SIMMONS FIRST NATIONAL CORPORATION 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549

FORM 10-K
(Mark One)
T
Annual Report Pursuant to Section 13 or 15(d) of the Exchange Act of 1934
 
For the fiscal year ended: December 31, 2006
 
or
£
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
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)

Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, $0.01 par value
The Nasdaq Stock Market®
(Title of each class)
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
£ Yes S No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. £ Yes S No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or in information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £

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

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

The aggregate market value of the Registrant’s Common Stock, par value $0.01 per share, held by non-affiliates on June 30, 2006, was $369,711,360 based upon the last trade price as reported on the Nasdaq Global Select Market® of $29.01.

The number of shares outstanding of the Registrant's Common Stock as of February 8, 2007 was 14,192,201.

Part III is incorporated by reference from the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 10, 2007.
 

 
Introduction

The Company has chosen to combine our Annual Report to Shareholders with our Form 10-K, which is a document that U.S. public companies file with the Securities and Exchange Commission every year. Many readers are familiar with “Part II” of the Form 10-K, as it contains the business information and financial statements that were included in the financial sections of our past Annual Reports. These portions include information about our business that the Company believes will be of interest to investors. The Company hopes investors will find it useful to have all of this information available in a single document.

The Securities and Exchange Commission allows the Company to report information in the Form 10-K by “incorporated by reference” from another part of the Form 10-K, or from the proxy statement. You will see that information is “incorporated by reference” in various parts of our Form 10-K.

A more detailed table of contents for the entire Form 10-K follows:

FORM 10-K INDEX

Part I  
 
     
   
     
     
   
     
     
   
     
 
 

 
PART I

BUSINESS
 
The Company and the Banks

Simmons First National Corporation (the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956. The Gramm-Leach-Bliley-Act ("GLB Act") has substantially increased the financial activities that certain banks, bank holding companies, insurance companies and securities brokerage companies are permitted to undertake. Under the GLB Act, expanded activities in insurance underwriting, insurance sales, securities brokerage and securities underwriting not previously allowed for banks and bank holding companies are now permitted upon satisfaction of certain guidelines concerning management, capitalization and satisfaction of the applicable Community Reinvestment Act guidelines for the banks. Generally these new activities are permitted for bank holding companies whose banking subsidiaries are well managed, well capitalized and have at least a satisfactory rating under the Community Reinvestment Act. A bank holding company must apply to become a financial holding company and the Board of Governors of the Federal Reserve System must approve its application.

The Company's application to become a financial holding company was approved by the Board of Governors on March 13, 2000. The Company has reviewed the new activities permitted under the Act. If the appropriate opportunity presents itself, the Company is interested in expanding into other financial services.

The Company was the largest publicly traded financial holding company headquartered in Arkansas with consolidated total assets of $2.7 billion, consolidated loans of $1.8 billion, consolidated deposits of $2.2 billion and total equity capital of $259 million as of December 31, 2006. The Company owns eight community banks in Arkansas. The Company's banking subsidiaries conduct their operations through 86 offices, of which 82 are financial centers, located in 48 communities in Arkansas.

Simmons First National Bank (the “Bank”) is the Company’s lead bank. The Bank is a national bank, which has been in operation since 1903. The Bank's primary market area, with the exception of its nationally provided credit card product, is Central and Western Arkansas. At December 31, 2006 the Bank had total assets of $1.3 billion, total loans of $868 million and total deposits of $1.0 billion. Simmons First Trust Company N.A., a wholly owned subsidiary of the Bank, performs the trust and fiduciary business operations for the Bank as well as the Company. Simmons First Investment Group, Inc. (“SFIG”), a wholly owned subsidiary of the Bank, which is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the National Association of Securities Dealers (“NASD”), performs the broker-dealer operations of the Bank.

Simmons First Bank of Jonesboro (“Simmons/Jonesboro”) is a state bank, which was acquired in 1984. Simmons/Jonesboro’s primary market area is Northeast Arkansas. At December 31, 2006, Simmons/Jonesboro had total assets of $265 million, total loans of $215 million and total deposits of $237 million.

Simmons First Bank of South Arkansas (“Simmons/South”) is a state bank, which was acquired in 1984. Simmons/South’s primary market area is Southeast Arkansas. At December 31, 2006, Simmons/South had total assets of $142 million, total loans of $74 million and total deposits of $124 million.

Simmons First Bank of Northwest Arkansas (“Simmons/Northwest”) is a state bank, which was acquired in 1995. Simmons/Northwest’s primary market area is Northwest Arkansas. At December 31, 2006, Simmons/Northwest had total assets of $279 million, total loans of $211 million and total deposits of $238 million.

Simmons First Bank of Russellville (“Simmons/Russellville”) is a state bank, which was acquired in 1997. Simmons/Russellville’s primary market area is Russellville, Arkansas. At December 31, 2006, Simmons/Russellville had total assets of $201 million, total loans of $122 million and total deposits of $155 million.

Simmons First Bank of Searcy (“Simmons/Searcy”) is a state bank, which was acquired in 1997. Simmons/Searcy’s primary market area is Searcy, Arkansas. At December 31, 2006, Simmons/Searcy had total assets of $139 million, total loans of $97 million and total deposits of $107 million.

Simmons First Bank of El Dorado, N.A. (“Simmons/El Dorado”) is a national bank, which was acquired in 1999. Simmons/El Dorado’s primary market area is South Central Arkansas. At December 31, 2006, Simmons/El Dorado had total assets of $216 million, total loans of $118 million and total deposits of $186 million.
 
1

 
Simmons First Bank of Hot Springs (“Simmons/Hot Springs”) is a state bank, which was acquired in 2004. Simmons/Hot Springs’ primary market area is Hot Springs, Arkansas. At December 31, 2006, Simmons/Hot Springs had total assets of $158 million, total loans of $80 million and total deposits of $119 million.
 
The Company's subsidiaries provide complete banking services to individuals and businesses throughout the market areas they serve. Services include consumer (credit card, student and other consumer), real estate (construction, single family residential and other commercial) and commercial (commercial, agriculture and financial institutions) loans, checking, savings and time deposits, trust and investment management services, and securities and investment services.

Loan Risk Assessment

As part of the ongoing risk assessment, the Company has an Asset Quality Review Committee of management that meets quarterly to review the adequacy of the allowance for loan losses. The Committee reviews the status of past due, non-performing and other impaired loans, reserve ratios, and additional performance indicators for all of its subsidiary banks. The allowance for loan losses is determined based upon the aforementioned performance factors, and adjustments are made accordingly. Also, an unallocated reserve is established to compensate for the uncertainty in estimating loan losses, including the possibility of improper risk ratings and specific reserve allocations.

The Board of Directors of each of the Company's subsidiary banks reviews the adequacy of its allowance for loan losses on a monthly basis giving consideration to past due loans, non-performing loans, other impaired loans, and current economic conditions. The Company's loan review department monitors each of its subsidiary bank's loan information monthly. In addition, the loan review department prepares an analysis of the allowance for loan losses for each subsidiary bank twice a year, and reports the results to the Company's Audit and Security Committee. In order to verify the accuracy of the monthly analysis of the allowance for loan losses, the loan review department performs an on-site detailed review of each subsidiary bank's loan files on a semi-annual basis.

Growth Strategy

The Company's growth strategy is to primarily focus on the state of Arkansas. More specifically, the Company is interested in expansion by opening new financial centers or by acquisitions of financial centers in growth or strategic markets, preferably with assets totaling $200 million or more. The Company added new financial centers in Little Rock and El Dorado during 2006. In 2005 the Company added three branch locations in the Little Rock/Conway metropolitan area, one in the Fayetteville/Springdale/Rogers metropolitan area and one in the Fort Smith metropolitan area. For 2007, the Company plans to add financial centers in Little Rock, North Little Rock, Beebe and Paragould, as well as a new headquarters facility for Simmons/Northwest in Rogers. While new financial centers can be dilutive to earnings in the short-term, the Company believes they will reward shareholders in the intermediate and long-term. As the Company nears completion of its desired footprint within the state of Arkansas, it is beginning to evaluate opportunities to expand into contiguous states.

With an expanded presence in Arkansas, ongoing investments in technology, and enhanced products and services, the Company is in position to meet the demands of customers in the markets it serves.

Competition

The activities engaged in by the Company and its subsidiaries are highly competitive. In all aspects of its business, the Company encounters intense competition from other banks, lending institutions, credit unions, savings and loan associations, brokerage firms, mortgage companies, industrial loan associations, finance companies, and several other financial and financial service institutions. The amount of competition among commercial banks and other financial institutions has increased significantly over the past few years since the deregulation of the banking industry. The Company's subsidiary banks actively compete with other banks and financial institutions in their efforts to obtain deposits and make loans, in the scope and type of services offered, in interest rates paid on time deposits and charged on loans and in other aspects of commercial banking.

The Company's banking subsidiaries are also in competition with major national and international retail banking establishments, brokerage firms and other financial institutions within and outside Arkansas. Competition with these financial institutions is expected to increase, especially with the increase in interstate banking.
 
2

Employees

As of February 8, 2007, the Company and its subsidiaries had approximately 1,134 full time equivalent employees. None of the employees is represented by any union or similar groups, and the Company has not experienced any labor disputes or strikes arising from any such organized labor groups. The Company considers its relationship with its employees to be good.

Executive Officers of the Company

The following is a list of all executive officers of the Company. The Board of Directors elects executive officers annually.

NAME
AGE
POSITION
YEARS SERVED
       
J. Thomas May
60
Chairman and Chief Executive Officer
20
David L. Bartlett
55
President and Chief Operating Officer
10
Robert A. Fehlman
42
Executive Vice President and Chief Financial Officer
18
Marty D. Casteel
55
Executive Vice President
18
Tommie K. Jones
59
Senior Vice President and Human Resources Director
32
L. Ann Gill
59
Senior Vice President and Auditor
41
Kevin J. Archer
43
Senior Vice President/Credit Policy and Risk Assessment
11
David W. Garner
37
Senior Vice President and Controller
9
John L. Rush
72
Secretary
39

Board of Directors of the Company

The following is a list of the Board of Directors of the Company as of December 31, 2006, along with their principal occupation.

NAME
PRINCIPAL OCCUPATION
   
William E. Clark
Chairman and Chief Executive Officer
 
CDI Contractors, LLC
   
Steven A. Cosse¢
Executive Vice President and General Counsel
 
Murphy Oil Corporation
   
George A. Makris, Jr.
President
 
M.K. Distributors, Inc.
   
J. Thomas May
Chairman and Chief Executive Officer
 
Simmons First National Corporation
   
W. Scott McGeorge
President
 
Pine Bluff Sand and Gravel Company
   
Stanley E. Reed (1)
President
 
Farm Bureau Mutual Insurance of Arkansas
   
Harry L. Ryburn, D.D.S.
Orthodontist (retired)
   
Robert L. Shoptaw
Chief Executive Officer
 
Arkansas Blue Cross and Blue Shield
   
Henry F. Trotter, Jr.
President
 
Trotter Ford, Inc.; Trotter Auto, Inc.
   
(1) Mr. Reed was elected to the Board of Directors of the Company on December 11, 2006, effective January 1, 2007.
3

 
SUPERVISION AND REGULATION

The Company

The Company, as a bank holding company, is subject to both federal and state regulation. Under federal law, a bank holding company generally must obtain approval from the Board of Governors of the Federal Reserve System ("FRB") before acquiring ownership or control of the assets or stock of a bank or a bank holding company. Prior to approval of any proposed acquisition, the FRB will review the effect on competition of the proposed acquisition, as well as other regulatory issues.

The federal law generally prohibits a bank holding company from directly or indirectly engaging in non-banking activities. This prohibition does not include loan servicing, liquidating activities or other activities so closely related to banking as to be a proper incident thereto. Bank holding companies, including the Company, which have elected to qualify as financial holding companies, are authorized to engage in financial activities. Financial activities include any activity that is financial in nature or any activity that is incidental or complimentary to a financial activity.

As a financial holding company, the Company is required to file with the FRB an annual report and such additional information as may be required by law. From time to time, the FRB examines the financial condition of the Company and its subsidiaries. The FRB, through civil and criminal sanctions, is authorized to exercise enforcement powers over bank holding companies (including financial holding companies) and non-banking subsidiaries, to limit activities that represent unsafe or unsound practices or constitute violations of law.

The Company is subject to certain laws and regulations of the state of Arkansas applicable to financial and bank holding companies, including examination and supervision by the Arkansas Bank Commissioner. Under Arkansas law, a financial or bank holding company is prohibited from owning more than one subsidiary bank, if any subsidiary bank owned by the holding company has been chartered for less than 5 years and, further, requires the approval of the Arkansas Bank Commissioner for any acquisition of more than 25% of the capital stock of any other bank located in Arkansas. No bank acquisition may be approved if, after such acquisition, the holding company would control, directly or indirectly, banks having 25% of the total bank deposits in the state of Arkansas, excluding deposits of other banks and public funds.

Legislation enacted in 1994, allows bank holding companies (including financial holding companies) from any state to acquire banks located in any state without regard to state law, provided that the holding company (1) is adequately capitalized, (2) is adequately managed, (3) would not control more than 10% of the insured deposits in the United States or more than 30% of the insured deposits in such state, and (4) such bank has been in existence at least five years if so required by the applicable state law.
 
Subsidiary Banks

Simmons First National Bank, Simmons/El Dorado and Simmons First Trust Company N.A., as national banking associations, are subject to regulation and supervision, of which regular bank examinations are a part, by the Office of the Comptroller of the Currency of the United States ("OCC"). Simmons/Jonesboro, Simmons/South, Simmons/Northwest and Simmons/Hot Springs, as state chartered banks, are subject to the supervision and regulation, of which regular bank examinations are a part, by the Federal Deposit Insurance Corporation ("FDIC") and the Arkansas State Bank Department. Simmons/Russellville and Simmons/Searcy, as state chartered member banks, are subject to the supervision and regulation, of which regular bank examinations are a part, by the Federal Reserve Board and the Arkansas State Bank Department. The lending powers of each of the subsidiary banks are generally subject to certain restrictions, including the amount, which may be lent to a single borrower.

Prior to passage of the GLB Act in 1999, the subsidiary banks, with numerous exceptions, were subject to the application of the laws of the state of Arkansas, regarding the limitation of the maximum permissible interest rate on loans. The Arkansas limitation for general loans was 5% over the Federal Reserve Discount Rate, with an additional maximum limitation of 17% per annum for consumer loans and credit sales. Certain loans secured by first liens on residential real estate and certain loans controlled by federal law (e.g., guaranteed student loans, SBA loans, etc.) were exempt from this limitation; however, a substantial portion of the loans made by the subsidiary banks, including all credit card loans, have historically been subject to this limitation. The GLB Act included a provision which sets the maximum interest rate on loans made in Arkansas, by banks with Arkansas as their home state, at the greater of the rate authorized by Arkansas law or the highest rate permitted by any of the out-of-state banks which maintain branches in Arkansas. An action was brought in the Western District of Arkansas, attacking the validity of the statute in 2000. Subsequently, the District Court issued a decision upholding the statute, and during October 2001, the Eighth Circuit Court of Appeals upheld the statute on appeal. Thus, in the fourth quarter of 2001, the Company began to implement the changes permitted by the GLB Act.
 
4


All of the Company's subsidiary banks are members of the FDIC, which provides insurance on deposits of each member bank up to applicable limits by the Deposit Insurance Fund. For this protection, each bank pays a statutory assessment to the FDIC each year.

Federal law substantially restricts transactions between banks and their affiliates. As a result, the Company's subsidiary banks are limited in making extensions of credit to the Company, investing in the stock or other securities of the Company and engaging in other financial transactions with the Company. Those transactions, which are permitted, must generally be undertaken on terms at least as favorable to the bank, as those prevailing in comparable transactions with independent third parties.

Potential Enforcement Action for Bank Holding Companies and Banks

Enforcement proceedings seeking civil or criminal sanctions may be instituted against any bank, any financial or bank holding company, any director, officer, employee or agent of the bank or holding company, which is believed by the federal banking agencies to be violating any administrative pronouncement or engaged in unsafe and unsound practices. In addition, the FDIC may terminate the insurance of accounts, upon determination that the insured institution has engaged in certain wrongful conduct, or is in an unsound condition to continue operations.

Risk-Weighted Capital Requirements for the Company and the Banks

Since 1993, banking organizations (including financial holding companies, bank holding companies and banks) were required to meet a minimum ratio of Total Capital to Total Risk-Weighted Assets of 8%, of which at least 4% must be in the form of Tier 1 Capital. A well-capitalized institution is one that has at least a 10% "total risk-based capital" ratio. For a tabular summary of the Company’s risk-weighted capital ratios, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital" and Note 19, Stockholders’ Equity, of the Notes to Consolidated Financial Statements.

A banking organization's qualifying total capital consists of two components: Tier 1 Capital and Tier 2 Capital. Tier 1 Capital is an amount equal to the sum of common shareholders' equity, hybrid capital instruments (instruments with characteristics of debt and equity) in an amount up to 25% of Tier 1 Capital, certain preferred stock and the minority interest in the equity accounts of consolidated subsidiaries. For bank holding companies and financial holding companies, goodwill may not be included in Tier 1 Capital. Identifiable intangible assets may be included in Tier 1 Capital for banking organizations, in accordance with certain further requirements. At least 50% of the banking organization's total regulatory capital must consist of Tier 1 Capital.

Tier 2 Capital is an amount equal to the sum of the qualifying portion of the allowance for loan losses, certain preferred stock not included in Tier 1, hybrid capital instruments (instruments with characteristics of debt and equity), certain long-term debt securities and eligible term subordinated debt, in an amount up to 50% of Tier 1 Capital. The eligibility of these items for inclusion as Tier 2 Capital is subject to certain additional requirements and limitations of the federal banking agencies.

Under the risk-based capital guidelines, balance sheet assets and certain off-balance sheet items, such as standby letters of credit, are assigned to one of four-risk weight categories (0%, 20%, 50%, or 100%), according to the nature of the asset, its collateral or the identity of the obligor or guarantor. The aggregate amount in each risk category is adjusted by the risk weight assigned to that category, to determine weighted values, which are then added to determine the total risk-weighted assets for the banking organization. For example, an asset, such as a commercial loan, assigned to a 100% risk category, is included in risk-weighted assets at its nominal face value, but a loan secured by a one-to-four family residence is included at only 50% of its nominal face value. The applicable ratios reflect capital, as so determined, divided by risk-weighted assets, as so determined.
 
5

 
Federal Deposit Insurance Corporation Improvement Act

The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), enacted in 1991, requires the FDIC to increase assessment rates for insured banks and authorizes one or more "special assessments," as necessary for the repayment of funds borrowed by the FDIC or any other necessary purpose. As directed in FDICIA, the FDIC has adopted a transitional risk-based assessment system, under which the assessment rate for insured banks will vary, according to the level of risk incurred in the bank's activities. The risk category and risk-based assessment for a bank is determined from its classification, pursuant to the regulation, as well capitalized, adequately capitalized or undercapitalized.

FDICIA substantially revised the bank regulatory provisions of the Federal Deposit Insurance Act and other federal banking statutes, requiring federal banking agencies to establish capital measures and classifications. Pursuant to the regulations issued under FDICIA, a depository institution will be deemed to be well capitalized if it significantly exceeds the minimum level required for each relevant capital measure; adequately capitalized if it meets each such measure; undercapitalized if it fails to meet any such measure; significantly undercapitalized if it is significantly below any such measure; and critically undercapitalized if it fails to meet any critical capital level set forth in regulations. The federal banking agencies must promptly mandate corrective actions by banks that fail to meet the capital and related requirements, in order to minimize losses to the FDIC. The FDIC and OCC advised the Company that the subsidiary banks have been classified as well capitalized under these regulations.

The federal banking agencies are required by FDICIA to prescribe standards for banks and bank holding companies (including financial holding companies), relating to operations and management, asset quality, earnings, stock valuation and compensation. A bank or bank holding company that fails to comply with such standards will be required to submit a plan designed to achieve compliance. If no plan is submitted or the plan is not implemented, the bank or holding company would become subject to additional regulatory action or enforcement proceedings.

A variety of other provisions included in FDICIA may affect the operations of the Company and the subsidiary banks, including new reporting requirements, revised regulatory standards for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch.

Available Information

The Company maintains an Internet website at www.simmonsfirst.com. On this website under the section, investor relations - documents, the Company makes its filings with the Securities and Exchange Commission available free of charge. Additionally, the Company has adopted and posted on its website a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer.

RISK FACTORS

Investments in the Company’s common stock involve risk. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, including:
 
 
changes in securities analysts’ estimates of financial performance
 
volatility of stock market prices and volumes
 
rumors or erroneous information
 
changes in market valuations of similar companies
 
changes in interest rates
 
new developments in the banking industry
 
variations in quarterly or annual operating results
 
new litigation or changes in existing litigation
 
regulatory actions
 
changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies

If the Company does not adjust to changes in the financial services industry, its financial performance may suffer. The Company’s ability to maintain its history of strong financial performance and return on investment to shareholders will depend in part on its ability to expand its scope of available financial services to its customers. In addition to other banks, competitors include securities dealers, brokers, mortgage bankers, investment advisors, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers.
 
6


Future governmental regulation and legislation could limit growth. The Company and its subsidiaries are subject to extensive state and federal regulation, supervision and legislation that govern nearly every aspect of its operations. Changes to these laws could affect the Company’s ability to deliver or expand its services and diminish the value of its business.

Changes in interest rates could reduce income and cash flow. The Company’s income and cash flow depends to a great extent on the difference between the interest earned on loans and investment securities, and the interest paid on deposits and other borrowings. Interest rates are beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits.

Additional risks and uncertainties could have a negative effect on the financial performance of the Company and the Company’s common stock. Some of these factors are general economic and financial market conditions, competition, continuing consolidation in the financial services industry, new litigation or changes in existing litigation, regulatory actions, and losses.

UNRESOLVED STAFF COMMENTS

There are currently no unresolved Commission staff comments.

PROPERTIES

The principal offices of the Company and the Bank consist of an eleven-story office building and adjacent office space, located in the central business district of the city of Pine Bluff, Arkansas. Additionally, the Company has corporate offices located in Little Rock, Arkansas.

The Company and its subsidiaries own or lease additional offices throughout the state of Arkansas. The Company’s eight banks are conducting financial operations from 86 offices, of which 82 are financial centers, in 48 communities throughout Arkansas.

LEGAL PROCEEDINGS

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 continue 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 Company and the bank plan to vigorously defend the claims asserted in the suit.
 
7


SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
 
No matters were submitted to a vote of security-holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.

PART II

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
The Company’s Common Stock trades on The Nasdaq Stock MarketÒ in the Global Select Market System under the symbol “SFNC”. The following table sets forth, for all the periods indicated, cash dividends declared, and the high and low closing bid prices for the Company’s Common Stock.

   
 
 
 
 
Quarterly
 
 
Price Per
 
Dividends
 
 
 
Common Share
 
Per Common
 
 
High
 
Low
 
Share
 
                     
2006
                   
1st quarter
 
$
29.76
 
$
27.50
 
$
0.16
 
2nd quarter
   
30.36
   
25.00
   
0.17
 
3rd quarter
   
30.26
   
26.31
   
0.17
 
4th quarter
   
32.97
   
28.01
   
0.18
 
     
 
             
2005
                   
1st quarter
 
$
29.57
 
$
22.72
 
$
0.15
 
2nd quarter
   
27.42
   
21.40
   
0.15
 
3rd quarter
   
28.75
   
25.59
   
0.15
 
4th quarter
   
29.96
   
26.08
   
0.16
 
 
As of February 8, 2007, there were 1,433 shareholders of record of the Company’s Common Stock.

The Company's policy is to declare regular quarterly dividends based upon the Company's earnings, financial position, capital requirements and such other factors deemed relevant by the Board of Directors. This dividend policy is subject to change, however, and the payment of dividends by the Company is necessarily dependent upon the availability of earnings and the Company's financial condition in the future. The payment of dividends on the Common Stock is also subject to regulatory capital requirements.

The Company's principal source of funds for dividend payments to its stockholders is dividends received from its subsidiary banks. Under applicable banking laws, the declaration of dividends by the Bank and Simmons/El Dorado in any year, in excess of its net profits, as defined, for that year, combined with its retained net profits of the preceding two years, must be approved by the Office of the Comptroller of the Currency. Further, as to Simmons/Jonesboro, Simmons/Northwest, Simmons/South, Simmons/Hot Springs, Simmons/Russellville and Simmons/Searcy regulators have specified that the maximum dividends state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. At December 31, 2006, approximately $12.7 million was available for the payment of dividends by the subsidiary banks without regulatory approval. For further discussion of restrictions on the payment of dividends, see "Quantitative and Qualitative Disclosures About Market Risk - Liquidity and Market Risk Management," and Note 19, Stockholders’ Equity, of Notes to Consolidated Financial Statements.
 
8

Stock Repurchase

The Company made the following purchases of its common stock during the three months ended December 31, 2006:

 
 
 
     
Total Number
 
Maximum
 
 
 
 
 
 
 
of Shares
 
Number of
 
 
 
Total Number
 
 Average
 
Purchased as
 
 Shares that May
 
 
 
of Shares
 
 Price Paid
 
Part of Publicly
 
 Yet be Purchased
 
Period
 
 Purchased
 
 Per Share
 
Announced Plans
 
 Under the Plans
 
                           
October 1 - October 31
   
1,500
   
28.94
   
1,500
   
353,667
 
November 1 - November 30
   
5,000
   
30.91
   
5,000
   
348,667
 
December 1 - December 31
   
7,700
   
31.74
   
7,700
   
340,967
 
 Total    
14,200
   $
31.15
   
14,200
       
 
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 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 exercise, payment of future stock dividends and general corporate purposes.

Performance Graph

The performance graph below compares the cumulative total shareholder return on the Company’s Common Stock with the cumulative total return on the equity securities of companies included in the NASDAQ Bank Stock Index, the NASDAQ Composite Stock Index and the S&P 500 Stock Index. The graph assumes an investment of $100 on December 31, 2001 and reinvestment of dividends on the date of payment without commissions. The performance graph represents past performance and should not be considered to be an indication of future performance.
 

       
 
Period Ending
Index
12/31/01
12/31/02
12/31/03
12/31/04
12/31/05
12/31/06
Simmons First National Corporation
100.00
117.13
180.42
193.60
189.60
219.99
NASDAQ Bank Index
100.00
106.95
142.29
161.73
158.61
180.53
NASDAQ Composite Index
100.00
68.76
103.67
113.16
115.57
127.58
S&P 500 Index
100.00
77.90
100.24
111.14
116.59
135.00
9


Forward Looking Statements

Certain statements contained in this Annual 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.

SELECTED CONSOLIDATED FINANCIAL DATA
 
The following table sets forth selected consolidated financial data concerning the Company and is qualified in its entirety by the detailed information and consolidated financial statements, including notes thereto, included elsewhere in this report. The income statement, balance sheet and per common share data as of and for the years ended December 31, 2006, 2005, 2004, 2003, and 2002 were derived from consolidated financial statements of the Company, which were audited by BKD, LLP. Earnings per common share and dividends per common share presented in the financial statements have been restated retroactively to reflect the effects of the May 1, 2003, two for one stock split for shareholders of record as of April 18, 2003. The selected consolidated financial data set forth below should be read in conjunction with the financial statements of the Company and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
 
10

 
                                 
SELECTED CONSOLIDATED FINANCIAL DATA 
 
                                 
 
Years Ended December 31 (1)
 
(In thousands,
                               
except per share data)
 
2006
 
2005
 
2004
 
2003
 
2002
 
                                 
Income statement data:
                               
Net interest income
 
$
88,804
 
$
90,257
 
$
85,636
 
$
77,870
 
$
75,708
 
Provision for loan losses
   
3,762
   
7,526
   
8,027
   
8,786
   
10,223
 
Net interest income after provision for loan losses
   
85,042
   
82,731
   
77,609
   
69,084
   
65,485
 
Non-interest income
   
43,947
   
42,318
   
40,705
   
38,717
   
35,303
 
Non-interest expense
   
89,068
   
85,584
   
82,385
   
73,117
   
69,013
 
Provision for income taxes
   
12,440
   
12,503
   
11,483
   
10,894
   
9,697
 
Net income
   
27,481
   
26,962
   
24,446
   
23,790
   
22,078
 
                                 
Per share data:
                               
Basic earnings
   
1.93
   
1.88
   
1.68
   
1.69
   
1.56
 
Diluted earnings
   
1.90
   
1.84
   
1.65
   
1.65
   
1.54
 
Diluted operating earnings (2)
   
1.90
   
1.84
   
1.68
   
1.62
   
1.54
 
Book value
   
18.24
   
17.04
   
16.29
   
14.89
   
13.97
 
Dividends
   
0.68
   
0.61
   
0.57
   
0.53
   
0.48
 
                                 
Balance sheet data at period end:
                               
Assets
   
2,651,413
   
2,523,768
   
2,413,944
   
2,235,778
   
1,977,579
 
Loans
   
1,783,495
   
1,718,107
   
1,571,376
   
1,418,314
   
1,257,305
 
Allowance for loan losses
   
25,385
   
26,923
   
26,508
   
25,347
   
21,948
 
Deposits
   
2,175,531
   
2,059,958
   
1,959,195
   
1,803,468
   
1,619,196
 
Long-term debt
   
83,311
   
87,020
   
94,663
   
100,916
   
54,282
 
Stockholders’ equity
   
259,016
   
244,085
   
238,222
   
209,995
   
197,605
 
                                 
Capital ratios at period end:
                               
Stockholders’ equity to total assets
   
9.75
%
 
9.67
%
 
9.87
%
 
9.39
%
 
9.99
%
Leverage (3)
   
8.83
%
 
8.62
%
 
8.46
%
 
9.89
%
 
9.29
%
Tier 1
   
12.38
%
 
12.26
%
 
12.72
%
 
14.12
%
 
14.02
%
Total risk-based
   
13.64
%
 
13.54
%
 
14.00
%
 
15.40
%
 
15.30
%
                                 
Selected ratios:
                               
Return on average assets
   
1.07
%
 
1.08
%
 
1.03
%
 
1.18
%
 
1.12
%
Return on average equity
   
10.93
%
 
11.24
%
 
10.64
%
 
11.57
%
 
11.56
%
Return on average tangible equity (4)
   
15.03
%
 
15.79
%
 
14.94
%
 
14.03
%
 
13.99
%
Net interest margin (5)
   
3.96
%
 
4.13
%
 
4.08
%
 
4.34
%
 
4.37
%
Allowance/nonperforming loans
   
234.05
%
 
319.48
%
 
220.84
%
 
219.13
%
 
179.07
%
Allowance for loan losses as a percentage of period-end loans
   
1.42
%
 
1.57
%
 
1.69
%
 
1.79
%
 
1.75
%
Nonperforming loans as a percentage of period-end loans
   
0.56
%
 
0.49
%
 
0.76
%
 
0.82
%
 
0.97
%
Net charge-offs as a percentage of average total assets
   
0.15
%
 
0.28
%
 
0.34
%
 
0.41
%
 
0.46
%
Dividend payout
   
35.79
%
 
33.15
%
 
38.80
%
 
31.14
%
 
30.75
%
                                 
(1) The selected consolidated financial data set forth above should be read in conjunction with the financial statements of the Company and related Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this report.
(2) Diluted operating earnings exclude the following nonrecurring items. In 2004, the Company recorded a $0.03 reduction in EPS from the write off of deferred debt issuance cost associated with the redemption of trust preferred securities. In 2003, the Company recorded a $0.03 addition to EPS resulting from the sale of its mortgage servicing portfolio.
(3) Leverage ratio is Tier 1 capital to quarterly average total assets less intangible assets and gross unrealized gains/losses on available-for-sale investments.
(4) Tangible calculations eliminate the effect of goodwill and acquisition related intangible assets and the corresponding amortization expense on a tax-effected basis where applicable.
(5) Fully taxable equivalent (assuming an income tax rate of 37.5%).
 
11


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2006 Overview

Simmons First National Corporation recorded net income of $27,481,000 for the year ended December 31, 2006, a 1.9% increase from net income of $26,962,000 in 2005. Net income in 2004 was $24,446,000. Diluted earnings per share increased $0.06, or 3.3%, to $1.90 in 2006 compared to $1.84 in 2005. Diluted earnings per share in 2004 were $1.65. The Company’s return on average assets and return on average stockholders’ equity for the year ended December 31, 2006, were 1.07% and 10.93%, when compared to 1.08% and 11.24%, respectively, for the year ended 2005.

