QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934
SIMMONS FIRST NATIONAL CORPORATION
INDEX
Item 1: Consolidated Financial Statements and Condensed Notes to Financial Statements
Simmons First National CorporationConsolidated Balance SheetsMarch 31, 2005 and December 31, 2004
ASSETS
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Simmons First National CorporationConsolidated Statements of IncomeThree Months Ended March 31, 2005 and 2004
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Simmons First National CorporationConsolidated Statements of Cash FlowsThree Months Ended March 31, 2005 and 2004
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Simmons First National CorporationConsolidated Statements of Stockholders’ EquityThree Months Ended March 31, 2005 and 2004
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CONDENSED 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 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 2004 filed with the Securities and Exchange Commission.
Earnings Per Share
Basic earnings per share are 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 three months ended March 31, 2005 and 2004.
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NOTE 2: ACQUISITIONS
On June 25, 2004, the Company completed the branch purchase in which Cross County Bank sold its Weiner, Arkansas location to Simmons First Bank of Jonesboro, a subsidiary of the Company. The acquisition included approximately $6 million in total deposits and the fixed assets used in the branch operation. No loans were involved in the transaction. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $344,000 and $117,000, respectively.
On March 19, 2004, the Company merged with Alliance Bancorporation, Inc. (ABI). ABI owned Alliance Bank of Hot Springs, Hot Springs, Arkansas with consolidated assets (including goodwill and core deposit premiums), loans and deposits of approximately $155 million, $70 million and $110 million, respectively. During the second quarter of 2004, Alliance Bank changed its name to Simmons First Bank of Hot Springs and continues to operate as a separate community bank with virtually the same board of directors, management and staff. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $14,690,000 and $1,245,000, respectively.
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:
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The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $414,358,000 at March 31, 2005 and $397,311,000 at December 31, 2004.
The book value of securities sold under agreements to repurchase amounted to $71,921,000 and $68,515,000 for March 31, 2005 and December 31, 2004, respectively.
Income earned on securities for the three months ended March 31, 2005 and 2004, is as follows:
There were no realized gains or losses as of March 31, 2005 and 2004.
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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NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
The various categories are summarized as follows:
As of March 31, 2005, credit card loans, which are unsecured, were $141,793,000 or 8.9%, of total loans versus $155,326,000 or 9.9% of total loans at December 31, 2004. The credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Credit card loans are regularly reviewed to facilitate the identification and monitoring of creditworthiness.
At March 31, 2005 and December 31, 2004, impaired loans totaled $16,444,000 and $16,606,000, respectively. All impaired loans had either specific or general allocations within the allowance for loan losses. Allocations of the allowance for loan losses relative to impaired loans at March 31, 2005, were $4,060,000 and $4,125,000 at December 31, 2004. Approximately $97,000 and $128,000 of interest income were recognized on average impaired loans of $16,375,000 and $20,890,000 as of March 31, 2005 and 2004, respectively. Interest recognized on impaired loans on a cash basis during the first three months of 2005 and 2004 was immaterial.
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NOTE 5: GOODWILL AND CORE DEPOSIT PREMIUMS
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
Core deposit premiums are periodically evaluated as to the recoverability of their carrying value.
The carrying basis and accumulated amortization of core deposit premiums (net of core deposit premiums that were fully amortized) at March 31, 2005 and December 31, 2004, were as follows:
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NOTE 6: TIME DEPOSITS
Time deposits include approximately $376,478,000 and $356,926,000 of certificates of deposit of $100,000 or more at March 31, 2005 and December 31, 2004, respectively.
NOTE 7: INCOME TAXES
The provision for income taxes is comprised of the following components:
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NOTE 8: LONG-TERM DEBT
Long-term debt at March 31, 2005 and December 31, 2004, consisted of the following components:
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The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment. Distributions on these securities are included in interest expense on long-term debt. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Corporation, the sole asset of each trust. The preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by the Corporation. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Corporation making payment on the related junior subordinated debentures. The Corporation’s obligations under the junior subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Corporation of each respective trust’s obligations under the trust securities issued by each respective trust.
