SIMMONS FIRST NATIONAL CORPORATION 10-Q
 
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 September 30, 2006 
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 October 27, 2006 was 14,206,728.
 
 
Simmons First National Corporation
Quarterly Report on Form 10-Q
September 30, 2006
 
INDEX
 
   
Page No.
  
Part I:      Financial Information    
       
   
       
     
   
       
     
     
   
       
     
   
       
 
 
  
   
       
   
       
   
       
   
   
       
 
       
 
       
   
       
 
       
 
       
 
       
       
   


Part I: Financial Information
Item 1. Financial Statements

Simmons First National Corporation
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
 
ASSETS
 
   
September 30,
 
December 31,
  
(In thousands, except share data)
  
2006
 
2005
 
   
(Unaudited)
      
Cash and non-interest bearing balances due from banks
  
$
77,724
  
$
75,461
  
Interest bearing balances due from banks
    
19,599
    
14,397
  
Federal funds sold
    
49,340
    
11,715
  
Cash and cash equivalents
    
146,663
    
101,573
  
               
Investment securities
    
531,505
    
521,789
  
Mortgage loans held for sale
    
6,591
    
7,857
  
Assets held in trading accounts
    
4,574
    
4,631
  
Loans
    
1,788,517
    
1,718,107
  
Allowance for loan losses
    
(25,879
)
  
(26,923
)
Net loans
    
1,762,638
    
1,691,184
  
               
Premises and equipment
    
66,769
    
63,360
  
Foreclosed assets held for sale, net
    
1,413
    
1,540
  
Interest receivable
    
21,953
    
18,754
  
Bank owned life insurance
    
35,708
    
33,269
  
Goodwill
    
60,605
    
60,605
  
Core deposit premiums
    
4,406
    
5,029
  
Other assets
    
14,117
    
14,177
  
               
TOTAL ASSETS
  
$
2,656,942
  
$
2,523,768
  

See Condensed Notes to Consolidated Financial Statements.
3
 
Simmons First National Corporation
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
   
September 30,
 
December 31,
  
(In thousands, except share data)
  
2006
  
2005
  
   
(Unaudited)
      
LIABILITIES
          
Non-interest bearing transaction accounts
  
$
302,700
  
$
331,113
  
Interest bearing transaction accounts and savings deposits
    
745,649
    
749,925
  
Time deposits
    
1,100,127
    
978,920
  
Total deposits
    
2,148,476
    
2,059,958
  
Federal funds purchased and securities sold
              
under agreements to repurchase
    
85,535
    
107,223
  
Short-term debt
    
61,850
    
8,031
  
Long-term debt
    
82,173
    
87,020
  
Accrued interest and other liabilities
    
24,316
    
17,451
  
Total liabilities
    
2,402,350
    
2,279,683
  
               
STOCKHOLDERS’ EQUITY
              
Capital stock
              
Class A, common, par value $0.01 a share, authorized
              
30,000,000 shares, 14,188,008 issued and outstanding
              
at 2006 and 14,326,923 at 2005
    
142
    
143
  
Surplus
    
49,068
    
53,723
  
Undivided profits
    
208,200
    
194,579
  
Accumulated other comprehensive income (loss)
              
Unrealized appreciation (depreciation) on available-for-sale securities,
              
net of income tax credits of $1,691 at 2006 and $2,615 at 2005
   
(2,818
)
  
(4,360
)
Total stockholders’ equity
    
254,592
    
244,085
  
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
2,656,942
  
$
2,523,768
  
 
See Condensed Notes to Consolidated Financial Statements.
4
 
Simmons First National Corporation
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2006 and 2005
 
   
Three Months Ended
  
Nine Months Ended
  
   
September 30,
  
September 30,
  
(In thousands, except per share data)
  
2006
  
2005
  
2006
  
2005
  
   
(Unaudited)
  
(Unaudited)
  
INTEREST INCOME
                  
Loans
  
$
33,924
  
$
29,225
  
$
95,705
  
$
81,813
  
Federal funds sold
   
325
    
262
    
692
    
863
  
Investment securities
    
5,183
    
4,693
    
14,991
    
13,926
  
Mortgage loans held for sale
   
141
    
168
    
369
    
421
  
Assets held in trading accounts
    
14
    
25
    
58
    
74
  
Interest bearing balances due from banks
    
229
    
119
    
785
    
418
  
TOTAL INTEREST INCOME
    
39,816
    
34,492
    
112,600
    
97,515
  
                           
INTEREST EXPENSE
                          
Deposits
    
14,404
    
9,046
    
38,313
    
23,889
  
Federal funds purchased and securities sold
                          
under agreements to repurchase
    
1,152
    
815
    
3,320
    
2,088
  
Short-term debt
    
761
    
646
    
1,082
    
790
  
Long-term debt
    
1,122
    
1,113
    
3,364
    
3,306
  
TOTAL INTEREST EXPENSE
    
17,439
    
11,620
    
46,079
    
30,073
  
                           
NET INTEREST INCOME
    
22,377
    
22,872
    
66,521
    
67,442
  
Provision for loan losses
    
602
    
1,736
    
3,099
    
5,895
  
                           
NET INTEREST INCOME AFTER PROVISION
                          
FOR LOAN LOSSES
    
21,775
    
21,136
    
63,422
    
61,547
  
                           
NON-INTEREST INCOME
                          
Trust income
    
1,435
    
1,430
    
4,095
    
4,164
  
Service charges on deposit accounts
    
3,973
    
4,154
    
11,945
    
11,721
  
Other service charges and fees
    
596
    
472
    
1,846
    
1,511
  
Income on sale of mortgage loans, net of commissions
    
763
    
826
    
2,194
    
2,221
  
Income on investment banking, net of commissions
    
55
    
146
    
252
    
364
  
Credit card fees
    
2,755
    
2,619
    
7,912
    
7,543
  
Premiums on sale of student loans
    
413
    
295
    
1,808
    
1,572
  
Bank owned life insurance income
    
382
    
279
    
1,098
    
636
  
Other income
    
654
    
519
    
2,004
    
2,078
  
Gain (loss) on sale of securities, net of taxes
    
--
    
--
    
--
    
(168
)
TOTAL NON-INTEREST INCOME
    
11,026
    
10,740
    
33,154
    
31,642
  
                           
NON-INTEREST EXPENSE
                          
Salaries and employee benefits
    
13,298
    
12,703
    
40,269
    
38,231
  
Occupancy expense, net
    
1,612
    
1,483
    
4,673
    
4,314
  
Furniture and equipment expense
    
1,407
    
1,421
    
4,281
    
4,277
  
Loss on foreclosed assets
    
32
    
57
    
105
    
160
  
Deposit insurance
    
64
    
72
    
204
    
214
  
Other operating expenses
    
5,722
    
5,490
    
17,029
    
16,412
  
TOTAL NON-INTEREST EXPENSE
    
22,135
    
21,226
    
66,561
    
63,608
  
                           
INCOME BEFORE INCOME TAXES
    
10,666
    
10,650
    
30,015
    
29,581
  
Provision for income taxes
    
3,219
    
3,316
    
9,284
    
9,444
  
NET INCOME
  
$
7,447
  
$
7,334
  
$
20,731
  
$
20,137
  
BASIC EARNINGS PER SHARE
  
$
0.53
  
$
0.51
  
$
1.46
  
$
1.40
  
DILUTED EARNINGS PER SHARE
  
$
0.51
  
$
0.50
  
$
1.43
  
$
1.37
  
 
 
See Condensed Notes to Consolidated Financial Statements.
5
 
Simmons First National Corporation
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005
 
 
 
September 30,
 
September 30,
 
(In thousands)
 
2006
 
2005
  
OPERATING ACTIVITIES
  
(Unaudited)
  
Net income
  
$
20,731
  
$
20,137
  
Items not requiring (providing) cash
              
Depreciation and amortization
    
4,104
    
4,052
  
Provision for loan losses
    
3,099
    
5,895
  
Net amortization (accretion) of investment securities
    
185
    
247
  
Deferred income taxes
    
864
    
(1,227
)
(Gain) loss on sale of securities, net of taxes
    
--
    
168
  
Bank owned life insurance income 
    
(1,098
)
  
(636
)
Changes in
              
Interest receivable
    
(3,199
)
  
(4,307
)
Mortgage loans held for sale
    
1,266
    
(171
)
Assets held in trading accounts
    
56
    
186
  
Other assets
    
61
    
106
  
Accrued interest and other liabilities
    
7,445
    
4,224
  
Income taxes payable
    
(1,444
)
  
(1,515
)
Net cash provided (used) by operating activities
    
32,070
    
27,159
  
               
INVESTING ACTIVITIES
              
Net originations of loans
    
(75,408
)
  
(144,918
)
Purchases of premises and equipment, net
    
(6,890
)
  
(7,573
)
Proceeds from sale of foreclosed assets
    
982
    
1,568
  
Proceeds from sale of securities
    
1,542
    
1,225
  
Proceeds from maturities of available-for-sale securities
    
78,503
    
58,757
  
Purchases of available-for-sale securities
    
(65,625
)
  
(60,671
)
Proceeds from maturities of held-to-maturity securities
    
18,841
    
24,071
  
Purchases of held-to-maturity securities
    
(41,620
)
  
(24,140
)
Purchase of bank owned life insurance
   
(1,341
)
  
(25,000
)
Net cash provided (used) by investing activities
    
(91,016
)
  
(176,681
)
               
FINANCING ACTIVITIES
              
Net increase (decrease) in deposits
    
88,518
    
88,532
  
Net proceeds (repayments) of short-term debt
    
53,819
    
90,374
  
Dividends paid
    
(7,110
)
  
(6,464
)
Proceeds from issuance of long-term debt
    
6,785
    
1,821
  
Repayment of long-term debt
    
(11,632
)
  
(9,488
)
Net increase (decrease) in federal funds purchased and
             
securities sold under agreements to repurchase
    
(21,688
)
  
(12,465
)
Repurchase of common stock, net
    
(4,656
)
  
(8,400
)
Net cash provided (used) by financing activities
    
104,036
    
143,910
  
               
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
45,090
    
(5,612
)
CASH AND CASH EQUIVALENTS,
             
BEGINNING OF PERIOD
    
101,573
    
153,731
  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  
$
146,663
  
$
148,119
  
 
 
See Condensed Notes to Consolidated Financial Statements.
6
 
Simmons First National Corporation
Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2006 and 2005
 
   
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
Common
 
 
Comprehensive
 
Undivided
 
 
 
(In thousands, except share data)
 
Stock
 
Surplus
 
Income (loss)
 
Profits
 
Total
  
                       
Balance, December 31, 2004
  
$
146
  
$
62,826
  
$
(1,124
)
$
176,374
  
$
238,222
  
Comprehensive income
                                
Net income
    
--
    
--
    
--
    
20,137
    
20,137
  
Change in unrealized depreciation on
                                
available-for-sale securities, net of
                                
income tax credit of $1,394
    
--
    
--
    
(2,324
)
  
--
    
(2,324
)
Comprehensive income
                            
17,813
  
Stock issued as bonus shares - 5,620 shares
    
--
    
138
    
--
    
--
    
138
  
Exercise of stock options - 80,460 shares
    
1
    
1,112
    
--
    
--
    
1,113
  
Securities exchanged under stock option plan
    
(1
)
  
(775
)
  
--
    
--
    
(776
)
Repurchase of common stock - 341,995 shares
   
(3
)
  
(8,872
)
  
--
    
--
    
(8,875
)
Dividends paid - $0.45 per share
    
--
    
--
    
--
    
(6,464
)
  
(6,464
)
                                 
Balance, September 30, 2005 (Unaudited)
    
143
    
54,429
    
(3,448
)
  
190,047
    
241,171
  
Comprehensive income
                                
Net income
    
--
    
--
    
--
    
6,825
    
6,825
  
Change in unrealized depreciation on
                                
available-for-sale securities, net of
                               
income tax credit of $548
    
--
    
--
    
(912
)
  
--
    
(912
)
Comprehensive income
                            
5,913
  
Exercise of stock options - 25,960 shares
    
--
    
320
    
--
    
--
    
320
  
Securities exchanged under stock option plan
   
1
    
(213
)
  
--
    
--
    
(212
)
Repurchase of common stock - 29,458 shares
    
(1
)
  
(813
)
  
--
    
--
    
(814
)
Dividends paid - $0.16 per share
    
--
    
--
    
--
    
(2,293
)
  
(2,293
)
                                 
Balance, December 31, 2005
    
143
    
53,723
    
(4,360
)
  
194,579
    
244,085
  
Comprehensive income
                                
Net income
    
--
    
--
    
--
    
20,731
    
20,731
  
Change in unrealized depreciation on
                                
available-for-sale securities, net of
                                
income taxes of $924
    
--
    
--
    
1,542
    
--
    
1,542
  
Comprehensive income
                            
22,274
  
Stock issued as bonus shares - 10,200 shares
    
--
    
275
    
--
    
--
    
275
  
Exercise of stock options - 67,580 shares
    
1
    
992
    
--
    
--
    
993
  
Securities exchanged under stock option plan
    
--
    
(799
)
  
--
    
--
    
(799
)
Stock granted under
                                
stock-based compensation plans
    
--
    
69
    
--
    
--
    
69
  
Repurchase of common stock - 188,900 shares
    
(2
)
  
(5,192
)
  
--
    
--
    
(5,194
)
Dividends paid - $0.50 per share
    
--
    
--
    
--
    
(7,110
)
  
(7,110
)
                                 
Balance, September 30, 2006 (Unaudited)
  
$
142
  
$
49,068
  
$
(2,818
)
$
208,200
  
$
254,592
  
 
 
See Condensed Notes to Consolidated Financial Statements.
7
 
SIMMONS FIRST NATIONAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: ACCOUNTING POLICIES

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, 2005 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 2005 filed with the Securities and Exchange Commission.

