Edgar Filing: SIMMONS FIRST NATIONAL CORP

f10q_080911.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

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets	3

	Consolidated Statements of Income	4

	Consolidated Statements of Cash Flows	5

	Consolidated Statements of Stockholders' Equity	6

	Condensed Notes to Consolidated Financial Statements	7-40

	Report of Independent Registered Public Accounting Firm	41

Item 2.	Management's Discussion and Analysis of Financial Operations	42-71

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	71-74

Item 4.	Controls and Procedures	75

Part II:	Other Information

Item 1A.	Risk Factors	75

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75

Item 6.	Exhibits	76-81

Signatures		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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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	$	1,633,660	$	3,834

December 31, 2010
Consumer:
Credit cards	$	971	$	911	$	1,882	$	188,447	$	190,329	$	615
Student loans		1,505		1,736		3,241		58,064		61,305		1,736
Other consumer		2,016		448		2,464		116,117		118,581		155
Total consumer		4,492		3,095		7,587		362,628		370,215		2,506
Real estate: