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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Exchange Act of 1934
For the fiscal year ended: December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 Commission file number 0-6253
SIMMONS FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Arkansas 71-0407808
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
501 Main Street, Pine Bluff, Arkansas 71601
(Address of principal executive offices) (Zip Code)
(870) 541-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- --------------------------------------------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $1.00 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or in information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock, par value $1.00 per share, held by
non-affiliates on March 15, 1999, was approximately $185,484,000.
The number of shares outstanding of the Registrant's Common Stock as of March
15, 1999 was 6,520,232.
Part III is incorporated by reference from the Registrant's Proxy Statement
relating to the Annual Meeting of Shareholders to be held on April 27, 1999.
FORM 10-K INDEX
Part I
Item 1 Business..............................................................1
Item 2 Properties............................................................5
Item 3 Legal Proceedings.....................................................5
Item 4 Submission of Matters to a Vote of Security-Holders...................6
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.6
Item 6 Selected Consolidated Financial Data..................................7
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................9
Item 8 Consolidated Financial Statements and Supplementary Data.............30
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................58
Part III
Item 10 Directors and Executive Officers of the Company......................58
Item 11 Executive Compensation...............................................58
Item 12 Security Ownership of Certain Beneficial Owners and Management.......58
Item 13 Certain Relationships and Related Transactions.......................58
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K......58
Signatures...........................................................59
PART I
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. At December 31,
1998, the Company was the third largest bank holding company headquartered in
Arkansas with consolidated total assets of $1.464 billion, consolidated net
loans of $898.5 million, consolidated deposits of $1.188 billion and total
equity capital of $132.2 million. The Company owns eight community banks in
Arkansas. The Company's banking subsidiaries conduct their operations through 45
offices located in 24 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
is central and western Arkansas. During 1998, the Company sold its $1.2 billion
residential mortgage-servicing portfolio. At December 31, 1998, the Bank had
total assets of $733.2 million, total net loans of $455.8 million and total
deposits of $575.8 million.
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, 1998, Simmons/Jonesboro had total assets of $139.4
million, total net loans of $101.4 million and total deposits of $121.6 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. At December 31, 1998, Simmons/South had total assets of
$59.4 million, total net loans of $29.4 million and total deposits of $53.9
million.
Simmons First Bank of Dumas ("Simmons/Dumas") is a state bank, which
was acquired in 1995. Simmons/Dumas's primary market area is Dumas, Arkansas. At
December 31, 1998, Simmons/Dumas had total assets of $32.9 million, total net
loans of $17.6 million and total deposits of $29.0 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, 1998, Simmons/Northwest had total assets
of $90.5 million, total net loans of $52.5 million and total deposits of $83.7
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, 1998, Simmons/Russellville had total
assets of $233.9 million, total net loans of $134.6 million and total deposits
of $179.9 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, 1998, Simmons/Searcy had total assets of $112.7 million, total
net loans of $76.1 million and total deposits of $93.0 million.
American State Bank ("ASB") is a state bank, which was acquired in
1998. ASB's primary market area is western Arkansas. The Company plans to merge
ASB into Simmons First National Bank during the first quarter of 1999. At
December 31, 1998, ASB had total assets of $89.6 million, total net loans of
$43.7 million and total deposits of $73.7 million.
The Company's subsidiaries provide complete banking services to
individuals and businesses throughout the market areas, which 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 Company's Audit 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
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. The larger subsidiary banks
receive this review on a semi-annual basis.
Factors affecting decisions in determining the reserves for 1998 included
unfavorable weather and market conditions in the agricultural industry,
increased consumer bankruptcies, increased impaired loans and increased indirect
lending (loans originated by third parties which are underwritten and purchased
by the Company).
Growth Strategy
The Company's growth strategy is to expand in its primary market areas
by capitalizing on opportunities presented by the State of Arkansas and
expanding through further banking acquisitions. The most significant
opportunities for internal growth will come from the community banks of
Simmons/Northwest, Simmons/Searcy and Simmons/Jonesboro, which are located in
some of the fastest growing areas in the state, and the Company's continued
expansion into the Little Rock market. With an increased presence in Arkansas,
ongoing investments in technology, and enhanced products and services, the
Company is 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, 1998, the Company and its subsidiaries had 748 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.
Executive officers are elected annually by the Board of Directors.
NAME AGE POSITION YEARS SERVED
J. Thomas May 52 President and Chief Executive Officer 12
Barry L. Crow 56 Executive Vice President and 27
Chief Financial Officer
John L. Rush 64 Secretary 31
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 must generally
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.
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 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, which became effective September 29, 1995,
now 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, a national banking association, is 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, Simmons/Dumas, Simmons/Northwest,
Simmons/Russellville, Simmons/Searcy and ASB, 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. 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.
The subsidiary banks, with numerous exceptions, are subject to the
application of the laws of the State of Arkansas, including the limitation of
the maximum permissible interest rate on loans. This limitation for general
loans is 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.) are exempt from
this limitation; however, a very substantial portion of the loans made by the
subsidiary banks, including all credit card loans, are subject to this
limitation.
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 18 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 Company was advised
by the FDIC and OCC that the subsidiary banks had 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. 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 166,000 square feet of floor space,
approximately 7,500 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, 1998, the company's eight
banks are conducting financial operations from 45 offices in 24 communities
throughout Arkansas.
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. 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. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded and quoted on the over-the-counter NASDAQ
National Market System under the symbol "SFNCA." The following table sets forth,
for all the periods indicated, cash dividends paid, and the high and low bid
prices for the Common Stock as reported by NASDAQ.
Quarterly
Price Per Dividends
Common Share Per Common
High Low Share(1)
- ----------------------------------------------------------------------------------------------------
1998
1st quarter $ 53.25 $ 42.00 $ 0.15
2nd quarter 50.75 43.25 0.16
3rd quarter 49.50 33.75 0.16
4th quarter 44.88 33.63 0.17
1997
1st quarter $ 28.00 $ 25.50 $ 0.13
2nd quarter 30.00 27.00 0.14
3rd quarter 36.50 29.50 0.14
4th quarter 42.00 35.00 0.15
(1) Dividends per common share are historical amounts
At December 31, 1998, the Common Stock was held of record by
approximately 1,330 stockholders. On March 15, 1999, the last sale price for the
Common Stock as reported by NASDAQ was $33.50 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 are dividends received from its subsidiary banks. Under applicable
banking laws, the declaration of dividends by the Bank in any year, in excess of
the sum of net income for that year and retained earnings for the preceding two
years, must be approved by the Office of the Comptroller of the Currency.
Further, as to Simmons/Jonesboro, Simmons/Dumas, Simmons/Northwest,
Simmons/South, Simmons/Russellville, Simmons/Searcy and ASB, 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, 1998, approximately
$7 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 18 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 either the Simmons
First National Corporation Incentive and Non-qualified Stock Option Plan or the
Simmons First National Corporation Executive Stock Incentive Plan. No
underwriters were involved and no underwriter's discount or commissions were
involved. Exemption from registration is claimed under Section 4(2) of the
Securities Act of 1933 as private placements. Unless noted otherwise, the
registrant received cash as the consideration for the transaction.
