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EX-15.1 - EXHIBIT 15.1 - SIMMONS FIRST NATIONAL CORPa6389643_ex151.htm
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EX-31.1 - EXHIBIT 31.1 - SIMMONS FIRST NATIONAL CORPa6389643_ex311.htm
EX-12.1 - EXHIBIT 12.1 - SIMMONS FIRST NATIONAL CORPa6389643_ex121.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, 2010 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)

 
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.   x Yes   o 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):

 
o Large accelerated filer x Accelerated filer o Non-accelerated filer 
 
                                                                                        
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).   o Yes  x No


The number of shares outstanding of the Registrant’s Common Stock as of July 29, 2010, was 17,214,884.
 
 
 
 

 
 
Simmons First National Corporation
Quarterly Report on Form 10-Q
June 30, 2010
 
 
Table of Contents
 
   
Page
 
Part I: Financial Information  
     
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7-29
     
 
30
     
31-60
 
 
 
60-63
     
64
 
 
Part II: Other Information  
     
64
     
64
     
65-67
 
 
68
 
 
 
 

 

Part I:    Financial Information
Item 1.   Financial Statements

Consolidated Balance Sheets
June 30, 2010 and December 31, 2009

 
June 30,
   
December 31,
 
(In thousands, except share data)
2010     2009  
 
(Unaudited)
       
ASSETS
         
Cash and non-interest bearing balances due from banks
$ 80,883     $ 71,575  
Interest bearing balances due from banks
  161,443       282,010  
Federal funds sold
  2,750       --  
Cash and cash equivalents
  245,076       353,585  
Investment securities
  660,049       646,915  
Mortgage loans held for sale
  18,298       8,397  
Assets held in trading accounts
  7,827       6,886  
Loans
  1,822,028       1,874,989  
Allowance for loan losses
  (25,881 )     (25,016 )
Net loans
  1,796,147       1,849,973  
Covered assets:
             
Loans, net of discount
  39,346       --  
Other real estate owned, net of discount
  3,609       --  
FDIC loss share receivable
  12,614       --  
Premises and equipment
  76,349       78,126  
Foreclosed assets held for sale, net
  20,091       9,179  
Interest receivable
  16,264       17,881  
Bank owned life insurance
  48,258       40,920  
Goodwill
  60,605       60,605  
Core deposit premiums
  1,381       1,769  
Other assets
  19,211       19,086  
Total assets
$ 3,025,125     $ 3,093,322  
   
LIABILITIES AND STOCKHOLDERS' EQUITY
             
Deposits:
             
Non-interest bearing transaction accounts
$ 358,171     $ 363,154  
Interest bearing transaction accounts and savings deposits
  1,172,746       1,156,264  
Time deposits
  862,677       912,754  
Total deposits
  2,393,594       2,432,172  
Federal funds purchased and securities sold under agreements to repurchase
  84,456       105,910  
Short-term debt
  3,202       3,640  
Long-term debt
  138,893       159,823  
Accrued interest and other liabilities
  25,836       20,530  
Total liabilities
  2,645,981       2,722,075  
   
Stockholders' equity:
             
Preferred stock, $0.01 par value; 40,040,000 shares authorized
             
and unissued at June 30, 2010 and December 31, 2009
  --       --  
Common stock, Class A, $0.01 par value; 60,000,000 shares authorized;
             
17,209,973 and 17,093,931 shares issued and outstanding
             
at June 30, 2010, and December 31, 2009, respectively
  172       171  
Surplus
  112,851       111,694  
Undivided profits
  265,021       258,620  
Accumulated other comprehensive income
             
Unrealized appreciation on available-for-sale securities, net of
             
income taxes of $710 at June 30, 2010 and $457 at December 31, 2009
  1,100       762  
Total stockholders' equity
  379,144       371,247  
Total liabilities and stockholders' equity
$ 3,025,125     $ 3,093,322  
 
 
See Condensed Notes to Consolidated Financial Statements.
 
