ITEM 1. BUSINESS
The Company and the Banks
Simmons First National Corporation (the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956. The Gramm-Leach-Bliley-Act ("GLB Act") has substantially increased the financial activities that certain banks, bank holding companies, insurance companies and securities brokerage companies are permitted to undertake. Under the GLB Act, expanded activities in insurance underwriting, insurance sales, securities brokerage and securities underwriting not previously allowed for banks and bank holding companies are now permitted upon satisfaction of certain guidelines concerning management, capitalization and satisfaction of the applicable Community Reinvestment Act guidelines for the banks. Generally these new activities are permitted for bank holding companies whose banking subsidiaries are well managed, well capitalized and have at least a satisfactory rating under the Community Reinvestment Act. A bank holding company must apply to become a financial holding company and the Board of Governors of the Federal Reserve System must approve its application.
The Company's application to become a financial holding company was approved by the Board of Governors on March 13, 2000. The Company has reviewed the new activities permitted under the Act. If the appropriate opportunity presents itself, the Company is interested in expanding into other financial services. However, at this time the Company has no definite plans to commence any of the new activities.
The Company was the largest publicly traded bank holding company headquartered in Arkansas with consolidated total assets of $2.0 billion, consolidated loans of $1.3 billion, consolidated deposits of $1.6 billion and total equity capital of $198 million as of December 31, 2002. The Company owns seven community banks in Arkansas. The Company's banking subsidiaries conduct their operations through 65 offices located in 34 communities in Arkansas.
Simmons First National Bank (the "Bank") is the Company's lead bank. The Bank is a national bank, which has been in operation since 1903. The Bank's primary market area, with the exception of its nationally provided credit card product, is Central and Western Arkansas. At December 31, 2002, the Bank had total assets of $1.0 billion, total loans of $619 million and total deposits of $829 million. Simmons First Trust Company N.A., a wholly owned subsidiary of the Bank, performs the Company's trust and fiduciary business operations.
Simmons First Bank of Jonesboro ("Simmons/Jonesboro") is a state bank, which was acquired in 1984. Simmons/Jonesboro's primary market area is Northeast Arkansas. At December 31, 2002, Simmons/Jonesboro had total assets of $200 million, total loans of $155 million and total deposits of $182 million.
Simmons First Bank of South Arkansas ("Simmons/South") is a state bank, which was acquired in 1984. Simmons/South's primary market area is Southeast Arkansas. During the second quarter of 2001, the Company made a strategic decision to consolidate the charters of its two smallest banking subsidiaries. The Company consolidated Simmons First Bank of Dumas into Simmons/South on December 7, 2001. At December 31, 2002, Simmons/South had total assets of $112 million, total loans of $67 million and total deposits of $100 million.
Simmons First Bank of Northwest Arkansas ("Simmons/Northwest") is a state bank, which was acquired in 1995. Simmons/Northwest's primary market area is Northwest Arkansas. At December 31, 2002, Simmons/Northwest had total assets of $198 million, total loans of $139 million and total deposits of $172 million.
Simmons First Bank of Russellville ("Simmons/Russellville") is a state bank, which was acquired in 1997. Simmons/Russellville's primary market area is Russellville, Arkansas. At December 31, 2002, Simmons/Russellville had total assets of $207 million, total loans of $120 million and total deposits of $153 million.
Simmons First Bank of Searcy ("Simmons/Searcy") is a state bank, which was acquired in 1997. Simmons/Searcy's primary market area is Searcy, Arkansas. At December 31, 2002, Simmons/Searcy had total assets of $113 million, total loans of $72 million and total deposits of $86 million.
Simmons First Bank of El Dorado, N.A. ("Simmons/El Dorado") is a national bank, which was acquired in 1999. Simmons/El Dorado's primary market area is South Central Arkansas. At December 31, 2002, Simmons/El Dorado had total assets of $170 million, total loans of $86 million and total deposits of $144 million.
The Company's subsidiaries provide complete banking services to individuals and businesses throughout the market areas they serve. Services include consumer (credit card, student and other consumer), real estate (construction, single family residential and other commercial) and commercial (commercial, agriculture and financial institutions) loans, checking, savings and time deposits, trust and investment management services, and securities and investment services.
Loan Risk Assessment
As a part of the ongoing risk assessment, the Bank has a Loan Loss Reserve Committee that meets monthly to review the adequacy of the allowance for loan losses. The Committee reviews the status of past due, non-performing and other impaired loans on a loan-by-loan basis, including historical loan loss information. However, for credit card and other consumer loans consideration is given to more recent loss experience and current economic conditions. The allowance for loan losses is determined based upon the aforementioned factors and allocated to the individual loan categories. Also, an unallocated reserve is established to compensate for the uncertainty in estimating loan losses, including the possibility of improper risk ratings and specific reserve allocations. The Committee reviews their analysis with management and the Bank's Board of Directors on a monthly basis.
The Company has an independent loan review department. For the Bank, this department reviews the allowance for loan loss on a monthly basis, performs an independent loan analysis and prepares a detailed report on their analysis of the adequacy of the allowance for loan losses on a quarterly basis. This quarterly report is presented to the Bank's Board of Directors and the Company's Audit and Security Committee.
The Board of Directors of the other subsidiary banks review the adequacy of their allowance for loan losses on a monthly basis giving consideration to past due loans, non-performing loans, other impaired loans and current economic conditions. Quarterly, the other subsidiary banks supply loan information to the Company's loan review department for their review. The loan review department prepares a detailed report of their analysis of the allowance for loan losses for each bank. This report is presented to the Company's Audit and Security Committee on a quarterly basis. On an annual basis, the loan review department performs an on-site detailed review of the loan files to verify the accuracy of information being supplied on a quarterly basis. All subsidiary banks, except for Simmons/South, receive this review on a semi-annual basis.
Growth Strategy
The Company's growth strategy is to focus on the State of Arkansas with an emphasis on providing statewide coverage of financial services combined with continued investments in technology. More specifically, the Company is interested in strategic expansions by opening new financial centers or by acquisitions of banks in growth markets or in markets where we have an existing presence. For example, the Company is planning additional branch locations in the Little Rock metropolitan area during 2003. While these investments can be dilutive to earnings in the short-term, the Company believes they will reward shareholders in the intermediate and long-term.
With an increased presence in Arkansas, ongoing investments in technology, and enhanced products and services, the Company is better positioned to meet the customer demands of the State of Arkansas.
Competition
The activities engaged in by the Company and its subsidiaries are highly competitive. In all aspects of its business, the Company encounters intense competition from other banks, lending institutions, credit unions, savings and loan associations, brokerage firms, mortgage companies, industrial loan associations, finance companies, and several other financial and financial service institutions. The amount of competition among commercial banks and other financial institutions has increased significantly over the past few years since the deregulation of the banking industry. The Company's subsidiary banks actively compete with other banks and financial institutions in their efforts to obtain deposits and make loans, in the scope and type of services offered, in interest rates paid on time deposits and charged on loans and in other aspects of commercial banking.
The Company's banking subsidiaries are also in competition with major national and international retail banking establishments, brokerage firms and other financial institutions within and outside Arkansas. Competition with these financial institutions is expected to increase, especially with the increase in interstate banking.
Employees
As of December 31, 2002, the Company and its subsidiaries had 977 full time equivalent employees. None of the employees are represented by any union or similar groups, and the Company has not experienced any labor disputes or strikes arising from any such organized labor groups. The Company considers its relationship with its employees to be good.
Executive Officers of the Company
The following is a list of all executive officers of the Company. The Board of Directors elects executive officers annually.