Number
Identity Date of Sale of Shares Price(1) Type of Transaction
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1 Officer November, 1998 1,500 $12.333 Incentive Stock Option
- --------
Notes:
1. The per share price paid for incentive stock options represents the fair
market value of the stock as determined under the terms of the Plan on the date
the incentive stock option was granted to the officer. The price paid has been
adjusted to reflect the effect of the 50% stock dividend paid on December 6,
1996.
Forward Looking Statements
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to ", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive, and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
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, 1998, 1997,
1996, 1995, and 1994 were derived from consolidated financial statements of the
Company, which were audited by Baird, Kurtz & Dobson. Earnings per common share
and dividends per common share presented in the financial statements have been
restated retroactively to reflect the effects of the October 29, 1996 50% stock
dividend on a consistent basis. 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.
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31 (1)
(In thousands,
except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Income statement data:
Net interest income $ 52,234 $ 43,660 $ 36,740 $ 34,411 $ 32,135
Provision for loan losses 7,749 4,512 2,398 2,434 2,122
Net interest income after provision
for loan losses 44,485 39,148 34,342 31,977 30,013
Non-interest income 31,664 28,099 25,738 24,920 25,432
Non-interest expense 56,235 49,234 44,504 42,094 40,574
Provision for income taxes 5,583 5,219 4,496 4,318 4,027
Net income 14,331 12,794 11,080 10,485 10,844
Per share data:
Basic earnings 2.31 2.07 1.79 1.71 1.82
Diluted earnings 2.27 2.04 1.77 1.70 1.80
Basic cash earnings(2) 2.56 2.20 1.84 1.75 1.86
Book value 21.29 19.55 17.97 16.83 15.02
Dividends (3) 0.64 0.56 0.48 0.40 0.31
Balance sheet data at period end:
Assets 1,464,362 1,411,877 963,262 920,075 789,772
Loans 913,617 844,455 556,249 517,032 463,971
Allowance for loan losses 15,098 13,410 8,906 8,945 8,263
Deposits 1,187,913 1,175,451 807,643 774,794 651,338
Long-term debt 49,340 53,558 1,067 4,757 12,144
Stockholders' equity 132,180 121,012 110,882 104,198 89,834
Capital ratios at period end:
Stockholders' equity to
total assets 9.03% 8.57% 11.51% 11.32% 11.37%
Leverage (4) 8.27% 7.71% 11.58% 10.77% 11.31%
Tier 1 12.61% 11.94% 18.58% 18.40% 18.92%
Total risk-based 13.87% 13.21% 19.82% 19.78% 21.11%
Selected ratios:
Return on average assets 1.00% 1.11% 1.20% 1.23% 1.39%
Return on average common equity 11.24% 10.98% 10.29% 10.67% 12.55%
Net interest margin (5) 4.17% 4.36% 4.60% 4.67% 4.74%
Allowance/nonperforming loans 176.36% 162.25% 169.12% 257.63% 252.46%
Allowance for loan losses as a
percentage of average loans 1.73% 1.96% 1.68% 1.85% 1.92%
Nonperforming loans as a percentage
of period-end loans 0.94% 0.98% 0.95% 0.67% 0.71%
Net charge-offs as a percentage
of average total assets 0.42% 0.35% 0.26% 0.25% 0.22%
Dividend payout 26.2% 25.0% 24.6% 21.3% 16.0%
(1) The selected consolidated financial data set forth above should be read in
conjunction with the financial statements of the Company and related
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this Annual Report. All financial information
has been restated for the merger accounted for as pooling-of-interests. (2) Cash
earnings are net income excluding amortization of intangible assets.
(3) Dividends per common share are historical amounts.
(4) Leverage ratio is Tier 1 capital to quarterly average total assets less
intangible assets and gross unrealized gains/losses on available-for-sale
investments.
(5) Fully taxable equivalent (assuming an effective income tax rate
of 36.25% for 1998 through 1995 and 34% for 1994)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Simmons First National Corporation (SFNC) achieved record earnings in
1998. Earnings for the period ended December 31, 1998, were $14,331,000 or an
increase of $1,537,000 over the December 31, 1997 earnings of $12,794,000. Basic
earnings per share for the year were $2.31, an increase of 11.6% from $2.07 in
1997. Diluted earnings per share for the year were $2.27, an increase of 11.3%
from $2.04 in 1997. Return on average assets and return on average stockholder's
equity for the period ended December 31, 1998 was 1.00% and 11.24%, compared to
1.11% and 10.98%, respectively, for the same period in 1997. All financial
information has been restated for the merger with American Bancshares of
Arkansas, Inc. accounted for as a pooling-of-interests.
In connection with the aforementioned merger, non-recurring
merger-related expenses totaled $466,000, or $0.07 per share after tax. If
earnings for 1998 were adjusted for the merger-related expenses, diluted
earnings would have been $2.34 per share for the year ended December 31, 1998.
Because of the Corporation's historical cash acquisitions, cash
earnings (net income excluding amortization of intangible assets) are an
integral component of earnings. Basic cash earnings, on a per share basis were
$2.56 in 1998 compared to $2.20 in 1997, reflecting a 16.4% increase. Diluted
cash earnings, on a per share basis were $2.52 in 1998 compared to $2.17 in
1997, reflecting a 16.1% increase. Cash return on average assets was 1.13% and
cash return on average stockholders' equity was 12.43% for 1998, compared with
1.20% and 11.67%, respectively, for 1997.
Total assets for the Corporation at December 31, 1998, were $1.464
billion, an increase of $52 million over the same figure at December 31, 1997.
Stockholders' equity at the end of 1998 was $132.2 million, a $11.2 million, or
9.3%, increase for the period ended December 31, 1997.
Asset quality remains strong with the allowance for loan losses as a
percent of total loans at 1.65% as of December 31, 1998, compared to 1.59% for
the same date in 1997. As of December 31, 1998, non-performing loans equaled
0.94% of total loans, while the allowance for loan losses equaled 176% of
non-performing loans.
Simmons First National Corporation is an Arkansas based, Arkansas
committed, multi-bank holding company. At year-end the Company had eight
community banks in Pine Bluff, Jonesboro, Lake Village, Dumas, Rogers,
Russellville, Searcy and Charleston, Arkansas. The Company's banks are
conducting financial operations from 45 offices in 24 communities throughout
Arkansas.
Acquisitions
On August 1, 1997, Simmons First National Corporation acquired all the
outstanding capital stock of First Bank of Arkansas, Searcy, Arkansas and First
Bank of Arkansas, Russellville, Arkansas, in a cash purchase transaction of $53
million and changed the respective names of the banks to Simmons First Bank of
Searcy and Simmons First Bank of Russellville. The banks acquired had
consolidated assets of $362 million, as of August 1, 1997.
In December 1998, the Company and American Bancshares of Arkansas, Inc.