Aggregate annual maturities of long-term debt at March 31, 2005, are:
NOTE 9: CONTINGENT LIABILITIES
The Company and/or its subsidiaries have various unrelated legal proceedings, most of which involve loan foreclosure activity pending, which, in the aggregate, are not expected to have a material adverse effect on the financial position of the Company and its subsidiaries. However, on October 1, 2003, an action in Pulaski County Circuit Court was filed by Thomas F. Carter, Tena P. Carter and certain related entities against Simmons First Bank of South Arkansas and Simmons First National Bank alleging wrongful conduct by the banks in the collection of certain loans. The plaintiffs are seeking $2,000,000 in compensatory damages and $10,000,000 in punitive damages. The Company has filed a Motion to Dismiss. At this time, no basis for any material liability has been identified. The Banks plan to vigorously defend the claims asserted in the suit.
NOTE 10: CAPITAL STOCK
At the Company’s annual shareholder meeting held on March 30, 2004, the shareholders approved an amendment to the Articles of Incorporation reducing the par value of the Class A Common Stock from $1.00 to $0.01 and eliminating the authority of the Company to issue Class B Common Stock, Class A Preferred Stock and Class B Preferred Stock.
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NOTE 11: UNDIVIDED PROFITS
The Company’s 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 March 31, 2005, the bank subsidiaries had approximately $11 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 March 31, 2005, each of the eight subsidiary banks met the capital standards for a well-capitalized institution. The Company’s “total risk-based capital” ratio was 14.04% at March 31, 2005.
NOTE 12: STOCK OPTIONS AND RESTRICTED STOCK
At March 31, 2005, the Company had stock options outstanding of 648,920 shares and stock options exercisable of 510,375 shares. During the first three months of 2005, there were 26,080 shares issued upon exercise of stock options, options for 900 shares expired and no additional stock options of the Company were granted. Also, no additional shares of common stock of the Company were granted and issued as bonus shares of restricted stock, during the first three months of 2005.
NOTE 13: ADDITIONAL CASH FLOW INFORMATION
NOTE 14: 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. 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.
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NOTE 15: COMMITMENTS AND CREDIT RISK
The Company grants agri-business, credit card, commercial and residential loans to customers throughout Arkansas. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
At March 31, 2005, the Company had outstanding commitments to extend credit aggregating approximately $209,398,000 and $384,217,000 for credit card commitments and other loan commitments, respectively. At December 31, 2004, the Company had outstanding commitments to extend credit aggregating approximately $188,399,000 and $339,866,000 for credit card commitments and other loan commitments, respectively.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $16,351,000 and $16,684,000 at March 31, 2005 and December 31, 2004, respectively, with terms ranging from 90 days to three years. At March 31, 2005 and December 31, 2004, the Company’s deferred revenue under standby letter of credit agreements was approximately $21,000 and $85,000, respectively.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BKD, LLP
Certified Public Accountants200 East EleventhPine Bluff, Arkansas
Audit Committee, Board of Directors and StockholdersSimmons First National CorporationPine Bluff, Arkansas
We have reviewed the accompanying consolidated balance sheet of SIMMONS FIRST NATIONAL CORPORATION as of March 31, 2005, and the related consolidated statements of income, stockholders’ equity and cash flows for the three-month periods ended March 31, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board, 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 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, 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 February 9, 2005, 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, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
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OVERVIEW
Simmons First National Corporation recorded earnings of $5,860,000, or $0.40 diluted earnings per share for the first quarter of 2005, compared to earnings of $5,411,000, or $0.37 diluted earnings per share for same period in 2004. This represents a $449,000, or 8.3% increase in the first quarter 2005 earnings over 2004. From March 31, 2004 to March 31, 2005, diluted earnings per share increased by $0.03, or 8.1%. Return on average assets and return on average stockholders’ equity for the three-month period ended March 31, 2005, was 0.97% and 10.04%, compared to 0.96% and 10.09%, respectively, for the same period in 2004. On a quarter over quarter basis, the increase in earnings is primarily attributable to the growth in the loan portfolio, an improvement in net interest margin, and an increase in the level of non-interest income.
