Attached files

file filename
EX-15 - EXHIBIT 15.1 - SIMMONS FIRST NATIONAL CORPexh_151.htm
EX-31 - EXHIBIT 31.2 - SIMMONS FIRST NATIONAL CORPexh_312.htm
EX-32 - EXHIBIT 32.1 - SIMMONS FIRST NATIONAL CORPexh_321.htm
EX-32 - EXHIBIT 32.2 - SIMMONS FIRST NATIONAL CORPexh_322.htm
EX-12 - EXHIBIT 12.1 - SIMMONS FIRST NATIONAL CORPexh_121.htm
EX-31 - EXHIBIT 31.1 - SIMMONS FIRST NATIONAL CORPexh_311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For Quarter Ended June 30, 2011    Commission File Number 000-06253
     
SIMMONS FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
   
Arkansas   71-0407808
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)    Identification No.)
     
501 Main Street, Pine Bluff, Arkansas   71601
(Address of principal executive offices)   (Zip Code)
     
  870-541-1000  
  (Registrant's telephone number, including area code)  
     
   Not Applicable  
 
Former name, former address and former fiscal year, if changed since last report
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   S Yes   £ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

£ Large accelerated filer                                                S Accelerated filer                                        £ Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).   £ Yes  S No

The number of shares outstanding of the Registrant’s Common Stock as of July 22, 2011, was 17,348,775

 
 
 

 
Simmons First National Corporation
Quarterly Report on Form 10-Q
June 30, 2011
 

     
Page
 
         
Part I:
Financial Information
     
       
   
       
  Consolidated Balance Sheets 3  
       
  Consolidated Statements of Income 4  
       
  5  
       
  6  
       
   7-40  
       
  41  
       
 42-71  
       
71-74  
       
75  
         
Part II:
Other Information
     
       
75  
       
75  
       
76-81  
         
82  

                                                                                                             
 
 
 

 

Part I:               Financial Information
Item 1.               Financial Statements

Simmons First National Corporation
Consolidated Balance Sheets
June 30, 2011 and December 31, 2010

   
June 30,
   
December 31,
 
(In thousands, except share data)
 
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
Cash and non-interest bearing balances due from banks
  $ 43,604     $ 33,717  
Interest bearing balances due from banks
    498,323       418,343  
Cash and cash equivalents
    541,927       452,060  
Investment securities
    585,218       613,662  
Mortgage loans held for sale
    9,983       17,237  
Assets held in trading accounts
    7,356       7,577  
Loans
    1,633,660       1,683,464  
Allowance for loan losses
    (27,796 )     (26,416 )
Net loans
    1,605,864       1,657,048  
Covered assets:
               
Loans, net of discount
    192,899       231,600  
Other real estate owned, net of discount
    13,033       8,717  
FDIC loss share receivable
    54,437       60,235  
Premises and equipment
    82,145       77,199  
Foreclosed assets held for sale, net
    22,441       23,204  
Interest receivable
    15,203       17,363  
Bank owned life insurance
    49,914       49,072  
Goodwill
    60,605       60,605  
Core deposit premiums
    2,015       2,463  
Other assets
    20,169       38,390  
Total assets
  $ 3,263,209     $ 3,316,432  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Deposits:
               
Non-interest bearing transaction accounts
  $ 476,274     $ 428,750  
Interest bearing transaction accounts and savings deposits
    1,228,910       1,220,133  
Time deposits
    901,996       959,886  
Total deposits
    2,607,180       2,608,769  
Federal funds purchased and securities sold under agreements to repurchase
    93,560       109,139  
Short-term debt
    628       1,033  
Long-term debt
    123,673       164,324  
Accrued interest and other liabilities
    34,308       35,796  
Total liabilities
    2,859,349       2,919,061  
                 
Stockholders’ equity:
               
Preferred stock, $0.01 par value; 40,040,000 shares authorized and unissued at June 30, 2011 and December 31, 2010
    --       --  
Common stock, Class A, $0.01 par value; 60,000,000 shares authorized; 17,348,775 and 17,271,594 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    173       173  
Surplus
    115,126       114,040  
Undivided profits
    287,870       282,646  
Accumulated other comprehensive income
               
Unrealized appreciation on available-for-sale securities, net of income taxes of $446 at June 30, 2011 and $331 at December 31, 2010
    691       512  
Total stockholders’ equity
    403,860       397,371  
Total liabilities and stockholders’ equity
  $ 3,263,209     $ 3,316,432  
 
See Condensed Notes to Consolidated Financial Statements.
 