("ABA") merged in a pooling-of-interests transaction. Stockholders of ABA
received 464,885 shares of Simmons First National Corporation stock in exchange
for ABA shares in the transaction. ABA owned American State Bank ("ASB"),
Charleston, Arkansas with assets, as of December 31, 1998, of $90 million. The
Company plans to merge ASB into Simmons First National Bank during the first
quarter of 1999.
On January 15, 1999, the Company and Lincoln Bancshares, Inc. ("LBI")
merged in a pooling-of-interests transaction. Stockholders of LBI received
301,823 shares of Simmons First National Corporation stock in exchange for LBI
shares in the transaction. LBI owned the Bank of Lincoln ("BOL"), Lincoln,
Arkansas with assets, as of January 15, 1999, of $75 million. The Company plans
to merge BOL into Simmons First Bank of Northwest Arkansas during the second
quarter of 1999.
On March 22, 1999, an announcement was made jointly by the Chief
Executive Officers of both the Company and NBC Bank Corp. ("NBC") regarding the
execution of a definitive agreement under the terms of which NBC will be merged
into the Company. Stockholders of NBC will receive 785,000 shares of Simmons
First National Corporation stock in exchange for NBC shares in the transaction.
The transaction is expected to close during the third quarter of 1999.
NBC owns National Bank of Commerce, El Dorado, Arkansas with
consolidated assets of $147 million as of December 31, 1998. After the merger,
National Bank of Commerce will continue to operate as a separate community bank
with the same board of directors, management and staff.
Sale of Mortgage Servicing
On June 30, 1998, the Company sold its residential mortgage-servicing
portfolio resulting in a $3.3 million gain. The portfolio consisted of
approximately $1.2 billion in residential mortgage loans. The portfolio sale
will not have a material impact on future earnings of the Company.
Earnings Review For the Years 1998, 1997, and 1996
In 1998, the Company reported record net earnings of $14,331,000 and
diluted earnings per share of $2.27. This compares to net earnings of
$12,794,000 and $11,080,000 and diluted earnings per share of $2.04 and $1.77,
in 1997 and 1996, respectively. The earnings for 1998 were predominantly
influenced from growth in the loan portfolio, an increase in fees on loans, sale
of the mortgage-servicing portfolio, Year 2000 expenses, merger-related expenses
and an increase in the provision for loan losses due to growth in loans,
increased indirect lending, unfavorable weather and market conditions in the
agriculture industry and rising consumer bankruptcies.
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 (36.25% for 1998 through 1996).
For the year ended December 31, 1998, net interest income on a fully
taxable equivalent basis was $54.4 million, an increase of approximately $8.8
million, or 19.3%, from 1997 net interest income. The increase in 1998 in net
interest income resulted primarily from the growth due to purchase acquisitions
during 1997 and other growth in the loan portfolio. The growth offset a decrease
in net interest margin resulting from a higher cost of funds. The higher cost of
funds is the result of the long-term debt issued during 1997 for purchase
acquisitions. The net interest margin was 4.17% in 1998, compared to 4.36% in
1997 and 4.60% in 1996. For the year ended December 31, 1997, net interest
income on a fully taxable equivalent basis was $45.5 million, an increase of
approximately $7.1 million, or 18.5%, from comparable figures in 1996. The
increase in 1997 in net interest income resulted primarily from the growth due
to purchase acquisitions and general growth in earning assets throughout the
Company. The growth offset a decrease in net interest margin resulting from a
higher cost of funds. The tables below reflect an analysis of net interest
income on a fully taxable equivalent basis for the years ended December 31,
1998, 1997 and 1996, respectively, as well as changes in fully taxable
equivalent net interest income for the years 1998 versus 1997 and 1997 versus
1996.
Analysis of Net Interest Income
(FTE =Fully Taxable Equivalent)
Years Ended December 31
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Interest income $ 105,966 $ 84,810 $ 67,401
FTE adjustment 2,123 1,880 1,692
--------- --------- ------
Interest income - FTE 108,089 86,690 69,093
Interest expense 53,732 41,150 30,661
--------- --------- -------
Net interest income - FTE $ 54,357 $ 45,540 $ 38,432
======== ======== =======
Yield on earning assets - FTE 8.29% 8.31% 8.27%
Cost of interest bearing liabilities 4.73% 4.61% 4.39%
Net interest spread - FTE 3.56% 3.70% 3.88%
Net interest margin - FTE 4.17% 4.36% 4.60%
Changes in Fully Taxable Equivalent Net Interest Margin
(In thousands) 1998 vs. 1997 1997 vs.1996
- ---------------------------------------------------------------------------------------------------------------------
Increase due to change in earning assets $ 21,981 $ 17,515
Increase (decrease) due to change in earning asset yields (582) 82
Increase (decrease) due to change in interest rates paid on
interest bearing liabilities 95 (244)
Decrease due to change in interest bearing liabilities (12,677) (10,245)
-------- -------
Increase in net interest income $ 8,817 $ 7,108
======== =======
The following table shows, for each major category of earning assets
and interest bearing liabilities, the average 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, 1998. 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.
Under Financial Accounting Standard Board Statement No. 91 (SFAS 91), loan
fees and related costs are deferred and amortized as part of interest income.
Average Balance Sheets and Net Interest Income Analysis
Years Ended December 31
----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------- --------------------------
Average Income/Yield/ Average Income/ Yield/ Average Income/Yield/
(In thousands) Balance ExpenseRate(%) Balance Expense Rate(%) Balance ExpenseRate(%)
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets
Interest bearing balances
due from banks $ 7,858 $ 434 5.52 $ 4,678 $ 233 4.98 $ 5,299 $ 294 5.55
Federal funds sold 71,143 3,603 5.06 47,298 2,648 5.60 34,033 1,778 5.22
Investment securities-taxable 251,513 15,708 6.25 221,566 14,226 6.42 177,969 11,590 6.51
Investment securities-non-taxable 89,940 6,618 7.36 75,813 5,687 7.50 68,179 5,135 7.53
Mortgage loans held for sale,
net of unrealized gains (losses) 8,135 581 7.14 5,567 407 7.31 17,768 1,333 7.50
Assets held in trading accounts 1,996 97 4.86 3,118 209 6.70 2,429 142 5.85
Loans 873,806 81,048 9.28 685,380 63,280 9.23 529,907 48,821 9.21
--------- -------- --------- -------- -------- -------
Total interest earning assets 1,304,391 108,089 8.29 1,043,420 86,690 8.31 835,584 69,093 8.27
-------- -------- -------
Non-earning assets 130,058 104,790 89,845
--------- --------- --------
Total assets $1,434,449 $1,148,210 $ 925,429
========= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing transaction
and savings accounts $ 369,177 $ 10,777 2.92 $ 315,738 $ 9,132 2.89 $ 275,846 $ 7,700 2.79
Time deposits 653,780 36,006 5.51 507,719 27,704 5.46 387,366 21,065 5.44
--------- -------- -------- ------- -------- -------
Total interest 1,022,957 46,783 4.57 823,457 36,836 4.47 663,212 28,765 4.34
bearing deposits
Federal funds purchased and
securities sold under agreement
to repurchase 58,648 2,756 4.70 40,526 2,145 5.29 29,591 1,509 5.10
Other borrowed funds
Short-term debt 2,266 96 4.24 3,296 114 3.46 2,369 129 5.45
Long-term debt 51,685 4,097 7.93 24,763 2,055 8.30 2,861 258 9.02
--------- -------- --------- -------- --------- --------
Total interest 1,135,556 53,732 4.73 892,042 41,150 4.61 698,033 30,661 4.39
bearing liabilities -------- -------- --------
Non-interest bearing liabilities
Non-interest bearing deposits 154,039 126,554 108,895
Other liabilities 17,358 13,115 10,786
--------- --------- --------
Total liabilities 1,306,953 1,031,711 817,714
--------- --------- --------
Stockholders' equity 127,496 116,499 107,715
-------- --------- --------
Total liabilities and
stockholders' equity $1,434,449 $1,148,210 $ 925,429
========= ========= ========
Net interest margin $ 54,357 4.17 $ 45,540 4.36 $ 38,432 4.60
======= ======= =======
The following table 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, 1998 and 1997 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.