Board of Directors of the Company
The following is a list of the Board of Directors of the Company, along with their principal occupation.
NAME PRINCIPAL OCCUPATION - --------------------------------------------------------------------------------
William E. Clark Chairman and Chief Executive Officer CDI Contractors, LLC Lara F. Hutt, III President Hutt Building Material Company, Inc. George A. Makris, Jr. President M.K. Distributors, Inc. J. Thomas May Chairman, President and Chief Executive Officer Simmons First National Corporation David R. Perdue Vice President JDR, Inc. Harry L. Ryburn, D.D.S. Orthodontist Henry F. Trotter, Jr. President Trotter Ford, Lincoln, Mercury, Toyota, KIA
SUPERVISION AND REGULATION
The Company
The Company, as a bank holding company, is subject to both federal and state regulation. Under federal law, a bank holding company generally must obtain approval from the Board of Governors of the Federal Reserve System ("FRB") before acquiring ownership or control of the assets or stock of a bank or a bank holding company. Prior to approval of any proposed acquisition, the FRB will review the effect on competition of the proposed acquisition, as well as other regulatory issues.
The federal law generally prohibits a bank holding company from directly or indirectly engaging in non-banking activities. This prohibition does not include loan servicing, liquidating activities or other activities so closely related to banking as to be a proper incident thereto. Those bank holding companies, including the Company, which have elected to qualify as financial holding companies are also authorized to engage in financial activities. Financial activities include any activity that is financial in nature or any activity that is incidental or complimentary to a financial activity.
As a bank holding company, the Company is required to file with the FRB an annual report and such additional information as may be required by law. From time to time, the FRB examines the financial condition of the Company and its subsidiaries. The FRB, through civil and criminal sanctions, is authorized to exercise enforcement powers over bank holding companies (including financial holding companies) and non-banking subsidiaries, to limit activities that represent unsafe or unsound practices or constitute violations of law.
The Company is subject to certain laws and regulations of the State of Arkansas applicable to bank holding companies, including examination and supervision by the Arkansas Bank Commissioner. Under Arkansas law, a bank holding company is prohibited from owning more than one subsidiary bank, if any subsidiary bank owned by the holding company has been chartered for less than 5 years and, further, requires the approval of the Arkansas Bank Commissioner for any acquisition of more than 25% of the capital stock of any other bank located in Arkansas. No bank acquisition may be approved if, after such acquisition, the holding company would control, directly or indirectly, banks having 25% of the total bank deposits in the State of Arkansas, excluding deposits of other banks and public funds.
Legislation enacted in 1994, allows bank holding companies from any state to acquire banks located in any state without regard to state law, provided that the bank holding company (1) is adequately capitalized, (2) is adequately managed, (3) would not control more than 10% of the insured deposits in the United States or more than 30% of the insured deposits in such state, and (4) such bank has been in existence at least five years if so required by the applicable state law.
Subsidiary Banks
Simmons First National Bank, Simmons/El Dorado and Simmons First Trust Company N.A., as national banking associations, are subject to regulation and supervision, of which regular bank examinations are a part, by the Office of the Comptroller of the Currency of the United States ("OCC"). Simmons/Jonesboro, Simmons/South and Simmons/Northwest, as state chartered banks, are subject to the supervision and regulation, of which regular bank examinations are a part, by the Federal Deposit Insurance Corporation ("FDIC") and the Arkansas State Bank Department. Simmons/Russellville and Simmons/Searcy, as state chartered member banks, are subject to the supervision and regulation, of which regular bank examinations are a part, by the Federal Reserve Board and the Arkansas State Bank Department. The lending powers of each of the subsidiary banks are generally subject to certain restrictions, including the amount, which may be lent to a single borrower.
Prior to passage of the GLB Act in 1999, the subsidiary banks, with numerous exceptions, were subject to the application of the laws of the State of Arkansas, which included the limitation of the maximum permissible interest rate on loans. The Arkansas limitation for general loans was 5% over the Federal Reserve Discount Rate, with an additional maximum limitation of 17% per annum for consumer loans and credit sales. Certain loans secured by first liens on residential real estate and certain loans controlled by federal law (e.g., guaranteed student loans, SBA loans, etc.) were exempt from this limitation; however, a very substantial portion of the loans made by the subsidiary banks, including all credit card loans, have historically been subject to this limitation. The GLB Act included a provision which would set the maximum interest rate on loans made in Arkansas, by banks with Arkansas as their Home State, at the greater of the rate authorized by Arkansas law or the highest rate permitted by any of the out-of-state banks which maintain branches in Arkansas. An action was brought in the Western District of Arkansas, attacking the validity of the statute in 2000. Subsequently, the District Court issued a decision upholding the statute. Furthermore, during October 2001, the Eighth Circuit Court of Appeals upheld that statute. Thus, in the fourth quarter of 2001, the Company began to implement the changes permitted by the GLB Act.
All of the Company's subsidiary banks are members of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000 per deposit relationship. For this protection, each bank pays a statutory assessment to the FDIC each year.
Federal law substantially restricts transactions between banks and their affiliates. As a result, the Company's subsidiary banks are limited in making extensions of credit to the Company, investing in the stock or other securities of the Company and engaging in other financial transactions with the Company. Those transactions, which are permitted, must generally be undertaken on terms at least as favorable to the bank, as those prevailing in comparable transactions with independent third parties.
Potential Enforcement Action for Bank Holding Companies and Banks
Enforcement proceedings seeking civil or criminal sanctions may be instituted against any bank, any director, officer, employee or agent of the bank, that is believed by the federal banking agencies to be violating any administrative pronouncement or engaged in unsafe and unsound practices. In addition, the FDIC may terminate the insurance of accounts, upon determination that the insured institution has engaged in certain wrongful conduct, or is in an unsound condition to continue operations.
Risk-Weighted Capital Requirements for the Company and the Banks
Since 1993, banking organizations (including bank holding companies and banks) were required to meet a minimum ratio of Total Capital to Total Risk-Weighted Assets of 8%, of which at least 4% must be in the form of Tier 1 Capital. A well-capitalized institution is one that has at least a 10% "total risk-based capital" ratio. For a tabular summary of the Company's risk-weighted capital ratios, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital" and Note 19 of the Notes to Consolidated Financial Statements.
A banking organization's qualifying total capital consists of two components: Tier 1 Capital (core capital) and Tier 2 Capital (supplementary capital). Tier 1 Capital is an amount equal to the sum of common shareholders' equity, certain preferred stock and the minority interest in the equity accounts of consolidated subsidiaries. For bank holding companies, goodwill may not be included in Tier 1 Capital. Identifiable intangible assets may be included in Tier 1 Capital for banks and bank holding companies, in accordance with certain further requirements. At least 50% of the banking organization's total regulatory capital must consist of Tier 1 Capital.
Tier 2 Capital is an amount equal to the sum of the qualifying portion of the allowance for loan losses, certain preferred stock not included in Tier 1, hybrid capital instruments (instruments with characteristics of debt and equity), certain long-term debt securities and eligible term subordinated debt, in an amount up to 50% of Tier 1 Capital. The eligibility of these items for inclusion as Tier 2 Capital is subject to certain additional requirements and limitations of the federal banking agencies.