Total assets for the Company at March 31, 2005, were $2.443 billion, an increase of $28.6 million from December 31, 2004. Stockholders’ equity at the end of the first quarter of 2005 was $232.3 million, a $5.9 million, or 2.5%, decrease from December 31, 2004. The decrease in stockholders’ equity was directly related to the repurchase of $6.8 million of the Company’s stock and $3.1 million additional unrealized losses on securities classified as available for sale during the first quarter of 2005.
The allowance for loan losses as a percent of total loans equaled 1.67% and 1.69% as of March 31, 2005 and December 31, 2004, respectively. As of March 31, 2005, non-performing loans equaled 0.75% of total loans compared to 0.76% as of year-end 2004. As of March 31, 2005, the allowance for loan losses equaled 223% of non-performing loans compared to 221% at year-end 2004.
Simmons First National Corporation is an Arkansas based, Arkansas committed, financial holding company with eight community banks in Pine Bluff, Lake Village, Jonesboro, Rogers, Searcy, Russellville, El Dorado and Hot Springs, Arkansas. The Company’s eight banks conduct financial operations from 77 offices, of which 75 are financial centers, in 44 communities.
CRITICAL ACCOUNTING POLICIES
Overview
Management has reviewed its various accounting policies. Based on this review management believes the policies most critical to the Company are the policies associated with its lending practices including the accounting for the allowance for loan losses, treatment of goodwill, recognition of fee income, estimates of income taxes and employee benefit plans as it relates to stock options.
Loans
Loans which the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any loans charged-off, 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
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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.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the 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.
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 collected.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of acquired subsidiaries and branches. Financial Accounting Standards Board Statement No. 142 and No. 147 eliminated the amortization for these assets as of January 1, 2002. Although goodwill is not being amortized, it is tested annually for impairment.
Core Deposit Premiums
Core deposit premiums are being amortized using both straight-line and accelerated methods over periods ranging from 8 to 15 years. Such assets are periodically evaluated as to the recoverability of their carrying value.
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Fee Income
Periodic credit card fees, net of direct origination costs, are recognized as revenue on a straight-line basis over the period the fee entitles the cardholder to use the card. Origination fees and costs for other loans are being amortized over the estimated life of the loan.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
Employee Benefit Plans
The Company has a stock-based employee compensation plan. Presently, 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.
In December 2004, FASB issued SFAS No. 123R, Share-Based Payment, which requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. SFAS 123R becomes effective for public companies at the beginning of their next fiscal year that begins after June 15, 2005. The standard would require companies to expense the fair value of all stock options that have future vesting provisions, are modified, or are newly granted beginning on the grant date of such options. The Company is currently evaluating the impact that this statement will have on its financial statements and the Company will adopt SFAS 123R on the effective date of the statement.
ACQUISITIONS
On March 19, 2004, the Company merged with ABI. ABI owned Alliance Bank of Hot Springs, Hot Springs, Arkansas with consolidated assets (including goodwill and core deposit premiums), loans and deposits of approximately $155 million, $70 million and $110 million, respectively. During the second quarter of 2004, Alliance Bank changed its name to Simmons First Bank of Hot Springs and continues to operate as a separate community bank with virtually the same board of directors, management and staff. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $14,690,000 and $1,245,000, respectively.
The systems integration for the 2004 mergers and acquisitions were completed during the second quarter of 2004.
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NET INTEREST INCOME
Net interest income, the Company’s principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (37.5% for March 31, 2005 and 2004).
For the three-month period ended March 31, 2005, net interest income on a fully taxable equivalent basis was $22.9 million, an increase of $2.0 million, or 9.8%, from the same period in 2004. The increase in net interest income was the result of a $3.4 million increase in interest income offset by a $1.4 million increase in interest expense.