Volume/Rate Analysis
Years Ended December 31
1998 over 1997 1997 over 1996
Yield/ Yield/
(In thousands) Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in
Interest income
Interest earning time deposits $ 158 $ 43 $ 201 $ (34) $ (27) $ (61)
Federal funds sold 1,335 (380) 955 692 178 870
Investment securities - taxable 1,923 (441) 1,482 2,838 (202) 2,636
Investment securities - non-taxable 1,060 (129) 931 575 (23) 552
Mortgage loans held for sale, net of
unrealized gains (losses) 188 (14) 174 (915) (11) (926)
Assets held in trading accounts (75) (37) (112) 40 27 67
Loans 17,392 376 17,768 14,319 140 14,459
------- ------- -------- -------- ------- -------
Total 21,981 (582) 21,399 17,515 82 17,597
-------- ------- -------- -------- ------- -------
Interest expense
Interest bearing transaction and
savings accounts 1,544 101 1,645 1,113 319 1,432
Time deposits 7,975 327 8,302 6,547 92 6,639
Federal funds purchased
and securities sold under
agreements to repurchase 959 (348) 611 558 78 636
Other borrowed funds
Short-term debt (36) 18 (18) 51 (66) (15)
Long-term debt 2,235 (193) 2,042 1,976 (179) 1,797
-------- ------- -------- -------- -------- --------
Total 12,677 (95) 12,582 10,245 244 10,489
-------- ------- -------- -------- ------- -------
Increase (decrease) in
net interest income $ 9,304 $ (487) $ 8,817 $ 7,270 $ (162) $ 7,108
======= ======= ======= ======= ======= =======
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 1998, 1997 and 1996 was $7.7, $4.5 and $2.4 million, respectively.
The increase from 1997 to 1998 and from 1996 to 1997 is attributable to purchase
acquisitions, growth in loans, increased indirect lending, unfavorable weather
and market conditions in the agriculture industry and rising consumer
bankruptcies.
Non-Interest Income
Total non-interest income was $31.7 million in 1998, compared to $28.1
million in 1997 and $25.7 million in 1996. Non-interest income is principally
derived from three sources: fee income, which includes service charges on
deposit accounts, trust fees, credit card fees and loan servicing fees; income
on the sale of mortgage loans and investment banking profits; and any gain or
loss on sold or called securities.
The table below shows non-interest income for the years ended December 31,
1998, 1997 and 1996, respectively, as well as changes in 1998 from 1997 and in
1997 from 1996.
Non-Interest Income
1998 1997
Years Ended December 31 Change from Change from
(In thousands) 1998 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
Trust income $ 3,357 $ 2,536 $ 2,166 $ 821 32.37% $ 370 17.08%
Service charges on deposit accounts 5,927 4,457 3,492 1,470 32.98 965 27.63
Other service charges and fees 1,382 1,347 1,115 35 2.60 232 20.81
Income on sale of mortgage loans,
net of commissions 490 415 287 75 18.07 128 44.60
Income on investment banking,
net of commissions 1,044 1,061 758 (17) -1.60 303 39.97
Credit card fees 9,484 9,433 9,601 51 0.54 (168) -1.75
Mortgage servicing & related fees 5,208 7,766 7,095 (2,558) -32.94 671 9.46
Other income 1,449 1,070 946 379 35.42 124 13.11
Gain on sale of mortgage servicing 3,273 -- -- 3,273 -- -- --
Gains on sale of securities, net 50 14 278 36 257.14 (264) -94.96
-------- -------- ------- ------ -------
Total non-interest income $ 31,664 $ 28,099 $ 25,738 $ 3,565 12.69% $ 2,361 9.17%
======= ======== ======= ====== ======
Fee income for 1998 was $25.4 million, a decrease of $100,000, or 0.4%,
when compared with 1997 figures. Fee income for 1997 was $25.5 million, an
increase of $2.0 million, or 8.5%, when compared with 1996 figures. During the
second quarter of 1998 the Company sold its $1.2 billion residential
mortgage-servicing portfolio. The sale of the mortgage-servicing portfolio
resulted in a $3.3 million gain on sale and a $2.6 million decrease in mortgage
fees. In 1998, trust fees increased $821,000 from the 1997 level, while service
charges on deposit accounts increased $1.5 million. In 1997, trust fees
increased $370,000 from the 1996 level, while service charges on deposit
accounts increased $1.0 million. The increase in trust fees for 1998 and 1997 is
primarily the result of growth in the number of trust relationships. The
increase in service charges on deposit accounts for 1998 and 1997 is the result
of purchase acquisitions during 1997.
Non-Interest Expense
Non-interest expense consists of salaries and employee benefits,
occupancy, equipment 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. Monthly and annual profit plans are developed,
including manpower and capital expenditure budgets, based on a needs assessment
of the business plan for the upcoming year. 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 1998 was $56.2 million, an increase of $7.0
million, or 14.2%, from 1997. Non-interest expense for 1997 was $49.2 million,
an increase of $4.7 million, or 10.6%, from 1996. The increase in non-interest
expense in 1998, compared to 1997 primarily reflects the Company's purchase
acquisitions on August 1, 1997, ABA merger-related expenses and Year 2000
expenses. These increases were offset by expense reduction associated with the
sale of the Company's $1.2 billion residential mortgage-servicing portfolio. The
increase in non-interest expense in 1997, compared to 1996 primarily reflects
the Company's purchase acquisitions, offset by a reduction in FDIC insurance
expense. The reduction in FDIC insurance expense is the result of a one-time
charge to recapitalize the Savings Association Insurance Fund during 1996.
The table below show non-interest expense for the years ended December
31, 1998, 1997 and 1996, respectively, as well as changes to 1998 from 1997 and
1997 from 1996, respectively.