Under the risk-based capital guidelines, balance sheet assets and certain off-balance sheet items, such as standby letters of credit, are assigned to one of four-risk weight categories (0%, 20%, 50%, or 100%), according to the nature of the asset, its collateral or the identity of the obligor or guarantor. The aggregate amount in each risk category is adjusted by the risk weight assigned to that category, to determine weighted values, which are then added to determine the total risk-weighted assets for the banking organization. For example, an asset, such as a commercial loan, assigned to a 100% risk category, is included in risk-weighted assets at its nominal face value, but a loan secured by a one-to-four family residence is included at only 50% of its nominal face value. The applicable ratios reflect capital, as so determined, divided by risk-weighted assets, as so determined.
Federal Deposit Insurance Corporation Improvement Act
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), enacted in 1991, requires the FDIC to increase assessment rates for insured banks and authorizes one or more "special assessments", as necessary for the repayment of funds borrowed by the FDIC or any other necessary purpose. As directed in FDICIA, the FDIC has adopted a transitional risk-based assessment system, under which the assessment rate for insured banks will vary, according to the level of risk incurred in the bank's activities. The risk category and risk-based assessment for a bank is determined from its classification, pursuant to the regulation, as well capitalized, adequately capitalized or undercapitalized.
FDICIA substantially revised the bank regulatory provisions of the Federal Deposit Insurance Act and other federal banking statutes, requiring federal banking agencies to establish capital measures and classifications. Pursuant to the regulations issued under FDICIA, a depository institution will be deemed to be well capitalized if it significantly exceeds the minimum level required for each relevant capital measure; adequately capitalized if it meets each such measure; undercapitalized if it fails to meet any such measure; significantly undercapitalized if it is significantly below any such measure; and critically undercapitalized if it fails to meet any critical capital level set forth in regulations. The federal banking agencies must promptly mandate corrective actions by banks that fail to meet the capital and related requirements, in order to minimize losses to the FDIC. The FDIC and OCC advised the Company that the subsidiary banks have been classified as well capitalized under these regulations.
The federal banking agencies are required by FDICIA to prescribe standards for banks and bank holding companies, relating to operations and management, asset quality, earnings, stock valuation and compensation. A bank or bank holding company that fails to comply with such standards will be required to submit a plan designed to achieve compliance. If no plan is submitted or the plan is not implemented, the bank or holding company would become subject to additional regulatory action or enforcement proceedings.
A variety of other provisions included in FDICIA may affect the operations of the Company and the subsidiary banks, including new reporting requirements, revised regulatory standards for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch.
ITEM 2.
ITEM 2. PROPERTIES
The principal offices of the Company and the Bank consist of an eleven-story office building and adjacent office space, located in the central business district of the city of Pine Bluff, Arkansas. The building and adjacent office space is comprised of approximately 119,000 square feet of usable floor space, approximately 7,000 square feet of which is leased to a tenant as office space.
The Company and its subsidiaries own or lease additional offices throughout the State of Arkansas. As of December 31, 2002, the Company's seven banks are conducting financial operations from 65 offices in 34 communities throughout Arkansas.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and/or its subsidiary banks 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market(R) under the symbol "SFNCA". The following table sets forth, for all the periods indicated, cash dividends paid, and the high and low closing bid prices for the Company's common stock.
At December 31, 2002, the Common Stock was held of record by approximately 1,381 stockholders. On February 04, 2003, the last sale price for the Common Stock as reported by The Nasdaq Stock Market(R) was $34.85 per share.
The Company's policy is to declare regular quarterly dividends based upon the Company's earnings, financial position, capital requirements and such other factors deemed relevant by the Board of Directors. This dividend policy is subject to change, however, and the payment of dividends by the Company is necessarily dependent upon the availability of earnings and the Company's financial condition in the future. The payment of dividends on the Common Stock is also subject to regulatory capital requirements.
The Company's principal source of funds for dividend payments to its stockholders is dividends received from its subsidiary banks. Under applicable banking laws, the declaration of dividends by the Bank and Simmons/El Dorado in any year, in excess of its net profits, as defined, for that year, combined with its retained net profits of the preceding two, must be approved by the Office of the Comptroller of the Currency. Further, as to Simmons/Jonesboro, Simmons/Northwest, Simmons/South, Simmons/Russellville and Simmons/Searcy regulators have specified that the maximum dividends state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. At December 31, 2002, approximately $14 million was available for the payment of dividends by the subsidiary banks without regulatory approval. For further discussion of restrictions on the payment of dividends, see "Management's Discussion and Analysis of Financial Condition-Liquidity and Market Risk Management," and Note 19 of Notes to Consolidated Financial Statements.
Recent Sales of Unregistered Securities
The following transactions are sales of unregistered shares of Class A Common Stock of the registrant, which were issued to executive and senior management officers upon the exercise of rights granted under one of the Company's stock option plans. 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 and/or exchanged shares of the Company's Class A Common Stock as the consideration for the transactions.
Forward Looking Statements
Statements in this 10-K 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 are the Company's current estimates or expectations of future events or future results. As such, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from projected results discussed in this Report. These include variations in management projections or market forecasts and the actions that management could take in response to these changes.
The Company or its executive officers and directors on behalf of the Company, may from time to time make forward-looking statements. When used in this report, any press release or oral statements, the words "estimate", "project", "anticipate", "expect", "intend", "believe", "plan", "goal", and words of like import are intended to identify forward-looking statements in addition to statements specifically identified as forward-looking statements. These statements, projections or future plans, could be affected by a number of factors that the Company is necessarily unable to predict with accuracy, including future changes in interest rates, general credit quality, economic activity, consumer behavior, government monetary policy, legislation and regulation, competition, credit, market and operating risk, and loan demand. In addition, the Company's future results of operations, discussions of future plans and other forward-looking statements contained in Management's Discussion and Analysis and elsewhere in this Form 10-K involve a number of risks and uncertainties, including risks relating to the uncertainties created by the enactment of the Gramm-Leach-Bliley Financial Modernization Act of 1999. As a result of variations in such factors, actual results may differ materially from any forward-looking statements.
Forward-looking statements speak only as of the date they are made. The Company will not update forward-looking statements to reflect factual assumptions, circumstances or events, which have changed after a forward-looking statement was made.
ITEM 6:
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data concerning the Company and is qualified in its entirety by the detailed information and consolidated financial statements, including notes thereto, included elsewhere in this Annual Report. The income statement, balance sheet and per common share data as of and for the years ended December 31, 2002, 2001, 2000, 1999, and 1998 were derived from consolidated financial statements of the Company, which were audited by BKD, LLP. The selected consolidated financial data set forth below should be read in conjunction with the financial statements of the Company and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2002 Overview - --------------------------------------------------------------------------------
Simmons First National Corporation recorded record earnings of $22,078,000, or $3.07 diluted earnings per share for the twelve-month period ended December 31, 2002. These earnings reflect an increase of $5,550,000, or $0.76 per share from the December 31, 2001 earnings of $16,528,000, or $2.31 diluted earnings per share. The increase in earnings over last year is primarily attributable to a significant improvement in the Company's net interest margin and the elimination of the amortization of goodwill required by the Financial Accounting Standards Board. The Company's return on average assets and return on average stockholders' equity for the year ended December 31, 2002, was 1.12% and 11.56%, compared to 0.84% and 9.23%, respectively, for the year ended 2001.
Total assets for the Company at December 31, 2002, were $2.0 billion, a decrease of $39 million, or 2.0%, over the same figure at December 31, 2001. Stockholders' equity at December 31, 2002, was $197.6 million, a $15.2 million, or 8.4%, increase from December 31, 2001.