The $3.4 million increase in interest income primarily is the result of a $144.1 million increase in average interest earning assets associated with acquisitions and internal growth, as well as a 32 basis point increase in the yield on earning assets associated with the higher interest rate environment and the earning asset mix. The growth in average interest earning assets resulted in a $2.6 million improvement in interest income. More specifically, the higher level of average interest earning assets was the result of increases of approximately $109.3 million and $34.8 million from acquisitions and internal growth, respectively. The higher interest rates accounted for a $0.8 million increase in interest income. The most significant component of this increase was the $0.4 million increase associated with the repricing of the Company’s loan portfolio that resulted from loans that matured during the period or were tied to a rate that fluctuated with changes in market rates. Historically, approximately 75% of the Company’s loan portfolio reprices in one year or less. As a result, the average rate paid on the loan portfolio increased 16 basis points from 6.40% to 6.56%.
The $1.4 million increase in interest expense is the result a $131.5 million increase in average interest bearing liabilities associated with acquisitions and internal growth, coupled with a 20 basis point increase in cost of funds due to repricing during the higher interest rate environment. The higher level of average interest bearing liabilities resulted in a $0.3 million increase in interest expense. More specifically, the higher level of average interest bearing liabilities was the result of increases of approximately $96.2 million and $55.2 million from acquisitions and internal growth, respectively, offset by a $19.9 million reduction in average debt due primarily to the payoff of $17.3 million of trust preferred securities. The higher interest rates accounted for a $1.1 million increase in interest expense. The most significant component of this increase was the $0.5 million increase associated with the repricing of the Company’s time deposits that resulted from time deposits that matured during the period or were tied to a rate that fluctuated with changes in market rates. Historically, approximately 85% of the Company’s time deposits reprice in one year or less. As a result, the average rate paid on time deposits increased 26 basis points from 2.05% to 2.31%.
The Company’s net interest margin increased 14 basis points to 4.17% for the three-month period ended March 31, 2005, when compared to 4.03% for the same period in 2004. The increase in net interest margin can be primarily attributed to the continued growth in real estate loans, combined with the reduction in interest expense resulting from the December 31, 2004 prepayment of $17.3 million of trust preferred securities. Although net interest margin increased from last year, there were also some factors that negatively impacted the margin. Two of the higher yielding products, credit cards and
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consumer lending, decreased approximately $23.3 million from March 31, 2004 to March 31, 2005. The Company also completed a corporate-wide deposit promotion based on its projected liquidity needs for the balance of the year. The approximately $45 million of new deposits from this promotion, along with the transfer of funds to these accounts by existing customers, caused some temporary margin compression.
On April 29, 2005 the Company purchased $25 million of bank owned life insurance (“BOLI”). The expected increases in cash surrender value from these BOLI policies will be recognized as tax-free non-interest income. If the Company had not purchased this BOLI, these funds would have been available for investment in interest earning assets. Shifting these funds from interest earning assets to non-interest income producing assets will have the effect of reducing the Company’s net interest margin in future quarters.
Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three-month periods ended March 31, 2005 and 2004, respectively, as well as changes in fully taxable equivalent net interest margin for the three-month periods ended March 31, 2005 versus March 31, 2004.
Table 1: Analysis of Net Interest Income
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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 periods ended March 31, 2005 and 2004. 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.
Table 3: Average Balance Sheets and Net Interest Income Analysis
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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 period ended March 31, 2005, as compared to the same period 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.
Table 4: Volume/Rate Analysis
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PROVISION FOR LOAN LOSSES
The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings, in order to maintain the allowance for loan losses at a level, which is considered adequate, in relation to the estimated risk inherent in the loan portfolio. The provision for the three-month period ended March 31, 2005, was $2.2 million, which is comparable to the $2.1 million for the three-month period ended March 31, 2004.
NON-INTEREST INCOME
Total non-interest income was $10.1 million for the three-month period ended March 31, 2005, compared to $9.6 million for the same period in 2004. Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees, credit card fees and premiums on the sale of student loans. Non-interest income also includes income on the sale of mortgage loans and investment banking profits.
On April 29, 2005, the Company purchased $25 million of BOLI, which will result in additional tax-free, non-interest income in future periods.
Table 5 shows non-interest income for the three-month periods ended March 31, 2005 and 2004, respectively, as well as changes in 2005 from 2004.