 
 
3

 
 
 
Consolidated Statements of Income
Three and Six Months Ended June 30, 2010 and 2009
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In thousands, except per share data)
 
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
INTEREST INCOME
                       
Loans
  $ 26,691     $ 28,017     $ 53,479     $ 56,251  
Covered loans
    213       --       213       --  
Federal funds sold
    2       14       7       15  
Investment securities
    4,465       5,256       8,997       11,673  
Mortgage loans held for sale
    149       195       218       353  
Assets held in trading accounts
    11       5       13       10  
Interest bearing balances due from banks
    173       70       364       148  
TOTAL INTEREST INCOME
    31,704       33,557       63,291       68,450  
       
INTEREST EXPENSE
                               
Deposits
    4,839       7,901       10,276       17,404  
Federal funds purchased and securities sold
                               
under agreements to repurchase
    123       182       273       425  
Short-term debt
    15       6       30       12  
Long-term debt
    1,522       1,748       3,095       3,496  
TOTAL INTEREST EXPENSE
    6,499       9,837       13,674       21,337  
       
NET INTEREST INCOME
    25,205       23,720       49,617       47,113  
Provision for loan losses
    3,758       2,622       6,990       4,760  
       
NET INTEREST INCOME AFTER PROVISION
                               
FOR LOAN LOSSES
    21,447       21,098       42,627       42,353  
       
NON-INTEREST INCOME
                               
Trust income
    1,170       1,223       2,420       2,549  
Service charges on deposit accounts
    4,739       4,571       9,040       8,298  
Other service charges and fees
    671       646       1,451       1,392  
Income on sale of mortgage loans, net of commissions
    932       1,361       1,535       2,400  
Income on investment banking, net of commissions
    776       675       1,381       1,086  
Credit card fees
    4,043       3,597       7,720       6,750  
Premiums on sale of student loans
    545       286       545       286  
Bank owned life insurance income
    566       299       857       677  
Gain on sale of securities, net
    --       144       --       144  
Gain on FDIC assisted transaction
    3,037       --       3,037       --  
Other income
    769       556       1,463       1,235  
TOTAL NON-INTEREST INCOME
    17,248       13,358       29,449       24,817  
       
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
    15,064       14,674       30,230       29,257  
Occupancy expense, net
    1,844       1,824       3,726       3,713  
Furniture and equipment expense
    1,526       1,527       3,021       3,070  
Other real estate and foreclosure expense
    314       90       372       160  
Deposit insurance
    1,059       2,557       2,014       3,090  
Other operating expenses
    7,469       6,279       14,708       13,319  
TOTAL NON-INTEREST EXPENSE
    27,276       26,951       54,071       52,609  
       
INCOME BEFORE INCOME TAXES
    11,419       7,505       18,005       14,561  
Provision for income taxes
    3,438       1,996       5,068       3,816  
       
NET INCOME
  $ 7,981     $ 5,509     $ 12,937     $ 10,745  
BASIC EARNINGS PER SHARE
  $ 0.46     $ 0.40     $ 0.75     $ 0.77  
DILUTED EARNINGS PER SHARE
  $ 0.46     $ 0.39     $ 0.75     $ 0.76  
 
See Condensed Notes to Consolidated Financial Statements.
 
 
4

 

Consolidated Statements of Cash Flows
Six Months Ended June 30, 2010 and 2009
 
 
June 30,
   
June 30,
 
(In thousands)
2010
   
2009
 
 
(Unaudited)
 
OPERATING ACTIVITIES
         
Net income
$ 12,937     $ 10,745  
Items not requiring (providing) cash
             
Depreciation and amortization
  2,854       2,943  
Provision for loan losses
  6,990       4,760  
Gain on sale of investment securities
  --       (144 )
Net amortization (accretion) of investment securities
  16       (101 )
Stock-based compensation expense
  502       344  
Net accretion on FDIC loss share receivable
  1,169       --  
Gain on FDIC assisted transaction
  (3,037 )     --  
Deferred income taxes
  2,030       861  
Bank owned life insurance income
  (857 )     (677 )
Changes in
             
Interest receivable
  1,617       2,799  
Mortgage loans held for sale
  (9,901 )     (4,532 )
Assets held in trading accounts
  (941 )     (297 )
Other assets
  333       (899 )
Accrued interest and other liabilities
  1,805       (1,424 )
Income taxes payable
  (142 )     764  
Net cash provided by operating activities
  15,375       15,142  
               