Non-Interest Expense
1998 1997
Years Ended December 31 Change from Change from
(In thousands) 1998 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 28,614 $ 25,036 $ 22,935 $ 3,578 14.29% $ 2,101 9.16%
Occupancy expense, net 3,396 3,105 2,544 291 9.37 561 22.05
Furniture and equipment expense 4,025 3,449 2,646 576 16.70 803 30.35
Loss on foreclosed assets 605 1,121 1,175 (516) -46.03 (54) -4.60
Other operating expenses
Professional services 1,668 1,663 1,632 5 0.30 31 1.90
Postage 1,720 1,321 1,330 399 30.20 (9) -0.68
Telephone 1,191 1,017 905 174 17.11 112 12.38
Credit card expenses 1,495 1,413 1,426 82 5.80 (13) -0.91
Operating supplies 1,289 1,187 1,004 102 8.59 183 18.23
FDIC insurance 200 270 1,268 (70) -25.93 (998) -78.71
Merger-related 466 -- -- 466 -- -- --
Year 2000 500 -- -- 500 -- -- --
Amortization of MSR's 1,223 2,578 2,120 (1,355) -52.56 458 21.60
Amortization of intangibles 2,385 1,264 447 1,121 88.69 817 182.77
Other expenses 7,458 5,810 5,072 1,648 28.36 738 14.55
-------- --------- ------- ------- --------
Total non-interest expense $ 56,235 $ 49,234 $ 44,504 $ 7,001 14.22% $ 4,730 10.63%
======= ======== ======= ====== =======
Income Taxes
The provision for income taxes for 1998 was $5.6 million, compared to
$5.2 million in 1997 and $4.5 million in 1996. The effective income tax rates
for the years ended 1998, 1997 and 1996 were 28.0%, 29.0% and 28.9%,
respectively.
Loan Portfolio
The Company's loan portfolio averaged $873.8 million during 1998 and
$685.4 million during 1997. As of December 31, 1998, total loans were $913.6
million, compared to $844.5 million on December 31, 1997. The most significant
components of the loan portfolio were commercial real estate loans, loans to
individuals, in the form of credit card loans, student loans and single family
residential real estate loans. The loan figures for 1997 include a $213.9
million increase in loans as a result of the Company's purchase acquisitions.
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, 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 $365.5 million at December 31, 1998, or
40.0% of total loans, compared to $360.5 million, or 42.7% of total loans at
December 31, 1997. The consumer loan increase from 1997 to 1998 is the result of
the Company's increased indirect lending (loans originated by third parties
which are underwritten and purchased by the Company) through an expanded
marketing effort of this product offset by the decline in credit card loans
resulting from strong market competition in the credit card industry. Real
estate loans consist of construction loans, single family residential loans and
commercial loans. Real estate loans were $407.5 million at December 31, 1998, or
44.6% of total loans, compared to $344.0 million, or 40.7% of total loans at
December 31, 1997. The real estate loan increase from 1997 to 1998 is the result
of lower interest rates and favorable economic conditions. Commercial loans
consist of commercial loans, agricultural loans and financial institution loans.
Commercial loans were $134.3 million at December 31, 1998, or 14.7% of total
loans, compared to $133.2 million, or 15.8% of total loans at December 31, 1997.
The amounts of loans outstanding at the indicated dates are reflected
in the following table, according to type of loan.
Loan Portfolio
Years Ended December 31
(In thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Consumer
Credit cards $ 165,622 $ 179,828 $ 166,346 $ 154,808 $ 164,501
Student loans 66,134 63,291 64,193 63,492 62,836
Other consumer 133,778 117,380 69,514 61,646 42,446
Real Estate
Construction 53,255 44,052 20,769 16,240 7,778
Single family residential 160,963 149,666 82,343 77,688 66,311
Other commercial 193,312 150,285 70,581 67,972 53,562
Commercial
Commercial 92,729 94,329 45,017 40,818 36,610
Agricultural 35,917 32,758 22,959 22,744 18,108
Financial institutions 5,656 6,073 8,469 9,058 6,681
Other 6,251 6,793 6,058 2,566 5,138
---------- ---------- ---------- ---------- ---------
Total loans $ 913,617 $ 844,455 $ 556,249 $ 517,032 $ 463,971
========= ========= ========== ========= =========
The following table reflects the remaining maturities and interest rate
sensitivity of loans at December 31, 1998.
Maturity and Interest Rate Sensitivity of Loans
Over 1
year
1 year through Over
(In thousands) or less 5 years 5 years Total
- ---------------------------------------------------------------------------------------------------
Consumer $ 273,695 $ 89,568 $ 2,271 $ 365,534
Real estate 225,785 145,184 36,561 407,530
Commercial 105,763 26,514 2,025 134,302
Other 5,049 1,079 123 6,251
---------- ---------- --------- ----------
Total $ 610,292 $ 262,345 $ 40,980 $ 913,617
========== ========= ======== =========
Predetermined rate $ 445,313 $ 247,439 $ 40,980 $ 733,732
Floating rate 164,979 14,906 -- 179,885
----------- ---------- --------- ----------
Total $ 610,292 $ 262,345 $ 40,980 $ 913,617
========== ========= ======== =========
Asset Quality
A loan is considered impaired when it is probable that the Company will
not receive all amounts due according to the contracted terms of the loans. This
includes nonaccrual loans and certain loans identified by management.
Non-performing loans are comprised of (a) nonaccrual loans, (b) loans
that are contractually past due 90 days and (c) other loans for which terms have
been restructured to provide a reduction or deferral of interest or principal,
because of deterioration in the financial position of the borrower. The
subsidiary banks recognize income principally on the accrual basis of
accounting. When loans are classified as nonaccrual, the accrued interest is
charged off and no further interest is accrued. Loans, excluding credit card
loans, are placed on a nonaccrual basis either: (1) when there are serious
doubts regarding the collectability of principal or interest, or (2) when
payment of interest or principal is 90 days or more past due and either (i) not
fully secured or (ii) not in the process of collection. If a loan is determined
by management to be uncollectable, the portion of the loan determined to be
uncollectible is then charged to the allowance for loan losses. Credit card
loans are classified as impaired when payment of interest or principal is 90
days past due. Litigation accounts are placed on nonaccrual until such time as
deemed uncollectible. Credit card loans are generally charged off when payment
of interest or principal exceeds 180 days past due, but are turned over to the
credit card recovery department, to be pursued until such time as they are
determined, on a case-by-case basis, to be uncollectable.
At December 31, 1998, impaired loans were $11.2 million compared to
$9.2 million and $8.0 million in 1997 and 1996, respectively. At December 31,
1998, non-performing loans were $8.6 million compared to $8.3 million and $5.3
million in 1997 and 1996, respectively. These increases can be attributed to an
increase in credit card loans in bankruptcy and commercial loans that are 90
days or more past due.
The following table present information concerning non-performing
assets, including nonaccrual and restructured loans and other real estate owned.
