, 2003, an action in Pulaski County Circuit Court was filed by Thomas F. Carter, Tena P. Carter and certain related entities against Simmons First Bank of South Arkansas and Simmons First National Bank alleging wrongful conduct by the banks in the collection of certain loans. The plaintiffs are seeking $2,000,000 in compensatory damages and $10,000,000 in punitive damages. Management is currently conducting an internal review of the facts and circumstances surrounding this matter. At this time, no basis for any material liability has been identified. The banks plan to vigorously defend the claims asserted in the suit.
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Simmons First National Corporation achieved record third quarter earnings of $6,611,000, or $0.46 diluted earnings per share for the quarter ended September 30, 2003. These earnings reflect an increase of $842,000, or $0.06 per share over the September 30, 2002, earnings of $5,769,000, or $0.40 diluted earnings per share (stock split adjusted). Annualized return on average assets and annualized return on average stockholders’ equity for the three-month period ended September 30, 2003, was 1.31% and 12.65%, compared to 1.18% and 11.87%, respectively, for the same period in 2002.
The quarterly increase in earnings over the same quarter last year is primarily attributable to the increased volume of the Company’s mortgage banking operation, growth in the loan portfolio and a lower provision for loan losses, which correlates to the improved asset quality ratios.
Earnings for the nine-month period ended September 30, 2003, were $18,472,000, or $1.28 per diluted share. These earnings reflect an increase of $2,057,000, or $0.14 per share, when compared to the nine-month period ended September 30, 2002, earnings of $16,415,000, or $1.14 per diluted share. Annualized return on average assets and annualized return on average stockholders’ equity for the nine-month period ended September 30, 2003, was 1.24% and 12.10%, compared to 1.12% and 11.62%, respectively, for the same period in 2002.
The year-to-date increase in earnings is primarily attributable to the increased volume of the Company’s mortgage loan production units and investment banking operation, growth in the loan portfolio, improved asset quality ratios as reflected in the provision for loan losses, and the nonrecurring gain on sale of mortgage servicing. Refer to the Sale of Mortgage Servicing discussion for additional information regarding the Company’s nonrecurring gain.
Total assets for the Company at September 30, 2003, were $2.016 billion, an increase of $38.1 million from the same figure at December 31, 2002. Average quarter to date total assets for the Company during the third quarter of 2003 was $2.002 billion, an increase of $60.2 million over the average for the third quarter of 2002. Stockholders’ equity at the end of the third quarter of 2003 was $207.2 million, a $9.6 million, or 4.9%, increase from December 31, 2002.
The allowance for loan losses as a percent of total loans equaled 1.72% and 1.75% as of September 30, 2003 and December 31, 2002, respectively. As of September 30, 2003, non-performing loans equaled 0.93% of total loans compared to 0.97% as of year-end 2002. As of September 30, 2003, the allowance for loan losses equaled 184% of non-performing loans compared to 179% at year-end 2002.
Simmons First National Corporation is an Arkansas based, Arkansas committed, financial holding company, with community banks in Pine Bluff, Jonesboro, Lake Village, Rogers, Russellville, Searcy and El Dorado, Arkansas. The Company’s seven banks conduct financial operations from 64 offices, of which 62 are financial centers, in 34 communities throughout Arkansas.
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Management has reviewed its various accounting policies. Based on this review, management believes the policies most critical to the Company are the policies associated with its lending practices including the accounting for the allowance for loan losses, treatment of goodwill, recognition of fee income, estimates of income taxes, and employee benefit plan as it relates to stock options.
Loans the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-offs are reported at their outstanding principal adjusted for any loans charged off and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated life of the loan. Generally, loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well secured and in the process of collection.
Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.
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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance is maintained at a level considered adequate to provide for potential loan losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan portfolio that have been incurred as of period end. This estimate is based on management’s evaluation of the loan portfolio, as well as on prevailing and anticipated economic conditions and historical losses by loan category. General reserves have been established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances are accrued on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral. The unallocated reserve generally serves to compensate for the uncertainty in estimating loan losses, including the possibility of changes in risk ratings and specific reserve allocations in the loan portfolio as a result of the Company’s ongoing risk management system.
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A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loan. This includes loans that are delinquent 90 days or more, nonaccrual loans and certain other loans identified by management. Certain other loans identified by management consist of performing loans with specific allocations of the allowance for loan losses. Specific allocations are applied when quantifiable factors are present requiring a greater allocation than that established using the classified asset approach, as defined by the Office of the Comptroller of the Currency. Accrual of interest is discontinued and interest accrued and unpaid is removed at the time such amounts are delinquent 90 days, unless management is aware of circumstances which warrant continuing the interest accrual. Interest is recognized for nonaccrual loans only upon receipt and only after all principal amounts are current according to the terms of the contract.
Goodwill represents the excess of cost over the fair value of net assets of acquired subsidiaries and branches. Financial Accounting Standards Board Statement No. 142 and No. 147 eliminated the amortization for these assets as of January 1, 2002. Although goodwill is not being amortized, it is tested annually for impairment.
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.
Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
The Company has a stock-based employee compensation plan. The Company accounts for this plan under recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date.
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During the second quarter 2003, the Company recorded a nonrecurring $0.03 addition to earnings per share. On June 30, 1998, the Company sold its $1.2 billion residential mortgage-servicing portfolio. As a result of this sale, the Company established a reserve for potential liabilities due to certain representations and warranties made on the sale date. The time period for making claims under the terms of the mortgage servicing sale’s representations and warranties expired on June 30, 2003. Thus, the Company reversed this remaining reserve in the second quarter of 2003, which is reflected in the $771,000 pre-tax gain on sale of mortgage servicing. Excluding this nonrecurring gain, the Company would have reported $1.25 diluted earnings per share for the nine-months ended September 30, 2003.
Net interest income, the Company’s principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (37.50% for September 30, 2003 and 2002).
Throughout 2001, the Federal Reserve Bank steadily decreased the Federal Funds rate by a total of 475 basis points to 1.75% in an effort to stimulate economic growth. In 2002, the Federal Reserve continued to decrease the Federal Funds rate from 1.75% at the end of 2001 to 1.25% at the end of 2002. This decline has continued in 2003, with another 25 basis point decrease during the second quarter, bringing the Federal Funds rate to 1.00% at September 30, 2003. This declining rate environment contributed to the decline in interest income. This decline was more than offset by a decline in interest expense, driven by the declining interest rate environment, which resulted in growth in net interest income.
The Company’s practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing. Historically, approximately 70% of the Company’s loan portfolio and approximately 85% of the Company’s time deposits have repriced in one year or less. These historical amounts are consistent with current repricing.
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For the three-month period ended September 30, 2003, net interest income on a fully taxable equivalent basis was $20.6 million, an increase of $399,000 or 2.0%, from the same period in 2002. The increase in net interest income was the result of a $2.3 million decrease in interest income and a $2.7 million decrease in interest expense. The net interest margin declined slightly by 7 basis points to 4.43% for the three-month period ended September 30, 2003, when compared to 4.50% for the same period in 2002. This decline reflects a change in the Company’s overall mix of earning assets.
The $2.3 million decrease in interest income for the three-month period ended September 30, 2003, primarily is the result of a 71 basis point decrease in the yield earned on earning assets associated with the lower interest rate environment. The lower interest rates resulted in a $3.4 million decrease in interest income. However, this decrease was offset by an increase in earning asset volume, which resulted in a $1.1 million increase in interest income. More specifically, $2.5 million of the decrease is associated with the repricing of the Company’s loan portfolio that resulted from loans that matured during the period or were tied to a rate that fluctuated with changes in market rates. As a result, the average rate earned on the loan portfolio decreased 75 basis points from 7.49% to 6.74%.
