Note 5 - Loans Covered By FDIC Loss Share Agreements

6 Months Ended

Jun. 30, 2012

Loans Receivable Covered By Fdic Loss Share [Text Block]

NOTE 5:                      LOANS COVERED BY FDIC LOSS SHARE AGREEMENTS

During 2010, the Company, through its wholly-owned subsidiary, Simmons First National Bank (“SFNB” or “lead bank”), entered into purchase and assumption agreements 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 and Security Savings Bank, FSB (“SSB”) with offices in various locations in Kansas.

The Company evaluated loans purchased in conjunction with the acquisition of SWCB and SSB 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, 2012 and December 31, 2011, for the SWCB and SSB FDIC-assisted transactions:

	Loans Covered by FDIC Loss Share
(in thousands)	June 30, 2012		December 31, 2011
Consumer:
Other consumer	$	--	$	23
Total consumer		--		23
Real estate:
Construction		16,502		23,515
Single family residential		21,957		26,825
Other commercial		70,471		102,198
Total real estate		108,930		152,538
Commercial:
Commercial		5,259		5,514
Agricultural		--		--
Total commercial		5,259		5,514
Total covered loans (1)	$	114,189	$	158,075

(1)  These loans were not classified as non-performing assets at June 30, 2012 or December 31, 2011, 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.

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 date.  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 amount of the estimated cash flows expected to be received from the acquired loan pools in excess of the fair values recorded for the loan pools is referred to as the accretable yield.  The accretable yield is recognized as interest income over the estimated lives of the loans.  Each quarter, the Company estimates the cash flows expected to be collected from the acquired loan pools, and adjustments may or may not be required.  Beginning in the fourth quarter of 2011, the cash flows estimate has increased based on payment histories and reduced loss expectations of the loan pools.  This resulted in increased interest income that is spread on a level-yield basis over the remaining expected lives of the loan pools. The increases in expected cash flows also reduce the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets.  The estimated adjustments to the indemnification assets are amortized on a level-yield basis over the remainder of the loss sharing agreements or the remaining expected lives of the loan pools, whichever is shorter.  The impact of the adjustments on the Company’s financial results for the three and six months ended June 30, 2012 and 2011,  is shown below:

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2012			2011		2012			2011
Impact on net interest income	$	3,004		$	--	$	6,189		$	--
Non-interest income		(2,737	)		--		(5,516	)		--
Net impact to pre-tax income		267			--		673			--
Net impact, net of taxes	$	162		$	--	$	409		$	--

Because these adjustments will be recognized over the remaining lives of the loan pools and the remainder of the loss sharing agreements, respectively, they will impact future periods as well.  The current estimate of the remaining accretable yield adjustment that will positively impact interest income is $21.7 million and the remaining adjustment to the indemnification assets that will reduce non-interest income is $19.0 million.  Of the remaining adjustments, the Company expects to recognize $5.7 million of interest income and a $5.4 million reduction of non-interest income, for a net addition to pre-tax income of approximately $0.4 million during the remainder of 2012.  The accretable yield adjustments recorded in future periods will change as the Company continues to evaluate expected cash flows from the acquired loan pools.

Changes in the carrying amount of the accretable yield for purchased impaired and non-impaired loans were as follows for the three and six months ended June 30, 2012 and 2011, for SWCB and SSB, combined.

	Three Months Ended June 30, 2012						Six Months Ended June 30, 2012
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	36,860		$	129,755		$	42,833		$	158,075
Additions		--			--			--			--
Accretable yield adjustments		--			--			--			--
Accretion		(4,994	)		4,994			(10,967	)		10,967
Payments and other reductions, net		--			(20,560	)		--			(54,853	)
Balance, ending	$	31,866		$	114,189		$	31,866		$	114,189

	Three Months Ended June 30, 2011						Six Months Ended June 30, 2011
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	31,906		$	208,774		$	36,247		$	231,600
Additions		--			--			--			--
Accretable yield adjustments		--			--			--			--
Accretion		(4,347	)		4,347			(8,688	)		8,688
Payments and other reductions, net		--			(20,222	)		--			(47,389	)
Balance, ending	$	27,559		$	192,899		$	27,559		$	192,899

No pools evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows.  There were no allowances for loan losses related to the purchased impaired loans at June 30, 2012 or December 31, 2011.