Non-performing Assets
Years Ended December 31
(In thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 5,717 $ 6,038 $ 2,952 $ 1,762 $ 2,187
Loans past due 90 days or more
(principal or interest payments) 2,844 2,227 2,314 1,710 971
Restructured -- -- -- -- 115
--------- ------- -------- -------- -------
Total non-performing loans 8,561 8,265 5,266 3,472 3,273
--------- -------- -------- -------- -------
Other non-performing assets
Foreclosed assets held for sale 1,237 1,271 1,110 1,241 1,820
Other non-performing assets 29 -- 6 7 780
--------- -------- -------- -------- -------
Total other non-performing assets 1,266 1,271 1,116 1,248 2,600
--------- -------- -------- -------- -------
Total non-performing assets $ 9,827 $ 9,536 $ 6,382 $ 4,720 $ 5,873
======== ======= ======== ======== =======
Allowance for loan losses to
non-performing loans 176.36% 162.25% 169.12% 257.63% 252.46%
Non-performing loans to total loans 0.94% 0.98% 0.95% 0.67% 0.71%
Non-performing assets to total assets 0.67% 0.68% 0.66% 0.51% 0.74%
Approximately $531,000, $341,000 and $184,000 of interest income would
have been recorded for the periods ended December 31, 1998, 1997 and 1996,
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, 1998, 1997 and 1996.
Allowance for Loan Losses
An analysis of the allowance for loan losses for the last five years is
shown in the table below:
(In thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 13,410 $ 8,906 $ 8,945 $ 8,263 $ 7,830
-------- ------ ------- ------ ------
Loans charged off
Credit card 3,734 3,283 2,392 1,851 1,690
Other consumer 949 630 426 517 183
Real estate 1,016 309 73 37 234
Commercial 1,096 460 128 219 65
-------- ------ ------- ------ ------
Total loans charged off 6,795 4,682 3,019 2,624 2,172
-------- ------- ------- ------ ------
Recoveries of loans previously charged off
Credit card 398 365 309 143 306
Other consumer 217 138 202 285 74
Real estate 40 41 32 10 37
Commercial 79 102 39 73 66
-------- ------- ------- ------ ------
Total recoveries 734 646 582 511 483
-------- ------- ------- ------ ------
Net loans charged off 6,061 4,036 2,437 2,113 1,689
Allowance for loan losses of
acquired institutions -- 4,028 -- 361 --
Provision for loan losses 7,749 4,512 2,398 2,434 2,122
-------- ------- ------- ------ ------
Balance, end of year $ 15,098 $13,410 $ 8,906 $ 8,945 $ 8,263
======== ====== ======= ====== ======
Net charge-offs to average loans 0.69% 0.59% 0.46% 0.44% 0.39%
Allowance for loan losses to total loans 1.65% 1.59% 1.60% 1.73% 1.78%
Allowance for loan losses to net charge-offs 249.1% 332.3% 365.5% 423.3% 489.2%
The amount of provisions to the allowance during the year 1998 were
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.
As shown in the table above, the provision for loan losses increased
$3.2 million from 1997 to 1998 as a result of a $2.0 million increase in net
charge-offs for the same period. Other factors included an increase in impaired
loans of $2.0 million from 1997 to 1998. This increase in impaired loans was
largely real estate and commercial loans with specific loss allocations. Net
charge-offs from 1997 to 1998 increased $658,000, $708,000 and $659,000 for
consumer, real estate and commercial loans, respectively. The provision for loan
losses increased $2.1 million from 1996 to 1997 as a result of a $1.6 million
increase in net charge-offs for the same period. Other factors included an
increase in impaired loans of $3.1 million from 1996 to 1997. This increase in
impaired loans was largely real estate and commercial loans with specific loss
allocations coupled with purchase acquisitions. Net charge-offs from 1996 to
1997 increased $1,103,000, $227,000 and $269,000 for consumer, real estate and
commercial loans, respectively.
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 the table below:
Allocation of Allowance for Loan Losses
December 31
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
Allowance % of Allowance % of Allowance % of Allowance % of Allowance % of
(In thousands) Amount loans* Amount loans* Amount loans* Amount loans* Amount loans*
- ----------------------------------------------------------------------------------------------------------------
Credit cards $3,552 18.1% $ 3,339 21.3% $2,626 29.9% $ 2,658 29.9% $2,625 35.5%
Consumer 1,629 21.9% 1,382 21.4% 267 24.0% 309 24.2% 441 22.7%
Real Estate 5,608 44.6% 4,598 38.3% 2,965 31.3% 3,063 31.4% 2,168 27.5%
Commercial 2,333 14.7% 2,208 18.2% 700 13.7% 907 14.0% 633 13.2%
Other -- 0.7% 1 0.8% -- 1.1% -- 0.5% -- 1.1%
Unallocated 1,976 1,882 2,348 2,008 2,396
----- ------ ----- ------ -----
Total $15,098 100.0% $13,410 100.0% $8,906 100.0% $ 8,945 100.0% $8,263 100.0%
====== ====== ===== ====== =====
*Percentage of loans in each category to total loans
The unallocated reserve generally serves to compensate for the
uncertainty in estimating loan losses, including the possibility of improper
risk ratings and specific reserve allocations. The unallocated reserve is a
result of potential risk factors that cannot be quantified at December 31, 1998,
including the impact of increased indirect lending, unfavorable weather and
market conditions in the agriculture industry and rising consumer bankruptcies
inherent in the present portfolio.
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.
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.
Held-to-maturity and available-for-sale investment securities were
$150.7 million and $188.7 million, respectively, at December 31, 1998, compared
to the held-to-maturity amount of $162.1 million and available-for-sale amount
of $179.2 at December 31, 1997. The Company's philosophy regarding investments
is conservative, based on investment type and maturity. Investments in the
held-to-maturity portfolio include U.S. Treasury securities, U.S. government
agencies, mortgage-backed securities and municipal securities. As of December
31, 1998, $49.9 million, or 33.1%, of the held-to-maturity securities were
invested in U.S. Treasury securities and obligations of U.S. government
agencies, 82.5% of which will mature in less than five years. In the
available-for-sale securities, $177.9 million, or 94.3% were in U.S. Treasury
and U.S. government agency securities, 76.3% of which will mature in less than
five years. In order to reduce the Company's income tax burden, an additional
$98.5 million, or 65.3%, of the held-to-maturity securities portfolio, was
invested in tax-exempt obligations of state and political subdivisions. There
are no securities of any one issuer exceeding ten percent of the Company's
stockholders' equity at December 31, 1998. The Company has approximately $2.3
million, or 1.5%, in mortgaged-backed securities in the held-to-maturity
portfolio. The Company's general policy is not to invest in derivative type
investments, except for collateralized mortgage-backed securities for which
collection of principal and interest is not subordinated to significant superior
rights held by others.
As of December 31, 1998, the held-to-maturity investment portfolio had
gross unrealized gains of $3.1 million and gross unrealized losses of $133,000.
Net realized gains from called or sold available-for-sale securities for 1998
were $50,000, compared to net realized gains of $14,000 in 1997 and $278,000 in
1996.
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.
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.
The table below presents the carrying value and fair value of investment
securities for each of the years indicated.