The $2.7 million decrease in interest expense for the three-month period ended September 30, 2003, primarily is the result of a 75 basis point decrease in cost of funds, due to repricing opportunities during the lower interest rate environment last year. The lower interest rates resulted in $2.9 million decrease in interest expense. More specifically, $1.8 million of the decrease is associated with management’s ability to reprice the Company’s time deposits that resulted from time deposits maturing during the period or were tied to a rate that fluctuated with changes in market rates. As a result, the average rate paid on time deposits decreased 90 basis points from 3.23% to 2.33%.
For the nine-month period ended September 20, 2003, net interest income on a fully taxable equivalent basis was $60.3 million, an increase of $1.3 million, or 2.2%, from the same period in 2002. The increase in net interest income was the result of a $7.4 million decrease in interest income and a $8.7 million decrease in interest expense. As a result, the net interest margin improved 5 basis points to 4.41% for the nine-month period ended September 30, 2003, when compared to 4.36% for the same period in 2002.
The $7.4 million decrease in interest income for the nine-month period ended September 30, 2003 primarily is the result of a 61 basis point decrease in the yield earned on earning assets associated with the lower interest rates environment. The lower interest rates resulted in a $9.0 million decrease in interest income. More specifically, $6.4 million of the decrease is associated with the repricing of the Company’s loan portfolio that resulted from loans that matured during the period or were tied to a rate that fluctuated with changes in market rates. As a result, the average rate earned on the loan portfolio decreased 68 basis points from 7.71% to 7.03%.
The $8.7 million decrease in interest expense for the nine-month period ended September 30, 2003, primarily is the result of a 74 basis point decrease in cost of funds, due to repricing opportunities during the lower interest rate environment. The lower interest rates accounted for $8.5 million or 98.0% of the decrease in interest expense. More specifically, $6.2 million of the decrease is associated with management’s ability to reprice the Company’s time deposits that resulted from time deposits maturing during the period or were tied to a rate that fluctuated with changes in market rates. As a result, the average rate paid on time deposits decreased 102 basis points from 3.57% to 2.55%.
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Table 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three-month and nine-month periods ended September 30, 2003 and 2002, respectively, as well as changes in fully taxable equivalent net interest margin for the three-month and nine-month periods ended September 30, 2003 versus September 30, 2002.
Table 1: Analysis of Net Interest Income(FTE =Fully Taxable Equivalent)
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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 the three-month and nine-month periods ended September 30, 2003 and 2002. 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. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.
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Table 4 shows changes in interest income and interest expense, resulting from changes in volume and changes in interest rates for the three-month and nine-month periods ended September 30, 2003, as compared to the same periods of the prior year. 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.
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The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings, in order to maintain the allowance for loan losses at a level, which is considered adequate, in relation to the estimated risk inherent in the loan portfolio. The provision for the three-month period ended September 30, 2003 and 2002, was $2.2 and $2.9 million, respectively. The provision for the nine-month period ended September 30, 2003 and 2002, was $6.6 million and $7.7 million, respectively. The decrease in the provision for loan losses for 2003 reflects the improvement in the Company’s asset quality ratios from September 30, 2002 to September 30, 2003.
Total non-interest income was $9.9 million for the three-month period ended September 30, 2003, compared to $9.1 million for the same period in 2002. For the nine-months ended September 30, 2003, non-interest income was $29.7 million compared to the $26.1 million reported for the same period ended September 30, 2002. 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 and investment banking profits. Refer to the Sale of Mortgage Servicing discussion for additional information regarding the Company’s nonrecurring gain.
Table 5 shows non-interest income for the three-month and nine-month periods ended September 30, 2003 and 2002, respectively, as well as changes in 2003 from 2002.
Recurring fee income for the three-month and nine-month periods ended September 30, 2003 were $6.9 million and $20.4 million, respectively, which is relatively flat when compared with the same periods last year. Although recurring fee income was relatively flat, a few notable items were the increases in service charges on deposit accounts and other income, which were offset by the decline in credit card fees. The increase in service charges was primarily the result of an improved fee structure. The increase in other income was from an improvement in earnings on student loans. The decrease in credit card fees was the result of a decline in the number of cardholders in the credit card portfolio, due to competitive pressure in the credit card industry.