At December 31, 2006, the Company’s loan portfolio totaled $1.783 billion, which is a $65.4 million, or a 3.8%, increase from the same period last year. This increase is due primarily to a $94 million, or 9% increase in real estate loans. Loan growth was somewhat mitigated by a $15 million payoff of a bank stock loan, a $12 million reduction in a single commercial line of credit, a $5 million reduction in student loans due to early sales in order to avoid consolidation lenders, and a larger than normal seasonal drop in agricultural loans.

Asset quality remained strong with the allowance for loan losses at 1.42% of total loans and 252% of non-performing loans at December 31, 2006. The internal rating of several large commercial loan customers was upgraded due to financial improvement of the borrowers and two significant impaired credit relationships paid off. Net credit card charge-offs were down $2.6 million in 2006 from 2005, primarily due to the changes in bankruptcy laws effective in October 2005. These improvements resulted in a $3.7 million reduction in provision for loan losses in 2006 compared to 2005.

Total assets for the Company at December 31, 2006, were $2.651 billion, an increase of $128 million, or 5.1%, over the period ended December 31, 2005. Stockholders’ equity as of December 31, 2006 was $259 million, an increase of $14.9 million, or approximately 6.1%, from December 31, 2005.

Simmons First National Corporation is an Arkansas based, Arkansas committed financial holding company with $2.7 billion in assets and 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 86 offices, of which 82 are financial centers, in 48 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 plan as it relates to stock options.

Loans

Loans the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-offs are reported at their outstanding principal adjusted for any loans charged off and 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 nonaccrual 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.
 
12


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 uncollectability 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.
 
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.

Core Deposit Premiums

Core deposit premiums are being amortized using both straight-line and accelerated methods over periods ranging from 8 to 11 years. Such assets are periodically evaluated as to the recoverability of their carrying value.

Fee Income

Periodic bankcard 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.
 
13

 
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, Employee Benefit Plans, in the accompanying 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.

Acquisitions

On November 1, 2005, the Company completed a branch purchase in which Bank of Little Rock sold its Southwest Little Rock, Arkansas location at 8500 Geyer Springs Road to Simmons First National Bank, a subsidiary of the Company. The acquisition included approximately $3.5 million in total deposits in addition to the fixed assets used in the branch operation. No loans were involved in the transaction. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $151,000 and $31,000, respectively.

On June 25, 2004, the Company completed a branch purchase in which Cross County Bank sold its Weiner, Arkansas location to Simmons First Bank of Jonesboro, a subsidiary of the Company. The acquisition included approximately $6 million in total deposits and the fixed assets used in the branch operation. No loans were involved in the transaction. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $344,000 and $117,000, respectively.

On March 19, 2004, the Company merged with Alliance Bancorporation, Inc. (“ABI”). ABI owned Alliance Bank of Hot Springs, Hot Springs, Arkansas with consolidated assets (including goodwill and core deposits), loans and deposits of approximately $155 million, $70 million and $110 million, respectively. During the second quarter of 2004, Alliance Bank changed its name to Simmons First Bank of Hot Springs and continues to operate as a separate community bank with virtually the same board of directors, management and staff. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $14,690,000 and $1,245,000, respectively.

The system integration for the 2005 acquisition was completed on the acquisition date. The system integration for the 2004 mergers and acquisitions were completed during the second quarter of 2004.
 
Net Interest Income

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 Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Funds rate, which is the cost to banks of immediately available overnight funds, began 2004 at 1.00%. During 2004, the Federal Funds rate increased 125 basis points to end the year at 2.25%. During 2005, the Federal Funds rate increased 50 basis points in each of the four quarters to end the year at 4.25%. After seventeen consecutive quarters of increases, the Federal Funds rate has remained at 5.25% since June 29, 2006.

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.
 
14


For the year ended December 31, 2006, net interest income on a fully taxable equivalent basis was $92.0 million, a decrease of $1.5 million, or 1.6%, from the same period in 2005. The decrease in net interest income was the result of a $20.2 million increase in interest income offset by a $21.7 million increase in interest expense. As a result, the net interest margin decreased 17 basis points to 3.96% for the year ended December 31, 2006, when compared to 4.13% for 2005. The Company expects to see continued pressure on the margin driven primarily by the increase in cost of funds resulting from competitive deposit repricing. However, since approximate $111 million of the investment portfolio will mature or reprice during 2007, with reinvestment at a higher yield, management anticipates a flat to slightly improving margin in 2007.

The $20.2 million increase in interest income for 2006 is primarily the result of a 72 basis point increase in the yield on earning assets associated with the repricing to a higher interest rate environment, along with a growth in loans. The growth in average loans accounted for an increase of $6.2 million in interest income. The higher interest rates resulted in a $15.2 million increase in interest income. More specifically, $11.8 million of the increase due to higher rates is 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. As a result, the average rate earned on the loan portfolio increased 68 basis points from 6.82% to 7.50%.

The $21.7 million increase in interest expense for 2006 is primarily the result of a 103 basis point increase in the cost of funds due to competitive repricing during a higher interest rate environment, coupled with a $57 million increase in average interest bearing liabilities generated through internal growth. The higher interest rates accounted for a $19.8 million increase in interest expense. The most significant component of this increase was the $13.1 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. As a result of this repricing, the average rate paid on time deposits increased 127 basis points from 2.78% to 4.05%. The higher level of average interest bearing liabilities resulted in a $1.9 million increase in interest expense. More specifically, the higher level of average interest bearing liabilities was the result of increases of approximately $76.7 million from internal deposit growth, offset by a $12.8 million reduction in average Fed Funds purchased and short-term debt and a $7.1 million reduction in average long-term debt.
 
For the year ended December 31, 2005, net interest income on a fully taxable equivalent basis was $93.5 million, an increase of $4.7 million, or 5.3%, from the same period in 2004. The increase in net interest income was the result of a $17 million increase in interest income and a $12.4 million increase in interest expense. As a result, the net interest margin increased 5 basis points to 4.13% for the year ended December 31, 2005, when compared to 4.08% for 2004.
 
15


Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2006, 2005 and 2004, respectively, as well as changes in fully taxable equivalent net interest margin for the years 2006 versus 2005 and 2005 versus 2004.
 

Table 1:
Analysis of Net Interest Income
(FTE =Fully Taxable Equivalent)
 
 
Years Ended December 31
 
(In thousands)
 
2006
 
2005
 
2004
 
                     
Interest income
 
$
153,362
 
$
133,071
 
$
116,064
 
FTE adjustment
   
3,185
   
3,234
   
3,173
 
                   
Interest income - FTE
   
156,547
   
136,305
   
119,237
 
Interest expense
   
64,558
   
42,814
   
30,428
 
                     
Net interest income - FTE
 
$
91,989
 
$
93,491
 
$
88,809
 
                     
Yield on earning assets - FTE
   
6.74
%
 
6.02
%
 
5.48
%
                     
Cost of interest bearing liabilities
   
3.24
%
 
2.21
%
 
1.65
%
                     
Net interest spread - FTE
   
3.50
%
 
3.81
%
 
3.83
%
                     
Net interest margin - FTE
   
3.96
%
 
4.13
%
 
4.08
%

Table 2:
Changes in Fully Taxable Equivalent Net Interest Margin
 
               
(In thousands)
 
2006 vs. 2005
 
2005 vs. 2004
 
               
Increase due to change in earning assets
 
$
5,056
 
$
7,570
 
Increase due to change in earning asset yields
   
15,186
   
9,498
 
Decrease due to change in interest rates paid on interest bearing liabilities
   
(19,813
)
 
(11,300
)
Decrease due to change in interest bearing liabilities
   
(1,931
)
 
(1,086
)
               
(Decrease) increase in net interest income
 
$
(1,502
)
$
4,682
 
               
 
16


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 each of the years in the three-year period ended December 31, 2006. 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. Nonaccrual 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

 
 
Years Ended December 31
 
   
2006
 
2005
 
2004
 
 
 
Average
 
Income/
 
Yield/
 
Average
 
Income/
 
Yield/
 
Average
 
Income/
 
Yield/
 
(In thousands)
 
Balance
 
Expense
 
Rate(%)
 
Balance
 
Expense
 
Rate(%)
 
Balance
 
Expense
 
Rate(%)
 
                                                         
ASSETS
                                                       
                                                         
Earning Assets
                                                       
Interest bearing balances
due from banks
 
$
22,746
 
$
1,072
   
4.71
 
$
20,837
 
$
580
   
2.78
 
$
36,587
 
$
400
   
1.09
 
Federal funds sold
   
20,223
   
1,057
   
5.23
   
30,598
   
925
   
3.02
   
56,423
   
748
   
1.33
 
Investment securities - taxable
   
410,445
   
15,705
   
3.83
   
425,030
   
13,898
   
3.27
   
411,467
   
12,416
   
3.02
 
Investment securities - non-taxable
   
117,931
   
7,573
   
6.42
   
122,047
   
7,670
   
6.28
   
126,349
   
7,843
   
6.21
 
Mortgage loans held for sale
   
7,666
   
476
   
6.21
   
9,356
   
552
   
5.90
   
10,087
   
575
   
5.70
 
Assets held in trading accounts
   
4,590
   
71
   
1.55
   
4,584
   
99
   
2.16
   
4,980
   
41
   
0.82
 
Loans
   
1,740,477
   
130,593
   
7.50
   
1,651,950
   
112,581
   
6.82
   
1,528,447
   
97,214
   
6.36
 
Total interest earning assets
   
2,324,078
   
156,547
   
6.74
   
2,264,402
   
136,305
   
6.02
   
2,174,340
   
119,237
   
5.48
 
Non-earning assets
   
251,261
   
 
   
 
   
233,132
               
203,440
             
                                                         
Total assets
 
$
2,575,339
 
 
 
 
 
 
  $
2,497,534
              $
2,377,780
             
                                                         
                                                         
 
                                                       
LIABILITIES AND
STOCKHOLDERS’ EQUITY
                                                       
                                                         
Liabilities
                                                       
Interest bearing liabilities
                                                       
Interest bearing transaction
and savings deposits
 
$
737,328
 
$
11,658
   
1.58
 
$
762,558
 
$
7,777
   
1.02
 
$
729,842
 
$
4,965
   
0.68
 
Time deposits
   
1,052,705
   
42,592
   
4.05
   
950,820
   
26,431
   
2.78
   
892,360
   
18,198
   
2.04
 
Total interest bearing deposits
   
1,790,033
   
54,250
   
3.03
   
1,713,378
   
34,208
   
2.00
   
1,622,202
   
23,163
   
1.43
 
                                                         
 
                                                       
Federal funds purchased and
securities sold under agreement
to repurchase
   
100,280
   
4,615
   
4.60
   
102,041
   
3,104
   
3.04
   
94,465
   
1,227
   
1.30
 
Other borrowed funds
                                                       
Short-term debt
   
21,065
   
1,227
   
5.82
   
32,076
   
1,101
   
3.43
   
11,252
   
175
   
1.56
 
Long-term debt
   
82,525
   
4,466
   
5.41
   
89,590
   
4,401
   
4.91
   
110,946
   
5,863
   
5.28
 
Total interest bearing liabilities
   
1,993,903
   
64,558
   
3.24
   
1,937,085
   
42,814
   
2.21
   
1,838,865
   
30,428
   
1.65
 
                                                         
                                                       
Non-interest bearing liabilities
                                                       
Non-interest bearing deposits
   
308,804
   
 
   
 
   
303,974
             
293,060
             
Other liabilities
   
21,114
   
 
       
16,499
               
16,136
             
Total liabilities
   
2,323,821
   
 
   
 
   
2,257,558
               
2,148,061
             
Stockholders’ equity
   
251,518
   
 
   
 
   
239,976
                229,719              
Total liabilities and stockholders’ equity
 
$
2,575,339
 
 
 
 
 
 
  $
2,497,534
              $
2,377,780
             
Net interest spread
   
 
   
 
   
3.50
   
 
 
         
3.81
   
 
         
3.83
 
Net interest margin
 
 
 
 
$
91,989
 
 
3.96
   
 
 
$
93,491
   
4.13
        $
88,809
   
4.08
 
                                                         
 
17

 
Table 4 shows changes in interest income and interest expense, resulting from changes in volume and changes in interest rates for each of the years ended December 31, 2006 and 2005, as compared to prior years. 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
 
 
 
Years Ended December 31
 
 
 
2006 over 2005
 
2005 over 2004
 
(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
 
$
57
 
$
435
 
$
492
 
$
(230
)
$
410
 
$
180
 
Federal funds sold
   
(387
)
 
518
   
131
   
(457
)
 
634
   
177
 
Investment securities - taxable
   
(491
)
 
2,299
   
1,808
   
419
   
1,063
   
1,482
 
Investment securities - non-taxable
   
(263
)
 
166
   
(97
)
 
(269
)
 
96
   
(173
)
Mortgage loans held for sale
   
(104
)
 
28
   
(76
)
 
(43
)
 
20
   
(23
)
Assets held in trading accounts
   
--
   
(28
)
 
(28
)
 
(3
)
 
61
   
58
 
Loans
   
6,244
   
11,768
   
18,012
   
8,153
   
7,214
   
15,367
 
                                       
Total
   
5,056
   
15,186
   
20,242
   
7,570
   
9,498
   
17,068
 
                                       
Interest expense
                                     
Interest bearing transaction and savings deposits
   
(265
)
 
4,145
   
3,880
   
232
   
2,580
   
2,812
 
Time deposits
   
3,078
   
13,083
   
16,161
   
1,258
   
6,975
   
8,233
 
Federal funds purchased and securities sold under
agreements to repurchase
   
(55
)
 
1,566
   
1,511
   
105
   
1,772
   
1,877
 
Other borrowed funds
                                     
Short-term debt
   
(465
)
 
591
   
126
   
561
   
365
   
926
 
Long-term debt
   
(362
)
 
428
   
66
   
(1,070
)
 
(392
)
 
(1,462
)
                                       
Total
   
1,931
   
19,813
   
21,744
   
1,086
   
11,300
   
12,386
 
Increase (decrease) in net interest income
 
$
3,125
 
$
(4,627
)
$
(1,502
)
$
6,484
 
$
(1,802
)
$
4,682
 

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 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.

The provision for loan losses for 2006, 2005 and 2004 was $3.8 million, $7.5 million and $8.0 million, respectively. The provision reduction from 2005 to 2006 was primarily driven by two factors.
 
18

 
First, credit card net charge-offs were down $2.6 million, from $4.0 million in 2005 to $1.4 million in 2006. The Company recorded credit card net charge-offs of 1.06% of credit card balances for 2006 compared to 2.85% for 2005. Second, there was improvement in the credit quality of the loan portfolio, particularly due to the payoff of two large credit relationships in 2006. One was upgraded two levels from substandard to watch, based on improved financial condition of the borrower, and was ultimately paid off. The other impaired relationship, graded substandard, was refinanced with another financial institution. A specific reserve was applied to both of these credit relationships. Additional loans were classified in 2006 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.

The decrease in the provision for loans losses from 2004 to 2005 was due to the overall improvement in the Company’s asset quality.

Non-Interest Income
 
Total non-interest income was $43.9 million in 2006, compared to $42.3 million in 2005 and $40.7 million in 2004. 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.
 
Table 5 shows non-interest income for the years ended December 31, 2006, 2005 and 2004, respectively, as well as changes in 2006 from 2005 and in 2005 from 2004.

Table 5:
Non-Interest Income

 
 
 
 
     
2006
 
2005
 
 
 
 Years Ended December 31
 
Change from
 
Change from
 
(In thousands)
 
2006
 
2005
 
2004
 
2005
 
2004
 
                                             
Trust income
 
$
5,612
 
$
5,589
 
$
5,421
 
$
23
   
0.41
%
$
168
   
3.10
%
Service charges on deposit accounts
   
15,795
   
15,818
   
14,564
   
(23
)
 
(0.15
)
 
1,254
   
8.61
 
Other service charges and fees
   
2,561
   
2,017
   
2,016
   
544
   
26.97
   
1
   
0.05
 
Income on sale of mortgage loans, net of commissions
   
2,849
   
2,919
   
3,391
   
(70
)
 
(2.40
)
 
(472
)
 
(13.92
)
Income on investment banking, net of commissions
   
341
   
416
   
645
   
(75
)
 
(18.03
)
 
(229
)
 
(35.50
)
Credit card fees
   
10,742
   
10,252
   
10,001
   
490
   
4.78
   
251
   
2.51
 
Premiums on sale of student loans
   
2,071
   
1,822
   
2,114
   
249
   
13.67
   
(292
)
 
(13.81
)
Bank owned life insurance income
   
1,523
   
953
   
261
   
570
   
59.81
   
692
   
265.13
 
Other income
   
2,453
   
2,700
   
2,292
   
(247
)
 
(9.15
)
 
408
   
17.80
 
Loss on sale of securities, net
   
--
   
(168
)
 
--
   
168
   
100.00
   
(168
)
 
(100.00
)
Total non-interest income
 
$
43,947
 
$
42,318
 
$
40,705
 
$
1,629
   
3.85
%
$
1,613
   
3.96
%

Recurring fee income for 2006 was $34.7 million, an increase of $1.0 million, or 3.0%, when compared with the 2005 amounts. This increase was principally the result of growth in ATM income due to increased volume and an improvement in the fee structure. The increase in credit card fees was primarily the result of a pricing change related to interchange fees.