Asset quality improved during the year ended 2002. The allowance for loan losses as a percent of total loans equaled 1.75% at December 31, 2002, compared to 1.63% at December 31, 2001. As of December 31, 2002, non-performing loans equaled 0.97% of total loans compared to 1.19% as of year-end 2001. At year-end 2002, the allowance for loan losses equaled 179% of non-performing loans compared to 137% at year-end 2001.
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 65 offices in 34 communities throughout Arkansas.
Acquisitions - --------------------------------------------------------------------------------
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 July 17, 2000, the Company expanded its coverage of Central and Northwest Arkansas with a $7.6 million cash purchase of two Conway and six Northwest Arkansas locations from First Financial Banc Corporation. Simmons First National Bank acquired the two offices in Conway and Simmons First Bank of Northwest Arkansas acquired the six offices in Northwest Arkansas. As of July 14, 2000, the eight locations combined had total loans of $71.8 million, total deposits of $71.0 million and net assets of $8.5 million. The total acquisition cost exceeded the fair value of tangible assets and liabilities acquired by $10.8 million.
Sale of Mortgage Servicing - --------------------------------------------------------------------------------
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 $1.0 million reserve for potential liabilities under certain representations and warranties on the sale date. The balance for this reserve was $907,000 as of December 31, 2002. The potential liability for the representations and warranties for the mortgage-servicing sale will expire on June 30, 2003 and until that time the buyer has the ability to make claims on the entire balance. As such, management believes it is necessary to maintain the reserve until the term expires. If there is a remaining balance in the representations and warranties reserve, it will be reflected as an additional gain on sale of mortgage servicing on the expiration date.
Stock Repurchase - --------------------------------------------------------------------------------
The Company has a stock repurchase program, which is authorized to repurchase up to 400,000 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 exercises, payment of future stock dividends and general corporate purposes.
During the twelve-month period ended December 31, 2002, the Company repurchased 30,000 common shares of stock with a weighted average repurchase price of $32.65 per share. As of December 31, 2002, the Company has repurchased a total of 331,000 common shares of stock under its current program, with a weighted average repurchase price of $23.71 per share. Upon completion of the current plan, the Company expects to renew the repurchase program.
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 (37.50% for 2002, 2001 and 2000, respectively).
The year ended 2002 represents the first full year that the Company was able to fully utilize the changes in the Arkansas usury law made possible through the Gramm-Leach-Bliley Act, which was confirmed by the Eighth Circuit Court of Appeals in October 2001. This ability to reprice the loan portfolio, coupled with the ongoing repricing of the deposit base that was driven by the Federal Reserve's lowering of interest rates, has enabled the Company to achieve considerable improvement in both net interest income and net interest margin.
For the year ended December 31, 2002, net interest income on a fully taxable equivalent basis was $79.0 million, an increase of $8.4 million, or 12.0%, from the same period in 2001. The increase in net interest income was the result of a $19.6 million decrease in fully taxable equivalent interest income and a $28.0 million decrease in interest expense. The decrease in interest income was the result of a lower yield earned on earning assets. The decrease in interest expense was the result of a lower cost of funds. The net interest margin improved 45 basis points to 4.37% for the year ended December 31, 2002, when compared to 3.92% for the same period in 2001.
For the year ended December 31, 2001, net interest income on a fully taxable equivalent basis was $70.6 million, an increase of approximately $618,000, or 0.88%, from 2000 net interest income. The increase in 2001 in net interest income was the result of a $448,000 decrease in fully taxable equivalent interest income and a $1,066,000 decrease in interest expense. Interest income decreased from 2000 to 2001 as a result of a lower yield earned on earning assets, which was offset from the increase in the average balance of earning assets. The decrease in interest expense from 2000 to 2001 was the result of a lower cost of funds, which was offset by the increase in the average balance of interest bearing liabilities. Yield on earning assets and interest bearing liabilities were lower in 2001 as the result of lower average interest rates during 2001. The net interest margin was 3.92% in 2001, compared to 4.24% in 2000.
Table 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2002, 2001 and 2000, respectively, as well as changes in fully taxable equivalent net interest margin for the years 2002 versus 2001 and 2001 versus 2000.
Table 1: Analysis of Net Interest Income (FTE =Fully Taxable Equivalent)
Table 2: Changes in Fully Taxable Equivalent Net Interest Margin
Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for each of the years in the three-year period ended December 31, 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.
Table 3: Average Balance Sheets and Net Interest Income Analysis
Table 4 shows changes in interest income and interest expense, resulting from changes in volume and changes in interest rates for each of the years ended December 31, 2002 and 2001, as compared to prior years. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.
Table 4: Volume/Rate Analysis
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 2002, 2001 and 2000 was $10.2, $10.0 and $7.5 million, respectively. During the reporting year ended 2001, the Company experienced an increase in classified assets at one community bank subsidiary. Thus, the Company increased the provision for loan losses at that subsidiary during the year ended 2001. While the Company's asset quality improved during 2002, there continued to be significant uncertainties in the United States economy and concerns over the downturn in the catfish industry that affects one of the Company's community banks. For that reason, management continued with an increased level of provision during 2002.
Non-Interest Income - --------------------------------------------------------------------------------
Total non-interest income was $35.3 million in 2002, compared to $33.6 million in 2001 and $30.4 million in 2000. 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.
Table 5 shows non-interest income for the years ended December 31, 2002, 2001 and 2000, respectively, as well as changes in 2002 from 2001 and in 2001 from 2000.
Table 5: Non-Interest Income
Recurring fee income for 2002 was $27.0 million, an increase of $520,000, or 2.0%, when compared with the 2001 figures. This increase was attributable to the growth in service charges on deposit accounts offset by the decease in trust fees and credit card fees. The increase in service charges on deposit accounts for 2002 is the result of an improved fee structure. The decrease in trust fees was primarily the result of lower market valuations in the managed assets of the Trust Company, which was driven by the downturn in the market conditions of the United States. While the decrease in credit card fees is the result of increased competitive pressures for that product, which has resulted in a decline of the Company's credit card portfolio.
Recurring fee income for 2001 was $26.4 million, an increase of $1.0 million, or 4.0%, when compared with the 2000 figures. This increase was primarily attributable to the growth in service charges on deposit accounts. The increase in service charges on deposit accounts for 2001 is the result of internal deposit growth, an improved fee structure and the acquisition completed during July 2000.
During the years ended December 31, 2002 and 2001, income on the sale of mortgage loans and income on investment banking increased $774,000 and $1,925,000, respectively, from the years ended in 2001 and 2000. These increases were the result of a higher volume for those products during 2002 and 2001. The lower interest rate environment during 2002 and 2001 primarily drove the volume increases.
During the year ended December 31, 2002, the Company recorded several items in other income that are of a non recurring nature. These items included a gain on the sale one of the Company's branch facilities in the Northwest Arkansas area and higher than normal interest recoveries from interest charged off in prior years.
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 2002 was $69.0 million, an increase of $883,000 or 1.3%, from 2001. The relatively flat non-interest expense is primarily due to the increase in salary and employee benefits offset by the decrease in the amortization of goodwill and other intangibles. The salary and employee benefits increase is associated with normal salary adjustments, increased cost of health insurance, the opening of a new downtown financial center in Little Rock, during 2001, and a change in the Company's vacation policy. The vacation policy change created a special non-cash expense of $189,000 during the first quarter of 2002. The decrease in the amortization of intangibles was due to the Company adopting the Financial Accounting Standards Board SFAS No. 142, Goodwill and Other Intangible Assets effective January 1, 2002. The new rule eliminated most of the Company's amortization.
Non-interest expense for 2001 was $68.1 million, an increase of $5.6 million or 8.9%, from 2000. This increase reflects the Company's commitment to investment in technology and branch infrastructure, the normal increased cost of doing business and the acquisition completed during July 2000.