3

 
Simmons First National Corporation
Consolidated Statements of Income
Three and Six Months Ended June 30, 2011 and 2010

    Three Months Ended     Six Months Ended  
    June 30,    
June 30,
 
(In thousands, except per share data)
  2011     2010     2011    
2010
 
    (Unaudited)    
(Unaudited)
 
INTEREST INCOME
     
Loans
  $ 23,883     $ 26,691     $ 47,977     $ 53,479  
Covered loans
    4,347       213       8,688       213  
Federal funds sold
    1       2       2       7  
Investment securities
    3,771       4,465       7,476       8,997  
Mortgage loans held for sale
    87       149       175       218  
Assets held in trading accounts
    9       11       18       13  
Interest bearing balances due from banks
    298       173       533       364  
TOTAL INTEREST INCOME
    32,396       31,704       64,869       63,291  
                                 
INTEREST EXPENSE
                               
Deposits
    3,799       4,839       7,975       10,276  
Federal funds purchased and securities sold under agreements to repurchase
    103       123       219       273  
Short-term debt
    12       15       24       30  
Long-term debt
    1,232       1,522       2,567       3,095  
TOTAL INTEREST EXPENSE
    5,146       6,499       10,785       13,674  
                                 
NET INTEREST INCOME
    27,250       25,205       54,084       49,617  
Provision for loan losses
    3,328       3,758       6,003       6,990  
                                 
NET INTEREST INCOME AFTER PROVISION
                               
   FOR LOAN LOSSES
    23,922       21,447       48,081       42,627  
                                 
NON-INTEREST INCOME
                               
Trust income
    1,243       1,170       2,589       2,420  
Service charges on deposit accounts
    4,212       4,739       8,069       9,040  
Other service charges and fees
    780       671       1,586       1,451  
Income on sale of mortgage loans, net of commissions
    849       932       1,475       1,535  
Income on investment banking, net of commissions
    381       776       981       1,381  
Credit card fees
    4,264       4,043       8,207       7,720  
Premiums on sale of student loans
    --       545       --       545  
Bank owned life insurance income
    414       566       817       857  
Gain on FDIC-assisted transaction
    --       3,037       --       3,037  
Other income
    2,221       769       3,272       1,463  
TOTAL NON-INTEREST INCOME
    14,364       17,248       26,996       29,449  
                                 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
    16,436       15,064       33,552       30,230  
Occupancy expense, net
    2,100       1,844       4,289       3,726  
Furniture and equipment expense
    1,560       1,526       3,149       3,021  
Other real estate and foreclosure expense
    223       314       317       372  
Deposit insurance
    842       1,059       1,881       2,014  
Merger related costs
    167       443       357       443  
Other operating expenses
    7,364       7,026       15,122       14,265  
TOTAL NON-INTEREST EXPENSE
    28,692       27,276       58,667       54,071  
                                 
INCOME BEFORE INCOME TAXES
    9,594       11,419       16,410       18,005  
Provision for income taxes
    2,848       3,438       4,598       5,068  
                                 
NET INCOME
  $ 6,746     $ 7,981     $ 11,812     $ 12,937  
BASIC EARNINGS PER SHARE
  $ 0.39     $ 0.46     $ 0.68     $ 0.75  
DILUTED EARNINGS PER SHARE
  $ 0.39     $ 0.46     $ 0.68     $ 0.75  
 
See Condensed Notes to Consolidated Financial Statements.
 
 
4

 
Simmons First National Corporation
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010

   
June 30,
   
June 30,
 
(In thousands)
 
2011
   
2010
 
   
(Unaudited)
 
OPERATING ACTIVITIES
           
Net income
  $ 11,812     $ 12,937  
Items not requiring (providing) cash
               
Depreciation and amortization
    3,052       2,854  
Provision for loan losses
    6,003       6,990  
Net amortization of investment securities
    12       16  
Stock-based compensation expense
    613       502  
Net accretion and gain/loss on FDIC covered assets
    (2,317 )     1,169  
Gain on FDIC-assisted transaction
    --       (3,037 )
Deferred income taxes
    (2,495 )     2,030  
Bank owned life insurance income
    (817 )     (857 )
Changes in
               
Interest receivable
    2,160       1,617  
Mortgage loans held for sale
    7,254       (9,901 )
Assets held in trading accounts
    221       (941 )
Other assets
    3,318       333  
Accrued interest and other liabilities
    (1,208 )     1,805  
Income taxes payable
    2,215       (142 )
Net cash provided by operating activities
    29,823       15,375  
                 
INVESTING ACTIVITIES
               
Net collections of covered loans
    31,873        831  
Net collections of loans
    30,637       25,433  
Purchases of premises and equipment, net
    (7,550 )     (679 )
Proceeds from sale of covered other real estate owned
    4,281       1,037  
Proceeds from sale of foreclosed assets held for sale
    15,307       10,491  
Proceeds from sale of available-for-sale securities
    2,933       --  
Proceeds from maturities of available-for-sale securities
    126,831       149,248  
Purchases of available-for-sale securities
    (159,974 )     (165,235 )
Proceeds from maturities of held-to-maturity securities
    128,571       178,570  
Purchases of held-to-maturity securities
    (69,750 )     (150,545 )
Purchases of bank owned life insurance
    (25 )     (6,482 )
Cash received on FDIC loss share
    21,249       --  
Net cash proceeds received in FDIC-assisted transaction
    --       18,067  
Net cash provided by investing activities
    124,383       60,736  
                 
FINANCING ACTIVITIES
               
Net change in deposits
    (1,589 )     (135,918 )
Net change in short-term debt
    (405 )     (438 )
Dividends paid
    (6,588 )     (6,536 )
Proceeds from issuance of long-term debt
    3,161       3,200  
Repayment of long-term debt
    (43,812 )     (24,130 )
Net change in federal funds purchased and securities sold under agreements to repurchase
    (15,579 )     (21,454 )
Net shares issued under stock compensation plans
    473       656  
Net cash used in financing activities
    (64,339 )     (184,620 )
                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    89,867       (108,509 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    452,060       353,585  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 541,927     $ 245,076  
 
See Condensed Notes to Consolidated Financial Statements.
 
 
5

 
Simmons First National Corporation
Consolidated Statements of Stockholders’ Equity
Six Months Ended June 30, 2011 and 2010

               
Accumulated
Other
             
   
Common
         
Comprehensive
   
Undivided
       
(In thousands, except share data)
 
Stock
   
Surplus
   
Income
   
Profits
   
Total
 
                               
Balance, December 31, 2009
  $ 171     $ 111,694     $ 762     $ 258,620     $ 371,247  
   Comprehensive income
                                       
      Net income
    --       --       --       12,937       12,937  
      Change in unrealized appreciation on available-for-sale securities, net of income taxes of $218
    --       --       338       --       338  
   Comprehensive income
                                    13,275  
   Stock issued as bonus shares – 80,245 shares
    1       203       --       --       204  
   Non-vested bonus shares
    --       415       --       --       415  
   Stock issued for employee stock purchase plan – 4,947 shares
    --       131       --       --       131  
   Exercise of stock options – 38,018 shares
    --       518       --       --       518  
   Stock granted under stock-based compensation plans
    --       87       --       --       87  
   Securities exchanged under stock option plan
    --       (197 )     --       --       (197 )
   Cash dividends – $0.38 per share
    --       --       --       (6,536 )     (6,536 )
                                         
Balance, June 30, 2010 (Unaudited)
    172       112,851       1,100       265,021       379,144  
   Comprehensive income
                                       
      Net income
    --       --       --       24,180       24,180  
      Change in unrealized appreciation on available-for-sale securities, net of income taxes of ($379)
    --       --       (588 )     --       (588 )
   Comprehensive income
                                    23,592  
   Non-vested bonus shares
    --       386       --       --       386  
   Exercise of stock options – 70,586 shares
    1       942       --       --       943  
   Stock granted under stock-based compensation plans
    --       86       --       --       86  
   Securities exchanged under stock option plan
    --       (225 )     --       --       (225 )
   Cash dividends – $0.38 per share
    --       --       --       (6,555 )     (6,555 )
                                         
Balance, December 31, 2010
    173       114,040       512       282,646       397,371  
   Comprehensive income
                                       