Investment Securities
Years Ended December 31
---------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- -----------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains (Losses) Value Cost Gains (Losses) Value
- ---------------------------------------------------------------------------------------------------------------
Held-to-Maturity
U.S. Treasury $ 14,148 $ 268 $ -- $ 14,416 $ 17,610 $ 158 $ (37) $ 17,731
U.S. Government
agencies 35,770 474 (48) 36,196 55,662 462 (61) 56,063
Mortgage-backed
securities 2,258 17 (11) 2,264 3,350 14 (30) 3,334
State and political
subdivisions 98,469 2,335 (74) 100,730 85,265 1,711 (336) 86,640
Other securities 92 3 -- 95 229 2 -- 231
--------- ------ ----- --------- --------- ------ ------ ---------
$ 150,737 $ 3,097 $ (133) $ 153,701 $ 162,116 $ 2,347 $ (464) $ 163,999
========= ====== ===== ========= ========= ====== ====== =========
Available-for-Sale
U.S. Treasury $ 51,047 $ 1,078 $ -- $ 52,125 $ 72,715 $ 821 $ (24) $ 73,512
U.S. Government
agencies 125,527 417 (142) 125,802 93,393 400 (61) 93,732
Mortgage-backed
Securities 996 -- (1) 995 2,089 -- (17) 2,072
State and political
subdivisions 440 4 -- 444 451 -- -- 451
Other securities 8,022 1,523 (252) 9,293 8,461 1,222 (277) 9,406
--------- ------ ------ --------- --------- ------ ------ ---------
$ 186,032 $ 3,022 $ (395) $ 188,659 $ 177,109 $ 2,443 $ (379) $ 179,173
========= ====== ===== ========= ========= ====== ====== =========
The following table reflects the amortized cost and estimated fair
value of debt securities at December 31, 1998, by contractual maturity, the
weighted average yields (for tax-exempt obligations on a fully taxable basis,
assuming a 36.25% tax rate) of such securities and the taxable equivalent
adjustment used in calculating yields. 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.
Maturity Distribution of Investment Securities
December 31, 1998
----------------------------------------------------------------------------------
1 year 5 years
1 year through through Over No fixed Par Fair
(In thousands) or less 5 years 10 years 10 years maturity Total Value Value
- -------------------------------------------------------------------------------------------------------------
Held-to-Maturity
U.S. Treasury $ 7,049 $ 7,099 $ -- $ -- $ -- $ 14,148 $ 14,100 $ 14,416
U.S. Government
agencies 5,980 21,058 8,732 -- -- 35,770 35,867 36,196
Mortgage-backed
securities 87 1,556 59 556 -- 2,258 2,249 2,264
State and political
subdivisions 8,500 42,621 38,908 8,440 -- 98,469 98,656 100,730
Other securities -- -- -- -- 92 92 90 95
-------- ------- -------- ------- -------- -------- -------- --------
Total $ 21,616 $ 72,334 $ 47,699 $ 8,996 $ 92 $ 150,737 $ 150,962 $ 153,701
======== ======= ======== ======= ======== ======== ======== ========
Percentage of total 14.3% 48.0% 31.6% 6.0% 0.1% 100.0%
======= ====== ======= ====== ======= =======
Weighted average yield 6.6% 6.9% 7.3% 9.8% 6.0% 7.2%
======= ====== ======= ====== ======= =======
Available-for-Sale
U.S. Treasury $ 20,588 $ 28,998 $ 1,461 $ -- $ -- $ 51,047 $ 51,150 $ 52,125
U.S. Government
agencies 24,943 60,073 40,511 -- -- 125,527 125,695 125,802
Mortgage-backed
Securities 25 -- 441 530 -- 996 997 995
State and political
subdivisions -- 440 -- -- -- 440 425 444
Other securities -- -- -- -- 8,022 8,022 8,022 9,293
-------- ------- -------- ------- -------- -------- -------- --------
Total $ 45,556 $ 89,511 $ 42,413 $ 530 $ 8,022 $ 186,032 $ 186,289 $ 188,659
======== ======= ======== ======= ======== ======== ======== ========
Percentage of total 24.5% 48.1% 22.8% 0.3% 4.3% 100.0%
======= ====== ======= ====== ======= =======
Weighted average yield 5.9% 5.9% 6.4% 4.9% 4.7% 6.0%
======= ====== ======= ====== ======= =======
Deposits
Total average deposits for 1998 were $1.177 billion, compared to $950
million in 1997. The year-end balances of time deposits over $100,000 were $183
million in 1998, compared to $194 million in 1997. The increase in average
deposits is the result of purchase acquisitions during the third quarter of
1997.
The following table 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, 1998.
Average Deposits Balances and Rates
December 31
-----------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ------------------------
Average Average Average Average Average Average
(In thousands) Amount Rate Paid Amount Rate Paid Amount Rate Paid
- ------------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits $ 154,039 -- $ 126,554 -- $ 108,895 --
Interest bearing transaction and
savings deposits 369,177 2.92% 315,738 2.89% 275,846 2.79%
Time deposits
$100,000 or more 187,344 5.51% 143,306 5.36% 101,883 5.50%
Other time deposits 466,436 5.51% 364,413 5.49% 285,483 5.41%
---------- ----------- ---------
Total $1,176,996 $ 950,011 $ 772,107
========= ========== =========
Maturities of Large Denomination Time Deposits
Time Certificates of Deposit
($100,000 or more)
December 31
--------------------------------------------------------
1998 1997
--------------------------- ---------------------------
(In thousands) Balance Percent Balance Percent
- ----------------------------------------------------------------------------------------------------
Maturing
Three months or less $ 69,179 37.91% $ 65,024 33.54%
Over 3 months to 6 months 63,212 34.64% 58,851 30.36%
Over 6 months to 12 months 34,792 19.06% 34,371 17.73%
Over 12 months 15,322 8.39% 35,606 18.37%
---------- ----------
Total $ 182,505 100.00% $ 193,852 100.00%
========== ==========
Short-Term Borrowings
Federal funds purchased and securities sold under agreements to repurchase
were $71.4 million at December 31, 1998, as compared to $42.5 million at
December 31, 1997. Other short-term borrowings, consisting of U.S. Treasury
Notes were $1.1 million at December 31, 1998, as compared to $4.6 million at
December 31, 1997.
The Company has historically funded its growth in earning assets
through the use of core deposits, large certificates of deposits from local
markets 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 $49.3 million and $53.6 million at
December 31, 1998 and 1997, respectively. The outstanding balance for December
31, 1998 includes $18.0 million in long-term debt and $17.3 million of trust
preferred securities. This debt was incurred to fund a portion of the purchase
price of the acquisitions completed in 1997. The Company also has assumed $13.1
million of FHLB long-term advances during acquisitions.
Capital
At December 31, 1998, the total capital reached $132.2 million, another
milestone in the Company's history. Capital represents shareholder ownership in
the Company -- the book value of assets in excess of liabilities. At year-end
1998, the Company's equity to asset ratio was 9.03% compared to 8.57% at
year-end 1997.