Table 6 below shows non-interest expense for the years ended December 31, 2002, 2001 and 2000, respectively, as well as changes in 2002 from 2001 and in 2001 from 2000.
Table 6: Non-Interest Expense
Income Taxes - --------------------------------------------------------------------------------
The provision for income taxes for 2002 was $9.7 million, compared to $6.4 million in 2001 and $8.5 million in 2000. The effective income tax rates for the years ended 2002, 2001 and 2000 were 30.5%, 27.8% and 31.0%, respectively.
Loan Portfolio - --------------------------------------------------------------------------------
The Company's loan portfolio averaged $1.251 billion during 2002 and $1.292 billion during 2001. As of December 31, 2002, total loans were $1.257 billion, compared to $1.259 billion on December 31, 2001. 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.
Consumer loans consist of credit card loans, student loans and other consumer loans. Consumer loans were $417.4 million at December 31, 2002, or 33.2% of total loans, compared to $450.7 million, or 35.8% of total loans at December 31, 2001. The consumer loan decrease from 2001 to 2002 is the result of a decline in credit cards and indirect lending, which was offset by an increase in student loans. The credit card portfolio decrease was primarily the result of a decline in the number of cardholder accounts, due to competitive pressure in the credit card industry. The decline in indirect consumer loans was the result of 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 $614.4 million at December 31, 2002, or 48.9% of total loans, compared to $571.3 million, or 45.4% of total loans at December 31, 2001. The real estate loan increase is the result of the acquisition of the Monticello branch location during the third quarter of 2002 combined with an improved demand for real estate loans.
Commercial loans consist of commercial loans, agricultural loans and financial institution loans. Commercial loans were $209.8 million at December 31, 2002, or 16.7% of total loans, which is comparable to the $220.3 million, or 17.5% of total loans at December 31, 2001.
The amounts of loans outstanding at the indicated dates are reflected in table 7, according to type of loan.
Table 7: Loan Portfolio
Table 8 reflects the remaining maturities and interest rate sensitivity of loans at December 31, 2002.
Table 8: Maturity and Interest Rate Sensitivity of Loans
Asset Quality - --------------------------------------------------------------------------------
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 uncollectable 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 uncollectable. 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.
Table 9 presents information concerning non-performing assets, including nonaccrual and restructured loans and other real estate owned.
Table 9: Non-performing Assets
Approximately $796,000, $1,026,000 and $756,000 of interest income would have been recorded for the periods ended December 31, 2002, 2001and 2000, 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 years ended December 31, 2002, 2001 and 2000.
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 loans identified by management.
At December 31, 2002, impaired loans were $14.6 million compared to $21.0 million in 2001. The decrease in impaired loans from December 31, 2001, primarily relates to the $2.7 million decrease in non-performing loans and a $3.7 million decrease of borrowers that are still performing, but for which management has internally identified as impaired. Management has evaluated the underlying collateral on these loans and has allocated specific reserves in order to absorb potential losses if the collateral were ultimately foreclosed
Allowance for Loan Losses - --------------------------------------------------------------------------------
An analysis of the allowance for loan losses for the last five years is shown in table 10.
Table 10: Allowance for Loan Losses
The amount of provision to the allowance during the year 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 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 11.
Table 11: Allocation of Allowance for Loan Losses
The unallocated reserve generally serves to compensate for the uncertainty in estimating loan losses, including the inherent lack of precision of risk ratings and specific reserve allocations. The unallocated reserve is a result of potential risk factors that cannot be quantified for a particular year-end, which could include the risks associated with increased lending, consumer bankruptcies, unfavorable weather conditions or market prices in the agriculture industry, acquisitions and uncertainties in the economy.
Investments and Securities - --------------------------------------------------------------------------------
The Company's securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as either held-to-maturity, available-for-sale or trading.
Held-to-maturity securities, which include any security for which management has the positive intent and ability to hold until maturity, are carried at historical cost, adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity. Interest and dividends on investments in debt and equity securities are included in income when earned.
Available-for-sale securities, which include any security for which management has no immediate plans to sell, but which may be sold in the future, are carried at fair value. Realized gains and losses, based on amortized cost of the specific security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. Premiums and discounts are amortized and accreted, respectively, to interest income, using the constant yield method over the period to maturity. Interest and dividends on investments in debt and equity securities are included in income when earned.
The Company's philosophy regarding investments is conservative, based on investment type and maturity. Investments in the portfolio primarily include U.S. Treasury securities, U.S. Government agencies, mortgage-backed securities and municipal securities. The Company's general policy is not to invest in derivative type investments or high-risk securities, except for collateralized mortgage-backed securities for which collection of principal and interest is not subordinated to significant superior rights held by others.
Held-to-maturity and available-for-sale investment securities were $207.3 million and $196.7 million, respectively, at December 31, 2002, compared to the held-to-maturity amount of $191.1 million and available-for-sale amount of $256.2 million at December 31, 2001.
As of December 31, 2002, $85.5 million, or 41.2%, of the held-to-maturity securities were invested in U.S. Treasury securities and obligations of U.S. government agencies, 90.6% of which will mature in less than five years. In the available-for-sale securities, $178.4 million, or 90.7% were in U.S. Treasury and U.S. government agency securities, 92.6% of which will mature in less than five years.
In order to reduce the Company's income tax burden, an additional $120.2 million, or 58.0%, of the held-to-maturity securities portfolio, as of December 31, 2002, was invested in tax-exempt obligations of state and political subdivisions. In the available-for-sale securities, $5.3 million, or 2.7% were invested in tax-exempt obligations of state and political subdivisions. Most of the state and political subdivision debt obligations are non-rated bonds and represent relatively small, Arkansas issues, which are evaluated on an ongoing basis. There are no securities of any one state and political subdivision issuer exceeding ten percent of the Company's stockholders' equity at December 31, 2002.
The Company has approximately $1.5 million, or 0.7%, in mortgaged-backed securities in the held-to-maturity portfolio at December 31, 2002. In the available-for-sale securities, $3.0 million, or 1.5% were invested in mortgaged-backed securities.
As of December 31, 2002, the held-to-maturity investment portfolio had gross unrealized gains of $5.1 million and gross unrealized losses of $10,000. Net realized losses from called and/or sold securities for 2002 were $10,000, compared to net realized gains of $11,000 and zero in 2001 and 2000, respectively.
Trading securities, which include any security held primarily for near-term sale, are carried at fair value. Gains and losses on trading securities are included in other income. The Company's trading account is established and maintained for the benefit of investment banking. The trading account is typically used to provide inventory for resale and is not used to take advantage of short-term price movements.
Table 12 presents the carrying value and fair value of investment securities for each of the years indicated.
Table 12: Investment Securities
Table 13 reflects the amortized cost and estimated fair value of debt securities at December 31, 2002, by contractual maturity and the weighted average yields (for tax-exempt obligations on a fully taxable equivalent basis, assuming a 37.5% tax rate) of such securities. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
Table 13: Maturity Distribution of Investment Securities
Deposits - --------------------------------------------------------------------------------
Deposits are the Company's primary source of funding for earning assets. The Company offers a variety of products designed to attract and retain customers, with the primary focus on core deposits.
Total average deposits for 2002 were $1.626 billion, compared to $1.630 billion in 2001. As of December 31, 2002, total deposits were $1.619 billion, compared to $1.686 billion on December 31, 2001. The decrease in deposits was the result of a 2002 strategic decision made by the Company, which allowed deposits to decrease in the same relationship as the decrease in earning assets.
Table 14 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits for the three years ended December 31, 2002.
Table 14: Average Deposit Balances and Rates
The Company's maturities of large denomination time deposits at December 31, 2002 and 2001 are presented in table 15.
Table 15: Maturities of Large Denomination Time Deposits
Short-Term Debt - --------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase were $86.7 million at December 31, 2002, as compared to $86.6 million at December 31, 2001. Other short-term borrowings, consisting of U.S. TT&L Notes and short-term FHLB borrowings, were $3.6 million at December 31, 2002, as compared to $3.8 million at December 31, 2001.
The Company has historically funded its growth in earning assets through the use of core deposits, large certificates of deposits from local markets, FHLB short-term borrowings and federal funds purchased. Management anticipates that these sources will provide necessary funding in the foreseeable future. The Company's general policy is to avoid the use of brokered deposits.
Long-Term Debt - --------------------------------------------------------------------------------
The Company's long-term debt was $54.3 million and $42.2 million at December 31, 2002 and 2001, respectively. The outstanding balance for December 31, 2002, includes $10 million in long-term debt and $17.3 million of trust preferred securities. The trust preferred securities qualify as Tier 1 capital for regulatory purposes. This debt was incurred to fund a portion of the purchase price of the acquisitions completed in a previous year. The Company also has FHLB long-term advances included in long-term debt. The outstanding balance for FHLB long-term advances was $27.0 million as of December 31, 2002, compared to $12.9 million at December 31, 2001.
Capital - --------------------------------------------------------------------------------
At December 31, 2002, total capital reached $197.6 million, another record in the Company's history. Capital represents shareholder ownership in the Company -- the book value of assets in excess of liabilities. At year-end 2002, the Company's equity to asset ratio was 9.99% compared to 9.04% at year-end 2001.
The Federal Reserve Board's risk-based guidelines established a risk-adjusted ratio, relating capital to different categories of assets and off-balance sheet exposures, such as loan commitments and standby letters of credit. These guidelines place a strong emphasis on tangible stockholders' equity as the core element of the capital base, with appropriate recognition of other components of capital. At December 31, 2002, the leverage ratio and the Tier 1 capital ratio was 9.3% and 14.0%, respectively, while the Company's total risk-based capital ratio was 15.3%, all of which exceed the capital minimums established in the risk-based capital requirements.
The Company's risk-based capital ratios at December 31, 2002 and 2001 are presented in table 16.
Table 16: Risk-Based Capital
Quarterly Results - --------------------------------------------------------------------------------
Selected unaudited quarterly financial information for the last eight quarters is shown in table 17.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in 15 C. F. R. ' 240.13a-14(c) and 15 C. F. R. '240.15-14(c)) as of 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Liquidity and Market Risk Management - --------------------------------------------------------------------------------
Parent Company
The Company has leveraged its investment in subsidiary banks and depends upon the dividends paid to it, as the sole shareholder of the subsidiary banks, as a principal source of funds for debt service requirements. At December 31, 2002, undivided profits of the Company's subsidiaries were approximately $108 million, of which approximately $14 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 makes adjustments as needed. At year-end, each subsidiary bank was within established guidelines and total corporate liquidity remains strong. At December 31, 2002, cash and cash equivalents, trading and available-for-sale securities and mortgage loans held for sale were 21.3% of total assets, as compared to 23.6% at December 31, 2001.
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 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. Disclosures about fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 14 of Notes to Consolidated Financial Statements.
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.
The table below presents the Company's interest rate sensitivity position at December 31, 2002. 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.
Table: Interest Rate Sensitivity
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Independent Accountants' Report................................31 Consolidated Balance Sheets, December 31, 2002 and 2001........32 Consolidated Statements of Income, Years Ended December 31, 2002, 2001 and 2000.............................33 Consolidated Statements of Cash Flows, Years Ended December 31, 2002, 2001 and 2000.............................34 Consolidated Statements of Stockholders' Equity, Years Ended December 31, 2002, 2001 and 2000.............................35 Notes to Consolidated Financial Statements, December 31, 2002, 2001 and 2000...........................36
Note: Supplementary Data may be found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quarterly Results" on page 27 hereof.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors Simmons First National Corporation Pine Bluff, Arkansas
We have audited the accompanying consolidated balance sheets of SIMMONS FIRST NATIONAL CORPORATION as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SIMMONS FIRST NATIONAL CORPORATION as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 5, during 2002 the Company changed its method of accounting for goodwill.
/s/ BKD, LLP
BKD, LLP
Pine Bluff, Arkansas January 31, 2003
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
- ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------
Nature of Operations
Simmons First National Corporation is primarily engaged in providing a full range of banking services to individual and corporate customers through its subsidiaries and their branch banks in Arkansas. The Company is subject to competition from other financial institutions. The Company also is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
Operating Segments
The Company is organized on a subsidiary bank-by-bank basis upon which management makes decisions regarding how to allocate resources and assess performance. Each of the subsidiary banks provides a group of similar community banking services, including such products and services as loans; time deposits, checking and savings accounts; personal and corporate trust services; credit cards; investment management; and securities and investment services. The individual bank segments have similar operating and economic characteristics and have been reported as one aggregated operating segment.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of foreclosed assets and the allowance for foreclosure expenses. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets, management obtains independent appraisals for significant properties.
Principles of Consolidation
The consolidated financial statements include the accounts of Simmons First National Corporation and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Various items within the accompanying financial statements for previous years have been reclassified to provide more comparative information. These reclassifications had no effect on net earnings.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers due from banks, federal funds sold and securities purchased under agreements to resell as cash equivalents.
Investment Securities
Held-to-maturity securities, which include any security for which the banking subsidiaries have the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity.
Available-for-sale securities, which include any security for which the banking subsidiaries have no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity.
Trading securities, which include any security held primarily for near-term sale, are carried at fair value. Gains and losses on trading securities are included in other income.
Interest and dividends on investments in debt and equity securities are included in income when earned.
Mortgage Loans Held For Sale
Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Forward commitments to sell mortgage loans are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid. Fees received from borrowers to guarantee the funding of mortgage loans held for sale are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-offs are reported at their outstanding principal adjusted for any loans charged off and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. 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.
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 December 31, 2002 and 2001. 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. Accrual of interest is discontinued and interest accrued and unpaid is removed at the time such amounts are delinquent 90 days. Interest is recognized for nonaccrual loans only upon receipt and only after all principal amounts are current according to the terms of the contract.
Premises and Equipment
Depreciable assets are stated at cost, less accumulated depreciation. Depreciation is charged to expense, using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized by the straight-line method over the terms of the respective leases or the estimated useful lives of the improvements whichever is shorter.
Foreclosed Assets Held For Sale
Assets acquired by foreclosure or in settlement of debt and held for sale are valued at estimated fair value, as of the date of foreclosure and a related valuation allowance is provided for estimated costs to sell the assets. Management evaluates the value of foreclosed assets held for sale periodically and increases the valuation allowance for any subsequent declines in fair value. Changes in the valuation allowance are charged or credited to other expense.
Goodwill and Core Deposits
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 and other intangibles are not being amortized, they are being tested annually for impairment.
Core deposit premiums represents the amount allocated to the future earnings potential of acquired deposits. The unamortized core deposits are being amortized using both straight-line and accelerated methods over periods ranging from 10 to 15 years.
Fee Income
Periodic bankcard fees, net of direct origination costs, are recognized as revenue on a straight-line basis over the period the fee entitles the cardholder to use the card. Origination fees and costs for other loans are being amortized over the estimated life of the loan.
Income Taxes
Deferred tax liabilities and assets 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.
Earnings Per Share
Basic earnings per share are computed based on the weighted average number of shares outstanding during each year. Diluted earnings per share are computed using the weighted average common shares and all potential dilutive common shares outstanding during the period.
The computation of per share earnings is as follows:
Employee Benefit Plans
At December 31, 2002, the Company has a stock-based employee compensation plan, which is described more fully in Note 11. 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. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions for FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
The above pro forma amounts include only the current year vesting, during 2002, 2001 and 2000 on outstanding options and therefore may not be representative of the pro forma impact in future years.
NOTE 2: ACQUISITIONS - --------------------------------------------------------------------------------
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 July 17, 2000, the Company expanded its coverage of Central and Northwest Arkansas with a $7.6 million cash purchase of two Conway and six Northwest Arkansas locations from First Financial Banc Corporation. Simmons First National Bank acquired the two offices in Conway and Simmons First Bank of Northwest Arkansas acquired the six offices in Northwest Arkansas. As of July 14, 2000, the eight locations combined had total loans of $71.8 million, total deposits of $71.0 million and net assets of $8.5 million. The total acquisition cost exceeded the fair value of tangible assets and liabilities acquired by $10.8 million.
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:
Income earned on the above securities for the years ended December 31, 2002, 2001 and 2000 is as follows:
The Statement of Stockholders' Equity includes other comprehensive income. Other comprehensive income for the Company includes the change in the unrealized appreciation (depreciation) on available-for-sale securities. The changes in the unrealized appreciation (depreciation) on available-for-sale securities for the years ended December 31, 2002, 2001 and 2000, are as follows:
The amortized cost and estimated fair value by maturity of securities are shown in the following table. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. Accordingly, actual maturities may differ from contractual maturities.
The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $306,082,000 at December 31, 2002 and $290,915,000 at December 31, 2001.
The book value of securities sold under agreements to repurchase amounted to $43,060,000 and $35,990,000 for December 31, 2002 and 2001, respectively.
Gross realized gains of $19,000, $46,000 and $0 resulting from sales and/or calls of securities were realized for the years ended December 31, 2002, 2001 and 2000, respectively. Gross realized losses of $29,000, $35,000 and $0 resulting from sales and/or calls of securities were realized for the years ended December 31, 2002, 2001 and 2000, respectively.
Most of the state and political subdivision debt obligations are non-rated bonds and represent small Arkansas issues, which are evaluated on an ongoing basis.
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES - --------------------------------------------------------------------------------
The various categories of loans are summarized as follows:
At December 31, 2002 and 2001, impaired loans totaled $14,646,000 and $21,012,000, respectively. All impaired loans had designated reserves for possible loan losses. Reserves relative to impaired loans at December 31, 2002, were $2,895,000 and $4,093,000 at December 31, 2001. Approximately, $376,000 and $893,000 of interest income were recognized on average impaired loans of $17,424,000 and $21,138,000 for 2002 and 2001, respectively. Interest recognized on impaired loans on a cash basis during 2002 or 2001 was immaterial.
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more totaled $1,814,000 and $2,991,000, respectively. Non-accruing loans at December 31, 2002 and 2001 were $10,443,000 and $11,956,000, respectively.
As of December 31, 2002, credit card loans, which are unsecured, were $180,439,000 or 14.4%, of total loans versus $196,710,000 or 15.6% of total loans at December 31, 2001. 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.
Transactions in the allowance for loan losses are as follows:
NOTE 5: GOODWILL AND CORE DEPOSITS - --------------------------------------------------------------------------------
During 2002, the Company changed its method of accounting and financial reporting for goodwill by adopting Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangibles. This statement requires transitional disclosures regarding the change in amortization and other treatment of goodwill for the years ended December 31, 2001 and 2000, as follows:
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.
The carrying basis and accumulated amortization of core deposits (net of core deposits that were fully amortized) at December 31, 2002 and 2001, were:
Core deposit amortization expense recorded for the years ended December 31, 2002, 2001 and 2000, was $78,000, $101,000 and $232,000, respectively. 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.
On October 1, 2002, Financial Accounting Standards Board issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This statement concludes that the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in all business combinations represents goodwill that should be accounted for under FASB Statement No. 142. Thus, the specialized accounting guidance in paragraph 5 of FASB Statement No. 72, Accounting for Certain Acquisition of Banking or Thrift Institutions, does not apply to transactions considered business combinations for 2002. The Company adopted the new rules effective October 1, 2002.
NOTE 6: TIME DEPOSITS - --------------------------------------------------------------------------------
Time deposits included approximately $310,581,000 and $341,085,000 of certificates of deposit of $100,000 or more, at December 31, 2002 and 2001, respectively. At December 31, 2002, time deposits with a remaining maturity of one year or more amounted to $109,769,000. Maturities of all time deposits are as follows: 2003 - $704,841,000; 2004 - $91,398,000; 2005 - $17,455,000; 2006 - $579,000; 2007 - $327,000 and thereafter $10,000.
Deposits are the Company's primary funding source for loans and investment securities. The mix and repricing alternatives can significantly affect the cost of this source of funds and, therefore, impact the margin.
NOTE 7: INCOME TAXES - --------------------------------------------------------------------------------
The provision for income taxes is comprised of the following components:
The tax effects of temporary differences related to deferred taxes shown on the balance sheet were:
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below.
NOTE 8: LONG-TERM DEBT - --------------------------------------------------------------------------------
Long-term debt at December 31, 2002 and 2001 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 Trust and to invest the gross proceeds of such Preferred Securities into notes of the Corporation. The sole assets of the Trust are $17.8 million aggregate principal amount of the Corporation's 9.12% Subordinated Debenture Notes due 2027 which are currently redeemable. Such securities qualify as Tier 1 Capital for regulatory purposes.
Aggregate annual maturities of long-term debt at December 31, 2002 are:
NOTE 9: CAPITAL STOCK - --------------------------------------------------------------------------------
In addition to the common stock outstanding, the following classes of stock have been authorized.
Class B common stock of $1.00 par value per share, authorized 300 shares: none issued. Class A preferred stock of $100.00 par value per share, authorized 50,000 shares: none issued. Class B preferred stock of $100.00 par value per share, authorized 50,000 shares: none issued.
The Company has a stock repurchase program, which is authorized to repurchase up to 400,000 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 exercises, for payment of future stock dividends and for general corporate purposes
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. During the twelve-month period ended December 31, 2002, the Company repurchased 30,000 common shares of stock with a weighted average repurchase price of $32.65 per share. As of December 31, 2002, the Company has repurchased a total of 331,000 common shares of stock with a weighted average repurchase price of $23.71 per share.
NOTE 10: TRANSACTIONS WITH RELATED PARTIES - --------------------------------------------------------------------------------
At December 31, 2002 and 2001, the subsidiary banks had extensions of credit to executive officers, directors and to companies in which the banks' executive officers or directors were principal owners, in the amount of $35.1 million in 2002 and $21.6 million in 2001.
In management's opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, these extensions of credit did not involve more than the normal risk of collectability or present other unfavorable features.
NOTE 11: EMPLOYEE BENEFIT PLANS - --------------------------------------------------------------------------------
The Company's 401(k) retirement plan covers substantially all employees. Contribution expense totaled $335,000, $282,000 and $258,000, in 2002, 2001 and 2000, respectively.