      Net income
    --       --       --       11,812       11,812  
      Change in unrealized appreciation on available-for-sale securities, net of income taxes of $116
    --       --       179       --       179  
   Comprehensive income
                                    11,991  
   Stock issued as bonus shares – 47,995 shares
            97       --       --       97  
   Non-vested bonus shares
    --       535       --       --       535  
   Stock issued for employee stock purchase plan – 4,805 shares
    --       127       --       --       127  
   Exercise of stock options – 28,566 shares
    --       358       --       --       358  
   Stock granted under stock-based compensation plans
    --       78       --       --       78  
   Securities exchanged under stock option plan – (4,185 shares)
    --       (109 )     --       --       (109 )
   Cash dividends – $0.38 per share
    --       --       --       (6,588 )     (6,588 )
Balance, June 30, 2011 (Unaudited)
  $ 173     $ 115,126     $ 691     $ 287,870     $ 403,860  
 
See Condensed Notes to Consolidated Financial Statements.
 
 
6

 
SIMMONS FIRST NATIONAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1:                      BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Simmons First National Corporation (the “Company”) and its subsidiaries.  Significant intercompany accounts and transactions have been eliminated in consolidation.

All adjustments made to the unaudited financial statements were of a normal recurring nature.  In the opinion of management, all adjustments necessary for a fair presentation of the results of interim periods have been made.  Certain prior year amounts are reclassified to conform to current year classification.  The consolidated balance sheet of the Company as of December 31, 2010, has been derived from the audited consolidated balance sheet of the Company as of that date.  The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K Annual Report for 2010 filed with the U.S. Securities and Exchange Commission (the “SEC”).

Recently Issued Accounting Pronouncements

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment.  The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, nonaccrual and past due loans and credit quality indicators.  The Company adopted the disclosure provisions of the new authoritative guidance about activity that occurs during a reporting period on January 1, 2011.  The adoption of these provisions did not have a significant impact on the Company’s financial position or results of operations.  The effective date disclosures related to loans modified in a troubled debt restructuring (“TDR”) was temporarily deferred to coincide with the effective date of the then proposed ASU 2011-02, Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, which is further discussed below

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.  ASU 2011-02 amended prior guidance to provide assistance in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring.  The new authoritative guidance provides clarification for evaluating whether a concession has been granted and whether a debtor is experiencing financial difficulties.  ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011.  The Company is currently in the process of determining the impact of this pronouncement on the Company’s ongoing financial position or results of operations.
 
7

 
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.  ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion.  ASU 2011-03 will be effective for the Company on January 1, 2012, and is not expected to have a significant impact on the Company’s ongoing financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to converge the fair value of measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures.  ASU 2011-04 is effective for the Company for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s ongoing financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income, to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented.  The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated.  ASU 2011-05 is effective for the Company for annual periods beginning after December 15, 2011, and is expected to result in presentation changes to the Company’s statements of income and the addition of a statement of comprehensive income.  The adoption of ASU 2011-05 is not expected to have a significant impact on the Company’s ongoing financial position or results of operations.

There have been no other significant changes to the Company’s accounting policies from the 2010 Form 10-K.  The Company is not aware of any other changes from the FASB that will have a significant impact on the Company’s present or future financial position or results of operations.

Acquisition Accounting, Covered Loans and Related Loss Share Receivable

The Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting.  All identifiable assets acquired, including loans, are recorded at fair value.  No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk.  Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared loss agreements with the FDIC.  The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

 
8

 
Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics and were treated in the aggregate when applying various  valuation techniques. The Company evaluates at each balance sheet date whether the present value of its loans determined using the effective interest rates has decreased and if so, recognizes a provision for loan loss in its consolidated statement of income.  For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.

Because the FDIC will reimburse the Company for losses incurred on certain acquired loans, an indemnification asset (FDIC loss share receivable) is recorded at fair value at the acquisition date.  The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations.  The shared-loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.

The shared-loss agreements continue to be measured on the same basis as the related indemnified loans.  Because the acquired loans are subject to the accounting prescribed by ASC Topic 310, subsequent changes to the basis of the shared-loss agreements also follow that model.  Deterioration in the credit quality of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the basis of the shared-loss agreements, with the offset recorded through the consolidated statement of income.  Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the shared-loss agreements, with such decrease being accreted into income over 1) the same period or 2) the life of the shared-loss agreements, whichever is shorter.  Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset.  Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared-loss agreements.

Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding, claim receivable is recorded until cash is received from the FDIC.  For further discussion of the Company’s acquisition and loan accounting, see Note 2 and Note 5 to the consolidated financial statements.
 
 
 
9

 
Earnings Per Share

Basic earnings per share are computed based on the weighted average number of common shares outstanding during each year.  Diluted earnings per share are computed using the weighted average common shares and all potential dilutive common shares outstanding during the period.

Following is the computation of per share earnings for the three and six months ended June 30, 2011 and 2010:
 
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In thousands, except per share data)
 
2011
   
2010
   
2011
   
2010
 
                                 
Net income
  $ 6,746     $ 7,981     $ 11,812     $ 12,937  
                                 
Average common shares outstanding
    17,342       17,200       17,320       17,170  
Average potential dilutive common shares
    15       68       15       68  
Average diluted common shares
    17,357       17,268       17,335       17,238  
                                 
Basic earnings per share
  $ 0.39     $ 0.46     $ 0.68     $ 0.75  
Diluted earnings per share
  $ 0.39     $ 0.46     $ 0.68     $ 0.75  

Stock options to purchase 95,770 and 100,290 shares for the three and six months ended June 30, 2011 and 2010, respectively, were not included in the earnings per share calculation because the exercise price exceeded the average market price.

NOTE 2:                      ACQUISITIONS

On May 14, 2010, the Company, through its wholly-owned subsidiary, Simmons First National Bank (“SFNB” or “lead bank”), entered into a purchase and assumption agreement with loss share arrangements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Southwest Community Bank (“SWCB”) in Springfield, Missouri.  As a result of this acquisition, the Company expanded its footprint outside the Arkansas borders for the first time.  The Company recognized a pre-tax gain of $3.0 million on this transaction and incurred pre-tax merger related costs of $0.4 million.

On October 15, 2010, the Company, through the lead bank, entered into a purchase and assumption agreement with loss share arrangements with the FDIC to purchase substantially all of the assets and to assume substantially all of the deposits and certain other liabilities of Security Savings Bank, FSB (“SSB”) with nine offices in Kansas, including three in Salina, two each in Olathe and Wichita and one each in Overland Park and Leawood.  This acquisition marked the Company’s second expansion outside the State of Arkansas.  The Company recognized a pre-tax gain of $18.3 million on this transaction and incurred pre-tax merger related costs of $2.0 million.

 
 
10

 
A summary, at fair value, of the assets acquired and liabilities assumed in the SWCB and SSB transactions, as of acquisition dates, is as follows:

(In thousands)
 
SWCB
   
SSB
   
Total
 
                   
Assets Acquired
                 
Cash and due from banks
  $ 7,414     $ 11,063     $ 18,477  
Cash received from FDIC
    10,000       71,200       81,200  
Receivable from FDIC
    653       1,856       2,509  
Investment securities
    24,850       75,621       100,471  
Loans not covered by loss share agreements
    --       991       991  
Covered assets:
                       
Loans
    40,177       219,158       259,335  
Other real estate
    4,646       6,363       11,009  
FDIC indemnification asset
    13,783       68,330       82,113  
Core deposit premium
    --       1,480       1,480  
Other assets
    467       1,577       2,044  
Total assets acquired
    101,990       457,639       559,629  
                         
Liabilities Assumed
                       
Deposits:
                       
Non-interest bearing transaction accounts
    5,063       82,614       87,677  
Interest bearing transaction accounts and savings deposits
    103       8,624       8,727  
Time deposits
    92,174       246,999       339,173  
Total deposits
    97,340       338,237       435,577  
Repurchase agreements
    --       2,215       2,215  
FHLB borrowings
    --       95,676       95,676  
Accrued interest and other liabilities
    1,613       3,234       4,847  
Total liabilities assumed
    98,953       439,362       538,315  
Pre-tax gains on FDIC-assisted transactions
  $ 3,037     $ 18,277     $ 21,314  

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.

Cash and due from banks, cash received from FDIC and receivable from FDIC – The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.  The $10.0 million cash received from the FDIC for SWCB and $71.2 million for SSB is the first pro-forma cash settlement received from the FDIC on Monday following the closing weekend.  The $0.7 million receivable from the FDIC for SWCB and $1.9 million for SSB is the remaining amount due from the settlement.

Investment securities – Investment securities were acquired from the FDIC at fair market value.  The fair values provided by the FDIC were reviewed and considered reasonable based on SFNB’s understanding of the market conditions.

Loans – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates.  The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.  The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.  Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

Foreclosed assets held for sale – These assets are presented at the estimated present values that management expects to receive when the properties are sold, net of related costs of disposal.
 