On January 1, 2006, the Company began recognizing compensation expense for stock options with the adoption of Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (Revised 2004). See Note 11 - Stock Based Compensation for additional information. There have been no other significant changes to the Company’s accounting policies from the 2005 Form 10-K.

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 nine months ended September 30, 2006 and 2005.
 

   
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
(In thousands, except per share data)
 
2006
 
2005
 
2006
 
2005
  
                   
Net income
  
$
7,447
  
$
7,334
  
$
20,731
  
$
20,137
  
                           
Average common shares outstanding
    
14,196
    
14,357
    
14,236
    
14,386
  
Average potential dilutive common shares
    
255
    
297
    
255
    
297
  
Average diluted common shares
   
14,451
    
14,654
    
14,491
    
14,683
  
                           
Basic earnings per share
  
$
0.53
  
$
0.51
  
$
1.46
  
$
1.40
  
Diluted earnings per share
  
$
0.51
  
$
0.50
  
$
1.43
  
$
1.37
  
 
 
8
 
NOTE 2: 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:
 
   
September 30,
  
December 31,
 
   
2006
  
2005
  
   
 
 
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
  
$
1,001
  
$
--
  
$
(4
)
$
997
  
$
1,004
  
$
--
  
$
(20
)
$
984
  
U.S. Government
                                                  
agencies
    
53,000
    
107
    
(115
)
  
52,992
    
28,000
    
--
    
(473
)
  
27,527
  
Mortgage-backed
                                                  
securities
    
161
    
3
    
(1
)
  
163
    
187
    
3
    
--
    
190
  
State and political
                                                  
subdivisions
    
116,481
    
314
    
(297
)
  
116,498
    
117,148
    
662
    
(1,298
)
  
116,512
  
Other securities
    
2,301
    
--
    
--
    
2,301
    
3,960
    
--
    
--
    
3,960
  
                                                   
   
$
172,944
  
$
424
  
$
(417
)
$
172,951
  
$
150,299
  
$
665
  
$
(1,791
)
$
149,173
  
                                                   
Available-for-Sale
                                                  
U.S. Treasury
  
$
6,792
  
$
--
  
$
(43
)
$
6,749
  
$
10,989
  
$
--
  
$
(102
)
$
10,887
  
U.S. Government
                                                  
agencies
    
336,545
    
--
    
(4,836
)
  
331,709
    
348,570
    
35
    
(7,615
)
  
340,990
  
Mortgage-backed
                                                  
securities
    
3,187
    
--
    
(92
)
  
3,095
    
3,392
    
9
    
(92
)
  
3,309
  
State and political
                                                  
subdivisions
    
1,360
    
13
    
--
    
1,373
    
3,014
    
39
    
--
    
3,053
  
Other securities
    
15,183
    
452
    
--
    
15,635
    
12,561
    
690
    
--
    
13,251
  
                                                   
   
$
363,067
  
$
465
  
$
(4,971
)
$
358,561
  
$
378,526
  
$
773
  
$
(7,809
)
$
371,490
  

 
The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $398,516,000 at September 30, 2006 and $411,580,000 at December 31, 2005.

The book value of securities sold under agreements to repurchase amounted to $70,610,000 and $67,778,000 for September 30, 2006 and December 31, 2005, respectively.

 
9

 
Income earned on securities for the nine months ended September 30, 2006 and 2005, is as follows:
 
(In thousands)
  
2006
  
2005
  
           
Taxable
          
Held-to-maturity
  
$
1,321
  
$
773
  
Available-for-sale
    
10,136
    
9,542
  
               
Non-taxable
              
Held-to-maturity
    
3,454
    
3,460
  
Available-for-sale
    
80
    
151
  
               
Total
  
$
14,991
  
$
13,926
  
 

Maturities of investment securities at September 30, 2006 are as follows:


   
Held-to-Maturity
  
Available-for-Sale
  
   
Amortized
 
Fair
 
Amortized
 
Fair
 
(In thousands)
 
Cost
 
Value
 
Cost
 
Value
  
                   
One year or less
  
$
19,459
  
$
19,377
  
$
102,837
  
$
101,962
  
After one through five years
    
54,952
    
54,831
    
161,855
    
158,704
  
After five through ten years
    
82,370
    
82,384
    
79,082
    
78,168
  
After ten years
    
14,792
    
14,988
    
4,112
    
4,092
  
Other securities
    
1,371
    
1,371
    
15,181
    
15,635
  
                           
Total
  
$
172,944
  
$
172,951
  
$
363,067
  
$
358,561
  

 
Gross realized losses of $0 and $275,000 were recognized for the nine-month periods ended September 30, 2006 and 2005. There were no realized gains over the same periods.

Most of the state and political subdivision debt obligations are non-rated bonds and represent small, Arkansas issues, which are evaluated on an ongoing basis.
 
10
 
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

The various categories are summarized as follows:
 
   
September 30,
 
December 31,
 
(In thousands)
 
2006
 
2005
  
           
Consumer
          
Credit cards
  
$
133,607
  
$
143,058
  
Student loans
    
86,875
    
89,818
  
Other consumer
    
146,039
    
138,051
  
Real Estate
              
Construction
    
267,600
    
238,898
  
Single family residential
    
364,657
    
340,839
  
Other commercial
    
494,514
    
479,684
  
Commercial
              
Commercial
    
175,576
    
184,920
  
Agricultural
    
103,301
    
68,761
  
Financial institutions
    
576
    
20,499
  
Other
    
15,772
    
13,579
  
               
Total loans before allowance for loan losses
  
$
1,788,517
  
$
1,718,107
  
 
As of September 30, 2006, credit card loans, which are unsecured, were $133,607,000, or 7.5% of total loans, versus $143,058,000, or 8.3% of total loans at December 31, 2005. 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 September 30, 2006 and December 31, 2005, impaired loans totaled $11,961,000 and $14,804,000, respectively. All impaired loans had either specific or general allocations within the allowance for loan losses. Allocations of the allowance for loan losses relative to impaired loans were $4,060,000 at September 30, 2006 and $3,868,000 at December 31, 2005. Approximately $297,000 and $313,000 of interest income was recognized on average impaired loans of $13,133,000 and $15,984,000 as of September 30, 2006 and 2005, respectively. Interest recognized on impaired loans on a cash basis during the first nine months of 2006 and 2005 was immaterial.
 
11
 
Transactions in the allowance for loan losses are as follows:
 
 
 
September 30,
 
December 31,
 
(In thousands)
 
2006
 
2005
  
           
Balance, beginning of year
  
$
26,923
  
$
26,508
  
Additions
              
Provision charged to expense
    
3,099
    
5,895
  
     
30,022
    
32,403
  
Deductions
              
Losses charged to allowance, net of recoveries
              
of $2,266 and $3,305 for the first nine months of
              
2006 and 2005, respectively
    
2,618
    
5,074
  
Reclassification of reserve related to unfunded commitments (1)
    
1,525
    
--
  
               
Balance, September 30
  
$
25,879
    
27,329
  
               
Additions
              
Provision charged to expense
          
1,631
  
               
Deductions
              
Losses charged to allowance, net of recoveries
              
of $511 for the last three months of 2005
        
2,037
  
               
Balance, end of year
        
$
26,923
  
 
(1)
On March 31, 2006, the reserve for unfunded commitments was reclassified from the allowance for loan losses to other liabilities.

NOTE 4: 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 September 30, 2006 and December 31, 2005, were as follows:
 
   
September 30,
 
December 31,
 
(In thousands)
 
2006
 
2005
  
           
Gross carrying amount
  
$
7,246
  
$
7,246
  
Accumulated amortization
    
(2,840
)
  
(2,217
)
               
Net core deposit premiums
  
$
4,406
  
$
5,029
  
 
12
 
Core deposit premium amortization expense recorded for the nine months ended September 30, 2006 and 2005, was $623,000 and $622,000, respectively. The Company’s estimated amortization expense for the remainder of 2006 is $207,000, and for each of the following four years is:
2007 – $818,000; 2008 – $807,000; 2009 – $802,000; and 2010 – $698,000.

NOTE 5: TIME DEPOSITS

Time deposits include approximately $436,022,000 and $364,177,000 of certificates of deposit of $100,000 or more at September 30, 2006 and December 31, 2005 respectively.

NOTE 6: INCOME TAXES

The provision for income taxes is comprised of the following components:
 
   
September 30,
 
September 30,
 
(In thousands)
 
2006
 
2005
  
           
Income taxes currently payable
  
$
10,148
  
$
10,671
  
Deferred income taxes
   
(864
)
  
(1,227
)
               
Provision for income taxes
  
$
9,284
  
$
9,444
  
 
The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:
 
 
 
September 30,
 
December 31,
 
(In thousands)
 
2006
 
2005
  
           
Deferred tax assets
          
Allowance for loan losses
  
$
8,655
  
$
8,329
  
Valuation of foreclosed assets
    
63
    
74
  
Deferred compensation payable
    
1,230
    
1,109
  
FHLB advances
    
64
    
97
  
Vacation compensation
    
757
    
727
  
Loan interest
    
140
    
241
  
Available-for-sale securities
    
1,691
    
2,615
  
Other
    
393
    
363
  
Total deferred tax assets
    
12,993
    
13,555
  
               
Deferred tax liabilities
              
Accumulated depreciation
   
(867
)
  
(1,128
)
Deferred loan fee income and expenses, net
    
(771
)
  
(657
)
FHLB stock dividends
    
(847
)
  
(740
)
Goodwill and core deposit premium amortization
    
(5,044
)
  
(3,852
)
Other
    
(880
)
  
(807
)
Total deferred tax liabilities
    
(8,409
)
  
(7,184
)
               
Net deferred tax assets included in other
              
assets on balance sheets
  
$
4,584
  
$
6,371
  
 
 
13

A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:
 
   
September 30,
 
September 30,
 
(In thousands)
 
2006
 
2005
  
           
Computed at the statutory rate (35%)
  
$
10,505
  
$
10,353
  
               
Increase (decrease) resulting from:
              
Tax exempt income
    
(1,389
)
  
(1,422
)
Other differences, net
    
168
    
513
  
               
Actual tax provision
  
$
9,284
  
$
9,444
  
 
NOTE 7: SHORT-TERM AND LONG-TERM DEBT

Long-term debt at September 30, 2006 and December 31, 2005, consisted of the following components:
 
   
September 30,
 
December 31,
 
(In thousands)
 
2006
 
2005
  
           
Note Payable, due 2007, at a floating rate of
          
0.90% above the one-month LIBOR rate, reset
          
monthly, unsecured
 
$
2,000
  
$
4,000
  
FHLB advances, due 2006 to 2024, 2.58% to 8.41%
            
secured by residential real estate loans
    
49,243
    
52,090
  
Trust preferred securities, due 2033,
             
fixed at 8.25%, callable in 2008 without penalty
    
10,310
    
10,310
  
Trust preferred securities, due 2033,
             
floating rate of 2.80% above the three-month LIBOR
             
rate, reset quarterly, callable in 2008 without penalty
    
10,310
    
10,310
  
Trust preferred securities, due 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
  
               
   
$
82,173
  
$
87,020
  
 
At September 30, 2006 the Company had Federal Home Loan Bank (“FHLB”) advances with original maturities of one year or less of $59.7 million with a weighted average rate of 5.30% 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.

14
 
Aggregate annual maturities of long-term debt at September 30, 2006 are:
 
   
 
  
Annual
  
(In thousands)
  
Year
  
Maturities
  
           
     
2006
  
$
3,244
  
     
2007
    
10,154
  
     
2008
    
12,939
  
     
2009
    
5,767
  
     
2010
   
2,446
  
   
Thereafter
    
47,623
  
               
   
Total
 
$
82,173
  
 
NOTE 8: CONTINGENT LIABILITIES

The Company and/or its subsidiaries have various unrelated legal proceedings, most of which involve loan foreclosure activity pending, which, in the aggregate, are not expected to have a material adverse effect on the financial position of the Company and its subsidiaries. The Company or its subsidiaries remain the subject of two (2) lawsuits asserting claims against the Company or its subsidiaries.

On October 1, 2003, an action in Pulaski County Circuit Court was filed by Thomas F. Carter, Tena P. Carter and certain related entities against Simmons First Bank of South Arkansas and Simmons First National Bank alleging wrongful conduct by the banks in the collection of certain loans. The plaintiffs are seeking $2,000,000 in compensatory damages and $10,000,000 in punitive damages. The Company has filed a Motion to Dismiss. The plaintiffs have been granted additional time to discover any evidence for litigation. At this time, no basis for any material liability has been identified. The Company and the banks plan to vigorously defend the claims asserted in the suit.

On April 3, 2006, an action in Johnson County Circuit Court was filed by Tria Xiong and Mai Lee Xiong against Simmons First Bank of Russellville and certain individuals alleging wrongful conduct by the bank in the underwriting and origination of certain loans. The plaintiffs are seeking an unspecified sum in compensatory damages and $1,000,000.00 in punitive damages. Discovery is in process, and the suit is pending, with no court date set. At this time, no basis for any material liability has been identified. The bank plans to vigorously defend the claims asserted in the suit.

On June 22, 2006, an action in Johnson County Circuit Court was filed by Wa Khue Moua and Maycha Moua against Simmons First Bank of Russellville alleging wrongful conduct by the bank in the underwriting and origination of certain loans. The plaintiffs were seeking $275,000.00 in compensatory damages and $500,000.00 in punitive damages. On October 6, 2006, an Order of Dismissal was signed in Johnson County Circuit Court dismissing the case without prejudice.
 
15

NOTE 9: CAPITAL STOCK

On May 25, 2004, the Company announced the adoption by the Board of Directors of a stock repurchase program. The program authorizes the repurchase of up to 5% of the then outstanding Common Stock, or 733,485 shares. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares the Company intends to repurchase. The Company may discontinue purchases at any time that management determines additional purchases are not warranted. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. The Company intends to use the repurchased shares to satisfy stock option exercises, payment of future stock dividends and general corporate purposes.

During the nine-month period ended September 30, 2006, the Company repurchased 188,900 shares of stock under the repurchase plan with a weighted average repurchase price of $27.54 per share. Under the current stock repurchase plan, the Company can repurchase an additional 355,167 shares.

NOTE 10: UNDIVIDED PROFITS

The Company’s subsidiary banks are subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. The approval of the Comptroller of the Currency is required, if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits, as defined, for that year combined with its retained net profits of the preceding two years. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of current year earnings plus 75% of the retained net earnings of the preceding year. At September 30, 2006, the bank subsidiaries had approximately $12 million available for payment of dividends to the Company, without prior approval of the regulatory agencies.

The Federal Reserve Board's risk-based capital guidelines include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. The criteria for a well-capitalized institution are: a 5% "Tier l leverage capital" ratio, a 6% "Tier 1 risk-based capital" ratio, and a 10% "total risk-based capital" ratio. As of September 30, 2006, each of the eight subsidiary banks met the capital standards for a well-capitalized institution. The Company's “total risk-based capital” ratio was 13.35% at September 30, 2006.

NOTE 11: STOCK BASED COMPENSATION

Prior to January 1, 2006, employee compensation expense under stock option plans was reported only if options were granted below market price at grant date in accordance with the intrinsic value method of Accounting Principles Board Opinion (APB) No.25, "Accounting for Stock Issued to Employees," and related interpretations. Because the exercise price of the Company's employee stock options always equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized on options granted. As stated in Note 1 - Significant Accounting Policies, the Company adopted the provisions of SFAS 123R on January 1, 2006. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant. The Company transitioned to fair-value based accounting for stock based compensation using a modified version of prospective application ("modified prospective application"). Under modified prospective application, as it is applicable to the Company, SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (generally referring to non-vested awards) that were outstanding as of January 1, 2006, will be recognized as the remaining requisite service is rendered during the period of and/or the periods after the adoption of SFAS 123R. The attribution of compensation cost for those earlier awards is based on the same method and on the same grant date fair values previously determined for the pro forma disclosures required for companies that did not previously adopt the fair value accounting method for stock-based employee compensation.

16
 
Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006, is based on the grant date fair value. For all awards except stock option awards, the grant date fair value is the market value per share as of the grant date. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company's employee stock options.

As a result of applying the provisions of SFAS 123R during the three and nine months ended September 30, 2006, the Company recognized additional stock-based compensation expense related to stock options of $18,773 and $69,112. The increase in stock-based compensation expense related to stock options during the three and nine months ended September 30, 2006, resulted in no change in basic or diluted earnings per share.

Stock-based compensation expense totaled $18,773 and $213,341 during the three and nine months ended September 30, 2006 and $0 and $116,691 during the three and nine months ended September 30, 2005. Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards. Unrecognized stock-based compensation expense related to stock options totaled $306,387 at September 30, 2006. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 2.11 years. Unrecognized stock-based compensation expense related to non-vested stock awards was $437,456 at September 30, 2006. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 2.48 years.

17

The following pro forma information presents net income and earnings per share for the three and nine months ended September 30, 2005, as if the fair value method of SFAS 123R had been applied.
 
   
Three Months Ended
  
Nine Months Ended
  
(In thousands, except per share data)
  
 September 30, 2005
  
 September 30, 2005
  
Net income, as reported
  
$
7,334
  
$
20,137
  
Add: Stock-based employee compensation included
              
in reported net income, net of related tax effects
    
--
    
73
  
Less: Total stock-based employee compensation
              
expense determined under fair value based method
              
for all awards, net of related tax effects
    
(65
)
  
(269
)
Pro forma net income
  
$
7,269
  
$
19,941
  
Earnings per share:
              
Basic - as reported
  
$
0.51
  
$
1.40
  
Basic - pro forma
  
$
0.51
  
$
1.39
  
               
Diluted - as reported
  
$
0.50
  
$
1.37
  
Diluted - pro forma
  
$
0.50
  
$
1.36
  
 
The Company’s Board of Directors has adopted various stock compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, and bonus stock awards. Pursuant to the plans, shares are reserved for future issuance by the Company, upon exercise of stock options or awarding of bonus shares granted to officers and other key employees.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses various assumptions. Expected volatility is based on historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Forfeitures are estimated at the time of grant, and are based partially on historical experience.

18


The table below summarizes the transactions under the Company's stock option plans for the nine months ended September 30, 2006:
 
   
 
 
Weighted
 
 
 
 
 
Average
 
 
 
 
 
Exercisable
 
(In thousands, except per share data)
 
Shares
 
Price
  
           
Outstanding, January 1, 2006
    
609
  
$
14.77
  
Granted
    
60
    
26.19
  
Forfeited/Expired
    
(27)
 
  
13.50
  
Exercised
   
(68)
 
  
14.68
  
               
Outstanding, September 30, 2006
    
574
  
$
16.03
  
               
Exercisable at September 30, 2006
    
509
  
$
14.79
  
 
Total intrinsic value of options exercised for the nine months ended September 30, 2006, was $913,682.

There were 59,700 options granted during the nine months ended September 30, 2006. The weighted-average fair value of options granted during the nine months ended September 30, 2006 was $5.01. The following weighted-average assumptions were used to estimate the fair value of options granted during the nine months ended September 30, 2006:
   
Expected dividend yield
2.67%
Expected stock price volatility
17.74%
Risk-free interest rate
4.84%
Expected life of options
5 - 10 Years
 
As of September 30, 2006, there was $743,343 of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.33 years.

NOTE 12: ADDITIONAL CASH FLOW INFORMATION
 
   
Nine Months Ended
 
 
 
September 30,
 
(In thousands)
 
2006
 
2005
  
           
Interest paid
  
$
43,552
  
$
29,019
  
Income taxes paid
  
$
9,865
  
$
9,732
  
 
19

NOTE 13: CERTAIN TRANSACTIONS

From time to time the Company and its subsidiaries have made loans and other extensions of credit to directors, officers, their associates and members of their immediate families. From time to time directors, officers and their associates and members of their immediate families have placed deposits with the Company’s subsidiary banks. Such loans, other extensions of credit and deposits were made in the ordinary course of business, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features.

NOTE 14: COMMITMENTS AND CREDIT RISK

The Company grants agri-business, commercial and residential loans to customers throughout Arkansas, along with credit card loans to customers throughout the United States. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

At September 30, 2006, the Company had outstanding commitments to extend credit aggregating approximately $214,882,000 and $443,950,000 for credit card commitments and other loan commitments, respectively. At December 31, 2005, the Company had outstanding commitments to extend credit aggregating approximately $194,614,000 and $429,442,000 for credit card commitments and other loan commitments, respectively.

Letters of credit are conditional commitments issued by the Company, to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $6,339,000 and $4,573,000 at September 30, 2006 and December 31, 2005, respectively, with terms ranging from 90 days to three years. At September 30, 2006 and December 31, 2005 the Company’s deferred revenue under standby letter of credit agreements is approximately $62,000 and $43,000, respectively.

20

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BKD, LLP
 
Certified Public Accountants
200 East Eleventh
Pine Bluff, Arkansas
 

Audit Committee, Board of Directors and Stockholders
Simmons First National Corporation
Pine Bluff, Arkansas

We have reviewed the accompanying consolidated balance sheet of SIMMONS FIRST NATIONAL CORPORATION as of September 30, 2006, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2006 and 2005, and the related consolidated statements of stockholders’ equity and cash flows for the nine-month periods ended September 30, 2006 and 2005. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2005, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein), and in our report dated February 15, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
  /s/ BKD, LLP
  BKD, LLP
 
Pine Bluff, Arkansas
November 6, 2006
 
21
 
Item 2.     Management’s Discussion and Analysis of Financial Condition
            and Results of Operations

OVERVIEW
 
Simmons First National Corporation recorded earnings of $7,447,000, or $0.51 diluted earnings per share for the third quarter of 2006, compared to earnings of $7,334,000, or $0.50 diluted earnings per share for same period in 2005. This represents a $113,000, or 1.5% increase in the third quarter 2006 earnings over 2005. From September 30, 2005 to September 30, 2006, quarterly diluted earnings per share increased by $0.01, or 2.0%. Annualized return on average assets and annualized return on average stockholders’ equity for the three-month period ended September 30, 2006, were 1.13% and 11.70%, compared to 1.15% and 12.05%, respectively, for the same period in 2005. The increase in earnings for the quarter over the same period last year is primarily attributable to an increase in non-interest income, a reduced provision for loan losses resulting from fewer credit card charge-offs, and a minimal increase in non-interest expense due to the Company’s emphasis on the budgeting process.

Earnings for the nine-month period ended September 30, 2006, were $20,731,000, or $1.43 per diluted share. These earnings reflect an increase of $594,000, or $0.06 per share, when compared to the nine-month period ended September 30, 2005, earnings of $20,137,000, or $1.37 per diluted share. Annualized return on average assets and annualized return on average stockholders’ equity for the nine-month period ended September 30, 2006, were 1.08% and 11.13%, compared to 1.08% and 11.29%, respectively, for the same period in 2005.

The non-performing assets ratio (the sum of non-performing loans and foreclosed assets divided by the sum of total loans and foreclosed assets) was 69 basis points and 58 basis points at September 30, 2006 and December 31, 2005, respectively. Non-performing loans to total loans were 61 basis points at the end of the quarter, compared to 49 basis points at December 31, 2005. The allowance for loan losses equaled 239% of non-performing loans as of September 30, 2006, compared to 319% as of year-end 2005. The allowance for loan losses as a percent of total loans equaled 1.45% and 1.57 % as of September 30, 2006 and December 31, 2005, respectively.

Annualized net charge-offs to total loans for the third quarter of 2006 were 20 basis points. Excluding credit cards, annualized net charge-offs to total loans were 13 basis points. The credit card annualized net charge-offs as a percent of the credit card portfolio were 1.10% for the quarter ended September 30, 2006, more than 300 basis points below the most recently published industry average of 4.23%. Credit card charge-offs increased during the fourth quarter of 2005 due to a new bankruptcy law that went into effect in October of 2005. While bankruptcy filings have declined significantly from the high levels of the fourth quarter of 2005, the Company does not expect the year-to-date results to be maintained during 2007. The Company anticipates credit card charge-offs will gradually return to the Company’s historical level of approximately 2.50%.

Total assets for the Company at September 30, 2006, were $2.657 billion, an increase of $133.2 million, or 5.3% from December 31, 2005. Stockholders’ equity at the end of the third quarter of 2006 was $254.6 million, a $10.5 million, or 4.3% increase from December 31, 2005.
 
22

Simmons First National Corporation is an Arkansas based financial holding company with eight community banks in Pine Bluff, Lake Village, Jonesboro, Rogers, Searcy, Russellville, El Dorado and Hot Springs, Arkansas. The Company's eight banks conduct financial operations from 84 offices, of which 81 are financial centers, located in 46 communities.

CRITICAL ACCOUNTING POLICIES

Overview

Management has reviewed its various accounting policies. Based on this review management believes the policies most critical to the Company are the policies associated with its lending practices including the accounting for the allowance for loan losses, treatment of goodwill, recognition of fee income, estimates of income taxes and employee benefit plans as it relates to stock options.

Loans

Loans which the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any loans charged-off, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated life of the loan. Generally, loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well secured and in the process of collection.

Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance is maintained at a level considered adequate to provide for potential loan losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan portfolio that have been incurred as of period end. This estimate is based on management's evaluation of the loan portfolio, as well as on prevailing and anticipated economic conditions and historical losses by loan category. General reserves have been established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances are accrued on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral. The unallocated reserve generally serves to compensate for the uncertainty in estimating loan losses, including the possibility of changes in risk ratings and specific reserve allocations in the loan portfolio as a result of the Company’s ongoing risk management system.
 
23

A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loan. This includes loans that are delinquent 90 days or more, nonaccrual loans and certain other loans identified by management. Certain other loans identified by management consist of performing loans with specific allocations of the allowance for loan losses. Specific allocations are applied when quantifiable factors are present requiring a greater allocation than that established using the classified asset approach, as defined by the Office of the Comptroller of the Currency. Accrual of interest is discontinued and interest accrued and unpaid is removed at the time such amounts are delinquent 90 days, unless management is aware of circumstances which warrant continuing the interest accrual. Interest is recognized for nonaccrual loans only upon receipt and only after all principal amounts are current according to the terms of the contract.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets of acquired subsidiaries and branches. Financial Accounting Standards Board Statement No. 142 and No. 147 eliminated the amortization for these assets as of January 1, 2002. While goodwill is not amortized, impairment testing of goodwill is performed annually, or more frequently if certain conditions occur. The Company did not record impairment of goodwill in 2006 or 2005.

Core Deposit Premiums

Core deposit premiums are being amortized using both straight-line and accelerated methods over periods ranging from 8 to 15 years. Such assets are periodically evaluated as to the recoverability of their carrying value.

Fee Income

Periodic credit card fees, net of direct origination costs, are recognized as revenue on a straight-line basis over the period the fee entitles the cardholder to use the card. Origination fees and costs for other loans are being amortized over the estimated life of the loan.

Income Taxes

Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

Employee Benefit Plans

The Company has a stock-based employee compensation plan. In December 2004, FASB issued SFAS No. 123, Share-Based Payment (Revised 2004), which requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. As discussed in Note 11 - Stock-Based Compensation in the accompanying condensed notes to consolidated financial statements included elsewhere in this report, the standard requires companies to expense the fair value of all stock options that have future vesting provisions, are modified, or are newly granted beginning on the grant date of such options. SFAS 123R became effective and was adopted by the Company on January 1, 2006.

24

NET INTEREST INCOME

Overview

Net interest income, the Company's principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 37.50%.

The Company’s practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing. Historically, approximately 70% of the Company’s loan portfolio and approximately 80% of the Company’s time deposits have repriced in one year or less. These historical percentages are consistent with the Company’s current interest rate sensitivity.

Net Interest Income Quarter-to-Date Analysis

For the three-month period ended September 30, 2006, net interest income on a fully taxable equivalent basis was $23.2 million, a decrease of $502,000, or 2.1%, from the same period in 2005. The decrease in net interest income was the result of a $5.3 million increase in interest income offset by a $5.8 million increase in interest expense.

The $5.3 million increase in interest income primarily is the result of a 75 basis point increase in yield on earning assets associated with the higher interest rate environment, as well as a $57 million increase in average interest earning assets due to internal growth and seasonal increases in the loan portfolio. The growth in average interest earning assets resulted in a $1.2 million improvement in interest income. The growth in average loans accounted for a $1.4 million increase, offset by lower average balances in other interest earning assets. The higher interest rates accounted for a $4.2 million increase in interest income. The most significant component of this increase was the $3.3 million increase associated with the repricing of the Company’s loan portfolio that resulted from loans that matured during the period or were tied to a rate that fluctuated with changes in market rates. Historically, approximately 70% of the Company’s loan portfolio reprices in one year or less. As a result, the average rate earned on the loan portfolio increased 75 basis points from 6.88% to 7.63%.

The $5.8 million increase in interest expense is the result of a 107 basis point increase in cost of funds due to competitive repricing during a higher interest rate environment, coupled with a $54.8 million increase in average interest bearing liabilities generated through internal growth. The higher level of average interest bearing liabilities resulted in a $510,000 increase in interest expense. More specifically, the higher level of average interest bearing liabilities was the result of an increase of approximately $89.4 million from internal deposit growth, offset by a reduction of $27.2 million in federal funds purchased and short-term debt, along with a $7.4 million reduction in average long-term debt due primarily to scheduled repayments of FHLB borrowings. The higher interest rates accounted for a $5.3 million increase in interest expense. The most significant component of this increase was the $3.4 million increase associated with the repricing of the Company’s time deposits that resulted from time deposits that matured during the period or were tied to a rate that fluctuated with changes in market rates. Historically, approximately 85% of the Company’s time deposits reprice in one year or less. As a result, the average rate paid on time deposits increased 128 basis points from 2.92% to 4.20%.

25
 
Net Interest Income Year-to-Date Analysis

For the nine-month period ended September 30, 2006, net interest income on a fully taxable equivalent basis was $68.9 million, a decrease of $986,000, or 1.4%, from the same period in 2005. The decrease in net interest income was the result of a $15.0 million increase in interest income offset by a $16.0 million increase in interest expense.

The $15.0 million increase in interest income primarily is the result of a 74 basis point increase in yield on earning assets associated with the higher interest rate environment, as well as a $50.3 million increase in average interest earning assets due to internal growth and seasonal increases in the loan portfolio. The growth in average interest earning assets resulted in a $3.7 million improvement in interest income. The growth in average loans accounted for a $5.1 million increase, offset by lower average balances in other interest earning assets. The higher interest rates accounted for an $11.4 million increase in interest income. The most significant component of this increase was the $8.8 million increase associated with the repricing of the Company’s loan portfolio that resulted from loans that matured during the period or were tied to a rate that fluctuated with changes in market rates. Historically, approximately 70% of the Company’s loan portfolio reprices in one year or less. As a result, the average rate paid on the loan portfolio increased 73 basis points from 6.70% to 7.43%.

The $16.0 million increase in interest expense is the result of a 103 basis point increase in cost of funds due to competitive repricing during a higher interest rate environment, coupled with a $48.7 million increase in average interest bearing liabilities generated through internal growth. The higher level of average interest bearing liabilities resulted in a $1.2 million increase in interest expense. More specifically, the higher level of average interest bearing liabilities was the result of an increase of approximately $64.3 million from internal deposit growth, offset by an $8.3 million reduction in average long-term debt due primarily to scheduled repayments of FHLB borrowings. The higher interest rates accounted for a $14.8 million increase in interest expense. The most significant component of this increase was the $9.5 million increase associated with the repricing of the Company’s time deposits that resulted from time deposits that matured during the period or were tied to a rate that fluctuated with changes in market rates. Historically, approximately 80% of the Company’s time deposits reprice in one year or less. As a result, the average rate paid on time deposits increased 126 basis points from 2.61% to 3.87%.

Net Interest Margin

The Company’s net interest margin decreased 19 basis points to 3.91% for the three-month period ended September 30, 2006, when compared to 4.10% for the same period in 2005. This decrease in the net interest margin was primarily due to the increase in the cost of funds resulting from deposit repricing, coupled with the effect of the inverted yield curve between short-term and long-term interest rates. The Company also completed a corporate-wide time deposit promotion during the quarter based on its projected liquidity needs for the balance of the year. The approximately $43 million of new deposits from this promotion, along with the transfer of funds to these accounts by existing customers, caused some additional margin compression. The Company expects to see continuing competitive pressure in deposit repricing in the short term, and anticipates flat to slight margin compression for the fourth quarter of 2006.
 
26


Net Interest Income Tables

Table 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three-month and nine-month periods ended September 30, 2006 and 2005, respectively, as well as changes in fully taxable equivalent net interest margin for the three-month and nine-month periods ended September 30, 2006 versus September 30, 2005.

Table 1: Analysis of Net Interest Income
(FTE =Fully Taxable Equivalent)
 
   
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
(In thousands)
 
2006
 
2005
 
2006
 
2005
  
                   
Interest income
  
$
39,816
  
$
34,492
  
$
112,600
  
$
97,515
  
FTE adjustment
    
796
    
803
    
2,380
    
2,445
  
                           
Interest income - FTE
    
40,612
    
35,295
    
114,980
    
99,960
  
Interest expense
    
17,439
    
11,620
    
46,079
    
30,073
  
                           
Net interest income - FTE
  
$
23,173
  
$
23,675
  
$
68,901
  
$
69,887
  
                           
Yield on earning assets - FTE
    
6.86
%
  
6.11
%
  
6.66
%
  
5.90
%
Cost of interest bearing liabilities
    
3.41
%
  
2.34
%
  
3.11
%
  
2.08
%
Net interest spread - FTE
    
3.45
%
  
3.77
%
  
3.55
%
  
3.84
%
Net interest margin - FTE
    
3.91
%
  
4.10
%
  
3.99
%
  
4.14
%
 
Table 2: Changes in Fully Taxable Equivalent Net Interest Margin
 
   
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
(In thousands)
 
2006 vs. 2005
 
2006 vs. 2005
 
           
Increase due to change in earning assets
  
$
1,159
  
$
3,651
  
Increase due to change in earning asset yields
    
4,160
    
11,368
  
Decrease due to change in interest
              
bearing liabilities
    
(510
)
  
(1,204
)
Decrease due to change in interest rates
              
paid on interest bearing liabilities
    
(5,309
)
  
(14,801
)
Decrease in net interest income
  
$
(500
)
$
(986
)
 
27

Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three-month and nine-month periods ended September 30, 2006 and 2005. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

Table 3: Average Balance Sheets and Net Interest Income Analysis
 
   
Three Months Ended September 30,
 
 
 
2006
 
2005
 
 
 
Average
 
Income/
 
Yield/
 
Average
 
Income/
 
Yield/
 
($ in thousands)
 
Balance
 
Expense
 
Rate(%)
 
Balance
 
Expense
 
Rate(%)
  
ASSETS
                          
Earning Assets
                          
Interest bearing balances
                          
due from banks
  
$
16,851
  
$
229
    
5.39
  
$
16,384
  
$
119
    
2.88
  
Federal funds sold
    
22,966
    
325
    
5.61
    
29,375
    
262
    
3.54
  
Investment securities - taxable
    
410,542
    
4,005
    
3.87
    
419,204
    
3,503
    
3.32
  
Investment securities - non-taxable
    
117,224
    
1,885
    
6.38
    
122,030
    
1,904
    
6.19
  
Mortgage loans held for sale
    
8,368
    
141
    
6.69
    
11,395
    
168
    
5.85
  
Assets held in trading accounts
    
4,598
    
14
    
1.21
    
4,711
    
25
    
2.11
  
Loans
   
1,769,131
    
34,013
    
7.63
    
1,689,883
    
29,314
    
6.88
  
Total interest earning assets
    
2,349,680
    
40,612
    
6.86
    
2,292,982
    
35,295
    
6.11
  
Non-earning assets
    
254,517
                
241,732
              
Total assets
  
$
2,604,197
              
$
2,534,714
              
                                       
LIABILITIES AND
                                      
STOCKHOLDERS’ EQUITY
                                      
Liabilities
                                      
Interest bearing liabilities
                                      
Interest bearing transaction
                                      
and savings accounts
  
$
722,920
  
$
3,023
    
1.66
  
$
751,877
  
$
2,015
    
1.06
  
Time deposits
    
1,074,875
    
11,381
    
4.20
    
956,558
    
7,031
    
2.92
  
Total interest bearing deposits
    
1,797,795
    
14,404
    
3.18
    
1,708,435
    
9,046
    
2.10
  
Federal funds purchased and
                                      
securities sold under agreement
                                      
to repurchase
    
93,670
    
1,152
    
4.88
    
92,508
    
815
    
3.50
  
Other borrowed funds
                
 
                    