The Company has a discretionary profit sharing and employee stock ownership plan covering substantially all employees. Contribution expense totaled $1,732,000 for 2002, $1,614,000 for 2001 and $1,523,000 for 2000.
The Board of Directors has adopted incentive and nonqualified stock option plans. Pursuant to the plans, shares are reserved for future issuance by the Company, upon exercise of stock options granted to officers and other key employees. Also, 24,700 and 3,000 additional shares of common stock of the Company were granted and issued to executive officers of the Company as bonus shares of restricted stock, during each of the years ended December 31, 2001 and 2000, respectively. No additional shares of common stock of the Company were granted and issued to executive officers of the Company as bonus shares of restricted stock, during the year ended December 31, 2002.
The weighted average fair values of options granted during 2002, 2001 and 2000 were $6.92, $4.58 and $3.92 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
The table below summarizes the transactions under the Company's stock option plans at December 31, 2002, 2001 and 2000 and changes during the years then ended:
The following table summarizes information about stock options under the plan outstanding at December 31, 2002:
Also, the Company has deferred compensation agreements with certain active and retired officers. The agreements provide monthly payments which, together with payments from the deferred annuities issued pursuant to the terminated pension plan, equal 50 percent of average compensation prior to retirement or death. The charges to income for the plans were $154,000 for 2002, $205,000 for 2001and $194,000 for 2000. Such charges reflect the straight-line accrual over the employment period of the present value of benefits due each participant, as of their full eligibility date, using an 8 percent discount factor.
NOTE 12: ADDITIONAL CASH FLOW INFORMATION - --------------------------------------------------------------------------------
In connection with cash acquisitions accounted for using the purchase method, the Company acquired assets and assumed liabilities as follows:
NOTE 13: OTHER EXPENSE - --------------------------------------------------------------------------------
The Company had aggregate annual equipment rental expense of approximately $480,000 in 2002, $727,000 in 2001 and $1,027,000 in 2000. The Company had aggregate annual occupancy rental expense of approximately $898,000 in 2002, $834,000 in 2001 and $634,000 in 2000.
NOTE 14: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalents
The carrying amount for cash and cash equivalents approximates fair value.
Investment Securities
Fair values for investment securities equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities.
Mortgage Loans Held for Sale
For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.
Loans
The fair value of loans is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.
Deposits
The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount). The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
Federal Funds Purchased, Securities Sold Under Agreement to Repurchase and Short-Term Debt
The carrying amount for federal funds purchased, securities sold under agreement to repurchase and short-term debt are a reasonable estimate of fair value.
Long-Term Debt
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
Commitments to Extend Credit, Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
The following table represents estimated fair values of the Company's financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows. This method involves significant judgments by management considering the uncertainties of economic conditions and other factors inherent in the risk management of financial instruments. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.
The fair value of commitments to extend credit and letters of credit is not presented since management believes the fair value to be insignificant.
NOTE 15: SIGNIFICANT ESTIMATES AND CONCENTRATIONS - --------------------------------------------------------------------------------
Accounting principles generally accepted in the United Sates of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses and certain concentrations of credit risk are reflected in Note 4.
NOTE 16: COMMITMENTS AND CREDIT RISK - --------------------------------------------------------------------------------
The Company grants agri-business, credit card, commercial and residential loans to customers throughout Arkansas. Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
At December 31, 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. At December 31, 2001, the Company had outstanding commitments to extend credit aggregating approximately $230,783,000 and $203,808,000 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 $2,474,000 and $4,218,000 at December 31, 2002 and 2001, respectively, with terms ranging from 90 days to one year.
At December 31, 2002, the Company did not have concentrations of 5% or more of the investment portfolio in bonds issued by a single municipality.
NOTE 17: FUTURE CHANGES IN ACCOUNTING PRINCIPLE - --------------------------------------------------------------------------------
In 2001, the Company adopted Financial Accounting Standards Board Statements No. 142, Goodwill and Other Intangibles and No. 147, Acquisitions of Certain Financial Institutions. The impact of the Company adopting these statements is reflected in Note 5.
Presently, the Company is not aware of any other changes from the Financial Accounting Standards Board that will have an impact on the Company's present or future financial statements.
NOTE 18: CONTINGENT LIABILITIES - --------------------------------------------------------------------------------
The Company and/or its subsidiary banks 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.
NOTE 19: STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
The Company's subsidiaries are subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. The approval of the Office of the Comptroller of the Currency is required, if the total of all the dividends declared by a national bank in any calendar year exceeds the total of its net profits, as defined, for that year, combined with its retained net profits of the preceding two years. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. At December 31, 2002, the Company subsidiaries had approximately $14 million in undivided profits available for payment of dividends to the Company, without prior approval of the regulatory agencies.
The Company's subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2002, 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 actual capital amounts and ratios along with the Company's most significant subsidiaries are presented in the following table.
NOTE 20: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - --------------------------------------------------------------------------------
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No items are reportable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held March 25, 2003, filed pursuant to Regulation 14A on or about February 11, 2003.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held March 25, 2003 filed pursuant to Regulation 14A on or about February 11, 2003.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held March 25, 2003, filed pursuant to Regulation 14A on or about February 11, 2003.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held March 25, 2003, filed pursuant to Regulation 14A on or about February 11, 2003.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements and any Financial Statement Schedules
The financial statements and financial statement schedules listed in the accompanying index to the consolidated financial statements and financial statement schedules are filed as part of this Annual Report.
(b) Reports on Form 8-K
The registrant filed Form 8-K on October 17, 2002. The report contained the text of a press release issued by the registrant concerning the announcement of third quarter earnings.
The registrant filed Form 8-K on December 3, 2002. The report contained the text of a press release issued by the registrant concerning the declaration of a quarterly dividend.
(c) Listing of Exhibits
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
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ John L. Rush February 6, 2003 ----------------------------------------- John L. Rush, Secretary
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 6, 2003.
Signature Title --------- -----
/s/ J. Thomas May President, Chairman, Chief Executive Officer - ----------------- and Director J. Thomas May
/s/ Barry L. Crow Executive Vice President and Chief Financial - ----------------- Officer (Principal Financial and Accounting Officer) Barry L. Crow
/s/ William E. Clark Director - --------------------- William E. Clark
/s/ Lara F. Hutt, III Director - --------------------- Lara F. Hutt, III
/s/ George Makris, Jr. Director - ---------------------- George Makris, Jr.
/s/ David R. Perdue Director - ------------------- David R. Perdue
/s/ Harry L. Ryburn Director - ------------------- Harry L. Ryburn
/s/ Henry F. Trotter Director - -------------------- Henry F. Trotter, Jr.
CERTIFICATION
I, J. Thomas May certify that:
1. I have reviewed this annual report on Form 10-K of Simmons First National Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: February 6, 2003
/s/ J. Thomas May - ------------------ J. Thomas May, Chairman, President and Chief Executive Officer
CERTIFICATION
I, Barry L. Crow, certify that:
1. I have reviewed this annual report on Form 10-K of Simmons First National Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: February 6, 2003
/s/ Barry L. Crow - ----------------- Barry L. Crow, Chief Financial Officer
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
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Simmons First National Corporation (the "Company"), on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, J. Thomas May, Chairman, President and Chief Executive Officer of the Company, hereby certifies that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ J. Thomas May - ----------------- J. Thomas May Chairman, President and Chief Executive Officer February 6, 2003
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Simmons First National Corporation (the "Company"), on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Barry L. Crow, Chief Financial Officer of the Company, hereby certifies that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Barry L. Crow - ----------------- Barry L. Crow Chief Financial Officer February 6, 2003