Recurring fee income for 2005 was $33.7 million, an increase of $1.7 million, or 5.2%, when compared with the 2004 amounts. The increase in service charges on deposit accounts for 2005 can be primarily attributed to normal growth in transaction accounts and improvement in the fee structure associated with the Company’s deposit accounts.

During the years ended December 31, 2006 and 2005, combined income on the sale of mortgage loans and income on investment banking decreased $145,000 and $701,000, respectively, from the years ended in 2005 and 2004. The decrease was primarily the result of a reduced demand for those products due to the rising interest rate environment.
 
19


Premiums on sale of student loans increased by $249,000, or 13.7%, in 2006 over 2005. The increase was primarily due to accelerating the sale of student loans during 2006. Normally, as student loans reach payout status, the Company generally sells student loans into the secondary market. Because of changes in the industry relative to loan consolidations, and in order to protect the premium on these loans, the Company made the decision to sell student loans prior to the payout period. This resulted in recognition of premium in 2006 on loans that normally would have been sold in 2007. Premiums on sale of student loans decreased by $292,000, or 13.8%, in 2005 over 2004 due to similar accelerated sales during 2004.

On April 29, 2005, the Company invested an additional $25 million in Bank Owned Life Insurance (“BOLI”). BOLI income increased by $570,000 in 2006 over 2005, primarily due to an improved earnings credit on the investment. The remainder of the increase can be attributed to the timing of the investment, with approximately eight months of earnings in 2005 compared to a full year in 2006. BOLI income increased by $692,000 in 2005 over 2004, with the increase almost entirely attributable to this purchase.

There were no gains or losses on sale of securities during 2006. During the second quarter of 2005, the Company sold certain available-for-sale 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. There were no gains or losses on sale of securities during 2004.

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 2006 was $89.1 million, an increase of $3.5 million or 4.1%, from 2005. The increase in non-interest expense during 2006 compared to 2005 is primarily attributed to normal on-going operating expenses and the incremental expenses of approximately $1.1 million associated with the operation of new financial centers opened during 2005 and 2006. When normalized for the additional expenses from the expansion, non-interest expense for 2006 increased by 2.8% over 2005.

Non-interest expense for 2005 was $85.6 million, an increase of $3.2 million or 3.9%, from 2004. The increase in non-interest expense during 2005 compared to 2004 is primarily attributed to normal on-going operating expenses and the additional expenses of approximately $748,000 associated with the operation of new financial centers opened during 2005. During 2004, the Company recorded a nonrecurring expense of $771,000 related to the write off of deferred debt issuance cost associated with the redemption of its 9.12% trust preferred securities. When normalized for both the prepayment of the trust preferred securities and the additional expenses from the expansion, non-interest expense for 2005 increased by the same 3.9% over 2004.

The increase in credit card expense over the past two years was primarily attributable to the Company’s travel rewards program. Accumulated travel rewards expire after 36 months. The Company has introduced several new initiatives to make its product more competitive. One of the key initiatives introduced in 2005 was to move as many qualifying accounts as possible from a standard VISA product to a Platinum VISA Rewards product. As a result of this conversion process, travel rewards expense increased in 2005 and in 2006.

Core deposit premium amortization expense recorded for the years ended December 31, 2006, 2005 and 2004, was $830,000, $830,000 and $791,000, respectively. The Company’s estimated amortization expense for each of the following five years is: 2007 - $818,000; 2008 - $807,000; 2009 - $802,000; 2010 - $698,000; and 2011 -$451,000. The estimated amortization expense decreases as core deposit premiums fully amortize in future years.
 
20

Table 6 below shows non-interest expense for the years ended December 31, 2006, 2005 and 2004, respectively, as well as changes in 2006 from 2005 and in 2005 from 2004.

Table 6:
Non-Interest Expense

     
 
   
 
       
2006
 
2005
 
 
 
Years Ended December 31
 
Change from
 
Change from
 
(In thousands)
 
2006
2005
 
2004
 
2005
 
2004
 
                                               
Salaries and employee benefits
 
$
53,442
 
$
51,270
 
$
48,533
 
$
2,172
   
4.24
%
 
$
2,737
   
5.64
%
Occupancy expense, net
   
6,385
   
5,840
   
5,500
   
545
   
9.33
     
340
   
6.18
 
Furniture and equipment expense
   
5,718
   
5,758
   
5,646
   
(40
)
 
(0.69
)
   
112
   
1.98
 
Loss on foreclosed assets
   
136
   
191
   
346
   
(55
)
 
(28.80
)
   
(155
)
 
(44.80
)
Deposit insurance
   
270
   
279
   
284
   
(9
)
 
(3.23
)
   
(5
)
 
(1.76
)
Other operating expenses
                                             
Professional services
   
2,490
   
2,201
   
2,029
   
289
   
13.13
     
172
   
8.48
 
Postage
   
2,278
   
2,281
   
2,256
   
(3
)
 
(0.13
)
   
25
   
1.11
 
Telephone
   
1,961
   
1,847
   
1,784
   
114
   
6.17
     
63
   
3.53
 
Credit card expense
   
3,235
   
2,693
   
2,374
   
542
   
20.13
     
319
   
13.44
 
Operating supplies
   
1,611
   
1,555
   
1,528
   
56
   
3.60
     
27
   
1.77
 
Amortization of core deposits
   
830
   
830
   
791
   
--
   
0.00
     
39
   
4.93
 
Write off of deferred debt issuance cost
   
--
   
--
   
771
   
--
   
--
     
(771
)
 
(100.00
)
Other expense
   
10,712
   
10,839
   
10,543
   
(127
)
 
(1.17
)
   
296
   
2.81
 
Total non-interest expense
 
$
89,068
 
$
85,584
 
$
82,385
 
$
3,484
   
4.07
%
 
$
3,199
   
3.88
%

Income Taxes

The provision for income taxes for 2006 was $12.4 million, compared to $12.5 million in 2005 and $11.5 million in 2004. The effective income tax rates for the years ended 2006, 2005 and 2004 were 31.2%, 31.7% and 32.0%, respectively.

Loan Portfolio

The Company's loan portfolio averaged $1.740 billion during 2006 and $1.652 billion during 2005. As of December 31, 2006, total loans were $1.783 billion, compared to $1.718 billion on 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 collectable 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 $370.8 million at December 31, 2006, or 20.8% of total loans, compared to $370.9 million, or 21.6% of total loans at December 31, 2005. The $141,000 consumer loan decrease from 2005 to 2006 is the result of an increase in indirect lending, offset by a decline in student loans. The increase in the indirect consumer loan portfolio was primarily the result of more aggressive marketing efforts by the Company, along with less attractive finance incentives offered by car manufacturers. As student loans reach payout status, the Company generally sells these loans into the secondary market. Because of changes in the industry relative to loan consolidations, and in order to protect the premium, the Company made the decision to sell some student loans prior to the payout period in 2006. These early sales created a decline in the portfolio balances at December 31, 2006.
 
21


The Company continues to experience significant competitive pressure from the credit card industry. Over the previous three years, the credit card portfolio has decreased by approximately $10 million to $14 million each year, primarily due to closed accounts. However, the Company experienced a slow-down in this trend in 2006, with the credit card portfolio balance increasing by approximately $300 thousand from December 31, 2005 to December 31, 2006.

Management believes the increase in outstanding balances is the result of the introduction of several initiatives over the past two years to make the Company’s credit card products more competitive, and therefore slow down the number of closed accounts. In 2005, as part of its retention strategy, the Company converted over 15,000 accounts to a new Platinum VISA Rewards product, carrying a low fixed interest rate of 8.95%, and offering customers competitive rewards based on their purchases. The accounts were converted from the Company’s standard VISA product, the card that has been primarily impacted by the competitive teaser rates. As a continuation of efforts to stabilize the credit card portfolio, the Company introduced another new initiative in July 2006, a 7.25% fixed rate card with no fees and no rewards. Over the previous five years, 2001 - 2005, the Company had a net cumulative decrease of 14,500 accounts in its credit card portfolio. In 2006, there was an addition of 1,650 net new accounts, with the most significant growth coming since the introduction of the 7.25% fixed rate card in July. While these results are positive, management cannot be assured that a sustained growth trend has yet been established.

Real estate loans consist of construction loans, single family residential loans and commercial loans. Real estate loans were $1.2 billion at December 31, 2006, or 64.7% of total loans, compared to $1.1 billion, or 61.7% of total loans at December 31, 2005. Construction loans accounted for $38.5 million of the increase in real estate loans, single-family residential loans increased by $23.6 million and commercial real estate loans increased $32.7 million during 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 financial institution loans. Commercial loans were $245.1 million at December 31, 2006, or 13.7% of total loans, compared to the $274.2 million, or 16.0% of total loans at December 31, 2005. This $29.1 million reduction in commercial loans resulted from unexpected decreases in each commercial loan category. Other commercial loans decreased $6.9 million, primarily due to a reduction of one significant commercial line of credit. The $6.5 million dollar decrease in agricultural loans resulted from early payoffs of loans due to a successful year for farmers. The payoff of one bank stock loan was the primary reason for the $15.7 million decrease in loans to financial institutions.

The amounts of loans outstanding at the indicated dates are reflected in table 7, according to type of loan.

Table 7:
Loan Portfolio

 
 
Years Ended December 31
 
(In thousands)
   
2006
   
2005
   
2004
   
2003
   
2002
 
                                 
Consumer
                               
Credit cards
 
$
143,359
 
$
143,058
 
$
155,326
 
$
165,919
 
$
180,439
 
Student loans
   
84,831
   
89,818
   
83,283
   
86,301
   
83,890
 
Other consumer
   
142,596
   
138,051
   
128,552
   
142,995
   
153,103
 
Real Estate
                               
Construction
   
277,411
   
238,898
   
169,001
   
111,567
   
90,736
 
Single family residential
   
364,450
   
340,839
   
318,488
   
261,936
   
233,193
 
Other commercial
   
512,404
   
479,684
   
481,728
   
408,452
   
290,469
 
Commercial
                               
Commercial
   
178,028
   
184,920
   
158,613
   
162,122
   
144,678
 
Agricultural
   
62,293
   
68,761
   
62,340
   
57,393
   
58,585
 
Financial institutions
   
4,766
   
20,499
   
1,079
   
6,370
   
6,504
 
Other
   
13,357
   
13,579
   
12,966
   
15,259
   
15,708
 
                                 
Total loans
 
$
1,783,495
 
$
1,718,107
 
$
1,571,376
 
$
1,418,314
 
$
1,257,305
 
 
22

 
Table 8 reflects the remaining maturities and interest rate sensitivity of loans at December 31, 2006.

Table 8:
Maturity and Interest Rate Sensitivity of Loans

 
         
Over 1 
             
         
year 
             
 
   
1 year 
   
through
   
Over
       
(In thousands)
   
or less
   
5 years
   
5 years
   
Total
 
                           
Consumer
 
$
270,979
 
$
99,759
 
$
48
 
$
370,786
 
Real estate
   
784,719
   
358,926
   
10,620
   
1,154,265
 
Commercial
   
190,979
   
53,714
   
394
   
245,087
 
Other
   
7,660
   
5,381
   
316
   
13,357
 
                           
Total
 
$
1,254,337
 
$
517,780
 
$
11,378
 
$
1,783,495
 
                           
                           
Predetermined rate
 
$
847,266
 
$
467,100
 
$
11,060
 
$
1,325,426
 
Floating rate
   
407,071
   
50,680
   
318
   
458,069
 
                           
Total
 
$
1,254,337
 
$
517,780
 
$
11,378
 
$
1,783,495
 

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 uncollectable, the portion of the loan determined to be uncollectable 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 uncollectable. 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 uncollectable.
 
23

 
Table 9 presents information concerning non-performing assets, including nonaccrual and restructured loans and other real estate owned.

Table 9:
Non-performing Assets

 
 
Years Ended December 31
 
(In thousands)
   
2006
   
2005
   
2004
   
2003
   
2002
 
                                 
Nonaccrual loans
 
$
8,958
 
$
7,296
 
$
10,918
 
$
10,049
 
$
10,443
 
Loans past due 90 days or more
(principal or interest payments)
   
1,097
   
1,131
   
1,085
   
1,518
   
1,814
 
Restructured
   
--
   
--
   
--
   
--
   
--
 
Total non-performing loans
   
10,055
   
8,427
   
12,003
   
11,567
   
12,257
 
                                 
Other non-performing assets
                               
Foreclosed assets held for sale
   
1,940
   
1,540
   
1,839
   
2,979
   
2,705
 
Other non-performing assets
   
52
   
16
   
83
   
393
   
426
 
Total other non-performing assets
   
1,992
   
1,556
   
1,922
   
3,372
   
3,131
 
                                 
Total non-performing assets
 
$
12,047
 
$
9,983
 
$
13,925
 
$
14,939
 
$
15,388
 
                                 
Allowance for loan losses to non-performing loans
   
252.46
%
 
319.48
%
 
220.84
%
 
219.13
%
 
179.07
%
Non-performing loans to total loans
   
0.56
%
 
0.49
%
 
0.76
%
 
0.82
%
 
0.97
%
Non-performing assets to total assets
   
0.45
%
 
0.40
%
 
0.58
%
 
0.67
%
 
0.78
%

There was no interest income on the nonaccrual loans recorded for the years ended December 31, 2006, 2005 and 2004.

At December 31, 2006, impaired loans were $12.8 million compared to $14.8 million in 2005. The decrease in impaired loans from December 31, 2005, primarily relates to the decrease of borrowers that are still performing, but for which management has internally identified as impaired. This decrease is mainly due to the general improvement of the Company’s smaller commercial loan relationships, as well as the payoff of one significant impaired credit, and is indicative of the overall improvement in the asset quality of the Company. In addition, workout efforts were completed in 2006 on one large loan relationship. On an ongoing basis, management evaluates the underlying collateral on all impaired loans and allocates specific reserves, where appropriate, in order to absorb potential losses if the collateral were ultimately foreclosed.

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 nonaccruals, 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.
 
24


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.
 
25

An analysis of the allowance for loan losses for the last five years is shown in table 10.

Table 10:
Allowance for Loan Losses

(In thousands)
 
2006
 
2005
 
2004
 
2003
 
2002
 
                                 
Balance, beginning of year
 
$
26,923
 
$
26,508
 
$
25,347
 
$
21,948
 
$
20,496
 
                                 
Loans charged off
                               
Credit card
   
2,454
   
4,950
   
4,589
   
4,705
   
4,703
 
Other consumer
   
1,242
   
1,240
   
2,144
   
1,987
   
2,320
 
Real estate
   
1,868
   
1,048
   
1,263
   
1,504
   
1,813
 
Commercial
   
1,317
   
3,688
   
2,409
   
2,674
   
2,310
 
Total loans charged off
   
6,881
   
10,926
   
10,405
   
10,870
   
11,146
 
                                 
Recoveries of loans previously charged off
                               
Credit card
   
1,040
   
832
   
720
   
670
   
640
 
Other consumer
   
629
   
636
   
683
   
644
   
677
 
Real estate
   
901
   
251
   
277
   
218
   
253
 
Commercial
   
536
   
2,096
   
751
   
987
   
558
 
Total recoveries
   
3,106
   
3,815
   
2,431
   
2,519
   
2,128
 
Net loans charged off
   
3,775
   
7,111
   
7,974
   
8,351
   
9,018
 
Allowance for loan losses of acquired institutions
   
--
   
--
   
1,108
   
2,964
   
247
 
Reclass to reserve for unfunded commitments (1)
   
(1,525
)
 
--
   
--
   
--
   
--
 
Provision for loan losses
   
3,762
   
7,526
   
8,027
   
8,786
   
10,223
 
                                 
Balance, end of year
 
$
25,385
 
$
26,923
 
$
26,508
 
$
25,347
 
$
21,948
 
                                 
Net charge-offs to average loans
   
0.22
%
 
0.43
%
 
0.52
%
 
0.64
%
 
0.72
%
Allowance for loan losses to period-end loans
   
1.42
%
 
1.57
%
 
1.69
%
 
1.79
%
 
1.75
%
Allowance for loan losses to net charge-offs
   
672.45
%
 
378.6
%
 
332.4
%
 
303.5
%
 
243.4
%
                                 
(1) On March 31, 2006, the reserve for unfunded commitments was reclassified from the allowance for loan losses to other liabilities.