INVESTING ACTIVITIES
             
Net collections (originations) of loans
  26,264       (20,437 )
Purchases of premises and equipment, net
  (679 )     (2,285 )
Proceeds from sale of foreclosed assets
  11,528       2,330  
Net sales of short-term investment securities
  --       23,879  
Proceeds from sale of available-for-sale securities
  --       194  
Proceeds from maturities of available-for-sale securities
  149,248       537,302  
Purchases of available-for-sale securities
  (165,235 )     (382,136 )
Proceeds from maturities of held-to-maturity securities
  178,570       72,994  
Purchases of held-to-maturity securities
  (150,545 )     (238,732 )
Purchases of bank owned life insurance
  (6,482 )     (25 )
Net cash proceeds received in FDIC assisted transaction
  18,067       --  
Net cash provided by (used in) investing activities
  60,736       (6,916 )
               
FINANCING ACTIVITIES
             
Net change in deposits
  (135,918 )     (17,189 )
Net change in short-term debt
  (438 )     1,535  
Dividends paid
  (6,536 )     (5,330 )
Proceeds from issuance of long-term debt
  3,200       7,266  
Repayment of long-term debt
  (24,130 )     (3,211 )
Net change in federal funds purchased and
             
securities sold under agreements to repurchase
  (21,454 )     (17,303 )
Net shares issued under stock compensation plans
  656       1,047  
Net cash used in financing activities
  (184,620 )     (33,185 )
               
DECREASE IN CASH AND CASH EQUIVALENTS
  (108,509 )     (24,959 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
  353,585       139,536  
               
CASH AND CASH EQUIVALENTS, END OF PERIOD
$ 245,076     $ 114,577  
 
See Condensed Notes to Consolidated Financial Statements.
 
 
5

 
 
Consolidated Statements of Stockholders’ Equity
Six Months Ended June 30, 2010 and 2009
 
               
Accumulated
             
               
Other
             
   
Common
         
Comprehensive
   
Undivided
       
(In thousands, except share data)
 
Stock
   
Surplus
   
Income
   
Profits
   
Total
 
   
Balance, December 31, 2008
  $ 140     $ 40,807     $ 3,190     $ 244,655     $ 288,792  
Comprehensive income
                                       
Net income
    --       --       --       10,745       10,745  
Change in unrealized appreciation on
                                       
available-for-sale securities, net of
                                       
income tax credits of $1,205
    --       --       (2,009 )     --       (2,009 )
Comprehensive income
                                    8,736  
Stock issued as bonus shares - 27,915 shares
    --       702       --       --       702  
Non-vested bonus shares
    --       (1,374 )     --       --       (1,374 )
Stock issued for employee stock
                                       
purchase plan - 5,823 shares
    --       141       --       --       141  
Exercise of stock options - 45,200 shares
    --       551       --       --       551  
Stock granted under
                                       
stock-based compensation plans
    --       92       --       --       92  
Securities exchanged under stock option plan
    --       (95 )     --       --       (95 )
Cash dividends declared - $0.38 per share
    --       --       --       (5,330 )     (5,330 )
   
Balance, June 30, 2009 (Unaudited)
    140       40,824       1,181       250,070       292,215  
Comprehensive income
                                       
Net income
    --       --       --       14,465       14,465  
Change in unrealized appreciation on
                                       
available-for-sale securities, net of
                                       
income taxes of ($251)
    --       --       (419 )     --       (419 )
Comprehensive income
                                    14,046  
Stock issued from public stock offering, net of
                                       
offering costs of $4,178
    30       70,456       --       --       70,486  
Cancelled bonus shares - 1,113 shares
    --       29       --       --       29  
Non-vested bonus shares
    --       166       --       --       166  
Exercise of stock options - 11,500 shares
    1       138       --       --       139  
Stock granted under
                                       
stock-based compensation plans
    --       88       --       --       88  
Securities exchanged under stock option plan
    --       (7 )     --       --       (7 )
Dividends paid - $0.38 per share
    --       --       --       (5,915 )     (5,915 )
   
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 )
Dividends paid - $0.38 per share
    --       --       --       (6,536 )     (6,536 )
   
Balance, June 30, 2010 (Unaudited)
  $ 172     $ 112,851     $ 1,100     $ 265,021     $ 379,144  
 
See Condensed Notes to Consolidated Financial Statements.
 
 
6

 
 
 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)

NOTE 1:                      BASIS OF PRESENTATION

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

All adjustments made to the unaudited financial statements were of a normal recurring nature.  In the opinion of management, all adjustments necessary for a fair presentation of the results of interim periods have been made.  Certain prior year amounts are reclassified to conform to current year classification.  The consolidated balance sheet of the Company as of December 31, 2009, 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 2009 filed with the U.S. Securities and Exchange Commission (the “SEC”).

Recently Issued Accounting Pronouncements

In December 2009, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) ASU 2009-17, Consolidation (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.  ASU 2009-17 amends the consolidation guidance applicable to variable interest entities.  The amendments to the consolidation guidance affect all entities, as well as qualifying special-purpose entities that were previously excluded from previous consolidation guidance.  ASU 2009-17 was effective as of the beginning of the first annual reporting period that begins after November 15, 2009.  Adoption of the new guidance did not have a significant impact on the Company’s ongoing financial position or results of operations.

In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets.  ASU 2009-16 amends the derecognition accounting and disclosure guidance.  ASU 2009-16 eliminates the exemption from consolidation for Qualified Special Purpose Entities (“QSPEs”) and also requires a transferor to evaluate all existing QSPEs to determine whether they must be consolidated.  ASU 2009-16 was effective as of the beginning of the first annual reporting period that begins after November 15, 2009, and did not have a significant impact on the Company’s ongoing financial position or results of operations.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements.  ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others.  It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers.  It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis.  The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements.  The Company’s disclosures about fair value measurements are presented in Note 17 – Fair Value Measurements.  These new disclosure requirements were adopted by the Company during the period ended March 31, 2010, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010.  With respect to the portions of this ASU that were adopted during the period ended March 31, 2010, the adoption of this standard did not have a significant impact on the Company’s financial position, results of operations or disclosures.  Management does not believe that the adoption of the remaining portion of this ASU will have a significant impact on the Company’s ongoing financial position, results of operation or disclosures.
 
 
7

 

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements.  The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements.  Removal of the disclosure requirement is not expected to affect the nature or timing of subsequent events evaluations performed by the Company.  ASU 2010-09 became effective upon issuance.

There have been no other significant changes to the Company’s accounting policies from the 2009 Form 10-K.

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 Federal Deposit Insurance Corporation (“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.

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 certain acquired loans should the Company experience a loss, 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.
 
 
8

 

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 acquisitions and loan accounting, see Note 2 and Note 5 to the consolidated financial statements.

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, 2010 and 2009:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In thousands, except per share data)
 
2010
   
2009
   
2010
   
2009
 
   
Net income
  $ 7,981     $ 5,509     $ 12,937     $ 10,745  
   
Average common shares outstanding
    17,200       14,022       17,170       14,007  
Average potential dilutive common shares
    68       86       68       86  
Average diluted common shares
    17,268       14,108       17,238       14,093  
   
Basic earnings per share
  $ 0.46     $ 0.40     $ 0.75     $ 0.77  
Diluted earnings per share
  $ 0.46     $ 0.39     $ 0.75     $ 0.76  
 
Stock options to purchase 100,290 and 158,150 shares for the three and six months ended June 30, 2010 and 2009, respectively, were not included in the earnings per share calculation because the exercise price exceeded the average market price.
 
 
9

 

NOTE 2:                      ACQUISITION

On May 14, 2010, the Company, through its wholly-owned subsidiary, Simmons First National Bank (the “Bank”), entered into a purchase and assumption agreement with loss share agreements with the Federal Deposit Insurance Corporation (“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 expands 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. A summary, at fair value, of the assets acquired and liabilities assumed is as follows:

   
Acquired from
   
Fair Value
   
Fair
 
(In thousands)
 
the FDIC
   
Adjustments
   
Value
 
   
ASSETS
                 
Cash and non-interest bearing balances due from banks
  $ 222     $ 10,653     $ 10,875  
Interest bearing balances due from banks
    7,192       --       7,192  
Investment securities
    24,850       --       24,850  
Covered assets:
                       
Loans
    56,214       (16,037 )     40,177  
Other real estate
    6,538       (1,892 )     4,646  
FDIC loss share receivable
    --       13,783       13,783  
Premises and equipment
    10       --       10  
Other assets
    616       (159 )     457  
Total assets
  $ 95,642     $ 6,348     $ 101,990  
   
LIABILITIES
                       
Deposits:
                       
Non-interest bearing transaction accounts
  $ 5,063     $ --     $ 5,063  
Interest bearing transaction accounts and savings deposits
    103       --       103  
Time deposits
    92,174       --       92,174  
Total deposits
    97,340       --       97,340  
FDIC true-up payable
    --       1,504       1,504  
Accrued interest and other liabilities
    109       --       109  
Total liabilities
  $ 97,449     $ 1,504     $ 98,953  
   
Gain on acquisition of SWCB
                  $ 3,037  
 
The Bank will share in the losses on assets covered under the loss share agreements.  The FDIC will reimburse the Bank for 80% of all losses on covered assets.  The loss sharing agreements entered into by the Bank and the FDIC in conjunction with the purchase and assumption agreement require that the Bank 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 the Bank under the loss share agreements are less than expected, the Bank may be required to reimburse the FDIC under the clawback provisions of the loss share agreements.  At June 30, 2010, the covered loans and covered other real estate owned and the related FDIC loss share receivable (collectively, the “covered assets”) and the FDIC clawback payable were reported at the net present value of expected future amounts to be paid or received.

Purchased loans acquired in a business combination, including loans purchased in the SWCB acquisition, 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 Financial Accounting Standards Board (“FASB”) 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.
 
 
10

 

On the acquisition date, the preliminary estimate of the contractually required payments for all acquired loans was $56.2 million, the cash flows expected to be collected were $43.3 million including interest, and the estimated fair value was $40.2 million.  These amounts were determined based upon the remaining life of the acquired loans, including the effects of estimated prepayments, estimated loss ratios, the estimated value of the underlying collateral, and the net present value of cash flows expected to be received.  The discount on covered loans that that would be accreted into future earnings of the Company based on expected cash flows totaled $16.0 million.

The Company expects to finalize its analysis of the acquired loans along with the other acquired assets and assumed liabilities in this transaction over the next twelve months.  Therefore, adjustments to the estimated amounts and carrying values may occur.

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,
 
   
2010
   
2009
 
         
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     $ 27     $ --     $ 4,027     $ --     $ --     $ --     $ --  
U.S. Government
                                                               
agencies
    224,928       2,299       (22 )     227,205       254,229       799       (1,348 )     253,680  
Mortgage-backed
                                                               
securities
    84       4       --       88       90       5       --       95  
State and political
                                                               
subdivisions
    206,076       2,798       (521 )     208,353       208,812       2,728       (580 )     210,960  
Other securities
    930       --       --       930       930       --       --       930  
   
    $ 436,018     $ 5,128     $ (543 )   $ 440,603     $ 464,061     $ 3,532     $ (1,928 )   $ 465,665  
   
Available-for-Sale
                                                               
U.S. Treasury
  $ 300     $ --     $ --     $ 300     $ 4,297     $ 32     $ --     $ 4,329  
U.S. Government
                                                               
agencies
    205,232       1,286       (21 )     206,497       160,807       953       (236 )     161,524  
Mortgage-backed
                                                               
securities
    2,845       166       (3 )     3,008       2,896       78       (2 )     2,972  
Other securities
    13,844       386       (4 )     14,226       13,633       399       (3 )     14,029  
   
    $ 222,221     $ 1,838     $ (28 )   $ 224,031     $ 181,633     $ 1,462     $ (241 )   $ 182,854  
 
 
11

 
 
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.

As of June 30, 2010, 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
  $ 10,606     $ 22     $ --     $ --     $ 10,606     $ 22  
State and political subdivisions
    24,594       377       4,382       144       28,976       521  
   
Total
  $ 35,200     $ 399     $ 4,382     $ 144     $ 39,582     $ 543  
   
Available-for-Sale
                                               
   
U.S. Government agencies
  $ 10,299     $ 1     $ 1,009     $ 20     $ 11,308     $ 21  
Mortgage-backed securities
    397       2       120       1       517       3  
Other securities
    1       4       --       --       1       4  
   
Total
  $ 10,697     $ 7     $ 1,129     $ 21     $ 11,826     $ 28  
 
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, 2010, 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, 2010, 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 $423,288,000 at June 30, 2010, and $446,189,000 at December 31, 2009.
 