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During the three-month period ended September 30, 2003, income on the sale of mortgage loans and income on investment banking increased $550,000 and $138,000, respectively, from the same period during 2002. During the nine-month period ended September 30, 2003, income on the sale of mortgage loans and income on investment banking increased $1.6 million and $752,000, respectively, from the same period during 2002. These increases were the result of a higher volume for those products during 2003 compared to 2002. The lower interest rate environment primarily drove both volume increases.
Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for the operation of the Company. Management remains committed to controlling the level of non-interest expense, through the continued use of expense control measures that have been installed. The Company utilizes an extensive profit planning and reporting system involving all affiliates. Based on a needs assessment of the business plan for the upcoming year, monthly and annual profit plans are developed, including manpower and capital expenditure budgets. These profit plans are subject to extensive initial reviews and monitored by management on a monthly basis. Variances from the plan are reviewed monthly and, when required, management takes corrective action intended to ensure financial goals are met. Management also regularly monitors staffing levels at each affiliate, to ensure productivity and overhead are in line with existing workload requirements.
Non-interest expense for the three-month and nine-month periods ended September 30, 2003, were $17.9 million and $54.1 million, an increase of $428,000 or 2.4% and $2.7 million or 5.2%, respectively, from the same periods in 2002. The increase in non-interest expense during 2003, compared to 2002 is primarily derived from the increase in salary and employee benefits. The salary and employee benefits increase is associated with normal salary adjustments and the increased cost of health insurance.
Table 6 below shows non-interest expense for the three-month and nine-month periods ended September 30, 2003 and 2002, respectively, as well as changes in 2003 from 2002.
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LOAN PORTFOLIO
The Company’s loan portfolio averaged $1.279 billion and $1.247 billion during the first nine months of 2003 and 2002, respectively. As of September 30, 2003, total loans were $1.325 billion, compared to $1.257 billion on December 31, 2002. The most significant components of the loan portfolio were loans to businesses (commercial loans and commercial real estate loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans).
The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral, obtaining and monitoring collateral, providing an adequate allowance for loan losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry and, in the case of credit card loans, which are unsecured, by geographic region. The Company seeks to use diversification within the loan portfolio to reduce credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. The Company uses the allowance for loan losses as a method to value the loan portfolio at its estimated collectible amount. Loans are regularly reviewed to facilitate the identification and monitoring of deteriorating credits.
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Consumer loans consist of credit card loans, student loans and other consumer loans. Consumer loans were $388.5 million at September 30, 2003, or 29.3% of total loans, compared to $417.4 million, or 33.2% of total loans at December 31, 2002. The consumer loan decrease from December 31, 2002 to September 30, 2003 is the result of the Company’s lower credit card portfolio and indirect lending, which was partially offset by an increase in student loans. The consumer market, particularly credit card and indirect lending, continues to be one of the Company’s greatest challenges. As a result, the credit card portfolio continued its decline as the result of an on-going reduction in the number of cardholder accounts, due to competitive pressure in the credit card industry combined with some seasonality for that product. The decline in the indirect consumer loan portfolio was the result of the on-going special finance incentives from car manufacturers and a planned reduction by the Company of that product based on the risk-reward relationship. The increase in student loans was a result of greater demand for that product.
Real estate loans consist of construction loans, single family residential loans and commercial loans. Real estate loans were $692.8 million at September 30, 2003, or 52.3% of total loans, compared to the $614.4 million, or 48.9% of total loans at December 31, 2002. This improvement is the result of increased loan demand by the Company’s construction and commercial real estate borrowers.
Commercial loans consist of commercial loans, agricultural loans and loans to financial institutions. Commercial loans were $230.7 million at September 30, 2003, or 17.4% of total loans, compared to $209.8 million, or 16.7% of total loans at December 31, 2002. This improvement is the result of seasonality in the Company’s agricultural loan portfolio.