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, 1998, the Tier 1 capital ratio was
12.6%, while the Company's total risk-based capital ratio was 13.9%, both of
which exceed the capital minimums established in the risk-based capital
requirements.
The Company's risk-based capital ratios at December 31, 1998 and 1997
are presented below.
Risk-Based Capital
December 31
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
Tier 1 capital
Stockholders' equity $ 132,180 $ 121,012
Trust preferred securities 17,250 17,250
Intangible assets (28,513) (30,834)
Unrealized gain on
available-for-sale securities (1,528) (1,216)
Other (986) (1,023)
----------- -----------
Total Tier 1 capital 118,403 105,189
----------- ----------
Tier 2 capital
Qualifying allowance for loan losses 11,778 11,204
----------- ----------
Total Tier 2 capital 11,778 11,204
----------- ----------
Total risk-based capital $ 130,181 $ 116,393
========== =========
Risk weighted assets $ 938,916 $ 880,822
========== =========
Ratios at end of year
Leverage ratio 8.27% 7.71%
Tier 1 capital 12.61% 11.94%
Total risk-based capital 13.87% 13.21%
Minimum guidelines
Leverage ratio 4.00% 4.00%
Tier 1 capital 4.00% 4.00%
Total risk-based capital 8.00% 8.00%
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, 1998, undivided profits of the Company's subsidiaries were approximately $78
million, of which approximately $7 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 monitors 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, 1998, cash and cash
equivalents, trading and available-for-sale securities and mortgage loans held
for sale were 22.1% of total assets, as compared to 22.7% at December 31, 1997.
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 13 of Notes to Consolidated Financial Statements.
Interest Rate Sensitivity
Management continually reviews the Company's exposure to changes in
interest rates. Among the factors considered during its evaluations are changes
in the mix of earning assets, growth of earning assets, interest rate spreads
and repricing periods. Management forecasts and models the impact of various
interest rate fluctuations would have on net interest income. One such model
measures the interest rate sensitivity GAP, which presents, at a particular
point in time, the matching of interest rate sensitive assets with interest rate
sensitive liabilities. The following schedule presents the ratios of cumulative
rate sensitive assets to rate sensitive liabilities.
Interest Rate Sensitivity
Interest Rate Sensitivity Period
--------------------------------------------------------------------------------------
0-30 31-90 91-180 181-365 1 to 2 2-5 Over 5
(In thousands, except ratios) Days Days Days Days Years Years Years Total
- -------------------------------------------------------------------------------------------------------------------
Earning assets
Short-term investments $ 75,709 $ -- $ -- $ -- $ -- $ -- $ -- $ 75,709
Assets held in trading
accounts 78 -- -- -- -- -- -- 78
Investment securities 19,320 45,690 31,254 41,300 53,077 71,454 77,301 339,396
Mortgage loans held for sale 12,641 -- -- -- -- -- -- 12,641
Loans 113,661 242,787 84,703 169,141 128,436 133,909 40,980 913,617
--------- --------- --------- --------- --------- --------- --------- ---------
Total earning assets 221,409 288,477 115,957 210,441 181,513 205,363 118,281 1,341,441
--------- --------- --------- --------- --------- --------- --------- ---------
Interest bearing liabilities
Interest bearing transaction
and savings accounts 261,691 -- -- -- 25,435 76,305 25,437 388,868
Time deposits 99,339 131,455 190,449 144,614 54,069 25,682 1,181 646,789
Short-term borrowings 72,499 -- -- -- -- -- -- 72,499
Long-term debt 288 575 863 1,725 3,448 9,856 32,585 49,340
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest bearing
liabilities 433,817 132,030 191,312 146,339 82,952 111,843 59,203 1,157,496
--------- --------- --------- --------- --------- --------- --------- ---------
Interest rate $(212,408) $ 156,447 $ (75,355) $ 64,102 $ 98,561 $ 93,520 $ 59,078 $ 183,945
Sensitivity GAP ======== ======== ======== ======= ======== ======== ======== =========
Cumulative interest rate
sensitivity GAP $(212,408) $ (55,961) $(131,316) $ (67,214) $ 31,347 $ 124,867 $ 183,945
Cumulative rate sensitive assets
to rate sensitive liabilities 51.0% 90.1% 82.7% 92.6% 103.2% 111.4% 115.9%
Cumulative GAP as a % of
earning assets -15.8% -4.2% -9.8% -5.0% 2.3% 9.3% 13.7%
Impact of the Year 2000 Issue
General
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Many computer
systems, software, and embedded computer chips may be unable to distinguish
between 1900 and 2000. If not corrected, this problem could create system errors
and failure resulting in the disruption of normal business operations.
In 1996, as part of its strategic plan to provide quality customer
service, introduce new products, and improve operating efficiencies, the Company
began converting all of its software and hardware systems to state-of-the-art
technology. As a byproduct of this effort, the Year 2000 issue was addressed.
State of Readiness
The Company has identified the following three key phases for
addressing the Year 2000 issues: analysis, testing, and remediation. The Company
has completed the Year 2000 analysis by identification of mission critical
systems, vendors, large borrowers and large depositors requiring assessment and
testing. The Company is utilizing both internal and external resources to test
its software systems for Year 2000 compliance. At December 31, 1998, the
Company's internal missions critical testing was approximately 60% complete.
Management believes the completion of internal mission critical testing will be
completed by March 31, 1999. The testing with vendors, payment system providers
and third party suppliers will be completed by June 30, 1999. The replacement of
non-compliant systems was completed at December 31, 1998. The Company expects to
substantially complete all phases by June 30, 1999, in accordance with
guidelines established by the Federal Financial Institutions Examination Council
(FFIEC).
Costs
During the year ended December 31, 1998, the Company expensed $500,000
for software testing and hardware replacement related to the Year 2000 issues.
The Company is utilizing internal personnel to complete all work associated with
the Year 2000 project. Therefore, management believes completion of the Year
2000 modifications and subsequent testing will not have a material effect on the
Company's future consolidated results of operations or financial position.
Risks
Although the Company's Year 2000 readiness is directed at reducing it
exposure, there can be no assurance that these efforts will fully mitigate the
effect of Year 2000 issues. In the event the Company fails to identify or
correct a material Year 2000 problem, there could be disruptions in normal
business operations, which could have a material adverse effect on the Company's
results of operations, liquidity or financial condition. Additionally, the
Company is subject to credit risk to the extent borrowers fail to adequately
address Year 2000 issues and to liquidity risk to the extent of deposit
withdrawals and to the extent its lenders are unable to provide the Company with
funds due to Year 2000 issues. Although it is not possible to quantify the
potential impact of these risks at this time, in future years, there may be
increases in problem loans, credit losses, and liquidity problems, as well as
the risk of litigation and potential losses from litigation related to the
foregoing.
Contingency Plans
The Company has existing disaster recovery plans that address its
response to disruptions to business due to natural disasters, civil unrest,
utility outages or other occurrences. The Company is in the process of modifying
the disaster recovery plans to specifically address Year 2000 issues. The
Company intends to complete