 
12

 

The book value of securities sold under agreements to repurchase amounted to $67,341,000 and $80,050,000 for June 30, 2010, and December 31, 2009, respectively.

Income earned on securities for the six months ended June 30, 2010 and 2009, is as follows:
 
(In thousands)
 
2010
   
2009
 
   
Taxable
           
Held-to-maturity
  $ 2,412     $ 828  
Available-for-sale
    2,426       7,148  
   
Non-taxable
               
Held-to-maturity
    4,159       3,683  
Available-for-sale
    --       14  
   
Total
  $ 8,997     $ 11,673  

Maturities of investment securities at June 30, 2010, are as follows:

   
Held-to-Maturity
   
Available-for-Sale
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
   
Cost
   
Value
 
   
One year or less
  $ 9,336     $ 9,444     $ 599     $ 599  
After one through five years
    188,738       190,486       133,598       133,735  
After five through ten years
    155,933       158,280       74,173       75,464  
After ten years
    82,011       82,393       7       7  
Other securities
    --       --       13,844       14,226  
   
Total
  $ 436,018     $ 440,603     $ 222,221     $ 224,031  
 
There were no realized gains from the sale of securities for the three and six-month periods ended June 30, 2010, with gross realized gains of $144,000 recognized for the three and six-month periods ended June 30, 2009.  There were no realized losses over the same periods.

The state and political subdivision debt obligations are primarily non-rated bonds and represent small, Arkansas issues, which are evaluated on an ongoing basis.
 
 
13

 

NOTE 4:                      LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2010, the Company’s loan portfolio, excluding loans covered by FDIC loss share agreements, was $1.82 billion, compared to $1.87 billion at December 31, 2009.  The various categories of loans, excluding loans covered by FDIC loss share agreements, are summarized as follows:
 
   
June 30,
   
December 31,
 
(In thousands)
 
2010
   
2009
 
   
Consumer
           
Credit cards
  $ 180,591     $ 189,154  
Student loans
    133,012       114,296  
Other consumer
    127,343       139,647  
Total consumer
    440,946       443,097  
Real Estate
               
Construction
    153,869       180,759  
Single family residential
    386,570       392,208  
Other commercial
    574,859       596,517  
Total real estate
    1,115,298       1,169,484  
Commercial
               
Commercial
    151,817       168,206  
Agricultural
    104,247       84,866  
Financial institutions
    --       3,885  
Total commercial
    256,064       256,957  
Other
    9,720       5,451  
   
Total loans before allowance for loan losses
  $ 1,822,028     $ 1,874,989  
 
As of June 30, 2010, credit card loans, which are unsecured, were $180,591,000 or 9.9% of total loans, versus $189,154,000, or 10.1% of total loans at December 31, 2009.  The credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio.  Credit card loans are regularly reviewed to facilitate the identification and monitoring of creditworthiness.

At June 30, 2010, and December 31, 2009, impaired loans, net of Government guarantees, totaled $55,124,000 and $46,859,000, respectively.  Allocations of the allowance for loan losses relative to impaired loans were $7,014,000 at June 30, 2010, and $8,343,000 at December 31, 2009.  During the second quarter of 2009, the Company made adjustments to its methodology in the evaluation of the collectability of loans, which added additional quantitative factors to the internal and external influences used in determining the credit quality of loans and the allocation of the allowance.  This adjustment in methodology resulted in an addition to impaired loans from classified loans and a redistribution of allocated and unallocated reserves.  Approximately $645,000 and $242,000 of interest income was recognized on average impaired loans of $57,432,000 and $27,203,000 as of June 30, 2010 and 2009, respectively.  Interest recognized on impaired loans on a cash basis during the first six months of 2010 and 2009 was immaterial.