Provision for Loan Losses

The amount of provision to the allowance each year 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 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.
 
26


As of December 31, 2006, the allowance for loan losses reflects a decrease of approximately $1.5 million from December 31, 2005, due to the reclassification to establish a reserve for unfunded commitments. As a general rule, the allocation in each category within the allowance reflects the overall changes in loan portfolio mix.

The Company’s unallocated portion of the allowance increased approximately $1.4 million from December 31, 2005 to 2006, offset by a $3.0 million decrease to the allocation for commercial loans. The increase in unallocated is primarily due to the credit quality upgrade of several significant commercial loan customers, and the overall improvement in the credit quality of the loan portfolio. The unallocated portion of the allowance as a percent of total loans was 0.43% and 0.36% for the years ended December 31, 2006, and 2005, respectively.

The Company still has some concerns over the uncertainty of the economy and the impact of pricing in the poultry and timber industries in Arkansas. The Company is also cautious regarding the softening of the real estate market in Arkansas. Based on its analysis of loans within these business sectors, the Company believes the allowance for loan losses is adequate for the year ended December 31, 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.

The Company allocates the allowance for loan losses according to the amount deemed to be reasonably necessary to provide for losses incurred within the categories of loans set forth in table 11.

Table 11:
Allocation of Allowance for Loan Losses

 
 December 31
 
2006
 
2005
 
2004
 
2003
 
2002
 
(In thousands)
 
Allowance
Amount
 
% of
loans(1)
 
Allowance
Amount
 

% of
loans(1)
 
Allowance
Amount
 
% of
loans(1)
 
 
Allowance
Amount
   
 
% of
loans(1)
 
 
Allowance
Amount
   
% of
loans(1)
 
                                                               
Credit cards
 
$
3,702
   
8.0%
 
$
3,887
   
8.3%
 
$
4,217
   
9.9%
 
$
3,913
   
11.7%
 
$
4,270
   
14.4%
 
Other consumer
   
1,402
   
12.8%
 
 
1,158
   
13.3%
 
 
1,097
   
13.5%
 
 
1,597
   
16.2%
 
 
1,745
   
18.8%
 
Real estate
   
9,835
   
64.7%
 
 
9,870
   
61.7%
 
 
9,357
   
61.7%
 
 
8,723
   
55.1%
 
 
7,393
   
48.9%
 
Commercial
   
2,856
   
13.7%
 
 
5,857
   
15.9%
 
 
4,820
   
14.1%
 
 
5,113
   
15.9%
 
 
4,398
   
16.7%
 
Other
   
--
   
0.8%
 
 
--
   
0.8%
 
 
--
   
0.8%
 
 
4
   
1.1%
 
 
--
   
1.2%
 
Unallocated
   
7,590
   
 
   
6,151
   
 
   
7,017
         
5,997
         
4,142
   
 
 
                                                               
Total
 
$
25,385
   
100.0%
 
$
26,923
   
100.0%
 
$
26,508
   
100.0%
 
$
25,347
   
100.0%
 
$
21,948
   
100.0%
 
                                                         
 (1) Percentage of loans in each category to total loans                                    
 
Investments and Securities

The Company's securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as either held-to-maturity, available-for-sale or trading.

Held-to-maturity securities, which include any security for which management has the positive intent and ability to hold until maturity, are carried at historical cost, adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity. Interest and dividends on investments in debt and equity securities are included in income when earned.

Available-for-sale securities, which include any security for which management has no immediate plans to sell, but which may be sold in the future, are carried at fair value. Realized gains and losses, based on amortized cost of the specific security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. Premiums and discounts are amortized and accreted, respectively, to interest income, using the constant yield method over the period to maturity. Interest and dividends on investments in debt and equity securities are included in income when earned.

The Company's philosophy regarding investments is conservative, based on investment type and maturity. Investments in the portfolio primarily include U.S. Treasury securities, U.S. Government agencies, mortgage-backed securities and municipal securities. The Company's general policy is not to invest in derivative type investments or high-risk securities, except for collateralized mortgage-backed securities for which collection of principal and interest is not subordinated to significant superior rights held by others.
 
27


Held-to-maturity and available-for-sale investment securities were $179.9 million and $347.2 million, respectively, at December 31, 2006, compared to the held-to-maturity amount of $150.3 million and available-for-sale amount of $371.5 million at December 31, 2005.
 
As of December 31, 2006, $55.0 million, or 30.6%, of the held-to-maturity securities were invested in U.S. Treasury securities and obligations of U.S. government agencies, 49.1% of which will mature in less than five years. In the available-for-sale securities, $333.3 million, or 95.0%, were in U.S. Treasury and U.S. government agency securities, 66.6% of which will mature in less than five years.
 
In order to reduce the Company's income tax burden, an additional $122.5 million, or 68.1%, of the held-to-maturity securities portfolio, as of December 31, 2006, was invested in tax-exempt obligations of state and political subdivisions. In the available-for-sale securities, $1.4 million, or 3.9% were invested in tax-exempt obligations of state and political subdivisions. Most of the state and political subdivision debt obligations are non-rated bonds and represent relatively small, Arkansas issues, which are evaluated on an ongoing basis. There are no securities of any one state and political subdivision issuer exceeding ten percent of the Company's stockholders' equity at December 31, 2006.
 
The Company has approximately $155,000, or 0.1%, in mortgaged-backed securities in the held-to-maturity portfolio at December 31, 2006. In the available-for-sale securities, $3.0 million, or 0.9% were invested in mortgaged-backed securities.
 
As of December 31, 2006, the held-to-maturity investment portfolio had gross unrealized gains of $1.037 million and gross unrealized losses of $1.165 million.

The Company had no gross realized gains during the years ended December 31, 2006, 2005 and 2004, resulting from the sales and/or calls of securities. Gross realized losses of $0, $275,000 and $0 resulting from sales and/or calls of securities were realized for the years ended December 31, 2006, 2005 and 2004, respectively.

Trading securities, which include any security held primarily for near-term sale, are carried at fair value. Gains and losses on trading securities are included in other income. The Company's trading account is established and maintained for the benefit of investment banking. The trading account is typically used to provide inventory for resale and is not used to take advantage of short-term price movements.
 
28

Table 12 presents the carrying value and fair value of investment securities for each of the years indicated.

Table 12:
Investment Securities

   
Years Ended 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
 
$
--
 
$
--
 
$
--
 
$
--
 
$
1,004
 
$
--
 
$
(20
)
$
984
 
U.S. Government agencies
   
54,998
   
367
   
(272
)
 
55,093
   
28,000
   
--
   
(473
)
 
27,527
 
Mortgage-backed securities
   
155
   
3
   
(1
)
 
157
   
187
   
3
   
--
   
190
 
State and political subdivisions
   
122,472
   
667
   
(892
)
 
122,247
   
117,148
   
662
   
(1,298
)
 
116,512
 
Other securities
   
2,319
   
--
   
--
   
2,319
   
3,960
   
--
   
--
   
3,960
 
                                                   
Total
 
$
179,944
 
$
1,037
 
$
(1,165
)
$
179,816
 
$
150,299
 
$
665
 
$
(1,791
)
$
149,173
 
                                                   
Available-for-Sale
                                                 
U.S. Treasury
 
$
6,970
 
$
--
 
$
(30
)
$
6,940
 
$
10,989
 
$
--
 
$
(102
)
$
10,887
 
U.S. Government agencies
   
326,301
   
287
   
(4,177
)
 
322,411
   
348,570
   
35
   
(7,615
)
 
340,990
 
Mortgage-backed securities
   
3,032
   
--
   
(76
)
 
2,956
   
3,392
   
9
   
(92
)
 
3,309
 
State and political subdivisions
   
1,360
   
10
   
--
   
1,370
   
3,014
   
39
   
--
   
3,053
 
Other securities
   
13,035
   
470
   
--
   
13,505
   
12,561
   
690
   
--
   
13,251
 
                                                   
Total
 
$
350,698
 
$
767
 
$
(4,283
)
$
347,182
 
$
378,526
 
$
773
 
$
(7,809
)
$
371,490
 
 
29

Table 13 reflects the amortized cost and estimated fair value of securities at December 31, 2006, by contractual maturity and the weighted average yields (for tax-exempt obligations on a fully taxable equivalent basis, assuming a 37.5% tax rate) of such securities. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

Table 13:
Maturity Distribution of Investment Securities

   
December 31, 2006
 
 
   
 
 
 
Over
 
 
Over
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year
 
 
5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year
 
 
through
 
 
through
 
 
Over
 
 
No fixed
 
 
 
 
Par
 
 
Fair 
 
(In thousands)
 
 
or less
 
 
5 years
 
 
10 years
 
 
10 years
 
 
maturity
 
 
Total
 
 
Value
 
 
Value
 
                                                   
Held-to-Maturity
                                                 
U.S. Treasury
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
U.S. Government agencies
   
10,998
   
16,000
   
28,000
   
--
   
--
   
54,998
   
55,000
   
55,093
 
Mortgage-backed securities
   
--
   
4
   
15
   
136
   
--
   
155
   
155
   
157
 
State and political subdivisions
   
9,551
   
41,395
   
56,033
   
15,493
   
--
   
122,472
   
122,540
   
122,247
 
Other securities
   
--
   
--
   
--
   
930
   
1,389
   
2,319
   
2,319
   
2,319
 
                                                   
Total
 
$
20,549
 
$
57,399
 
$
84,048
 
$
16,559
 
$
1,389
 
$
179,944
 
$
180,014
 
$
179,816
 
                                                   
Percentage of total
   
11.4
%
 
31.9
%
 
46.7
%
 
9.2
%
 
0.8
%
 
100.0
%
         
                                                   
Weighted average yield
   
4.3
%
 
4.5
%
 
4.6
%
 
4.3
%
 
4.3
%
 
4.5
%
         
                                                   
Available-for-Sale
                                                 
U.S. Treasury
 
$
6,970
 
$
--
 
$
--
 
$
--
 
$
--
 
$
6,970
 
$
7,000
 
$
6,940
 
U.S. Government agencies
   
85,562
   
129,356
   
111,382
   
--
   
--
   
326,300
   
326,325
   
322,411
 
Mortgage-backed securities
   
10
   
48
   
855
   
2,119
   
--
   
3,032
   
3,077
   
2,956
 
State and political subdivisions
   
505
   
856
   
--
   
--
   
--
   
1,361
   
1,360
   
1,370
 
Other securities
   
--
   
--
   
--
   
--
   
13,035
   
13,035
   
13,505
   
13,505
 
                                                   
Total
 
$
93,047
 
$
130,260
 
$
112,237
 
$
2,119
 
$
13,035
 
$
350,698
 
$
351,267
 
$
347,182
 
                                                   
Percentage of total
   
26.5
%
 
37.2
%
 
32.0
%
 
0.6
%
 
3.7
%
 
100.0
%
         
                                                   
Weighted average yield
   
3.3
%
 
4.1
%
 
5.8
%
 
5.2
%
 
6.7
%
 
4.5
%
         

Deposits
 
Deposits are the Company’s primary source of funding for earning assets and are primarily developed through the Company’s network of 82 financial centers. 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 December 31, 2006, core deposits comprised 77.3% 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 of the Company’s community banking philosophy, affiliate executives in the local markets establish the interest rates 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 the funding requirements. The Company believes it is paying a competitive rate, when compared with pricing in those markets.
 
30


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 deposit pricing if it experiences increased loan demand or other liquidity needs. The Company began to utilize brokered deposits during 2005 as an additional source of funding to meet liquidity needs.

The Company’s total deposits as of December 31, 2006 were $2.175 billion, an increase of $115 million, or 5.58%, from $2.060 billion at December 31, 2005. The Company had $50 million and $51 million of brokered deposits at December 31, 2006 and 2005, respectively.

Table 14 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits for the three years ended December 31, 2006.

Table 14:
Average Deposit Balances and Rates

   
December 31
 
   
 2006
   
2005
   
2004
 
 
 
Average
 
Average
 
 
Average
 
Average
   
Average
 
Average
 
(In thousands)
 
Amount
 
Rate Paid
   
Amount
 
Rate Paid
   
Amount
 
Rate Paid
 
                                           
Non-interest bearing transaction accounts
 
$
308,804
   
--
   
$
303,974
   
--
   
$
293,060
   
--
 
Interest bearing transaction and savings deposits
   
737,328
   
1.58%
 
   
762,558
   
1.02%
 
   
729,842
   
0.68%
 
Time deposits                        
 
           
 
$100,000 or more
   
407,778
   
4.08%
 
   
371,871
   
2.83%
 
   
349,224
   
2.00%
 
Other time deposits
   
644,927
   
3.92%
 
   
578,949
   
2.74%
 
   
543,136
   
2.06%
 
                                           
Total
 
$
2,098,837
   
2.59%
 
 
$
2,017,352
   
1.79%
 
 
$
1,915,262
   
1.21%
 
 
The Company's maturities of large denomination time deposits at December 31, 2006 and 2005 are presented in table 15.

Table 15:
Maturities of Large Denomination Time Deposits

   
Time Certificates of Deposit
 
 
 
 ($100,000 or more)
 
 
 
 December 31
 
   
 2006
   
2005
 
(In thousands)
   
Balance
   
Percent
     
Balance
   
Percent
 
                             
Maturing
                           
Three months or less
 
$
123,214
   
27.4%
 
 
$
97,676
   
26.8%
 
Over 3 months to 6 months
   
108,716
   
24.1%
 
   
80,763
   
22.2%
 
Over 6 months to 12 months
   
145,716
   
32.4%
 
   
113,968
   
31.3%
 
Over 12 months
   
72,664
   
16.1%
 
   
71,770
   
19.7%
 
                             
Total
 
$
450,310
   
100.00%
 
 
$
364,177
   
100.00%
 
 
31

 
Short-Term Debt
 
Federal funds purchased and securities sold under agreements to repurchase were $105.0 million at December 31, 2006, as compared to $107.2 million at December 31, 2005. Other short-term borrowings, consisting of U.S. TT&L Notes and short-term FHLB borrowings, were $6.1 million at December 31, 2006, as compared to $8.0 million at December 31, 2005.

The Company has historically funded its growth in earning assets through the use of core deposits, large certificates of deposits from local markets, FHLB borrowings and Federal funds purchased. Management anticipates that these sources will provide necessary funding in the foreseeable future.
 
Long-Term Debt
 
The Company’s long-term debt was $83.3 million and $87.0 million at December 31, 2006 and 2005, respectively. The outstanding balance for December 31, 2006 includes $2.0 million in long-term debt, $50.4 million in FHLB long-term advances and $30.9 million of trust preferred securities. The outstanding balance for December 31, 2005, includes $4.0 million in long-term debt, $52.1 million in FHLB long-term advances and $30.9 million of trust preferred securities.

During the year ended December 31, 2006, the Company decreased long-term debt by $3.7 million, or 4.3% from December 31, 2005. This decrease is 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.

On December 31, 2004, the Company redeemed the entire issue of Simmons First Capital Trust 9.12% Trust Preferred Securities, due June 30, 2027, with an aggregate face amount of $17,250,000.

Aggregate annual maturities of long-term debt at December 31, 2006 are presented in table 16.

Table 16:    Maturities of Long-Term Debt

(In thousands)
Year
 
Annual Maturities
       
 
2007
 $
10,383
 
2008
 
12,987
 
2009
 
5,842
 
2010
 
5,087
 
2011
 
3,881
 
Thereafter
 
45,131
       
 
Total
 $
83,311
 
Capital
 
Overview
 
At December 31, 2006, total capital reached $259.0 million. Capital represents shareholder ownership in the Company -- the book value of assets in excess of liabilities. At December 31, 2006, the Company’s equity to asset ratio was 9.77% 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.
 
32

 
Stock Repurchase

On May 25, 2004, the Company announced the adoption by the Board of Directors of a repurchase program. The program authorizes the repurchase of up to 5% of the 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 exercise, payment of future stock dividends and general corporate purposes.