11

 
FDIC indemnification asset – This loss sharing asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should SFNB choose to dispose of them.  Fair value was estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages.  These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss-sharing reimbursement from the FDIC.

Core deposit premium – This intangible asset represents the value of the relationships that SWCB and SSB had with their deposit customers.  The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits.  Based on the valuation methodologies use in the analysis, the estimated fair value of the core deposit premium at SWCB was immaterial.

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date.  Even though deposit rates were above market, because SFNB reset deposit rates to current market rates, there was no fair value adjustment recorded for time deposits.

FHLB borrowings – The fair value of Federal Home Loan Bank (“FHLB”) borrowings is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.  Included in the SSB acquisition were FHLB borrowed funds with a fair value totaling $95.7 million.  The Company did not need these advances to meet its present liquidity needs, and redeemed approximately $60.8 million of the advances during the fourth quarter of 2010.  The FHLB borrowings are secured by mortgage loans.  The remaining borrowings will be held to maturity to match loans with similar maturities.

FDIC True-Up Provision – The purchase and assumption agreements for SWCB and SSB allow for the FDIC to recover a portion of the funds previously paid out under the indemnification agreement in the event losses fail to reach the expected loss level under a claw back provision (“true-up provision”).  A true-up is scheduled to occur in the calendar month in which the tenth anniversary of the respective closing occurs.  If the threshold is not met, the assuming institution is required to pay the FDIC 50 percent of the excess, if any, within 45 days following the true-up.

The value of the true-up provision liability is calculated as the present value of the estimated payment to the FDIC in the tenth year using the formula provided in the agreements. The result of the calculation is based on the net present value of expected future cash payments to be made by SFNB to the FDIC at the conclusion of the loss share agreements.  The discount rate used was based on current market rates. The expected cash flows were calculated in accordance with the loss share agreements and are based primarily on the expected losses on the covered assets.  The value of the true-up provision was $3.3 million and $3.2 million at June 30, 2011 and December 31, 2010, respectively, and was included in accrued interest and other liabilities on the balance sheet.

In connection with the SWBC and SSB acquisitions, SFNB and the FDIC will share in the losses on assets covered under the loss share agreements.  The FDIC will reimburse SFNB for 80% of all losses on covered assets.  The loss sharing agreements entered into by SFNB and the FDIC in conjunction with the purchase and assumption agreements require that SFNB follow certain servicing procedures as specified in the loss share agreements or risk losing FDIC reimbursement of covered asset losses.  Additionally, to the extent that actual losses incurred by SFNB under the loss share agreements are less than expected, SFNB may be required to reimburse the FDIC under the clawback provisions of the loss share agreements.  At June 30, 2011 and December 31, 2010, the covered loans and covered other real estate owned and the related FDIC indemnification asset (collectively, the “covered assets”) and the FDIC true-up provision were reported at the net present value of expected future amounts to be paid or received.

 
12

 
Purchased loans acquired in a business combination, including loans purchased in the SWCB and SSB acquisitions, are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses.  Purchased loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality accounting guidance for certain loans or debt securities acquired in a transfer, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments.  The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference.  Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses.  Subsequent increases in cash flows result in a reversal of the provision for loan and lease losses to the extent of prior charges and an adjustment in accretable yield, recognized on a prospective basis over the loan’s or pool’s remaining life, which will have a positive impact on interest income.

The Company has finalized its analysis of the acquired loans along with the other acquired assets and assumed liabilities in these transactions.  No significant adjustments to the estimated amounts and carrying values were required.

During 2010, SFNB acquired the real estate (building and land) for the Springfield, Missouri location (formerly SWCB) for a total of $1.1 million.  During the three months ended March 31, 2011, SFNB acquired the real estate for four of the Kansas locations previously owned by SSB related entities for a total of $6.2 million.  An option to purchase the remaining SSB owned Kansas locations has been executed with the FDIC, and will be completed with final settlement of SSB with the FDIC.  Three locations are leased from third parties and SFNB will continue to lease these facilities.
 