The amounts of loans outstanding at the indicated dates are reflected in Table 7, according to type of loan.
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A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contracted terms of the loans. This includes loans past due 90 days or more, nonaccrual loans and certain loans identified by management.
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, the accrued interest is charged off and no further interest is accrued. Loans, excluding credit card loans, are placed on a nonaccrual basis either: (1) when there are serious doubts regarding the collectability of principal or interest, or (2) when payment of interest or principal is 90 days or more past due and either (i) not fully secured or (ii) not in the process of collection. If a loan is determined by management to be uncollectable, the portion of the loan determined to be 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 uncollectable.
At September 30, 2003, impaired loans were $19.5 million compared to $14.6 million at December 31, 2002. The increase in impaired loans from December 31, 2002, primarily relates to the increase of borrowers that are still performing, but for which management has internally identified as impaired. This increase is the result of three borrowers that was internally classified by management as substandard, which offset the removal of one agricultural credit during the period. Furthermore, management has evaluated the underlying collateral on these commercial real estate credits and has allocated specific reserves to cover potential losses. Also, management has evaluated the underlying collateral on the remaining impaired loans and has allocated specific reserves in order to absorb potential losses if the collateral were ultimately foreclosed.
In conclusion, at this time, management does not view the downgrading of these particular credits as a trend in the Company’s overall portfolio. Thus, while impaired loans did increase from year-end, the Company views asset quality ratios as improved when compared to the same period last year.
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Table 8 presents information concerning non-performing assets, including nonaccrual and other real estate owned.
Approximately $560,000 and $640,000 of interest income would have been recorded for the nine-month periods ended September 30, 2003 and 2002, respectively, if the nonaccrual loans had been accruing interest in accordance with their original terms. There was no interest income on the nonaccrual loans recorded for the nine-month periods ended September 30, 2003 and 2002.
The Company maintains an allowance for loan losses. This allowance is created through charges to income and maintained at a sufficient level to absorb expected losses in the Company’s 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 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, which will affect specific loans and categories of loans.
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As the Company evaluates the allowance for loan losses, it is categorized as follows: 1) specific allocations, 2) allocations for classified assets with no specific allocation, 3) general allocations for each major loan category and 4) miscellaneous allocations.
Specific allocations are made when factors are present requiring a greater reserve than would be required when using the assigned risk rating allocation. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. The evaluation process in specific allocations for the Company includes a review of appraisals or other collateral analysis. These values are compared to the remaining outstanding principal balance. If a loss is determined to be reasonably possible, the possible loss is identified as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the expected future cash flows of the loan.
The Company establishes allocations for loans rated “watch” through “doubtful” in accordance with the guidelines established by the regulatory agencies. A percentage rate is applied to each category of these loan categories to determine the level of dollar allocation.
The Company establishes general allocations for each major loan category. This section also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans. The allocations in this section are based on a historical review of loan loss experience and past due accounts. The Company gives consideration to trends, changes in loan mix, delinquencies, prior losses, and other related information.
Allowance allocations other than specific, classified and general for the Company are included in the miscellaneous section. This primarily consists of unfunded loan commitments.
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An analysis of the allowance for loan losses is shown in Table 9.
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The amount of provision to the allowance during the nine-month periods ended September 30, 2003 and 2002, and for the year ended 2002, 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 loans and net losses from loans charged off for the last five years. It is management’s practice to review the allowance on a monthly basis to determine whether additional provisions should be made to the allowance after considering the factors noted above.
The Company utilizes a consistent methodology in the calculation and application of its allowance for loan losses. Because there are portions of the portfolio that have not matured to the degree necessary to obtain reliable loss statistics from which to calculate estimated losses, the unallocated 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 imprecision inherent when estimating credit losses.
During the nine months ended September 30, 2003, the Company experienced an increase of $505,000 in the real estate allocation of the allowance for loan losses. This increase is primarily associated with three borrowers in the real estate portfolio. The two largest borrowers are still performing and were internally classified by management as substandard. Additionally, there is one borrower that is secured by commercial real estate that was previously classified as substandard but is currently on nonaccrual status. From period ended December 31, 2002, the Company has experienced a $665,000 increase in the allocation of the allowance for loan losses in the commercial loan category. This increase is primarily due to internal classifications related to the catfish industry. The change during the first nine months of 2003 in the allocation of allowance for loan losses for credit cards and other consumer loans is consistent with the change in the outstanding loan portfolio for those products from December 31, 2002. As a result, the unallocated allowance increased $110,000 during the first nine months of 2003.
While the Company still has some concerns over the uncertainty of the economy and the impact of foreign imports on the catfish industry in Arkansas, management believes the allowance for loan losses is adequate for the period ended September 30, 2003.
An analysis of the allocation of allowance for loan losses is presented in Table 10.
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Deposits are the Company’s primary source of funding for earning assets and are primarily developed through the Company’s network of 62 financial centers. The Company offers a variety of products designed to attract and retain customers with a continuing focus on developing core deposits. The Company’s core deposits consist of all deposits excluding time deposits of $100,000 or more. As of September 30, 2003, core deposits comprised 80.8% of the Company’s total deposits.
The Company continually monitors the funding requirements at each affiliate bank along with competitive interest rates in the markets it serves. Because the Company has a community banking philosophy, it allows managers in the local markets to establish the interest rates being 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. Although the interest rate environment is at a historical low, the Company believes it is paying a competitive rate, when compared with pricing in those markets. As a result, total deposits as of September 30, 2003, were $1.625 billion, which is relatively unchanged when compared to the $1.619 billion on December 31, 2002.
Although the Company lowered the interest rates on its time deposits, total deposits remained relatively flat. Time deposits increased $1.5 million to $816.1 million from $814.6 million at December 31, 2002. Non-interest bearing transaction accounts increased by $5.7 million to $245.2 million compared to $239.5 million at December 31, 2002. Interest bearing transaction and savings accounts was $563.3 million, which is a $1.7 million decrease when compared to the $565.0 million on December 31, 2002.
The Company will continue to manage interest expense through deposit pricing and does not anticipate a significant change in total deposits. The Company believes that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if it experiences increased loan demand or other liquidity needs.
During the nine month period ended September 30, 2003, the Company increased long-term debt by $18.9 million, or 34.7% from December 31, 2002. The increase is a result of the Company increasing the Federal Home Loan Bank borrowings in its community banking network. The Company made this strategic decision to help manage interest rate risk on specific new loan fundings and commitments made during 2003.
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At September 30, 2003, total capital reached $207.2 million. Capital represents shareholder ownership in the Company — the book value of assets in excess of liabilities. At September 30, 2003, the Company’s equity to asset ratio was 10.28% compared to 9.99% at year-end 2002.
The Company has a stock repurchase program, which is authorized to repurchase up to 800,000 common shares. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares the Company intends to repurchase. The Company may discontinue purchases at any time that management determines additional purchases are not warranted. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. The Company intends to use the repurchased shares to satisfy stock option exercise, payment of future stock dividends and general corporate purposes.
During the nine-month period ended September 30, 2003, the Company repurchased 82,000 common shares of stock with a weighted average repurchase price of $20.99 per share. As of September 30, 2003, the Company has repurchased a total of 743,564 common shares of stock with a weighted average repurchase price of $12.86 per share. Upon completion of the current plan, the Company expects to renew the repurchase program. All information on the stock repurchase plan has been adjusted for the two for one stock split which was distributed to shareholders effective May 1, 2003.
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The Company declared cash dividends on its common stock of $0.385 per share (split adjusted) for the first nine months of 2003 compared to $0.355 per share (split adjusted) for the first nine months of 2002. In recent years, the Company increased dividends no less than annually and presently plans to continue with this practice.