Table 5: Non-Interest Income
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Recurring fee income for the three-month period ended March 31, 2005, was $8.4 million, an increase of $268,000, or 3.31% from the three-month period ended March 31, 2004. For the three-month period ended March 31, 2005, service charges on deposit accounts increased by $187,000 from the March 31, 2004 level. The increase in service charges on deposit accounts for 2005 is primarily the result of the acquisitions completed in 2004, growth in transaction accounts, and improvement in the service charge fee structure associated with the Company’s deposit accounts.
Credit card fees were $2.34 million for the quarter ended March 31, 2005, a slight increase from $2.31 million for the same period in 2004. Due to competitive pressure in the credit card industry, the Company continues to experience a decline in the number of cardholders in the credit card portfolio.
During the three-month period ended March 31, 2005, income on the sale of mortgage loans and income on investment banking decreased $69,000 and $157,000, respectively, from the same period during 2004. These 2005 decreases were primarily the result of a reduced demand for those products due to the rising interest rate environment.
Other non-interest income for the quarter ended March 31, 2005, was $974,000, an increase of $382,000 over the quarter ended March 31, 2004. The increase primarily resulted from a one-time distribution of approximately $250,000 the Company received as part of the proceeds when Pulse EFT, a regional ATM switching network used by the Company, merged with Discover Financial Services.
NON-INTEREST EXPENSE
Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for the operation of the Company. Management remains committed to controlling the level of non-interest expense, through the continued use of expense control measures that have been installed. The Company utilizes an extensive profit planning and reporting system involving all affiliates. Based on a needs assessment of the business plan for the upcoming year, monthly and annual profit plans are developed, including manpower and capital expenditure budgets. These profit plans are subject to extensive initial reviews and monitored by management on a monthly basis. Variances from the plan are reviewed monthly and, when required, management takes corrective action intended to ensure financial goals are met. Management also regularly monitors staffing levels at each affiliate, to ensure productivity and overhead are in line with existing workload requirements.
Non-interest expense for the three-month period ended March 31, 2005, was $21.4 million, an increase of $1.7 million or 8.8%, from the same period in 2004. This increase is primarily the result of the increase in normal on-going operating expenses and the additional expenses associated with the 2004 acquisitions. Excluding the acquisitions, the increase in non-interest expense was 4.6%.
The Company closed three small financial centers during the first quarter of 2005. The decisions to close these financial centers were a part of on-going efforts to improve the efficiency of the Company’s branching network, many of which were acquired through mergers and acquisitions.
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Table 6 below shows non-interest expense for the periods ended March 31, 2005 and 2004, respectively, as well as changes to the first three months of 2005 from first three months of 2004, respectively.
Table 6: Non-Interest Expense
LOAN PORTFOLIO
The Company’s loan portfolio averaged $1.575 billion and $1.435 billion during the first three months of 2005 and 2004, respectively. As of March 31, 2005, total loans were $1.586 billion, an increase of $15.1 million from December 31, 2004. The most significant components of the loan portfolio were loans to businesses (commercial loans, commercial real estate loans and agricultural loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans).
The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral, obtaining and monitoring collateral, providing an adequate allowance for loan losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry and, in the case of credit card loans, which are unsecured, by geographic region. The Company seeks to use diversification within the loan portfolio to reduce credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. The Company uses the allowance for loan losses as a method to value the loan portfolio at its estimated 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 $356.8 million at March 31, 2005, or 22.5% of total loans, compared to $367.2 million, or 23.4% of total loans at December 31, 2004. The consumer loan decrease from December 31, 2004 to March 31, 2005 is the result of the Company’s lower credit card portfolio and other consumer loans, which was partially offset by an increase in student loans. The increase in student loans was the result of normal growth due to the greater demand for that product. The Company historically experiences a lower level in the credit card portfolio in the first quarter due to the seasonal nature of the product. As a general rule, credit card usage increases throughout the year, reaching its highest level during the fourth quarter.
The consumer market, particularly credit card and automobile loans, continues to be a challenge. The credit card portfolio continued to decline as the result of an on-going decrease in the number of cardholder accounts resulting from competitive pressure in the credit card industry. The Company has introduced several new initiatives that management believes will make the credit card product more competitive. The primary initiative is to move as many qualifying accounts as possible from a standard VISA product to a Platinum VISA Rewards product. The Platinum card compares favorably with similar products in the market, carries a low fixed interest rate of 8.95%, and offers the customers competitive air mileage based on their purchases. The Company plans to expand the rewards program beyond the air mileage offering. Management believes the increased usage will more than offset the increased cost. The decline in other consumer loans was the primarily the result of the on-going special financing incentives offered by car manufacturers.
Real estate loans consist of construction loans, single-family residential loans and commercial loans. Real estate loans were $991.0 million at March 31, 2005, or 62.5% of total loans, compared to the $969.2 million, or 61.7% of total loans at December 31, 2004. The increase in real estate loans is primarily due to increased loan demand.
Commercial loans consist of commercial loans, agricultural loans and loans to financial institutions. Commercial loans were $220.9 million at March 31, 2005, or 13.9% of total loans, which is comparable to $222.0 million, or 14.1% of total loans at December 31, 2004.
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The amounts of loans outstanding at the indicated dates are reflected in Table 7, according to type of loan.
Table 7: Loan Portfolio
ASSET QUALITY
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. Impaired loans include non-performing loans (loans past due 90 days or more and nonaccrual loans) and certain other loans identified by management that are still performing.
Non-performing loans are comprised of (a) nonaccrual loans, (b) loans that are contractually past due 90 days and (c) other loans for which terms have been restructured to provide a reduction or deferral of interest or principal, because of deterioration in the financial position of the borrower. The subsidiary banks recognize income principally on the accrual basis of accounting. When loans are classified as nonaccrual, the accrued interest is charged off and no further interest is accrued. Loans, excluding credit card loans, are placed on a nonaccrual basis either: (1) when there are serious doubts regarding the collectability of principal or interest, or (2) when payment of interest or principal is 90 days or more past due and either (i) not fully secured or (ii) not in the process of collection. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for loan losses.
Credit card loans are classified as impaired when payment of interest or principal is 90 days past due. Litigation accounts are placed on nonaccrual until such time as deemed uncollectible. Credit card loans are generally charged off when payment of interest or principal exceeds 180 days past due, but are turned over to the credit card recovery department, to be pursued until such time as they are determined, on a case-by-case basis, to be uncollectible.
At March 31, 2005, impaired loans were $16.4 million compared to $16.6 million at December 31, 2004.
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Table 8 presents information concerning non-performing assets, including nonaccrual and restructured loans and other real estate owned.
Table 8: Non-performing Assets
There was no interest income on the nonaccrual loans recorded for the three-month periods ended March 31, 2005 and 2004.
ALLOWANCE FOR LOAN LOSSES
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.
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.
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Specific Allocations
Specific allocations are made when factors are present requiring a greater reserve than would be required when using the assigned risk rating allocation. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. 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 and, when applicable, guarantor capacity.
Allocations for Classified Assets with no Specific Allocation
The Company establishes allocations for loans rated “watch” through “doubtful” in accordance with the guidelines established by the regulatory agencies. This allowance element is determined by an internal grading process in conjunction with associated risk factors. A percentage rate is applied to each category of these loan categories to determine the level of dollar allocation.
General Allocations
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. The Company has the ability to revise the general allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan pool classification.
Miscellaneous Allocations
Allowance allocations other than specific, classified and general for the Company are included in the miscellaneous section. These primarily consist of allocations for unfunded loan commitments.
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An analysis of the allowance for loan losses is shown in Table 9.
Table 9: Allowance for Loan Losses
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Provision for loan losses
The amount of provision to the allowance during the three-month periods ended March 31, 2005 and 2004, and for the year ended December 31, 2004, 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.
Allocated Allowance for Loan Losses
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. This imprecision results from several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends.
The Company’s allocation of the allowance for loan losses at March 31, 2005 remained consistent with the allocation at December 31, 2004.
While the Company still has some concerns over the uncertainty of the economy and the impact of pricing in the catfish industry in Arkansas, management believes the allowance for loan losses is adequate for the period ended March 31, 2005.
The Company allocates the allowance for loan losses according to the amount deemed to be reasonably necessary to provide for losses incurred within the categories of loans set forth in Table 10.