During the year ended December 31, 2006, the Company repurchased a total of 203,100 shares of stock with a weighted average repurchase price of $27.80 per share. Under the current stock repurchase plan, the Company can repurchase an additional 340,967 shares.

Cash Dividends

The Company declared cash dividends on its Common Stock of $0.68 per share for the twelve months ended 2006 compared to $0.61 per share for the twelve months ended 2005. In recent years, the Company increased dividends no less than annually and presently plans to continue with this practice.

Parent Company Liquidity

The primary liquidity needs of the Parent Company are the payment of dividends to shareholders, the funding of debt obligations and the share repurchase plan. The primary sources for meeting these liquidity needs are the current cash on hand at the parent company and 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 Item 7A, Liquidity and Qualitative Disclosures About Market Risk discussion 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). Management believes that, as of December 31, 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.
 
33

 
The Company's risk-based capital ratios at December 31, 2006 and 2005 are presented in table 17.
 
Table 17:    Risk-Based Capital
   
December 31
 
(In thousands)
 
2006
 
2005
 
           
Tier 1 capital
         
Stockholders’ equity
 
$
259,016
 
$
244,085
 
Trust preferred securities
   
30,000
   
30,000
 
Goodwill and core deposits
   
(64,334
)
 
(65,278
)
Unrealized loss on available-for-sale securities
   
2,198
   
4,360
 
Other
   
--
   
--
 
               
Total Tier 1 capital
   
226,880
   
213,167
 
               
Tier 2 capital
             
Qualifying unrealized gain on available-for-sale equity securities
   
167
   
338
 
Qualifying allowance for loan losses
   
22,953
   
21,811
 
               
Total Tier 2 capital
   
23,120
   
22,149
 
               
Total risk-based capital
 
$
250,000
 
$
235,316
 
               
Risk weighted assets
 
$
1,831,063
 
$
1,739,771
 
               
Ratios at end of year
             
Leverage ratio
   
8.83
%
 
8.61
%
Tier 1 capital
   
12.39
%
 
12.25
%
Total risk-based capital
   
13.65
%
 
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
%
 
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
 
In the normal course of business, the Company enters into a number of financial commitments. Examples of these commitments include but are not limited to long-term debt financing, operating lease obligations, unfunded loan commitments and letters of credit.
 
The Company’s long-term debt at December 31, 2006, includes notes payable, FHLB long-term advances and trust preferred securities, all of which the Company is contractually obligated to repay in future periods.

Operating lease obligations entered into by the Company are generally associated with the operation of a few of the Company’s financial centers located throughout the state of Arkansas. The financial obligation by the Company on these locations is considered immaterial due to the limited number of financial centers, which operate under an agreement of this type.

Commitments to extend credit and letters of credit are legally binding, conditional agreements generally having fixed expiration or termination dates. These commitments generally require customers to maintain certain credit standards and are established based on management’s credit assessment of the customer. The commitments may expire without being drawn upon. Therefore, the total commitment does not necessarily represent future requirements.
 
34

 
The funding requirements of the Company's most significant financial commitments, at December 31, 2006 are shown in table 18.

Table 18:    Funding Requirements of Financial Commitments
   
Payments due by period
 
   
Less than
 
1-3
 
3-5
 
Greater than
     
(In thousands)
 
1 Year
 
Years
 
Years
 
5 Years
 
Total
 
Long-term debt
 
$
10,383
 
$
18,829
 
$
8,968
 
$
45,131
 
$
83,311
 
Credit card loan commitments
   
202,047
   
--
   
--
   
--
   
202,047
 
Other loan commitments
   
529,697
   
--
   
--
   
--
   
529,697
 
Letters of credit
   
5,477
   
--
   
--
   
--
   
5,477
 
 
The Company has $64.8 million and $65.6 million total goodwill and core deposit premiums for the periods ended December 31, 2006 and December 31, 2005, respectively. Because of the Company’s high level of these two intangible assets, management believes a useful calculation is tangible return on equity. This calculation for the twelve months ended December 31, 2006, 2005, 2004, 2003 and 2002, which is similar to the GAAP calculation of return on average stockholders’ equity, is presented in table 19.

Table 19:     Return on Tangible Equity
(In thousands)
 
2006
 
2005
 
2004
 
2003
 
2002
     
                           
Twelve months ended
                         
Return on average stockholders equity: (A/C)
   
10.93
%
 
11.24
%
 
10.64
%
 
11.57
%
 
11.56
%
     
Return on tangible equity: (A+B)/(C-D)
   
15.03
%
 
15.79
%
 
14.94
%
 
14.03
%
 
13.99
%
     
                                       
Net income
 
$
27,481
 
$
26,962
 
$
24,446
 
$
23,790
 
$
22,078
   
(A
)
Amortization of intangibles, net of taxes
   
519
   
522
   
494
   
108
   
49
   
(B
)
Average stockholders' equity
   
251,518
   
239,976
   
229,719
   
205,683
   
190,947
   
(C
)
Average goodwill and core deposits, net
   
65,233
   
65,913
   
62,836
   
35,335
   
32,808
   
(D
)
 
35

 
On December 31, 2004, the Company recorded a nonrecurring $470,000 after tax charge, or a $0.03 reduction in diluted earnings per share, related to the write off of deferred debt issuance cost associated with the redemption of its 9.12% trust preferred securities. During the second quarter 2003, the Company recorded a nonrecurring $0.03 addition to earnings per share, resulting from the sale of its mortgage servicing portfolio. In light of these events, Management believes operating earnings (earnings excluding nonrecurring items) is a useful calculation in reflection the Company’s performance. This calculation for the twelve months ended December 31, 2006, 2005, 2004, 2003 and 2002 is presented in table 20.
 
Table 20:     Operating Earnings
(In thousands, except share data)
 
2006
 
2005
 
2004
 
2003
 
2002
 
Twelve months ended
                     
                                 
Net Income
 
$
27,481
 
$
26,962
 
$
24,446
 
$
23,790
 
$
22,078
 
Nonrecurring items
                               
Gain on sale of mortgage servicing
   
--
   
--
   
--
   
(771
)
 
--
 
Write off of deferred debt issuance cost
   
--
   
--
   
771
   
--
   
--
 
Tax effect
   
--
   
--
   
(301
)
 
301
   
--
 
Net nonrecurring items
   
--
   
--
   
470
   
(470
)
 
--
 
Operating Income
 
$
27,481
 
$
26,962
 
$
24,916
 
$
23,320
 
$
22,078
 
                                 
Diluted earnings per share
 
$
1.90
 
$
1.84
 
$
1.65
 
$
1.65
 
$
1.54
 
Nonrecurring items
                               
Gain on sale of mortgage servicing
   
--
   
--
   
--
   
(0.05
)
 
--
 
Write off of deferred debt issuance cost
   
--
   
--
   
0.05
   
--
   
--
 
Tax effect
   
--
   
--
   
(0.02
)
 
0.02
   
--
 
Net nonrecurring items
   
--
   
--
   
0.03
   
(0.03
)
 
--
 
Diluted operating earnings per share
 
$
1.90
 
$
1.84
 
$
1.68
 
$
1.62
 
$
1.54
 
 
Quarterly Results
 
Selected unaudited quarterly financial information for the last eight quarters is shown in table 21.

Table 21:    Quarterly Results
   
Quarter
 
(In thousands, except per share data)
 
First
 
Second
 
Third
 
Fourth
 
Total
 
2006
                     
Net interest income
 
$
21,952
 
$
22,192
 
$
22,377
 
$
22,283
 
$
88,804
 
Provision for loan losses
   
1,708
   
789
   
602
   
663
   
3,762
 
Non-interest income
   
10,612
   
11,516
   
11,026
   
10,793
   
43,947
 
Non-interest expense
   
22,125
   
22,301
   
22,135
   
22,507
   
89,068
 
Loss on sale of securities, net
   
--
   
--
   
--
   
--
   
--
 
Net income
   
5,988
   
7,296
   
7,447
   
6,750
   
27,481
 
Basic earnings per share
   
0.42
   
0.51
   
0.53
   
0.47
   
1.93
 
Diluted earnings per share
   
0.41
   
0.51
   
0.51
   
0.47
   
1.90
 
                                 
2005
                               
Net interest income
 
$
22,093
 
$
22,477
 
$
22,872
 
$
22,815
 
$
90,257
 
Provision for loan losses
   
2,221
   
1,939
   
1,736
   
1,630
   
7,526
 
Non-interest income
   
10,071
   
10,997
   
10,740
   
10,678
   
42,486
 
Non-interest expense
   
21,415
   
20,964
   
21,226
   
21,979
   
85,584
 
Loss on sale of securities, net
   
--
   
(168
)
 
--
   
--
   
(168
)
Net income
   
5,860
   
6,943
   
7,334
   
6,825
   
26,962
 
Basic earnings per share
   
0.41
   
0.48
   
0.51
   
0.48
   
1.88
 
Diluted earnings per share
   
0.40
   
0.47
   
0.50
   
0.47
   
1.84
 
 
36

 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Liquidity and Market Risk Management
 
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 repurchases and debt service requirements. At December 31, 2006, undivided profits of the Company's subsidiaries were approximately $142 million, of which approximately $13 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 December 31, 2006, each subsidiary bank was within established guidelines and total corporate liquidity remains strong. At December 31, 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.

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 a 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 a somewhat more expensive alternative to supplying liquidity, this source can be used to meet intermediate term liquidity needs.
 
37

 
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 $409 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 66% 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 designed to minimize structural interest rate risk are in place. 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.

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 model incorporates 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. These assumptions are inherently uncertain and, as a result, the model 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.
 
38

 
The table below presents the Company’s interest rate sensitivity position at December 31, 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: 22    Interest Rate Sensitivity

   
Interest Rate Sensitivity Period
 
   
0-30
 
31-90
 
91-180
 
181-365
 
1-2
 
2-5
 
Over 5
     
(In thousands, except ratios)
 
Days
 
Days
 
Days
 
Days
 
Years
 
Years
 
Years
 
Total
 
                                   
Earning assets
                                 
Short-term investments
 
$
67,699
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
$
67,699
 
Assets held in trading accounts
   
4,487
   
--
   
--
   
--
   
--
   
--
   
--
   
4,487
 
Investment securities
   
8,469
   
27,905
   
31,012
   
44,459
   
88,565
   
89,687
   
237,029
   
527,126
 
Mortgage loans held for sale
   
7,091
   
--
   
--
   
--
   
--
   
--
   
--
   
7,091
 
Loans
   
585,505
   
152,157
   
183,546
   
333,129
   
293,000
   
224,783
   
11,375
   
1,783,495
 
Total earning assets
   
673,251
   
180,062
   
214,558
   
377,588
   
381,565
   
314,470
   
248,404
   
2,389,898
 
                                                   
Interest bearing liabilities
                                                 
Interest bearing transaction and savings deposits
   
416,081
   
--
   
--
   
--
   
64,536
   
193,609
   
64,537
   
738,763
 
Time deposits
   
106,816
   
185,399
   
245,220
   
374,118
   
194,426
   
25,462
   
--
   
1,131,441
 
Short-term debt
   
111,700
   
--
   
--
   
--
   
--
   
--
   
--
   
111,700
 
Long-term debt
   
14,950
   
1,415
   
2,112
   
6,424
   
12,319
   
15,129
   
30,962
   
83,311
 
Total interest bearing liabilities
   
649,547
   
186,814
   
247,332
   
380,542
   
271,281
   
234,200
   
95,499
   
2,065,215
 
                                                   
Interest rate sensitivity Gap
 
$
23,704
 
$
(6,752
)
$
(32,774
)
$
(2,954
)
$
110,284
 
$
80,270
 
$
152,905
 
$
324,683
 
Cumulative interest rate sensitivity Gap
 
$
23,704
 
$
16,952
 
$
(15,822
)
$
(18,776
)
$
91,508
 
$
171,778
 
$
324,683
       
Cumulative rate sensitive assets to rate sensitive liabilities
   
103.6
%
 
102.0
%
 
98.5
%
 
98.7
%
 
105.3
%
 
108.7
%
 
115.7
%
     
Cumulative Gap as a % of earning assets
   
1.0
%
 
0.7
%
 
-0.7
%
 
-0.8
%
 
3.8
%
 
7.2
%
 
13.6
%
     
 
39

 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    

INDEX
 

 
Management’s Report on Internal Control Over Financial Reporting
41
 
Report of Independent Registered Public Accounting Firm
 
 
Report on Internal Control Over Financial Reporting
42
 
Report on Consolidated Financial Statements
43
 
Consolidated Balance Sheets, December 31, 2006 and 2005
44
 
Consolidated Statements of Income, Years Ended
 
 
December 31, 2006, 2005 and 2004
45
 
Consolidated Statements of Cash Flows, Years Ended
 
 
December 31, 2006, 2005 and 2004
46
 
Consolidated Statements of Stockholders’ Equity, Years Ended
 
 
December 31, 2006, 2005 and 2004
47
 
Notes to Consolidated Financial Statements,
 
 
December 31, 2006, 2005 and 2004
48

Note:    Supplementary Data may be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quarterly Results” on page 36 hereof.
 
40

 
Management’s Report on Internal Control Over Financial Reporting

The management of Simmons First National Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.

As of December 31, 2006, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on those criteria.

BKD, LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. The report, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, immediately follows.
 
41

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that SIMMONS FIRST NATIONAL CORPORATION maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that SIMMONS FIRST NATIONAL CORPORATION maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, SIMMONS FIRST NATIONAL CORPORATION maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of SIMMONS FIRST NATIONAL CORPORATION and our report dated February 19, 2007 expressed an unqualified opinion thereon.

/s/ BKD, LLP

BKD, LLP
 
Pine Bluff, Arkansas
February 19, 2007
 
42

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
Audit Committee, Board of Directors and Stockholders
Simmons First National Corporation
Pine Bluff, Arkansas
 
We have audited the accompanying consolidated balance sheets of SIMMONS FIRST NATIONAL CORPORATION as of December 31, 2006 and 2005, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SIMMONS FIRST NATIONAL CORPORATION as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Simmons First National Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 19, 2007 expressed unqualified opinions on management’s assessment and the effectiveness of the Company’s internal control over financial reporting.

 
/s/ BKD, LLP
 
BKD, LLP
 
 
Pine Bluff, Arkansas
February 19, 2007
 
43

 

CONSOLIDATED BALANCE SHEETS
           
DECEMBER 31, 2006 and 2005
           
(In thousands, except share data)
 
2006
 
2005
 
           
ASSETS
         
           
Cash and non-interest bearing balances due from banks
 
$
83,452
 
$
75,461
 
Interest bearing balances due from banks
   
45,829
   
14,397
 
Federal funds sold
   
21,870
   
11,715
 
Cash and cash equivalents
   
151,151
   
101,573
 
Investment securities
   
527,126
   
521,789
 
Mortgage loans held for sale
   
7,091
   
7,857
 
Assets held in trading accounts
   
4,487
   
4,631
 
Loans
   
1,783,495
   
1,718,107
 
Allowance for loan losses
   
(25,385
)
 
(26,923
)
Net loans
   
1,758,110
   
1,691,184
 
Premises and equipment
   
67,926
   
63,360
 
Foreclosed assets held for sale, net
   
1,940
   
1,540
 
Interest receivable
   
21,974
   
18,754
 
Bank owned life insurance
   
36,133
   
33,269
 
Goodwill
   
60,605
   
60,605
 
Core deposit premiums
   
4,199
   
5,029
 
Other assets
   
10,671
   
14,177
 
TOTAL ASSETS
 
$
2,651,413
 
$
2,523,768
 
               
LIABILITIES
             
               
Non-interest bearing transaction accounts
 
$
305,327
 
$
331,113
 
Interest bearing transaction accounts and savings deposits
   
738,763
   
749,925
 
Time deposits    
1,131,441
   
978,920
 
Total deposits
   
2,175,531
   
2,059,958
 
Federal funds purchased and securities sold
             
under agreements to repurchase
   
105,036
   
107,223
 
Short-term debt
   
6,114
   
8,031
 
Long-term debt
   
83,311
   
87,020
 
Accrued interest and other liabilities
   
22,405
   
17,451
 
Total liabilities
   
2,392,397
   
2,279,683
 
               
STOCKHOLDERS’ EQUITY
             
               
Capital stock
             
Class A, common, par value $0.01 a share,
             
authorized 30,000,000 shares, 14,196,855
             
issued and outstanding at 2006 and 14,326,923 at 2005
   
142
   
143
 
Surplus
   
48,678
   
53,723
 
Undivided profits
   
212,394
   
194,579
 
Accumulated other comprehensive income (loss)
             
Unrealized depreciation on available-for-sale
             
securities, net of income tax credits of $1,319 at 2006
             
and $2,615 at 2005
   
(2,198
)
 
(4,360
)
Total stockholders’ equity
   
259,016
   
244,085
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
2,651,413
 
$
2,523,768
 
 
See Notes to Consolidated Financial Statements.
 
44

 


CONSOLIDATED STATEMENTS OF INCOME
               
YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
               
               
(In thousands, except per share data)
 
2006
 
2005
 
2004
 
               
INTEREST INCOME
             
Loans
 
$
130,248
 
$
112,238
 
$
96,853
 
Federal funds sold
   
1,057
   
925
   
748
 
Investment securities
   
20,438
   
18,677
   
17,447
 
Mortgage loans held for sale
   
476
   
552
   
575
 
Assets held in trading accounts
   
71
   
99
   
41
 
Interest bearing balances due from banks
   
1,072
   
580
   
400
 
TOTAL INTEREST INCOME
   
153,362
   
133,071
   
116,064
 
                     
INTEREST EXPENSE
                   
Deposits
   
54,250
   
34,208
   
23,163
 
Federal funds purchased and securities sold
                   
under agreements to repurchase
   
4,615
   
3,104
   
1,227
 
Short-term debt
   
1,227
   
1,101
   
175
 
Long-term debt
   
4,466
   
4,401
   
5,863
 
TOTAL INTEREST EXPENSE
   
64,558
   
42,814
   
30,428
 
                     
NET INTEREST INCOME
   
88,804
   
90,257
   
85,636
 
Provision for loan losses
   
3,762
   
7,526
   
8,027
 
NET INTEREST INCOME AFTER PROVISION
                   
FOR LOAN LOSSES
   
85,042
   
82,731
   
77,609
 
NON-INTEREST INCOME
                   
Trust income
   
5,612
   
5,589
   
5,421
 
Service charges on deposit accounts
   
15,795
   
15,818
   
14,564
 
Other service charges and fees
   
2,561
   
2,017
   
2,016
 
Income on sale of mortgage loans, net of commissions
   
2,849
   
2,919
   
3,391
 
Income on investment banking, net of commissions
   
341
   
416
   
645
 
Credit card fees
   
10,742
   
10,252
   
10,001
 
Premiums on sale of student loans
   
2,071
   
1,822
   
2,114
 
Bank owned life insurance income
   
1,523
   
953
   
261
 
Other income
   
2,453
   
2,700
   
2,292
 
Loss on sale of securities, net of taxes
   
--
   
(168
)
 
--
 
TOTAL NON-INTEREST INCOME
   
43,947
   
42,318
   
40,705
 
                     
NON-INTEREST EXPENSE
                   
Salaries and employee benefits
   
53,442
   
51,270
   
48,533
 
Occupancy expense, net
   
6,385
   
5,840
   
5,500
 
Furniture and equipment expense
   
5,718
   
5,758
   
5,646
 
Loss on foreclosed assets
   
136
   
191
   
346
 
Deposit insurance
   
270
   
279
   
284
 
Other operating expenses
   
23,117
   
22,246
   
22,076
 
TOTAL NON-INTEREST EXPENSE
   
89,068
   
85,584
   
82,385
 
INCOME BEFORE INCOME TAXES
   
39,921
   
39,465
   
35,929
 
Provision for income taxes
   
12,440
   
12,503
   
11,483
 
NET INCOME
 
$
27,481
 
$
26,962
 
$
24,446
 
BASIC EARNINGS PER SHARE
 
$
1.93
 
$
1.88
 
$
1.68
 
DILUTED EARNINGS PER SHARE
 
$
1.90
 
$
1.84
 
$
1.65
 
 
See Notes to Consolidated Financial Statements.
 
45

 


CONSOLIDATED STATEMENTS OF CASH FLOWS
               
YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
               
               
(In thousands)
 
2006
 
2005
 
2004
 
               
CASH FLOWS FROM OPERATING ACTIVITIES
             
Net income
 
$
27,481
 
$
26,962
 
$
24,446
 
Items not requiring (providing) cash
                   
Depreciation and amortization
   
5,501
   
4,861
   
5,385
 
Provision for loan losses
   
3,762
   
7,526
   
8,027
 
Net amortization of investment securities
   
188
   
370
   
686
 
Deferred income taxes
   
2,221
   
1,342
   
2,946
 
Provision for losses on foreclosed assets
   
--
   
--
   
89
 
Loss on sale of securities, net of taxes
   
--
   
168
   
--
 
Bank owned life insurance income
   
(1,523
)
 
(953
)
 
(261
)
Changes in
                   
Interest receivable
   
(3,220
)
 
(4,506
)
 
(775
)
Mortgage loans held for sale
   
766
   
1,389
   
2,965
 
Assets held in trading accounts
   
143
   
285
   
(4,826
)
Other assets
   
3,508
   
(1,949
)
 
4,733
 
Accrued interest and other liabilities
   
3,596
   
1,366
   
(3,027
)
Income taxes payable
   
(863
)
 
142
   
(1,317
)
Net cash provided by operating activities
   
41,560
   
37,003
   
39,071
 
                     
CASH FLOWS FROM INVESTING ACTIVITIES
                   
Net originations of loans
   
(72,137
)
 
(156,243
)
 
(93,105
)
Purchase of bank and branch locations, net funds
                   
received (disbursed)
   
--
   
1,945
   
(2,943
)
Purchases of premises and equipment, net
   
(9,238
)
 
(10,150
)
 
(10,212
)
Proceeds from sale of foreclosed assets
   
1,049
   
2,700
   
3,229
 
Proceeds from sale of securities
   
2,161
   
1,225
   
17,958
 
Proceeds from maturities of available-for-sale securities
   
130,345
   
88,382
   
134,106
 
Purchases of available-for-sale securities
   
(106,088
)
 
(73,921
)
 
(161,857
)
Proceeds from maturities of held-to-maturity securities
   
29,431
   
32,921
   
46,496
 
Purchases of held-to-maturity securities
   
(59,213
)
 
(32,220
)
 
(22,165
)
Purchases of bank owned life insurance
   
(1,341
)
 
(25,000
)
 
--
 
Net cash used in investing activities
   
(85,031
)
 
(170,361
)
 
(88,493
)
                   
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Net change in deposits
   
115,573
   
98,609
   
38,813
 
Net change in short-term debt
   
(1,917
)
 
5,658
   
(4,460
)
Dividends paid
   
(9,666
)
 
(8,757
)
 
(8,263
)
Proceeds from issuance of long-term debt
   
7,275
   
1,821
   
9,900
 
Repayment of long-term debt
   
(10,984
)
 
(9,464
)
 
(28,934
)
Net change in Federal funds purchased and
                   
securities sold under agreements to repurchase
   
(2,187
)
 
2,438
   
(4,123
)
Repurchase of common stock, net
   
(5,045
)
 
(9,105
)
 
(1,395
)
Net cash provided by financing activities
   
93,049
   
81,200
   
1,538
 
INCREASE (DECREASE) IN CASH AND
                   
CASH EQUIVALENTS
   
49,578
   
(52,158
)
 
(47,884
)
CASH AND CASH EQUIVALENTS,
                   
BEGINNING OF YEAR
   
101,573
   
153,731
   
201,615
 
CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
151,151
 
$
101,573
 
$
153,731
 
 
See Notes to Consolidated Financial Statements.
 
46

 


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
                       
YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
                       
           
Accumulated
         
           
Other
         
   
Common
     
Comprehensive
 
Undivided
     
(In thousands, except share data)
 
Stock
 
Surplus
 
Income (Loss)
 
Profits
 
Total
 
Balance, December 31, 2003
 
$
14,102
 
$
35,988
 
$
(286
)
$
160,191
 
$
209,995
 
Comprehensive income
                               
Net income
   
--
   
--
   
--
   
24,446
   
24,446
 
Change in unrealized depreciation on
                               
available-for-sale securities, net of
                               
income tax credits of $503
   
--
   
--
   
(838
)
 
--
   
(838
)
Comprehensive income
                           
23,608
 
Stock issued as bonus shares - 2,000 shares
   
2
   
50
   
--
   
--
   
52
 
Change in the par value of common stock
   
(14,523
)
 
14,523
   
--
   
--
   
--
 
Stock issued in connection with the merger
                               
of Alliance Bancorporation, Inc.
   
545
   
13,732
   
--
   
--
   
14,277
 
Exercise of stock options - 68,997 shares
   
43
   
922
   
--
   
--
   
965
 
Securities exchanged under
                               
employee option plan
   
(22
)
 
(606
)
 
--
   
--
   
(628
)
Repurchase of common stock
                               
- 73,465 shares
   
(1
)
 
(1,783
)
 
--
   
--
   
(1,784
)
Cash dividends declared ($0.57 per share)
   
--
   
--
   
--
   
(8,263
)
 
(8,263
)
Balance, December 31, 2004
   
146
   
62,826
   
(1,124
)
 
176,374
   
238,222
 
Comprehensive income
                               
Net income
   
--
   
--
   
--
   
26,962
   
26,962
 
Change in unrealized depreciation on
                               
available-for-sale securities, net of
                               
income tax credits of $1,942
   
--
   
--
   
(3,236
)
 
--
   
(3,236
)
Comprehensive income
                           
23,726
 
Stock issued as bonus shares - 5,620 shares
   
--
   
138
   
--
   
--
   
138
 
Exercise of stock options - 106,420 shares
   
1
   
1,432
   
--
   
--
   
1,433
 
Securities exchanged under
                               
employee option plan
   
--
   
(988
)
 
--
   
--
   
(988
)
Repurchase of common stock
                               
- 371,453 shares
   
(4
)
 
(9,685
)
 
--
   
--
   
(9,689
)
Cash dividends declared ($0.61 per share)
   
--
   
--
   
--
   
(8,757
)
 
(8,757
)
Balance, December 31, 2005
   
143
   
53,723
   
(4,360
)
 
194,579
   
244,085
 
Comprehensive income
                               
Net income
   
--
   
--
   
--
   
27,481
   
27,481
 
Change in unrealized depreciation on
                               
available-for-sale securities, net of
                               
income taxes of $1,296
   
--
   
--
   
2,162
   
--
   
2,162
 
Comprehensive income
                           
29,643
 
Stock issued as bonus shares - 10,200 shares
   
--
   
275
   
--
   
--
   
275
 
Exercise of stock options - 106,880 shares
   
1
   
1,516
   
--
   
--
   
1,517
 
Securities exchanged under
                               
employee option plan
   
--
   
(1,291
)
 
--
   
--
   
(1,291
)
Repurchase of common stock
                               
- 203,100 shares
   
(2
)
 
(5,545
)
 
--
   
--
   
(5,547
)
Cash dividends declared ($0.68 per share)
   
-
   
--
   
--
   
(9,666
)
 
(9,666
)
Balance, December 31, 2006
 
$
142
 
$
48,678
 
$
(2,198
)
$
212,394
 
$
259,016
 
 
See Notes to Consolidated Financial Statements.
 
47

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:
 
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Nature of Operations

Simmons First National Corporation is primarily engaged in providing a full range of banking services to individual and corporate customers through its subsidiaries and their branch banks in Arkansas. The Company is subject to competition from other financial institutions. The Company also is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Operating Segments

The Company is organized on a subsidiary bank-by-bank basis upon which management makes decisions regarding how to allocate resources and assess performance. Each of the subsidiary banks provides a group of similar community banking services, including such products and services as loans; time deposits, checking and savings accounts; personal and corporate trust services; credit cards; investment management; and securities and investment services. The individual bank segments have similar operating and economic characteristics and have been reported as one aggregated operating segment.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of foreclosed assets and the allowance for foreclosure expenses. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets, management obtains independent appraisals for significant properties.

Principles of Consolidation

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.

Reclassifications
 
Various items within the accompanying financial statements for previous years have been reclassified to provide more comparative information. These reclassifications had no effect on net earnings.

Cash Equivalents

For purposes of the statement of cash flows, the Company considers due from banks, Federal funds sold and securities purchased under agreements to resell as cash equivalents.
 
48


Investment Securities

Held-to-maturity securities, which include any security for which the Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity.

Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant yield method over the period to maturity.
 
Trading securities, which include any security held primarily for near-term sale, are carried at fair value. Gains and losses on trading securities are included in other income.

Interest and dividends on investments in debt and equity securities are included in income when earned.

Mortgage Loans Held For Sale

Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Forward commitments to sell mortgage loans are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. The forward commitments acquired by the Company for mortgage loans in process of origination are not mandatory forward commitments. These commitments are structured on a best efforts basis; therefore the Company is not required to substitute another loan or to buyback the commitment if the original loan does not fund. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid. Fees received from borrowers to guarantee the funding of mortgage loans held for sale are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-offs are reported at their outstanding principal adjusted for any loans charged off and 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 nonaccrual 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.

Derivative Financial Instruments

The Company may enter into derivative contracts for the purposes of managing exposure to interest rate risk to meet the financing needs of its customers. The Company records all derivatives on the balance sheet at fair value. Historically, the Company’s policy has been not to invest in derivative type investments but in an effort to meet the financing needs of its customers, the Company entered into its first fair value hedge during the second quarter of 2003. Fair value hedges include interest rate swap agreements on fixed rate loans. For derivatives designated as hedging the exposure to changes in the fair value of the hedged item, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain of the hedging instrument. The fair value hedge is considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amount of the loan being hedged was $1.9 million at December 31, 2006 and $2.0 million at December 31, 2005.

49

 
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 uncollectability 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.
 
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.

Premises and Equipment

Depreciable assets are stated at cost, less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized by the straight-line method over the terms of the respective leases or the estimated useful lives of the improvements whichever is shorter.

Foreclosed Assets Held For Sale

Assets acquired by foreclosure or in settlement of debt and held for sale are valued at estimated fair value as of the date of foreclosure and a related valuation allowance is provided for estimated costs to sell the assets. Management evaluates the value of foreclosed assets held for sale periodically and increases the valuation allowance for any subsequent declines in fair value. Changes in the valuation allowance are charged or credited to other expense.

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’s. 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.
 
50


Core Deposit Premiums

Core deposit premiums represent the amount allocated to the future earnings potential of acquired deposits. The unamortized core deposit premiums are being amortized using both straight-line and accelerated methods over periods ranging from 8 to 11 years. Unamortized core deposit premiums are tested for impairment annually, or more frequently if certain conditions occur.

Fee Income

Periodic bankcard 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 liabilities and assets 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.

Earnings Per Share

Basic earnings per share are computed based on the weighted average number of 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.

The computation of per share earnings is as follows:

(In thousands, except per share data)
 
2006
 
2005
 
2004
 
               
Net Income
 
$
27,481
 
$
26,962
 
$
24,446
 
                     
Average common shares outstanding
   
14,226
   
14,375
   
14,515
 
Average common share stock options outstanding
   
248
   
312
   
333
 
Average diluted common shares
   
14,474
   
14,687
   
14,848
 
                     
Basic earnings per share
 
$
1.93
 
$
1.88
 
$
1.68
 
Diluted earnings per share
 
$
1.90
 
$
1.84
 
$
1.65
 
 
51


Stock-Based Compensation

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, Employee Benefit Plans, for additional information.

SFAS No. 123R requires pro forma disclosures of net income and earnings per share for all periods prior to the adoption of the fair value accounting method for stock-based employee compensation. The pro forma disclosures presented in Note 11, Employee Benefit Plans, use the fair value method of SFAS 123 to measure compensation expense for stock-based compensation plans for years prior to 2006.

NOTE 2:
ACQUISITIONS

On November 1, 2005, the Company completed a branch purchase in which Bank of Little Rock sold its Southwest Little Rock, Arkansas location at 8500 Geyer Springs Road to Simmons First National Bank, a subsidiary of the Company. The acquisition included approximately $3.5 million in total deposits in addition to the fixed assets used in the branch operation. No loans were involved in the transaction. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $151,000 and $31,000, respectively.

On June 25, 2004, the Company completed a branch purchase in which Cross County Bank sold its Weiner, Arkansas location to Simmons First Bank of Jonesboro, a subsidiary of the Company. The acquisition included approximately $6 million in total deposits and the fixed assets used in the branch operation. No loans were involved in the transaction. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $344,000 and $117,000, respectively.