Short-term debt
    
54,120
    
761
    
5.58
    
82,463
    
646
    
3.11
  
Long-term debt
    
80,825
    
1,122
    
5.51
    
88,242
    
1,113
    
5.00
  
Total interest bearing liabilities
    
2,026,410
    
17,439
    
3.41
    
1,971,648
    
11,620
    
2.34
  
Non-interest bearing liabilities
                
 
                    
Non-interest bearing deposits
    
302,490
                
303,387
              
Other liabilities
    
22,804
                
18,120
              
Total liabilities
    
2,351,704
                
2,293,155
              
Stockholders’ equity
    
252,493
                
241,559
              
Total liabilities and
                                     
stockholders’ equity
  
$
2,604,197
              
$
2,534,714
              
Net interest spread
                
3.45
                
3.77
  
Net interest margin
        
$
23,173
    
3.91
        
$
23,675
    
4.10
  
 
28
 
   
Nine Months Ended September 30,
  
   
2006
  
2005
  
   
Average
 
Income/
 
Yield/
 
Average
 
Income/
 
Yield/
 
(In thousands)
 
Balance
 
Expense
 
Rate(%)
 
Balance
 
Expense
 
Rate(%)
  
                           
ASSETS
                          
Earning Assets
                          
Interest bearing balances
                          
due from banks
  
$
22,209
  
$
785
    
4.73
  
$
22,324
  
$
418
    
2.49
  
Federal funds sold
    
18,471
    
692
    
5.01
    
38,768
    
863
    
2.97
  
Investment securities - taxable
    
410,500
    
11,457
    
3.73
    
429,258
    
10,316
    
3.20
  
Investment securities - non-taxable
    
117,566
    
5,654
    
6.43
    
122,857
    
5,801
    
6.29
  
Mortgage loans held for sale
    
7,794
    
369
    
6.33
    
9,794
    
421
    
5.73
  
Assets held in trading accounts
    
4,602
    
58
    
1.69
    
4,549
    
74
    
2.17
  
Loans
   
1,727,725
    
95,965
    
7.43
    
1,630,995
    
82,067
    
6.70
  
Total interest earning assets
    
2,308,867
    
114,980
    
6.66
    
2,258,545
    
99,960
    
5.90
  
Non-earning assets
    
249,069
    
         
226,599
              
Total assets
  
$
2,557,936
              
$
2,485,144
              
                                       
LIABILITIES AND
                                      
STOCKHOLDERS’ EQUITY
                                      
Liabilities
                                      
Interest bearing liabilities
                                      
Interest bearing transaction
                                      
and savings accounts
  
$
740,321
  
$
8,476
    
1.53
  
$
767,160
  
$
5,508
    
0.96
  
Time deposits
    
1,030,591
    
29,837
    
3.87
    
939,464
    
18,381
    
2.61
  
Total interest bearing deposits
    
1,770,912
    
38,313
    
2.89
    
1,706,624
    
23,889
    
1.86
  
Federal funds purchased and
                                  
 
  
securities sold under agreement
                                      
to repurchase
    
99,613
    
3,320
    
4.46
    
99,673
    
2,088
    
2.79
  
Other borrowed funds
                                      
Short-term debt
    
25,400
    
1,082
    
5.70
    
32,629
    
790
    
3.23
  
Long-term debt
    
82,570
    
3,364
    
5.45
    
90,865
    
3,306
    
4.85
  
Total interest bearing liabilities
    
1,978,495
    
46,079
    
3.11
    
1,929,791
    
30,073
    
2.08
  
Non-interest bearing liabilities
                                      
Non-interest bearing deposits
    
309,873
                
300,430
              
Other liabilities
    
20,451
                
16,380
              
Total liabilities
    
2,308,819
                
2,246,601
              
Stockholders’ equity
    
249,117
                
238,543
              
Total liabilities and
                                     
stockholders’ equity
  
$
2,557,936
              
$
2,485,144
              
Net interest spread
                
3.55
                
3.84
  
Net interest margin
        
$
68,901
    
3.99
        
$
69,887
    
4.14
  
 
29
 
Table 4 shows changes in interest income and interest expense, resulting from changes in volume and changes in interest rates for the three-month and nine-month periods ended September 30, 2006, as compared to the same periods of the prior year. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

Table 4: Volume/Rate Analysis
 
   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2006 over 2005
 
2006 over 2005
  
(In thousands, on a fully
 
 
 
Yield/
 
 
 
 
 
Yield/
 
 
 
taxable equivalent basis)
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
  
                           
Increase (decrease) in
                          
                           
Interest income
                          
Interest bearing balances
                          
due from banks
  
$
3
  
$
107
  
$
110
  
$
(2
)
$
369
  
$
367
  
Federal funds sold
    
(66
)
  
129
    
63
    
(586
)
  
414
    
(172
)
Investment securities - taxable
    
(73
)
  
577
    
504
    
(467
)
  
1,609
    
1,142
  
Investment securities - non-taxable
    
(76
)
  
57
    
(19
)
  
(254
)
  
106
    
(148
)
Mortgage loans held for sale
    
(48
)
  
22
    
(26
)
  
(91
)
  
40
    
(51
)
Assets held in trading accounts
    
(1
)
  
(11
)
  
(12
)
  
--
    
(17
)
  
(17
)
Loans
    
1,420
    
3,279
    
4,699
    
5,051
    
8,847
    
13,898
  
                                       
Total
    
1,159
    
4,160
    
5,319
    
3,651
    
11,368
    
15,019
  
                                       
Interest expense
                                      
Interest bearing transaction and
                                      
savings accounts
    
(81
)
  
1,089
    
1,008
    
(199
)
  
3,166
    
2,967
  
Time deposits
    
954
    
3,396
    
4,350
    
1,927
    
9,528
    
11,455
  
Federal funds purchased
                                      
and securities sold under
                                      
agreements to repurchase
    
10
    
327
    
337
    
(1
)
  
1,233
    
1,232
  
Other borrowed funds
                                      
Short-term debt
    
(275
)
  
390
    
115
    
(205
)
  
498
    
293
  
Long-term debt
    
(98
)
  
107
    
9
    
(318
)
  
376
    
58
  
                                       
Total
    
510
    
5,309
    
5,819
    
1,204
    
14,801
    
16,005
  
Increase (decrease) in net
                                      
interest income
  
$
649
  
$
(1,149
)
$
(500
)
$
2,447
  
$
(3,433
)
$
(986
)
 
30

PROVISION FOR LOAN LOSSES

The provision for loan losses represents management's determination of the amount necessary to be charged against the current period's earnings, in order to maintain the allowance for loan losses at a level, which is considered adequate, in relation to the estimated risk inherent in the loan portfolio. The level of provision to the allowance is based on management's judgment, with consideration given to the composition, maturity and other qualitative characteristics of the portfolio, historical loan loss experience, assessment of current economic conditions, past due and non-performing loans and net loan loss experience. It is management's practice to review the allowance on a quarterly basis to determine the level of provision made to the allowance after considering the factors noted above.

The provision for loan losses for the three-month period ended September 30, 2006, was $0.6 million, compared to $1.7 million for the three-month period ended September 30, 2005, a reduction of $1.1 million. The provision for loan losses for the nine-month period ended September 30, 2006, was $3.1 million, compared to $5.9 million for the nine-month period ended September 30, 2005, a reduction of $2.8 million. These provision reductions were primarily driven by two factors.

First, credit card net charge-offs were down $542,000 and $1.8 million for the three-month and nine-month periods ended September 30, 2006, respectively, when compared to the same periods in 2005. Credit card net charge-offs as a percent of the credit card portfolio were 1.10% for the quarter ended September 30, 2006, compared to 2.59% for the same period in 2005. This positive trend of significant reduction in credit card charge-offs has continued throughout the year, as the Company has recorded credit card net charge-offs of 1.06% of credit card balances for the nine-months ended September 30, 2006, compared to 2.68% for the same period in 2006. Second, there was improvement in the credit quality of the loan portfolio, particularly one large credit relationship that was upgraded two levels from substandard to watch, based upon improved financial condition of the borrower, for which a specific reserve was no longer required. During the quarter ended September 30, 2006, additional loans were classified as non-performing based upon various criteria; however, there were no specific reserve allocations required for these loans. The provision for loan losses was reduced due to the continued significant reduction in credit card charge-offs and the improvement in credit quality of loans with specific reserves.
 
NON-INTEREST INCOME

Total non-interest income was $11.0 million for the three-month period ended September 30, 2006, compared to $10.7 million for the same period in 2005. For the nine-months ended September 30, 2006, non-interest income was $33.2 million compared to the $31.6 reported for the same period ended September 30, 2005. Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and credit card fees. Non-interest income also includes income on the sale of mortgage loans, investment banking income, premiums on sale of student loans, income from the increase in cash surrender values of bank owned life insurance, and gains (losses) from sales of securities.
 
31

Table 5 shows non-interest income for the three-month and nine-month periods ended September 30, 2006 and 2005, respectively, as well as changes in 2006 from 2005.
 
Table 5: Non-Interest Income
 
 
 
  
Three Months
Ended Sept 30,
    
2006
Change from
     
Nine Months
Ended Sept 30,
    
2006
Change from
  
 (In thousands)
    
2006
    
2005
    
2005
      
2006
    
2005
    
2005
  
                                                       
Trust income
  
$
1,435
  
$
1,430
  
$
5
    
0.35
%
  
$
4,095
  
$
4,164
  
$
(69
)
  
(1.66
)%
  
Service charges on
   
3,973
    
4,154
    
(181
)
  
(4.36
)
    
11,945
    
11,721
    
224
    
1.91
    
Other service charges and fees
    
596
    
472
    
124
    
26.27
      
1,846
    
1,511
    
335
    
22.17
    
Income on sale of mortgage loans, net of commissions
    
763
    
826
    
(63
)
  
(7.63
)
    
2,194
    
2,221
    
(27
)
  
(1.22
)
  
Income on investment banking, net of commissions
    
55
    
146
    
(91
)
  
(62.33
)
    
252
    
364
    
(112
)
  
(30.77
)
  
Credit card fees
    
2,755
    
2,619
    
136
    
5.19
      
7,912
    
7,543
    
369
    
4.89
    
Premiums on sale of student loans
    
413
    
295
    
118
    
40.00
      
1,808
    
1,572
    
236
    
15.01
    
Bank owned life insurance income
    
382
    
279
    
103
    
36.92
      
1,098
    
636
    
462
    
72.64
    
Other income
    
654
    
519
    
135
    
26.01
      
2,004
    
2,078
    
(74
)
  
(3.56
)
  
Gain (loss) on sale of securities, net of tax
    
--
    
--
    
--
            
--
    
(168
)
  
168
    
(100.00
)%
  
Total non-interest income
  
$
11,026
  
$
10,740
  
$
286
    
2.66
%
  
$
33,154
  
$
31,642
  
$
1,512
    
4.78
%
  
 
Recurring fee income for the three-month period ended September 30, 2006, was $8.8 million, an increase of $84,000, or 1.0% from the three-month period ended September 30, 2005. Other service charges and fees increased by $124,000, primarily due to an increase in ATM income, based on increased volume and an improvement in the fee structure. Service charges on deposit accounts decreased by $181,000 due to reduced income on insufficient funds charges. Recurring fee income for the nine-month period ended September 30, 2006, was $25.8 million, an increase of $859,000, or 3.4% from the nine-month period ended September 30, 2005. Other service charges and fees increased by $335,000, primarily due to an increase in ATM income, based on increased volume and an improvement in the fee structure.

On April 29, 2005, the Company invested an additional $25 million in Bank Owned Life Insurance (“BOLI”). BOLI income increased by $103,000 for the three-months ended September 30, 2006, compared to the same period in 2005, due primarily to an improved earnings credit on the investment. BOLI income increased by $462,000 for the nine-months ended September 30, 2006, compared to the same period in 2005. Approximately $315,000 of this increase can be attributed to an improved earnings credit on the investment, while the remainder of the increase relates to the acquisition timing of the investment.

Other non-interest income for the nine-months ended September 30, 2006, was $2.0 million, a decrease of $74,000 over the nine-months ended September 30, 2005. The decrease primarily resulted from a one-time distribution of approximately $250,000 the Company received in the first quarter of 2005 as part of the proceeds when Pulse EFT, a regional ATM switching network used by the Company, merged with Discover Financial Services.
 
32
 
There were no gains or losses on sale of securities during the three and nine-months ended September 30, 2006. During the quarter ended June 30, 2005, the Company sold certain investment securities obtained in a prior acquisition that did not fit its current investment portfolio strategy. As a result of this liquidation, the Company recognized an after-tax loss on sale of securities of $168,000 for the nine-months ended September 30, 2005.

NON-INTEREST EXPENSE
 
Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for the operation of the Company. Management remains committed to controlling the level of non-interest expense, through the continued use of expense control measures that have been installed. The Company utilizes an extensive profit planning and reporting system involving all affiliates. Based on a needs assessment of the business plan for the upcoming year, monthly and annual profit plans are developed, including manpower and capital expenditure budgets. These profit plans are subject to extensive initial reviews and monitored by management on a monthly basis. Variances from the plan are reviewed monthly and, when required, management takes corrective action intended to ensure financial goals are met. Management also regularly monitors staffing levels at each affiliate, to ensure productivity and overhead are in line with existing workload requirements.

Non-interest expense for the three-month and nine-month periods ended September 30, 2006, was $22.1 million and $66.6 million, an increase of $0.9 million, or 4.3% and $3.0 million, or 4.65%, respectively, from the same periods in 2005. These increases are primarily the result of an increase in normal ongoing operating expenses and the additional expense associated with the operation of seven new financial centers opened since the second quarter of 2005. The new locations accounted for approximately $321,000 and $1,172,000 of the non-interest expense increase during the three-month and nine-month periods ended September 30, 2006, respectively. Normalizing for the expansion expenses, non-interest expense increased by 2.8% for both the three-months and nine-months ended September 30, 2006, over the same periods of 2005.

Credit card expense increased for the three-month and nine-month periods ended September 30, 2006 and 2005 by $108,000, or 14.6%, and $329,000, or 16.4%, respectively. As a result of previously reported initiatives, the Company converted approximately 15,000 accounts to its Platinum rewards card. The conversion process resulted in increased expense for the rewards program in 2006.
 
33
 
Table 6 below shows non-interest expense for the three-month and nine-month periods ended September 30, 2006 and 2005, respectively, as well as changes in 2006 from 2005.

Table 6: Non-Interest Expense

     
Three Months
Ended Sept 30
    
2006
Change from
      
Nine Months
Ended Sept 30
    
2006
Change from
    
(In thousands)    
 2006
    
2005
    
2005
      
2006
    
2005
    
2005
    
                                                       
Salaries and employee benefits
  
$
13,298
  
$
12,703
  
$
595
    
4.68
%
  
$
40,269
  
$
38,231
  
$
2,038
    
5.33
%
  
Occupancy expense, net
    
1,612
    
1,483
    
129
    
8.70
      
4,673
    
4,314
    
359
    
8.32
    
Furniture and equipment expense
    
1,407
    
1,421
    
(14
)
  
(0.99
)
    
4,281
    
4,277
    
4
    
0.09
    
Loss on foreclosed assets
    
32
    
57
    
(25
)
  
(43.86
)
    
105
    
160
    
(55
)
  
(34.38
)
  
Other operating expenses
                                                      
Professional services
    
469
    
512
    
(43
)
  
(8.40
)
    
1,770
    
1,655
    
115
    
6.95
    
Postage
    
555
    
555
    
--
            
1,691
    
1,693
    
(2
)
  
(0.12
)
  
Telephone
    
492
    
442
    
50
    
11.31
      
1,471
    
1,328
    
143
    
10.77
    
Credit card expenses
    
849
    
741
    
108
    
14.57
      
2,332
    
2,003
    
329
    
16.43
    
Operating supplies
    
390
    
399
    
(9
)
  
(2.26
)
    
1,205
    
1,190
    
15
    
1.26
    
FDIC insurance
    
64
    
72
    
(8
)
  
(11.11
)
    
204
    
214
    
(10
)
  
(4.67
)
  
Amortization of intangibles
    
207
    
207
    
--
            
623
    
622
    
1
    
0.16
    
Other expense
    
2,760
    
2,634
    
126
    
4.78
      
7,937
    
7,921
    
16
    
0.20
    
Total non-interest expense
  
$
22,135
  
$
21,226
  
$
909
    
4.28
%
  
$
66,561
  
$
63,608
  
$
2,953
    
4.64
%
  
 
LOAN PORTFOLIO

The Company's loan portfolio averaged $1.726 billion and $1.631 billion during the first nine months of 2006 and 2005, respectively. As of September 30, 2006, total loans were $1.789 billion, an increase of $70.4 million from December 31, 2005. The most significant components of the loan portfolio were loans to businesses (commercial loans, commercial real estate loans and agricultural loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans).

The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral, obtaining and monitoring collateral, providing an adequate allowance for loan losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry and, in the case of credit card loans, which are unsecured, by geographic region. The Company seeks to use diversification within the loan portfolio to reduce credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. The Company uses the allowance for loan losses as a method to value the loan portfolio at its estimated collectible amount. Loans are regularly reviewed to facilitate the identification and monitoring of deteriorating credits.

Consumer loans consist of credit card loans, student loans and other consumer loans. Consumer loans were $366.5 million at September 30, 2006, or 20.5% of total loans, compared to $370.9 million, or 21.6% of total loans at December 31, 2005. The consumer loan decrease from December 31, 2005 to September 30, 2006 is the result of the decline in the Company’s credit card portfolio, along with a seasonal decline in student loans, partially offset by an increase in other consumer loans.
 
34
 
As a general rule, the Company’s credit card portfolio experiences seasonal fluctuations, reaching its highest level during the fourth quarter and dropping off with paydowns to its lowest level during the first quarter. Even so, the Company continues to experience significant competitive pressure from the credit card industry. Over the last three years, the credit card portfolio has decreased by approximately $10 to $12 million each year, primarily due to closed accounts. However, during the second and third quarters of 2006, the Company experienced some slow-down in this trend. When compared to September 30, 2005, outstanding balances decreased by only $4.5 million. Also, the balance of the credit card portfolio has increased each of the past two quarters. When compared to March 31, 2006, the portfolio increased $3.8 million, the first March 31 to September 30 increase since 2001.

In order to reverse the negative trend of closed accounts within the credit card portfolio, the Company previously introduced several initiatives to make the product more competitive. Management believes these initiatives resulted in a slowing of the number of accounts closed. As a continuation of its efforts to stabilize the credit card portfolio, at the end of July the Company introduced a new initiative to increase new accounts. This initiative is a 7.25% fixed rate card with no fees and no rewards, and, to management’s knowledge, is one of the lowest fixed rate cards in America. Since introducing the new initiatives, the Company has experienced a positive net growth in credit card accounts.

Real estate loans consist of construction loans, single-family residential loans and commercial real estate loans. Real estate loans were $1.127 billion at September 30, 2006, or 63.0% of total loans, compared to the $1.059 billion, or 61.7% of total loans at December 31, 2005. Construction loans increased $28.7 million, while single-family residential loans increased by $23.8 million from December 31, 2005 to September 30, 2006. These increases are primarily due to increased loan demand in various growth areas of Arkansas.

Commercial loans consist of commercial loans, agricultural loans and loans to financial institutions. Commercial loans were $279.5 million at September 30, 2006, or 15.6% of total loans, compared to $274.2 million, or 16.0% of total loans at December 31, 2005. The commercial loan increase is primarily due to seasonal increases in agricultural loans. This increase was partially offset by a $19.9 million decrease in loans to financial institutions due primarily to the early payoff by one borrower.
 
35
 
The amounts of loans outstanding at the indicated dates are reflected in Table 7, according to type of loan.

Table 7: Loan Portfolio
(In thousands)     
September 30,
2006
    
December 31,
2005
  
Consumer              
Credit cards
  
$
133,607
  
$
143,058
  
Student loans
    
86,875
    
89,818
  
Other consumer
    
146,039
    
138,051
  
Real Estate
              
Construction
    
267,600
    
238,898
  
Single family residential
    
364,657
    
340,839
  
Other commercial
    
494,514
    
479,684
  
Commercial
              
Commercial
    
175,576
    
184,920
  
Agricultural
    
103,301
    
68,761
  
Financial institutions
    
576
    
20,499
  
Other
    
15,772
    
13,579
  
Total loans before allowance for loan losses
  
$
1,788,517
  
$
1,718,107
  
 
ASSET QUALITY

A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contracted terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and nonaccrual loans) and certain other loans identified by management that are still performing.

Non-performing loans are comprised of (a) nonaccrual loans, (b) loans that are contractually past due 90 days and (c) other loans for which terms have been restructured to provide a reduction or deferral of interest or principal, because of deterioration in the financial position of the borrower. The subsidiary banks recognize income principally on the accrual basis of accounting. When loans are classified as nonaccrual, generally, the accrued interest is charged off and no further interest is accrued. Loans, excluding credit card loans, are placed on a nonaccrual basis either: (1) when there are serious doubts regarding the collectability of principal or interest, or (2) when payment of interest or principal is 90 days or more past due and either (i) not fully secured or (ii) not in the process of collection. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for loan losses.

Credit card loans are classified as impaired when payment of interest or principal is 90 days past due. Litigation accounts are placed on nonaccrual until such time as deemed uncollectible. Credit card loans are generally charged off when payment of interest or principal exceeds 180 days past due, but are turned over to the credit card recovery department, to be pursued until such time as they are determined, on a case-by-case basis, to be uncollectible.

At September 30, 2006, impaired loans were $12.0 million compared to $14.8 million at December 31, 2005.
 
36
 
Table 8 presents information concerning non-performing assets, including nonaccrual and other real estate owned.

Table 8: Non-performing Assets

   
September 30,
  
December 31,
  
($ in thousands)
  
2006
  
2005
  
           
Nonaccrual loans
  
$
9,817
  
$
7,296
  
Loans past due 90 days or more (principal or interest payments)
     1,029     1,131  
Total non-performing loans
    
10,846
    
8,427
  
               
Other non-performing assets
              
Foreclosed assets held for sale
    
1,413
    
1,540
  
Other non-performing assets
    
16
    
16
  
Total other non-performing assets
    
1,429
    
1,556
  
               
Total non-performing assets
  
$
12,275
  
$
9,983
  
               
Allowance for loan losses to non-performing loans
    
238.60
%
  
319.48
%
Non-performing loans to total loans
    
0.61
%
  
0.49
%
Non-performing assets to total assets
    
0.46
%
  
0.40
%
Non-performing assets ratio(1)
    
0.69
%
  
0.58
%
(1) (Non-performing loans + foreclosed assets) / (total loans + foreclosed assets)
              
 
There was no interest income on the nonaccrual loans recorded for the nine-month periods ended September 30, 2006 and 2005.

ALLOWANCE FOR LOAN LOSSES
 
Overview
 
The Company maintains an allowance for loan losses. This allowance is created through charges to income and maintained at a sufficient level to absorb expected losses in the Company’s loan portfolio. The allowance for loan losses is determined monthly based on management’s assessment of several factors such as 1) historical loss experience based on volumes and types, 2) reviews or evaluations of the loan portfolio and allowance for loan losses, 3) trends in volume, maturity and composition, 4) off balance sheet credit risk, 5) volume and trends in delinquencies and non-accruals, 6) lending policies and procedures including those for loan losses, collections and recoveries, 7) national and local economic trends and conditions, 8) concentrations of credit that might affect loss experience across one or more components of the loan portfolio, 9) the experience, ability and depth of lending management and staff and 10) other factors and trends, which will affect specific loans and categories of loans.

As the Company evaluates the allowance for loan losses, it is categorized as follows: 1) specific allocations, 2) allocations for classified assets with no specific allocation, 3) general allocations for each major loan category and 4) unallocated portion.
 
37
 
Specific Allocations

Specific allocations are made when factors are present requiring a greater reserve than would be required when using the assigned risk rating allocation. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. The evaluation process in specific allocations for the Company includes a review of appraisals or other collateral analysis. These values are compared to the remaining outstanding principal balance. If a loss is determined to be reasonably possible, the possible loss is identified as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the expected future cash flows of the loan.

Allocations for Classified Assets with no Specific Allocation

The Company establishes allocations for loans rated “watch” through “doubtful” in accordance with the guidelines established by the regulatory agencies. A percentage rate is applied to each category of these loan categories to determine the level of dollar allocation.

General Allocations

The Company establishes general allocations for each major loan category. This section also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans. The allocations in this section are based on a historical review of loan loss experience and past due accounts. The Company gives consideration to trends, changes in loan mix, delinquencies, prior losses, and other related information.

Unallocated Portion

Allowance allocations other than specific, classified and general for the Company are included in unallocated.

Reserve for Unfunded Commitments

Historically, the Company has included reserves for unfunded commitments in the allowance for loan losses. On March 31, 2006, the reserve for unfunded commitments was reclassified from the allowance for loan losses to other liabilities. This reserve will be maintained at a level sufficient to absorb losses arising from unfunded loan commitments. The adequacy of the reserve for unfunded commitments is determined monthly based on methodology similar to the Company’s methodology for determining the allowance for loan losses. Future net adjustments to the reserve for unfunded commitments will be included in other non-interest expense.
 
38
 
An analysis of the allowance for loan losses is shown in Table 9.

Table 9: Allowance for Loan Losses

(In thousands)
  
2006
  
2005
  
           
Balance, beginning of year
  
$
26,923
  
$
26,508
  
               
Loans charged off
              
Credit card
    
1,854
    
3,495
  
Other consumer
    
847
    
941
  
Real estate
    
1,075
    
786
  
Commercial
     1,108     3,157  
Total loans charged off
    
4,884
    
8,379
  
               
Recoveries of loans previously charged off
              
Credit card
    
798
    
640
  
Other consumer
    
456
    
505
  
Real estate
    
498
    
205
  
Commercial
     514     1,955  
Total recoveries
    
2,266
    
3,305
  
Net loans charged off
    
2,618
    
5,074
  
 
              
Reclassification of reserve related to unfunded commitments(1)
    
(1,525
)
  
--
  
Provision for loan losses
    
3,099
    
5,895
  
Balance, September 30
  
$
25,879
  
$
27,329
  
               
Loans charged off
              
Credit card
          
1,455
  
Other consumer
          
299
  
Real estate
          
262
  
Commercial
          
531
  
Total loans charged off
          
2,547
  
               
Recoveries of loans previously charged off
              
Credit card
          
192
  
Other consumer
           131  
Real Estate
           46  
Commercial
          
141
  
Total recoveries
          
510
  
Net loans charged off
          
2,037
  
Provision for loan losses
          
1,631
  
               
Balance, end of year
        
$
26,923
  
   
(1) On March 31, 2006, the reserve for unfunded commitments was reclassified from the allowance for loan losses to other liabilities.
              
 
39
 
Provision for Loan Losses

The amount of provision to the allowance during the nine-month periods ended September 30, 2006 and 2005, and for the year ended December 31, 2005, was based on management's judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic conditions, past due and non-performing loans and net loan loss experience. It is management's practice to review the allowance on at least a quarterly basis, but generally on a monthly basis, to determine the level of provision made to the allowance after considering the factors noted above.

Allocated Allowance for Loan Losses

The Company utilizes a consistent methodology in the calculation and application of its allowance for loan losses. Because there are portions of the portfolio that have not matured to the degree necessary to obtain reliable loss statistics from which to calculate estimated losses, the unallocated portion of the allowance is an integral component of the total allowance. Although unassigned to a particular credit relationship or product segment, this portion of the allowance is vital to safeguard against the imprecision inherent when estimating credit losses.

Several factors in the national economy, including seventeen successive interest-rate increases by the Federal Reserve from June 2004 through June 2006, the effect of fuel prices on the commercial and consumer market, and certain loan sectors which may be exhibiting weaknesses, further justifies the need for unallocated reserves.

The Company’s unallocated portion of the allowance increased approximately $1.7 million during the nine-months ended September 30, 2006, offset by a $2.5 million decrease the allocation for commercial loans. The increase in unallocated is primarily due to the credit quality upgrade of several significant commercial loan customers.

The Company still has some concerns over the uncertainty of the economy and the impact of pricing in the catfish, poultry and timber industries in Arkansas. Based on our analysis of loans within these business sectors, the Company believes the allowance for loan losses is adequate for the period ended September 30, 2006. Management actively monitors the status of these industries as they relate to the Company’s loan portfolio and makes changes to the allowance for loan losses as necessary.
 
40
 
An analysis of the allocation of allowance for loan losses is presented in Table 10.

Table 10: Allocation of Allowance for Loan Losses
 
   
September 30, 2006
  
December 31, 2005
  
   
Allowance
  
% of
  
Allowance
  
% of
  
($ in thousands)
  
Amount
  
loans(1)
  
Amount
  
loans(1)
  
                   
Credit cards
  
$
3,692
    
7.50%
 
$
3,887
    
8.30%
 
Other consumer
    
1,282
    
13.00%
 
  
1,158
    
13.30%
 
Real estate
    
9,668
    
63.00%
 
  
9,870
    
61.70%
 
Commercial
    
3,350
    
15.60%
 
  
5,857
    
15.90%
 
Other
    
--
    
0.90%
 
  
--
    
0.80%
 
Unallocated
    
7,887
    
 
    
6,151
    
 
  
                           
Total
  
$
25,879
    
100.00%
 
$
26,923
    
100.00%
 
   
(1) Percentage of loans in each category to total loans
                          
 
DEPOSITS

Deposits are the Company’s primary source of funding for earning assets and are primarily developed through the Company’s network of 81 financial centers as of September 30, 2006. The Company offers a variety of products designed to attract and retain customers with a continuing focus on developing core deposits. The Company’s core deposits consist of all deposits excluding time deposits of $100,000 or more and brokered deposits. As of September 30, 2006, core deposits comprised 79.7% of the Company’s total deposits.

The Company continually monitors the funding requirements at each affiliate bank along with competitive interest rates in the markets it serves. Because the Company has a community banking philosophy, managers in the local markets establish the interest rates being offered on both core and non-core deposits. This approach ensures that the interest rates being paid are competitively priced for each particular deposit product and structured to meet each affiliate bank’s respective funding requirements. The Company believes it is paying a competitive rate, when compared with pricing in those markets. As a result, year-to-date internal deposit growth was $88.0 million. More specifically, total deposits as of September 30, 2006, were $2.148 billion versus $2.060 billion on December 31, 2005.

The Company manages its interest expense through deposit pricing and does not anticipate a significant change in total deposits. The Company believes that additional funds can be attracted and deposit growth can be accelerated through promotion and deposit pricing if it experiences accelerated loan demand or other liquidity needs beyond its current projections. During the third quarter of 2006, the Company generated approximately $43 million of new deposits with a corporate-wide time deposit promotion based on its projected liquidity needs for the balance of the year. The Company began to utilize brokered deposits during 2005 as an additional source of funding to meet liquidity needs.

Total time deposits increased approximately $43.0 million as a result of the deposit promotion and $78.1 million through internal deposit growth, to $1.100 billion at September 30, 2006, from $978.9 million at December 31, 2005. Non-interest bearing transaction accounts decreased $28.4 million to $302.7 million at September 30, 2006, compared to $331.1 million at December 31, 2005. Interest bearing transaction and savings accounts were $745.6 million at September 30, 2006, a $4.4 million decrease compared to $750.0 million on December 31, 2005. The Company had $42.8 million and $50.7 million of brokered deposits at September 30, 2006 and December 31, 2005, respectively.
 
41
 
LONG-TERM DEBT

During the nine month period ended September 30, 2006, the Company decreased long-term debt by $4.8 million, or 5.6% from December 31, 2005. This decrease is primarily attributable to the Company’s annual $2.0 million payment on its note payable along with scheduled principal pay downs on FHLB long-term advances.

CAPITAL

Overview
 
At September 30, 2006, total capital reached $254.6 million. Capital represents shareholder ownership in the Company - the book value of assets in excess of liabilities. At September 30, 2006, the Company’s equity to asset ratio was 9.58% compared to 9.67% at year-end 2005.

Capital Stock

At the Company’s annual shareholder meeting held on March 30, 2004, the shareholders approved an amendment to the Articles of Incorporation reducing the par value of the Class A Common Stock from $1.00 to $0.01 and eliminating the authority of the Company to issue Class B common stock, Class A Preferred Stock and Class B Preferred Stock.

Stock Repurchase

On May 25, 2004, the Company announced the adoption by the Board of Directors of a stock repurchase program. The program authorizes the repurchase of up to 5% of the then outstanding Common Stock, or 733,485 shares. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares the Company intends to repurchase. The Company may discontinue purchases at any time that management determines additional purchases are not warranted. The shares are to be purchased from time to time at prevailing market prices, through open market or unsolicited negotiated transactions, depending upon market conditions. The Company intends to use the repurchased shares to satisfy stock option exercises, payment of future stock dividends and general corporate purposes.

During the nine-month period ended September 30, 2006, the Company repurchased 188,900 shares of stock under the repurchase plan with a weighted average repurchase price of $27.54 per share. Under the current stock repurchase plan, the Company can repurchase an additional 355,167 shares.

Cash Dividends

The Company declared cash dividends on its common stock of $0.50 per share for the first nine months of 2006 compared to $0.45 per share for the first nine months of 2005. In recent years, the Company increased dividends no less than annually and presently plans to continue with this practice.
 
42
 
Parent Company Liquidity

The primary sources for payment of dividends by the Company to its shareholders and the share repurchase plan are the current cash on hand at the parent company plus the future dividends received from the eight affiliate banks. Payment of dividends by the eight affiliate banks is subject to various regulatory limitations. Reference is made to the Liquidity and Market Risk Management discussions of Item 3 - Quantitative and Qualitative Disclosure About Market Risk for additional information regarding the parent company’s liquidity.

Risk Based Capital

The Company’s subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). As of September 30, 2006, the Company meets all capital adequacy requirements to which it is subject.

As of the most recent notification from regulatory agencies, the subsidiaries were well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and subsidiaries must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions’ categories.
 
43
 
The Company's risk-based capital ratios at September 30, 2006 and December 31, 2005, are presented in table 11.

Table 11: Risk-Based Capital

   
September 30,
  
December 31,
  
($ in thousands)
  
2006
  
2005
  
           
Tier 1 capital
          
Stockholders’ equity
  
$
254,592
  
$
244,085
  
Trust preferred securities
    
30,000
    
30,000
  
Intangible assets
    
(64,557
)
  
(65,278
)
Unrealized loss on available-for-sale securities
    
2,818
    
4,360
  
               
Total Tier 1 capital
    
222,853
    
213,167
  
               
Tier 2 capital
              
Qualifying unrealized gain on available-for-sale equity securities
    
177
    
338
  
Qualifying allowance for loan losses
    
23,103
    
21,811
  
               
Total Tier 2 capital
    
23,280
    
22,149
  
               
Total risk-based capital
  
$
246,133
  
$
235,316
  
               
Risk weighted assets
  
$
1,843,960
  
$
1,739,771
  
               
Assets for leverage ratio
  
$
2,547,237
  
$
2,475,428
  
               
Ratios at end of period
              
Leverage ratio
    
8.75
%
  
8.61
%
Tier 1 capital
    
12.09
%
  
12.25
%
Total risk-based capital
    
13.35
%
  
13.53
%
               
Minimum guidelines
              
Leverage ratio
    
4.00
%
  
4.00
%
Tier 1 capital
    
4.00
%
  
4.00
%
Total risk-based capital
    
8.00
%
  
8.00
%
 
44
 
FORWARD-LOOKING STATEMENTS

Certain statements contained in this quarterly report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “anticipate,” “estimate,” “expect,” “foresee,” “may,” “might,” “will,” “would,” “could” or “intend,” future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the Company’s future growth, revenue, assets, asset quality, profitability and customer service, critical accounting policies, net interest margin, non-interest revenue, market conditions related to the Company’s stock repurchase program, allowance for loan losses, the effect of certain new accounting standards on the Company’s financial statements, income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of pending litigation, acquisition strategy, legal and regulatory limitations and compliance and competition.

We caution the reader not to place undue reliance on the forward-looking statements contained in this Report in that actual results could differ materially from those indicated in such forward-looking statements, due to a variety of factors. These factors include, but are not limited to, changes in the Company’s operating or expansion strategy, availability of and costs associated with obtaining adequate and timely sources of liquidity, the ability to maintain credit quality, possible adverse rulings, judgments, settlements and other outcomes of pending litigation, the ability of the Company to collect amounts due under loan agreements, changes in consumer preferences, effectiveness of the Company’s interest rate risk management strategies, laws and regulations affecting financial institutions in general or relating to taxes, the effect of pending or future legislation, the ability of the Company to repurchase its Common Stock on favorable terms and other risk factors. Other relevant risk factors may be detailed from time to time in the Company’s press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report.
 
45
 
Item 3. Quantitative and Qualitative Disclosure About Market Risk

Parent Company

The Company has leveraged its investment in subsidiary banks and depends upon the dividends paid to it, as the sole shareholder of the subsidiary banks, as a principal source of funds for dividends to shareholders, stock repurchase and debt service requirements. At September 30, 2006, undivided profits of the Company's subsidiaries were approximately $140 million, of which approximately $12 million was available for the payment of dividends to the Company without regulatory approval. In addition to dividends, other sources of liquidity for the Company are the sale of equity securities and the borrowing of funds.

Banking Subsidiaries

Generally speaking, the Company's banking subsidiaries rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash used in investing activities. Typical of most banking companies, significant financing activities include: deposit gathering; use of short-term borrowing facilities, such as federal funds purchased and repurchase agreements; and the issuance of long-term debt. The banks' primary investing activities include loan originations and purchases of investment securities, offset by loan payoffs and investment maturities.