The primary sources for payment of dividends by the Company to its shareholders and the share repurchase plan are the current cash on hand at the parent company plus the future dividends received from the seven affiliate banks. Payment of dividends by the seven affiliate banks is subject to various regulatory limitations. Reference is made to the Liquidity and Market Risk Management discussion of the MD&A for additional information regarding the parent company’s liquidity.
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 September 30, 2003, 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.
The Company’s risk-based capital ratios at September 30, 2003 and December 31, 2002, are presented in Table 11.
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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 September 30, 2003, undivided profits of the Company’s subsidiaries were approximately $115 million, of which approximately $15 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.
Generally speaking, the Company’s banking subsidiaries rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash used in investing activities. Typical of most banking companies, significant financing activities include: deposit gathering; use of short-term borrowing facilities, such as federal funds purchased and repurchase agreements; and the issuance of long-term debt. The banks’ primary investing activities include loan originations and purchases of investment securities, offset by loan payoffs and investment maturities.
Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors and borrowers, by either converting assets into cash or accessing new or existing sources of incremental funds. A major responsibility of management is to maximize net interest income within prudent liquidity constraints. Internal corporate guidelines have been established to constantly measure liquid assets, as well as relevant ratios concerning earning asset levels and purchased funds. The management and board of directors of each bank subsidiary monitor these same indicators and make adjustments as needed. At September 30, 2003, each subsidiary bank was within established guidelines and total corporate liquidity remains strong. At September 30, 2003, cash and cash equivalents, trading and available-for-sale securities and mortgage loans held for sale were 22.1% of total assets, as compared to 21.3% at December 31, 2002.
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The objective of the Company’s liquidity management is to access adequate sources of funding to ensure that cash flow requirements of depositors and borrowers are met in an orderly and timely manner. Sources of liquidity are managed so that reliance on any one funding source is kept to a minimum. The Company’s liquidity sources are prioritized for both availability and time to activation.
The Company’s liquidity is at the forefront of not only funding needs, but 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 six primary and secondary sources of liquidity available to the Company. The particular liquidity need and timeframe determine the use of these sources.
The first source of liquidity available to the Company is Federal funds. Federal funds, primarily from downstream correspondent banks, are available on a daily basis and are used to meet the normal fluctuations of a dynamic balance sheet. In addition, the Company and its affiliates have approximately $100 million in Federal funds lines of credit from upstream correspondent banks that can be accessed, when needed. In order to insure availability of these upstream funds, the Company has a plan for rotating the usage of the funds among the upstream correspondent banks, thereby providing approximately $50 million in funds on a given day. Historical monitoring of these funds has made it possible for the Company to project seasonal fluctuations and structure its funding requirements on a month to month basis.
Secondly, the Company uses a laddered investment portfolio that insures 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. The Company has begun designating a higher percentage of new investment purchases into the available-for-sale securities classification to provide additional flexibility in liquidity management. Approximately 65% of the investment portfolio is classified as available-for-sale. The Company also uses securities held in the securities portfolio to pledge when obtaining public funds.
A third source of liquidity is the retail deposits available through the Company’s network of affiliate banks throughout Arkansas. Although this method can be somewhat of a more expensive alternative to supplying liquidity, this source can be used to meet intermediate term liquidity needs.
Fourth, the Company has established a $5 million unsecured line of credit with a major commercial bank that could be used to meet unexpected liquidity needs at both the parent company level as well as at any affiliate bank.
The fifth source of liquidity is the ability to access brokered deposits. On an on-going basis the Company has chosen not to tap this source of funding. However, for short-term liquidity needs, it remains a viable option.
Finally, the Company’s affiliate banks have lines of credit available with Federal Home Loan Bank. While the Company has used portions of those lines only to match off longer-term mortgage loans, the Company could use those lines to meet liquidity needs. Approximately $244 million under these lines of credit are currently available, if needed.
The Company believes the various sources available are ample liquidity for short-term, intermediate-term, and long-term liquidity.
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Market risk arises from changes in interest rates. The Company has risk management policies to monitor and limit exposure to market risk. In asset and liability management activities, policies are in place that are designed to minimize structural interest rate risk. 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 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 models incorporate 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. In addition, the impact of planned growth and anticipated new business is factored into the simulation models. These assumptions are inherently uncertain and, as a result, the models 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.
Table 12 below presents the Company’s interest rate sensitivity position at September 30, 2003. This Gap analysis is based on a point in time and may not be meaningful because assets and liabilities are categorized according to contractual maturities (investment securities are according to call dates) and repricing periods rather than estimating more realistic behaviors, as is done in the simulation models. Also, the Gap analysis does not consider subsequent changes in interest rate level or spreads between asset and liability categories.
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In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement is currently effective for the Company’s interim reporting period of September 30, 2003. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability. The Company’s trust preferred securities qualify as a liability classification under SFAS No. 150. Because the Company currently, as well as historically, classifies its trust preferred securities as long term debt, management does not anticipate that the adoption of SFAS No. 150 will have a material impact on the financial condition or operating results of the Company.
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Statements in this report that are not historical facts should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements of this type speak only as of the date of this report. By nature, forward-looking statements involve inherent risk and uncertainties. Various factors, including, but not limited to, economic conditions, credit quality, interest rates, loan demand and changes in the assumptions used in making the forward-looking statements, could cause actual results to differ materially from those contemplated by the forward-looking statements. Additional information on factors that might affect the Company’s financial results is included in its annual report for 2002 (Form 10-K) filed with the Securities and Exchange Commission.
(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 a date within ninety days prior to the filing of this quarterly 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.
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Certified Public Accountants200 East EleventhPine Bluff, Arkansas
Board of DirectorsSimmonsFirst National CorporationPine Bluff, Arkansas
We have reviewed the accompanying consolidated balance sheet of SIMMONS FIRST NATIONAL CORPORATION as of September 30, 2003, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2003 and 2002 and changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2003 and 2002. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of 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 reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated January 31, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ BKD, LLP BKD, LLP
Pine Bluff, ArkansasOctober 29, 2003
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Recent Sales of Unregistered Securities. The following transactions are sales of unregistered shares of Class A Common Stock of the Company which were issued to executive and senior management officers upon the exercise of rights granted under (i) the Simmons First National Corporation Incentive and Non-qualified Stock Option Plan (ii) the Simmons First National Corporation Executive Stock Incentive Plan, or (iii) the Simmons First National Corporation Executive Stock Incentive Plan — 2001. 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. The Company received cash or exchanged shares of the Company’s Class A Common Stock as the consideration for the transactions. The share and price information has been adjusted for the two for one stock split, which was distributed to shareholders effective May 1, 2003.
Notes:
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a) Exhibits
b) Reports on Form 8-K
The registrant filed Form 8-K on July 18, 2003. The report contained the text of a press release issued by the registrant concerning the announcement of second quarter 2003 earnings.
The registrant filed Form 8-K on July 28, 2003. The report contained the text of a press release issued by the registrant announcing a change in the ticker symbol from SFNCA to SFNC.
The registrant filed Form 8-K on August 29, 2003. The report contained the text of a press release issued by the registrant concerning the declaration of a quarterly cash dividend.
The registrant filed Form 8-K on September 8, 2003. The report contained the text of a press release issued by the registrant concerning an agreement to acquire nine branches from Union Planters, N.A.
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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.
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CERTIFICATION
I, J. Thomas May certify that:
1. I have reviewed this quarterly report on Form 10-Q of Simmons First National Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: October 30, 2003
/s/ J. Thomas MayJ. Thomas May, Chairman, President and Chief Executive Officer
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I, Barry L. Crow, certify that:
/s/ Barry L. CrowBarry L. Crow, Executive Vice President and Chief Financial Officer
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Index to Exhibits
Exhibit Description
Exhibit 99.1 - 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, President and Chief Executive Officer
Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Barry L. Crow, Chief Financial Officer