 
13

 
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:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
         
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
  $ 4,000     $ 28     $ --     $ 4,028     $ 4,000     $ 28     $ --     $ 4,028  
U.S. Government agencies
    190,294       946       (14 )     191,226       249,844       1,764       (507 )     251,101  
Mortgage-backed securities
    70       3       --       73       78       4       --       82  
State and political subdivisions
    211,071       4,440       (238 )     215,273       210,331       2,280       (1,845 )     210,766  
Other securities
    930       1       --       931       930       --       --       930  
                                                                 
    $ 406,365     $ 5,418     $ (252 )   $ 411,531     $ 465,183     $ 4,076     $ (2,352 )   $ 466,907  
                                                                 
Available-for-Sale
                                                               
U.S. Government agencies
  $ 157,360     $ 529     $ (53 )   $ 157,836     $ 125,175     $ 577     $ (283 )   $ 125,469  
Mortgage-backed securities
    2,398       267       (1 )     2,664       2,647       143       (1 )     2,789  
Other securities
    17,958       399       (4 )     18,353       19,814       411       (4 )     20,221  
    $ 177,716     $ 1,195     $ (58 )   $ 178,853     $ 147,636     $ 1,131     $ (288 )   $ 148,479  

Certain investment securities are valued at less than their historical cost.  These declines primarily resulted from the rate for these investments yielding less than current market rates.  Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary.  Management does not have the intent to sell these securities and management believes it is more likely than not the Company will not have to sell these securities before recovery of their amortized cost basis less any current period credit losses.  Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 
14

 
As of June 30, 2011, securities with unrealized losses, segregated by length of impairment, were as follows:
 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Estimated
   
Gross
   
Estimated
   
Gross
   
Estimated
   
Gross
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
(In thousands)
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
                                     
Held-to-Maturity
                                   
                                     
U.S. Government agencies
  $ 24,987     $ (14 )   $ --     $ --     $ 24,987     $ (14 )
State and political subdivisions
    6,105       (74 )     1,864       (164 )     7,969       (238 )
                                                 
Total
  $ 31,092     $ (88 )   $ 1,864     $ (164 )   $ 32,956     $ (252 )
                                                 
Available-for-Sale
                                               
                                                 
U.S. Government agencies
  $ 27,440     $ (53 )   $ --     $ --     $ 27,440     $ (53 )
Mortgage-backed securities
    --       --       43       (1 )     43       (1 )
Other securities
    1       (4 )     --       --       1       (4 )
                                                 
Total
  $ 27,441     $ (57 )   $ 43     $ (1 )   $ 27,484     $ (58 )

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company expects to receive full value for the securities.  Furthermore, as of June 30, 2011, management also had the ability and intent to hold the securities classified as available-for-sale for a period of time sufficient for a recovery of cost.  The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of June 30, 2011, management believes the impairments detailed in the table above are temporary.

The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $436,932,000 at June 30, 2011, and $435,635,000 at December 31, 2010.

The book value of securities sold under agreements to repurchase amounted to $72,280,000 and $75,774,000 for June 30, 2011, and December 31, 2010, respectively.

 
15

 
Income earned on securities for the six months ended June 30, 2011 and 2010, is as follows:

(In thousands)
 
2011
   
2010
 
             
Taxable
           
  Held-to-maturity
  $ 2,300     $ 2,412  
  Available-for-sale
    1,205       2,426  
                 
Non-taxable
               
  Held-to-maturity
    3,971       4,159  
                 
Total
  $ 7,476     $ 8,997  

Maturities of investment securities at June 30, 2011, are as follows:

                                                      
   
Held-to-Maturity
   
Available-for-Sale
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
   
Cost
   
Value
 
                         
One year or less
  $ 30,683     $ 30,796     $ 300     $ 300  
After one through five years
    224,658       226,369       112,836       112,912  
After five through ten years
    68,392       69,819       46,617       47,282  
After ten years
    82,632       84,547       5       6  
Other securities
    --       --       17,958       18,353  
                                 
Total
  $ 406,365     $ 411,531     $ 177,716     $ 178,853  

There were no realized gains or losses on investment securities for the three and six month periods ended June 30, 2011or 2010.

The state and political subdivision debt obligations are primarily non-rated bonds and represent small, Arkansas issues, which are evaluated on an ongoing basis.
 
 
16

 
NOTE 4:                      LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2011, the Company’s loan portfolio, excluding loans covered by FDIC loss share agreements, was $1.63 billion, compared to $1.68 billion at December 31, 2010.  The various categories of loans, excluding loans covered by FDIC loss share agreements, are summarized as follows:
 
   
June 30,
   
December 31,
 
(In thousands)
 
2011
   
2010
 
             
Consumer
           
Credit cards
  $ 181,216     $ 190,329  
Student loans
    53,574       61,305  
Other consumer
    107,411       118,581  
Total consumer
    342,201       370,215  
Real Estate
               
Construction
    139,217       153,772  
Single family residential
    355,566       364,442  
Other commercial
    540,011       548,360  
Total real estate
    1,034,794       1,066,574  
Commercial
               
Commercial
    142,897       150,501  
Agricultural
    104,526       86,171  
Total commercial
    247,423       236,672  
Other
    9,242       10,003  
                 
Total loans before allowance for loan losses
  $ 1,633,660     $ 1,683,464  

Loan Origination/Risk Management – 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 loans losses by regularly reviewing loans through the internal loan review process.  The loan portfolio is diversified by borrower, purpose and industry.  The Company seeks to use diversification within the loan portfolio to reduce its 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.  Furthermore, factors that influenced the Company’s judgment regarding the allowance for loan losses consists of a three-year historical loss average segregated by each primary loan sector.  On an annual basis, historical loss rates are calculated for each sector.

Consumer – The consumer loan portfolio consists of credit card loans, student loans and other consumer loans.  The Company no longer originates student loans, and the current portfolio is guaranteed by the Department of Education at 97% of principal and interest.  Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to be impacted by economic downturns resulting in increasing unemployment.  Other consumer loans include direct and indirect installment loans and overdrafts.  Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

Real estate – The real estate loan portfolio consists of construction loans, single family residential loans and commercial loans.  Construction and development loans (“C&D”) and commercial real estate loans (“CRE”) can be particularly sensitive to valuation of real estate.  Commercial real estate cycles are inevitable.  The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties.  While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market.  CRE cycles tend to be local in nature and longer than other credit cycles.  Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult.  Additionally, submarkets within commercial real estate – such as office, industrial, apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the overall risk through diversification across types of CRE loans.  Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and length.  The Company monitors these loans closely and has no significant concentrations in its real estate loan portfolio.
 
17

 
Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchase or other expansion projects.  Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations.  The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates.  Term loans are generally set up with a one or three year balloon, and the Company has recently instituted a pricing index for commercial loans.  It is standard practice to require personal guaranties on all commercial loans, particularly as they relate to closely-held or limited liability entities.

Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.  When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Nonaccrual loans, excluding loans covered by FDIC loss share agreements, segregated by class of loans, are as follows:

   
June 30,
   
December 31,
 
(In thousands)
 
2011
   
2010
 
             
Consumer:
           
Credit cards
  $ 176     $ 295  
Student loans
    --       --  
Other consumer
    810       963  
Total consumer
    986       1,258  
Real estate:
               
Construction
    538       804  
Single family residential
    4,429       3,470  
Other commercial
    7,270       4,340  
Total real estate
    12,237       8,614  
Commercial:
               
Commercial
    1,120       972  
Agricultural
    463       342  
Total commercial
    1,583       1,314  
Other
    --       --  
                 
Total
  $ 14,806     $ 11,186  

 
18

 
An age analysis of past due loans, excluding loans covered by FDIC loss share agreements, segregated by class of loans, is as follows:

   
Gross
   
90 Days
                     
90 Days
 
   
30-89 Days
   
or More
   
Total
         
Total
   
Past Due &
 
(In thousands)
 
Past Due
   
Past Due
   
Past Due
   
Current
   
Loans
   
Accruing
 
                                     
June 30, 2011
                                   
Consumer:
                                   
Credit cards
  $ 946     $ 426     $ 1,372     $ 179,844     $ 181,216     $ 251  
Student loans
    1,504       3,113       4,617       48,957       53,574       3,113  
Other consumer
    1,476       505       1,981       105,430       107,411       173  
Total consumer
    3,926       4,044       7,970       334,231       342,201       3,537  
Real estate:
                                               
Construction
    435       225       660       138,557       139,217       --  
Single family residential
    3,315       1,888       5,203       350,363       355,566       227  
Other commercial
    1,845       6,167       8,012       531,999       540,011       --  
Total real estate
    5,595       8,280       13,875       1,020,919       1,034,794       227  
Commercial:
                                               
Commercial
    526       690       1,216       141,681       142,897       70  
Agricultural
    263       214       477       104,049       104,526       --  
Total commercial
    789       904       1,693       245,730       247,423       70  
Other
    --       --       --       9,242       9,242       --  
                                                 
Total
  $ 10,310     $ 13,228     $ 23,538     $ 1,610,122     $