Table 10: Allocation of Allowance for Loan Losses
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DEPOSITS
Deposits are the Company’s primary source of funding for earning assets and are primarily developed through the Company’s network of 75 financial centers as of March 31, 2005. 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 March 31, 2005, core deposits comprised 81.3% 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 of the Company’s community banking philosophy, affiliate executives in the local markets establish the interest rates offered on both core and non-core deposits. This approach ensures that the interest rates being paid are competitively priced for each particular deposit product and structured to meet funding requirements. Although interest rates have been at historical lows and are slowly beginning to rise, the Company believes it is paying a competitive rate, when compared with pricing in those markets. As a result, internal deposit growth was $49.2 million. More specifically, total deposits as of March 31, 2005, were $2.008 billion versus $1.959 billion on December 31, 2004.
The Company manages its interest expense through deposit pricing. The Company believes that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if it experiences accelerated loan demand or other liquidity needs beyond its current projections. During the first quarter of 2005, the Company generated approximately $45 million of new deposits with a corporate-wide time deposit promotion based on its projected liquidity needs for the balance of the year. Currently, the Company does not utilize brokered deposits; however, brokered deposits can provide an additional source of funding to meet liquidity needs.
Total time deposits increased approximately $45.0 million as a result of the deposit promotion and decreased $3.2 million through internal deposit shrinkage, to $938.6 million at March 31, 2005, from $896.8 million at December 31, 2004. Non-interest bearing transaction accounts increased $3.2 million to $296.3 million at March 31, 2005, compared to $293.1 million at December 31, 2004. Interest bearing transaction and savings accounts were $773.4 million at March 31, 2005, a $4.1 million increase compared to $769.3 million on December 31, 2004.
LONG-TERM DEBT
During the three month period ended March 31, 2005, the Company decreased long-term debt by $2.2 million, or 2.3% from December 31, 2004. This decrease is primarily the result of normal pay downs on FHLB long-term advances.
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CAPITAL
At March 31, 2005, total capital reached $232.3 million. Capital represents shareholder ownership in the Company — the book value of assets in excess of liabilities. At March 31, 2005, the Company’s equity to asset ratio was 9.51% compared to 9.87% at year-end 2004.
Capital Stock
Stock Repurchase
On May 25, 2004, the Company announced the adoption by the Board of Directors of a new stock repurchase program. The program authorizes the repurchase of up to 5% of the outstanding Common Stock, or 733,485 shares. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares the Company intends to repurchase. The Company may discontinue purchases at any time that management determines additional purchases are not warranted. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. The Company intends to use the repurchased shares to satisfy stock option exercises, payment of future stock dividends and general corporate purposes.
During the three-month period ended March 31, 2005, the Company repurchased 11,500 shares of stock under the repurchase plan with a weighted average repurchase price of $24.83 per share. The Company purchased an additional 250,000 shares for $26.00 per share, negotiated in a private transaction outside the repurchase plan. Under the current stock repurchase plan, the Company can repurchase an additional 654,020 shares.
Cash Dividends
The Company declared cash dividends on its common stock of $0.15 per share for the first quarter of 2005 compared to $0.14 per share for the first quarter of 2004. In recent years, the Company increased dividends no less than annually and presently plans to continue with this practice.
Parent Company Liquidity
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 eight affiliate banks. Payment of dividends by the eight 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.
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Risk Based Capital
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 March 31, 2005, 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.
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The Company’s risk-based capital ratios at March 31, 2005 and December 31, 2004, are presented in Table 11.
Table 11: Risk-Based Capital
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “anticipate,” “estimate,” “expect,” “foresee,” “may,” “might,” “will,” “would,” “could” or “intend,” future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the Company’s future growth, revenue, assets, asset quality, profitability and customer service, critical accounting policies, net interest margin, non-interest revenue, market conditions related to the Company’s stock repurchase program, allowance for loan losses, the effect of certain new accounting standards on the Company’s financial statements, income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of pending litigation, acquisition strategy, legal and regulatory limitations and compliance and competition.