Liquidity represents an institution's ability to provide funds to satisfy demands from depositors and borrowers, by either converting assets into cash or accessing new or existing sources of incremental funds. A major responsibility of management is to maximize net interest income within prudent liquidity constraints. Internal corporate guidelines have been established to constantly measure liquid assets, as well as relevant ratios concerning earning asset levels and purchased funds. The management and board of directors of each bank subsidiary monitor these same indicators and make adjustments as needed. At September 30, 2006, each subsidiary bank was within established guidelines and total corporate liquidity remains strong. At September 30, 2006, cash and cash equivalents, trading and available-for-sale securities and mortgage loans held for sale were 19.4% of total assets, as compared to 19.2% at December 31, 2005.

Liquidity Management

The objective of the Company’s liquidity management is to access adequate sources of funding to ensure that cash flow requirements of depositors and borrowers are met in an orderly and timely manner. Sources of liquidity are managed so that reliance on any one funding source is kept to a minimum. The Company’s liquidity sources are prioritized for both availability and time to activation.
 
The Company’s liquidity is a primary consideration in determining funding needs and is an integral part of asset/liability management. Pricing of the liability side is a major component of interest margin and spread management. Adequate liquidity is a necessity in addressing this critical task. There are six primary and secondary sources of liquidity available to the Company. The particular liquidity need and timeframe determine the use of these sources.
 
46
 
The first source of liquidity available to the Company is Federal funds. Federal funds, primarily from downstream correspondent banks, are available on a daily basis and are used to meet the normal fluctuations of a dynamic balance sheet. In addition, the Company and its affiliates have approximately $106 million in Federal funds lines of credit from upstream correspondent banks that can be accessed, when needed. In order to ensure availability of these upstream funds, the Company has a plan for rotating the usage of the funds among the upstream correspondent banks, thereby providing approximately $40 million in funds on a given day. Historical monitoring of these funds has made it possible for the Company to project seasonal fluctuations and structure its funding requirements on month-to-month basis.

A second source of liquidity is the retail deposits available through the Company’s network of affiliate banks throughout Arkansas. Although this method can be somewhat of a more expensive alternative to supplying liquidity, this source can be used to meet intermediate term liquidity needs.

Third, the Company’s affiliate banks have lines of credits available with the Federal Home Loan Bank. While the Company uses portions of those lines to match off longer-term mortgage loans, the Company also uses those lines to meet liquidity needs. Approximately $335 million of these lines of credit are currently available, if needed.

Fourth, the Company uses a laddered investment portfolio that ensures there is a steady source of intermediate term liquidity. These funds can be used to meet seasonal loan patterns and other intermediate term balance sheet fluctuations. Approximately 67% of the investment portfolio is classified as available-for-sale. The Company also uses securities held in the securities portfolio to pledge when obtaining public funds.

The fifth source of liquidity is the ability to access large deposits from both the public and private sector to fund short-term liquidity needs.

Finally, the Company has established a $5 million unsecured line of credit with a major commercial bank that could be used to meet unexpected liquidity needs at both the parent company level as well as at any affiliate bank.
 
The Company believes the various sources available are ample liquidity for short-term, intermediate-term and long-term liquidity.

Market Risk Management

Market risk arises from changes in interest rates. The Company has risk management policies to monitor and limit exposure to market risk. In asset and liability management activities, policies are in place designed to minimize structural interest rate risk. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified.
 
47
 
Interest Rate Sensitivity

Interest rate risk represents the potential impact of interest rate changes on net income and capital resulting from mismatches in repricing opportunities of assets and liabilities over a period of time. A number of tools are used to monitor and manage interest rate risk, including simulation models and interest sensitivity gap analysis. Management uses simulation models to estimate the effects of changing interest rates and various balance sheet strategies on the level of the Company’s net income and capital. As a means of limiting interest rate risk to an acceptable level, management may alter the mix of floating and fixed-rate assets and liabilities, change pricing schedules and manage investment maturities during future security purchases.

The simulation models incorporate management’s assumptions regarding the level of interest rates or balance changes for indeterminate maturity deposits for a given level of market rate changes. These assumptions have been developed through anticipated pricing behavior. Key assumptions in the simulation models include the relative timing of prepayments, cash flows and maturities. In addition, the impact of planned growth and anticipated new business is factored into the simulation models. These assumptions are inherently uncertain and, as a result, the models cannot precisely estimate net interest income or precisely predict the impact of a change in interest rates on net income or capital. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.
 
48
 
Table A below presents the Company’s interest rate sensitivity position at September 30, 2006. This analysis is based on a point in time and may not be meaningful because assets and liabilities are categorized according to contractual maturities, repricing periods and expected cash flows rather than estimating more realistic behaviors, as is done in the simulation models. Also, this analysis does not consider subsequent changes in interest rate level or spreads between asset and liability categories.

Table A: Interest Rate Sensitivity

   
 Interest Rate Sensitivity Period
(In thousands, except ratios)
  
0-30
Days
  
31-90
Days
  
91-180
Days
  
181-365
Days
  
1-2
Years 
  
2-5
Years
  
Over 5
Years
  
Total
  
Earning assets
                                  
Short-term investments
  
$
63,581
  
$
--
  
$
--
  
$
--
  
$
--
  
$
--
  
$
5,358
  
$
68,939
  
Assets held in trading accounts
    
4,574
    
--
    
--
    
--
    
--
    
--
    
--
    
4,574
  
Investment securities
    
5,988
    
42,091
    
36,069
    
36,584
    
91,919
    
117,953
    
200,901
    
531,505
  
Mortgage loans held for sale
    
6,591
    
--
    
--
    
--
    
--
    
--
    
--
    
6,591
  
Loans
   
586,153
    
216,521
    
196,208
    
256,558
    
297,691
    
225,885
    
9,501
    
1,788,517
  
Total earning assets
    
666,887
    
258,612
    
232,277
    
293,142
    
389,610
    
343,838
    
215,760
    
2,400,126
  
Interest bearing liabilities
                                                  
Interest bearing transaction and savings deposits
    
405,047
    
--
    
--
    
--
    
68,120
    
204,362
    
68,120
    
745,649
  
Time deposits
    
116,461
    
182,288
    
249,479
    
316,630
    
210,984
    
24,285
    
--
    
1,100,127
  
Short-term debt
    
147,385
    
--
    
--
    
--
    
--
    
--
    
--
    
147,385
  
Long-term debt
    
12,126
    
1,399
    
2,121
    
6,325
    
10,885
    
14,937
    
34,380
    
82,173
  
Total interest bearing liabilities
    
681,019
    
183,687
    
251,600
    
322,955
    
289,989
    
243,584
    
102,500
    
2,075,334
  
Interest rate sensitivity Gap
  
$
(14,132
)
$
74,925
  
$
(19,323
)
$
(29,813
)
$
99,621
  
$
100,254
  
$
113,260
  
$
324,792
  
Cumulative interest rate sensitivity Gap
  
$
(14,132
)
$
60,793
  
$
41,470
  
$
11,657
  
$
111,278
  
$
211,532
  
$
324,792
        
Cumulative rate sensitive asset to rate sensitive liabilities
    
97.9
%
  
107.0
%
  
103.7
%
  
100.8
%
  
106.4
%
  
110.7
%
  
115.7
%
      
Cumulative Gap as a % of earning assets
    
(0.6
)%
  
2.5
%
  
1.7
%
  
0.5
%
  
4.6
%
  
8.8
%
  
13.5
%
      
 
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in 15 C.F.R. 240.13a-15(e) or 15 C.F.R. 240.15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of evaluation.
 
49
 
Part II: Other Information

Item 1A. Risk Factors

There has not been any material change in the risk factors disclosure from that contained in the Company’s 2005 Form 10-K for the fiscal year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
(c) Issuer Purchases of Equity Securities. The Company made the following purchases of its common stock during the three months ended September 30, 2006:

Period    
Total Number
of Shares
Purchased
    
Average
Price Paid
Per Share
    
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
    
Maximum
Number of
Shares that May
Yet be Purchased
Under the Plans
  
                           
July 1 - July 31
    
14,000
    
27.32
    
14,000
    
365,167
  
August 1 - August 31
    
4,500
    
28.33
    
4,500
    
360,667
  
September 1 - September 30
    
5,500
    
29.17
    
5,500
    
355,167
  
                           
Total
    
24,000
  
$
27.93
    
24,000
        
 
Item 6. Exhibits
 
  Exhibit No. Description
     
 
3.1
Restated Articles of Incorporation of Simmons First National Corporation (incorporated by reference to Exhibit 4 to Simmons First National Corporation’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2004 (File No. 0-6253)).
     
  3.2 Amended By-Laws of Simmons First National Corporation (incorporated by reference to Exhibit 3.2 to Simmons First National Corporation's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005 (File No. 0-6253)).
     
 
10.1
Amended and Restated Trust Agreement, dated as of December 16, 2003, among the Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company Delaware and each of J. Thomas May, Barry L. Crow and Robert A. Fehlman as administrative trustees, with respect to Simmons First Capital Trust II (incorporated by reference to Exhibit 10.1 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
     
 
10.2
Guarantee Agreement, dated as of December 16, 2003, between the Company and Deutsche Bank Trust Company Americas, as guarantee trustee, with respect to Simmons First Capital Trust II (incorporated by reference to Exhibit 10.2 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
 
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10.3
Junior Subordinated Indenture, dated as of December 16, 2003, among the Company and Deutsche Bank Trust Company Americas, as trustee, with respect to the junior subordinated note held by Simmons First Capital Trust II (incorporated by reference to Exhibit 10.3 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
     
  10.4 Amended and Restated Trust Agreement, dated as of December 16, 2003, among the Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company Delaware and each of J. Thomas May, Barry L. Crow and Robert A. Fehlman as administrative trustees, with respect to Simmons First Capital Trust III (incorporated by reference to Exhibit 10.4 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
     
 
10.5
Guarantee Agreement, dated as of December 16, 2003, between the Company and Deutsche Bank Trust Company Americas, as guarantee trustee, with respect to Simmons First Capital Trust III (incorporated by reference to Exhibit 10.5 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
     
 
10.6
Junior Subordinated Indenture, dated as of December 16, 2003, among the Company and Deutsche Bank Trust Company Americas, as trustee, with respect to the junior subordinated note held by Simmons First Capital Trust III (incorporated by reference to Exhibit 10.6 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
     
 
10.7
Amended and Restated Trust Agreement, dated as of December 16, 2003, among the Company, Deutsche Bank Trust Company Americas, Deutsche Bank Trust Company Delaware and each of J. Thomas May, Barry L. Crow and Robert A. Fehlman as administrative trustees, with respect to Simmons First Capital Trust IV (incorporated by reference to Exhibit 10.7 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
     
 
10.8
Guarantee Agreement, dated as of December 16, 2003, between the Company and Deutsche Bank Trust Company Americas, as guarantee trustee, with respect to Simmons First Capital Trust IV (incorporated by reference to Exhibit 10.8 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
 
51
 
 
10.9
Junior Subordinated Indenture, dated as of December 16, 2003, among the Company and Deutsche Bank Trust Company Americas, as trustee, with respect to the junior subordinated note held by Simmons First Capital Trust IV (incorporated by reference to Exhibit 10.9 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
     
 
10.10
Long-Term Executive Incentive Agreement, dated as of January 1, 2005, by and between the Company and J. Thomas May (incorporated by reference to Exhibit 10.10 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2005 (File No. 0-6253)).
     
 
14
Code of Ethics, dated December 2003, for CEO, CFO, controller and other accounting officers (incorporated by reference to Exhibit 14 to Simmons First National Corporation’s Annual Report on Form 10-K for the Year ended December 31, 2003 (File No. 0-6253)).
     
 
31.1
Rule 13a-14(a)/15d-14(a) Certification - J. Thomas May, Chairman and Chief Executive Officer.*
     
 
31.2
Rule 13a-14(a)/15d-14(a) Certification - Robert A. Fehlman, Chief Financial Officer.*
     
 
32.1
Certification Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - J. Thomas May, Chairman and Chief Executive Officer.*
     
 
32.2
Certification Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Robert A. Fehlman, Chief Financial Officer.*

* Filed herewith.
  
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
SIMMONS FIRST NATIONAL CORPORATION
(Registrant)
       
   
 		  
 		  
 
Date: November 9, 2006 By:   /s/ J. Thomas May
 
J. Thomas May
    Chairman and Chief Executive Officer
       
   
 		  
 		  
 
Date:  November 9, 2006 By:   /s/ Robert A. Fehlman
 
Robert A. Fehlman
    Executive Vice President and Chief Financial Officer

 
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