 
14

 

Transactions in the allowance for loan losses are as follows:
 
(In thousands)
 
2010
   
2009
 
   
Balance, beginning of year
  $ 25,016     $ 25,841  
Additions
               
Provision charged to expense
    6,990       4,760  
              30,601  
Deductions
               
Losses charged to allowance, net of recoveries
               
of $3,172 and $2,104 for the first six months of
               
2010 and 2009, respectively
    6,125       5,569  
   
Balance, June 30
  $ 25,881       25,032  
   
Additions
               
Provision charged to expense
            5,556  
                 
Deductions
               
Losses charged to allowance, net of recoveries
               
of $1,583 for the last six months of 2009
            5,572  
   
Balance, end of year
          $ 25,016  

NOTE 5:                      COVERED LOANS

The Company evaluated loans purchased in conjunction with the acquisitions of SWCB described in Note 2, Business Combinations, for impairment in accordance with the provisions of ASC Topic 310-30.  Purchased covered loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.  The following table reflects the carrying value of all purchased covered impaired loans as of June 30, 2010, for the SWCB FDIC assisted transaction:
 
   
Loans Covered
 
   
by FDIC Loss Share
 
   
June 30,
 
(in thousands)
 
2010
 
   
Performing fixed rate loans
  $ 13,269  
Criticized fixed rate loans
    2,421  
Sub-standard fixed rate loans
    15,493  
Total fixed rate loans
    31,182  
Performing variable rate loans
    2,360  
Criticized variable rate loans
    148  
Sub-standard variable rate loans
    5,656  
Total variable rate loans
    8,164  
Total covered loans (1)
  $ 39,346  

(1) 
These loans were not classified as non-performing assets at June 30, 2010, as the loans are accounted for on a pooled basis and the pools are considered to be performing.  Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased impaired loans.  The loans are grouped in pools sharing common risk characteristics and were treated in the aggregate when applying various valuation techniques.

 
15

 
 
The acquired loans were grouped into pools based on common risk characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition dates.  These loan pools are systematically reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition.  Techniques used in determining risk of loss are similar to the Company’s non-covered loan portfolio, with most focus being placed on those loan pools which include the larger loan relationships and those loan pools which exhibit higher risk characteristics.

The following is a summary of the covered impaired loans acquired in the SWCB acquisition on May 14, 2010, as of the date of acquisition.
 
   
Loans Covered
 
   
by FDIC Loss Share
 
(in thousands)
 
May 14, 2010
 
   
Contractually required principal and interest at acquisition
  $ 58,739  
Non-accretable difference (expected losses and foregone interest)
    (15,396 )
Cash flows expected to be collected at acquisition
    43,343  
Accretable yield
    (3,166 )
Basis in acquired loans at acquisition
  $ 40,177  
 
As of the acquisition date, the preliminary estimates of contractually required payments receivable, including interest, for all covered impaired loans acquired in the SWCB transaction was $56.2 million.  The cash flows expected to be collected as of the acquisition dates for these loans were $40.9 million, including interest. These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments.

Changes in the carrying amount of the accretable yield for purchased impaired and non-impaired loans were not deemed material for the three months ended June 30, 2010.

There were no allowances for loan losses related to the purchased impaired loans at June 30, 2010.

NOTE 6:                      GOODWILL AND CORE DEPOSIT PREMIUMS

Goodwill is tested annually for impairment.  If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the financial statements.

Core deposit premiums are periodically evaluated as to the recoverability of their carrying value.

The carrying basis and accumulated amortization of core deposit premiums (net of core deposit premiums that were fully amortized) at June 30, 2010, and December 31, 2009, were as follows:
 
(In thousands)
 
June 30,
2010
   
December 31,
2009
 
   
Gross carrying amount
  $ 6,822     $ 6,822  
Accumulated amortization
    (5,441 )     (5,053 )
   
Net core deposit premiums
  $ 1,381     $ 1,769  

 
 
16

 

Core deposit premium amortization expense recorded for the six months ended June 30, 2010 and 2009, was $388,000 and $403,000, respectively.  The Company’s estimated amortization expense for the remainder of 2010 is $311,000, and for each of the following four years is: 2011 – $451,000; 2012 – $321,000; 2013 – $268,000; and 2014 – $30,000.