We caution the reader not to place undue reliance on the forward-looking statements contained in this Report in that actual results could differ materially from those indicated in such forward-looking statements, due to a variety of factors. These factors include, but are not limited to, changes in the Company’s operating or expansion strategy, availability of and costs associated with obtaining adequate and timely sources of liquidity, the ability to maintain credit quality, possible adverse rulings, judgments, settlements and other outcomes of pending litigation, the ability of the Company to collect amounts due under loan agreements, changes in consumer preferences, effectiveness of the Company’s interest rate risk management strategies, laws and regulations affecting financial institutions in general or relating to taxes, the effect of pending or future legislation, the ability of the Company to repurchase its Common Stock on favorable terms and other risk factors. Other relevant risk factors may be detailed from time to time in the Company’s press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report
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Item 3: Quantitative and Qualitative Disclosure About Market Risk
Parent Company
The Company has leveraged its investment in subsidiary banks and depends upon the dividends paid to it, as the sole shareholder of the subsidiary banks, as a principal source of funds for dividends to shareholders, stock repurchase and debt service requirements. At March 31, 2005, undivided profits of the Company’s subsidiaries were approximately $126 million, of which approximately $11 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.
Banking Subsidiaries
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 March 31, 2005, each subsidiary bank was within established guidelines and total corporate liquidity remains strong. At March 31, 2005, cash and cash equivalents, trading and available-for-sale securities and mortgage loans held for sale were 23.5% of total assets, as compared to 23.1% at December 31, 2004.
Liquidity Management
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 a primary consideration in determining funding needs and is an integral part of asset/liability management. Pricing of the liability side is a major component of interest margin and spread management. Adequate liquidity is a necessity in addressing this critical task. There are six primary and secondary sources of liquidity available to the Company. The particular liquidity need and timeframe determine the use of these sources.
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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 $71 million in Federal funds lines of credit from upstream correspondent banks that can be accessed, when needed. In order to ensure availability of these upstream funds, the Company has a plan for rotating the usage of the funds among the upstream correspondent banks, thereby providing approximately $40 million in funds on a given day. Historical monitoring of these funds has made it possible for the Company to project seasonal fluctuations and structure its funding requirements on month-to-month basis.
A second 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.
Third, the Company’s affiliate banks have lines of credits available with Federal Home Loan Bank. While the Company has previously used portions of those lines to match off longer-term mortgage loans, the Company could use those lines to meet liquidity needs. Approximately $371 million of these lines of credit are currently available, if needed.
Fourth, the Company uses a laddered investment portfolio that ensures there is a steady source of intermediate term liquidity. These funds can be used to meet seasonal loan patterns and other intermediate term balance sheet fluctuations. Approximately 74% 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.
The fifth source of liquidity is the ability to access large deposits from both the public and private sector. On an ongoing 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 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 Company believes the various sources available are ample liquidity for short-term, intermediate-term and long-term liquidity.
Market Risk Management
Market risk arises from changes in interest rates. The Company has risk management policies to monitor and limit exposure to market risk. In asset and liability management activities, policies are in place 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.
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Interest Rate Sensitivity
Interest rate risk represents the potential impact of interest rate changes on net income and capital resulting from mismatches in repricing opportunities of assets and liabilities over a period of time. A number of tools are used to monitor and manage interest rate risk, including simulation models and interest sensitivity gap analysis. Management uses simulation models to estimate the effects of changing interest rates and various balance sheet strategies on the level of the Company’s net income and capital. As a means of limiting interest rate risk to an acceptable level, management may alter the mix of floating and fixed-rate assets and liabilities, change pricing schedules and manage investment maturities during future security purchases.
The simulation 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 A below presents the Company’s interest rate sensitivity position at March 31, 2005. This analysis is based on a point in time and may not be meaningful because assets and liabilities are categorized according to contractual maturities, repricing periods and expected cash flows rather than estimating more realistic behaviors, as is done in the simulation models. Also, this analysis does not consider subsequent changes in interest rate level or spreads between asset and liability categories.
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Item 4. Controls and Procedures
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-15(e) or 15 C.F.R. 240.15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
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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Part II: Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) 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.
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Item 6. Exhibits.
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* Filed herewith.
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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.
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