NOTE 7:                      TIME DEPOSITS

Time deposits include approximately $365,868,000 and $420,537,000 of certificates of deposit of $100,000 or more at June 30, 2010, and December 31, 2009, respectively.

NOTE 8:                      INCOME TAXES

The provision for income taxes is comprised of the following components:
 
   
June 30,
   
June 30,
 
(In thousands)
 
2010
   
2009
 
   
Income taxes currently payable
  $ 3,038     $ 2,955  
Deferred income taxes
    2,030       861  
   
Provision for income taxes
  $ 5,068     $ 3,816  
 
The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

   
June 30,
   
December 31,
 
(In thousands)
 
2010
   
2009
 
   
Deferred tax assets
           
Allowance for loan losses
  $ 9,123     $ 8,859  
Valuation of foreclosed assets
    103       99  
Deferred compensation payable
    1,735       1,603  
Vacation compensation
    946       898  
Loan interest
    203       195  
Other
    460       391  
Total deferred tax assets
    12,570       12,045  
   
Deferred tax liabilities
               
Accumulated depreciation
    (379 )     (451 )
Deferred loan fee income and expenses, net
    (1,535 )     (1,310 )
FHLB stock dividends
    (531 )     (503 )
Goodwill and core deposit premium amortization
    (10,883 )     (9,805 )
Gain on acquisition
    (1,191 )     --  
Available-for-sale securities
    (710 )     (457 )
Other
    (1,762 )     (1,657 )
Total deferred tax liabilities
    (16,991 )     (14,183 )
   
Net deferred tax liabilities included in other
               
liabilities on balance sheets
  $ (4,421 )   $ (2,138 )
 

 
17

 
 
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:
 
   
June 30,
   
June 30,
 
(In thousands)
 
2010
   
2009
 
   
Computed at the statutory rate (35%)
  $ 6,302     $ 5,096  
   
Increase (decrease) in taxes resulting from:
               
State income taxes, net of federal tax benefit
    352       120  
Tax exempt interest income
    (1,473 )     (1,359 )
Tax exempt earnings on BOLI
    (300 )     (232 )
Other differences, net
    187       191  
   
Actual tax provision
  $ 5,068     $ 3,816  

The Company follows ASC Topic 740, Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.  A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.  Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.

The Company files income tax returns in the U.S. federal jurisdiction.  The Company’s U.S. federal income tax returns are open and subject to examinations from the 2006 tax year and forward.  The Company’s various state income tax returns are generally open from the 2003 and later tax return years based on individual state statute of limitations.
 
 
18

 

NOTE 9:                      SHORT-TERM AND LONG-TERM DEBT

Long-term debt at June 30, 2010, and December 31, 2009, consisted of the following components:
 
   
June 30,
   
December 31,
 
(In thousands)
 
2010
   
2009
 
   
FHLB advances, due 2010 to 2033, 2.02% to 8.41%
           
secured by residential real estate loans
  $ 107,963     $ 128,893  
Trust preferred securities, due 12/30/2033,
               
fixed at 8.25%, callable without penalty
    10,310       10,310  
Trust preferred securities, due 12/30/2033,
               
floating rate of 2.80% above the three month LIBOR
               
rate, reset quarterly, callable without penalty
    10,310       10,310  
Trust preferred securities, due 12/30/2033,
               
fixed rate of 6.97% through 2010, thereafter,
               
at a floating rate of 2.80% above the three month
               
LIBOR rate, reset quarterly, callable
               
in 2010 without penalty
    10,310       10,310  
                 
    $ 138,893     $ 159,823  
 
At June 30, 2010, the Company had Federal Home Loan Bank (“FHLB”) advances with original maturities of one year or less of $2.0 million with a weighted average rate of 0.65% which are not included in the above table.

The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment. Distributions on these securities are included in interest expense on long-term debt.  Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Company, the sole asset of each trust.  The preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust.  The common securities of each trust are wholly-owned by the Company.  Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures.  The Company’s obligations under the junior subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.

Aggregate annual maturities of long-term debt at June 30, 2010, are:
 
     
Annual
 
(In thousands)
Year
 
Maturities
 
     
 
2010
  $ 3,038  
 
2011
    43,927  
 
2012
    6,858  
 
2013
    16,825  
 
2014