On March 19, 2004, the Company merged with Alliance Bancorporation, Inc. (“ABI”). ABI owned Alliance Bank of Hot Springs, Hot Springs, Arkansas with consolidated assets (including goodwill and core deposits), loans and deposits of approximately $155 million, $70 million and $110 million, respectively. During the second quarter of 2004, Alliance Bank changed its name to Simmons First Bank of Hot Springs and continues to operate as a separate community bank with virtually the same board of directors, management and staff. As a result of this transaction, the Company recorded additional goodwill and core deposit premiums of $14,690,000 and $1,245,000, respectively.

The system integration for the 2005 acquisition was completed on the acquisition date. The system integration for the 2004 mergers and acquisitions were completed during the second quarter of 2004.
 
52


NOTE 3:
INVESTMENT SECURITIES
 
The amortized cost and fair value of investment securities that are classified as held-to-maturity and available-for-sale are as follows:

   
Years Ended 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
 
$
--
 
$
--
 
$
--
 
$
--
 
$
1,004
 
$
--
 
$
(20
)
$
984
 
U.S. Government
                                                 
agencies
   
54,998
   
367
   
(272
)
 
55,093
   
28,000
   
--
   
(473
)
 
27,527
 
Mortgage-backed
                                                 
securities
   
155
   
3
   
(1
)
 
157
   
187
   
3
   
--
   
190
 
State and political
                                                 
subdivisions
   
122,472
   
667
   
(892
)
 
122,247
   
117,148
   
662
   
(1,298
)
 
116,512
 
Other securities
   
2,319
   
--
   
--
   
2,319
   
3,960
   
--
   
--
   
3,960
 
                                                   
Total
 
$
179,944
 
$
1,037
 
$
(1,165
)
$
179,816
 
$
150,299
 
$
665
 
$
(1,791
)
$
149,173
 
                                                   
Available-for-Sale
                                                 
                                                   
U.S. Treasury
 
$
6,970
 
$
--
 
$
(30
)
$
6,940
 
$
10,989
 
$
--
 
$
(102
)
$
10,887
 
U.S. Government
                                                 
agencies
   
326,301
   
287
   
(4,177
)
 
322,411
   
348,570
   
35
   
(7,615
)
 
340,990
 
Mortgage-backed
                                                 
securities
   
3,032
   
--
   
(76
)
 
2,956
   
3,392
   
9
   
(92
)
 
3,309
 
State and political
                                                 
subdivisions
   
1,360
   
10
   
--
   
1,370
   
3,014
   
39
   
--
   
3,053
 
Other securities
   
13,035
   
470
   
--
   
13,505
   
12,561
   
690
   
--
   
13,251
 
                                                   
Total
 
$
350,698
 
$
767
 
$
(4,283
)
$
347,182
 
$
378,526
 
$
773
 
$
(7,809
)
$
371,490
 

Certain investment securities are valued less than their historical cost. Total fair value of these investments at December 31, 2006, was $404.5 million, which is approximately 76.8% of the Company’s available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from recent increases in market interest rates.

Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold these securities to maturity.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
 
53


The following table shows the Company’s investments’ estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2006:

   
Less Than 12 Months
 
12 Months or More
 
Total
 
   
Estimated
 
Gross
 
Estimated
 
Gross
 
Estimated
 
Gross
 
   
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
(In thousands)
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
                           
Held-to-Maturity
                         
                           
U.S. Treasury
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
U.S. Government Agencies
   
9,990
   
8
   
22,736
   
264
   
32,726
   
272
 
Mortgage-backed securities
   
--
   
--
   
86
   
1
   
86
   
1
 
State and political subdivisions
   
17,290
   
139
   
49,328
   
753
   
66,618
   
892
 
                                       
Total
 
$
27,280
 
$
147
 
$
72,150
 
$
1,018
 
$
99,430
 
$
1,165
 
                                       
Available-for-Sale
                                     
                                       
U.S. Treasury
 
$
2,471
 
$
2
 
$
4,469
 
$
28
 
$
6,940
 
$
30
 
U.S. Government Agencies
   
42,455
   
287
   
252,679
   
3,890
   
295,134
   
4,177
 
Mortgage-backed securities
   
788
   
23
   
2,167
   
53
   
2,955
   
76
 
State and political subdivisions
   
--
   
--
   
--
   
--
   
--
   
--
 
                                       
Total
 
$
45,714
 
$
312
 
$
259,315
 
$
3,971
 
$
305,029
 
$
4,283
 
 
The following table shows the Company’s investments’ estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2005:

   
Less Than 12 Months
 
12 Months or More
 
Total
 
   
Estimated
 
Gross
 
Estimated
 
Gross
 
Estimated
 
Gross
 
   
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
(In thousands)
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
                           
Held-to-Maturity
                         
                           
U.S. Treasury
 
$
--
 
$
--
 
$
984
 
$
20
 
$
984
 
$
20
 
U.S. Government Agencies
   
10,901
   
99
   
16,627
   
374
   
27,528
   
473
 
Mortgage-backed securities
   
49
   
--
   
45
   
--
   
94
   
--
 
State and political subdivisions
   
45,410
   
515
   
33,308
   
783
   
78,718
   
1,298
 
                                       
Total
 
$
56,360
 
$
614
 
$
50,964
 
$
1,177
 
$
107,324
 
$
1,791
 
                                       
Available-for-Sale
                                     
                                       
U.S. Treasury
 
$
2,980
 
$
16
 
$
7,907
 
$
86
 
$
10,887
 
$
102
 
U.S. Government Agencies
   
57,869
   
678
   
284,175
   
6,937
   
342,044
   
7,615
 
Mortgage-backed securities
   
774
   
9
   
1,706
   
83
   
2,480
   
92
 
State and political subdivisions
   
--
   
-
   
--
   
-
   
-
   
--
 
                                       
Total
 
$
61,623
 
$
703
 
$
293,788
 
$
7,106
 
$
355,411
 
$
7,809
 
 
54


Income earned on the above securities for the years ended December 31, 2006, 2005 and 2004 is as follows:

(In thousands)
 
2006
 
2005
 
2004
 
               
Taxable
             
Held-to-maturity
 
$
2,007
 
$
1,056
 
$
1,436
 
Available-for-sale
   
13,698
   
12,842
   
10,980
 
                     
Non-taxable
                   
Held-to-maturity
   
4,635
   
4,588
   
4,794
 
Available-for-sale
   
98
   
191
   
237
 
                     
Total
 
$
20,438
 
$
18,677
 
$
17,447
 

The Statement of Stockholders’ Equity includes other comprehensive income (loss). Other comprehensive income (loss) for the Company includes the change in the unrealized depreciation on available-for-sale securities. The changes in the unrealized depreciation on available-for-sale securities for the years ended December 31, 2006, 2005 and 2004 are as follows:

(In thousands)
 
2006
 
2005
 
2004
 
               
Unrealized holding gains (losses) arising during the period
 
$
2,162
 
$
(3,511
)
$
(838
)
Losses realized in net income
   
--
   
275
   
--
 
                     
Net change in unrealized depreciation
                   
on available-for-sale securities
 
$
2,162
 
$
(3,236
)
$
(838
)
 
The amortized cost and estimated fair value by maturity of securities are shown in the following table. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. Accordingly, actual maturities may differ from contractual maturities.

   
Held-to-Maturity
 
Available-for-Sale
 
   
Amortized
 
Fair
 
Amortized
 
Fair
 
(In thousands)
 
Cost
 
Value
 
Cost
 
Value
 
                   
One year or less
 
$
20,549
 
$
20,501
 
$
93,047
 
$
92,284
 
After one through five years
   
57,399
   
57,224
   
130,260
   
127,957
 
After five through ten years
   
84,048
   
84,083
   
112,237
   
111,369
 
After ten years
   
16,559
   
16,619
   
2,119
   
2,067
 
Other securities
   
1,389
   
1,389
   
13,035
   
13,505
 
                           
Total
 
$
179,944
 
$
179,816
 
$
350,698
 
$
347,182
 
 
The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $400,668,000 at December 31, 2006 and $411,580,000 at December 31, 2005.

The book value of securities sold under agreements to repurchase amounted to $80,566,000 and $67,778,000 for December 31, 2006 and 2005, respectively.
 
55


The Company had no gross realized gains during the years ended December 31, 2006, 2005 and 2004, resulting from the sales and/or calls of securities. Gross realized losses of $0, $275,000 and $0 resulting from sales and/or calls of securities were realized for the years ended December 31, 2006, 2005 and 2004, respectively.

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.

NOTE 4:
LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The various categories of loans are summarized as follows:

(In thousands)
 
2006
 
2005
 
           
Consumer
         
Credit cards
 
$
143,359
 
$
143,058
 
Student loans
   
84,831
   
89,818
 
Other consumer
   
142,596
   
138,051
 
Real estate
             
Construction
   
277,411
   
238,898
 
Single family residential
   
364,450
   
340,839
 
Other commercial
   
512,404
   
479,684
 
Commercial
             
Commercial
   
178,028
   
184,920
 
Agricultural
   
62,293
   
68,761
 
Financial institutions
   
4,766
   
20,499
 
Other
   
13,357
   
13,579
 
               
Total loans before allowance for loan losses
 
$
1,783,495
 
$
1,718,107
 
 
At December 31, 2006 and 2005, impaired loans totaled $12,829,000 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 at December 31, 2006 and 2005 were $3,418,000 and $3,868,000, respectively. Approximately, $350,000, $452,000 and $477,000 of interest income was recognized on average impaired loans of $13,072,000, $15,748,000 and $18,937,000 for 2006, 2005 and 2004, respectively. Interest recognized on impaired loans on a cash basis during 2006, 2005 and 2004 was immaterial.

At December 31, 2006 and 2005, accruing loans delinquent 90 days or more totaled $1,097,000 and $1,131,000, respectively. Non-accruing loans at December 31, 2006 and 2005 were $8,958,000 and $7,296,000, respectively.

As of December 31, 2006, credit card loans, which are unsecured, were $143,359,000 or 8.0%, 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.
 
56


Transactions in the allowance for loan losses are as follows:

(In thousands)
 
2006
 
2005
 
2004
 
               
Balance, beginning of year
 
$
26,923
 
$
26,508
 
$
25,347
 
Additions
                   
Provision for loan losses
   
3,762
   
7,526
   
8,027
 
Allowance for loan losses of acquired banks and branches
   
--
   
--
   
1,108
 
     
30,685
   
34,034
   
34,482
 
Deductions
                   
Losses charged to allowance, net of recoveries
                   
of $3,106 for 2006, $3,815 for 2005 and $2,431 for 2004
   
3,775
   
7,111
   
7,974
 
Reclassification of reserve for unfunded commitments (1)
   
1,525
   
--
   
--
 
                     
Balance, end of year
 
$
25,385
 
$
26,923
 
$
26,508
 

(1) On March 31, 2006, the reserve for unfunded commitments was reclassified from the allowance for loan losses to other liabilities.

NOTE 5:
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. Goodwill totaled $60.6 million at December 31, 2006, unchanged from December 31, 2005, as the Company made no acquisitions during the year ended December 31, 2006.

The carrying basis and accumulated amortization of core deposit premiums (net of core deposit premiums that were fully amortized) at December 31, 2006 and 2005 were:

   
December 31, 2006
 
December 31, 2005
 
   
Gross
         
Gross
         
   
Carrying
 
Accumulated
     
Carrying
 
Accumulated
     
(In thousands)
 
Amount
 
Amortization
 
Net
 
Amount
 
Amortization
 
Net
 
                           
Core deposit premiums
 
$
7,246
 
$
3,047
 
$
4,199
 
$
7,246
 
$
2,217
 
$
5,029
 
 
Core deposit premium amortization expense recorded for the years ended December 31, 2006, 2005 and 2004, was $830,000, $830,000 and $791,000, respectively. The Company’s estimated amortization expense for each of the following five years is: 2007 - $818,000; 2008 - $807,000; 2009 - $802,000; 2010 - $699,000; and 2011 - $451,000.

NOTE 6:
TIME DEPOSITS

Time deposits included approximately $450,310,000 and $364,177,000 of certificates of deposit of $100,000 or more, at December 31, 2006 and 2005, respectively. Brokered deposits were $42,522,000 and $50,725,000 at December 31, 2006 and 2005, respectively. At December 31, 2006, time deposits with a remaining maturity of one year or more amounted to $219,888,000. Maturities of all time deposits are as follows: 2007 - $911,553,000; 2008 - $194,426,000; 2009 - $24,950,000; 2010 - $265,000; 2011 - $247,000 and none thereafter.

Deposits are the Company's primary funding source for loans and investment securities. The mix and repricing alternatives can significantly affect the cost of this source of funds and, therefore, impact the margin.
 
57


NOTE 7:
INCOME TAXES

The provision for income taxes is comprised of the following components:

(In thousands)
 
2006
 
2005
 
2004
 
               
Income taxes currently payable
 
$
10,219
 
$
11,161
 
$
8,537
 
Deferred income taxes
   
2,221
   
1,342
   
2,946
 
                     
Provision for income taxes
 
$
12,440
 
$
12,503
 
$
11,483
 
 
The tax effects of temporary differences related to deferred taxes shown on the balance sheet were:

(In thousands)
 
2006
 
2005
 
           
Deferred tax assets
         
Allowance for loan losses
 
$
8,543
 
$
8,329
 
Valuation of foreclosed assets
   
63
   
74
 
Deferred compensation payable
   
1,275
   
1,109
 
FHLB advances
   
58
   
97
 
Vacation compensation
   
740
   
727
 
Loan interest
   
140
   
241
 
Available-for-sale securities
   
1,319
   
2,615
 
Other
   
174
   
363
 
     
12,312
   
13,555
 
Deferred tax liabilities
             
Accumulated depreciation
   
(852
)
 
(1,128
)
Deferred loan fee income and expenses, net
   
(787
)
 
(657
)
FHLB stock dividends
   
(887
)
 
(740
)
Goodwill and core deposit premium amortization
   
(6,051
)
 
(3,852
)
Other
   
(880
)
 
(807
)
     
(9,457
)
 
(7,184
)
Net deferred tax assets included in other assets
             
on balance sheets
 
$
2,855
 
$
6,371
 
 
A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below.

(In thousands)
 
2006
 
2005
 
2004
 
               
Computed at the statutory rate (35%)
 
$
13,972
 
$
13,813
 
$
12,575
 
Increase (decrease) resulting from
                   
Tax exempt income
   
(1,858
)
 
(1,882
)
 
(1,988
)
Non-deductible interest
   
276
   
187
   
137
 
State income taxes
   
792
   
862
   
822
 
Other non-deductible expenses
   
97
   
86
   
112
 
Other differences, net
   
(839
)
 
(563
)
 
(175
)
                     
Actual tax provision
 
$
12,440
 
$
12,503
 
$
11,483
 
 
58


NOTE 8:
SHORT-TERM AND LONG-TERM DEBT

Long-term debt at December 31, 2006, and 2005 consisted of the following components.

(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
   
50,381
   
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
 
               
Total long-term debt
 
$
83,311
 
$
87,020
 

At December 31, 2006 the Company had Federal Home Loan Bank (“FHLB”) advances with original maturities of one year or less of $5.0 million with a weighted average rate of 5.26% 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 Corporation, the sole asset of each trust. The preferred trust 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 Corporation. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Corporation making payment on the related junior subordinated debentures. The Corporation’s obligations under the junior subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Corporation of each respective trust’s obligations under the trust securities issued by each respective trust.

Aggregate annual maturities of long-term debt at December 31, 2006 are:

   
 
 
Annual
 
(In thousands)
 
Year
 
Maturities
 
           
     
2007
 
$
10,383
 
     
2008
   
12,987
 
     
2009
   
5,842
 
     
2010
   
5,087
 
     
2011
   
3,881
 
   
Thereafter
   
45,131
 
             
   
Total
 
$
83,311
 
 
59


NOTE 9:
CAPITAL STOCK

On May 25, 2004, the Company announced the adoption by the Board of Directors of a repurchase program. The program authorizes the repurchase of up to 5% of the 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 exercise, payment of future stock dividends and general corporate purposes.

During the year ended December 31, 2006, the Company repurchased a total of 203,100 shares of stock with a weighted average repurchase price of $27.80 per share. Under the current stock repurchase plan, the Company can repurchase an additional 340,967 shares.

NOTE 10:
TRANSACTIONS WITH RELATED PARTIES

At December 31, 2006 and 2005, the subsidiary banks had extensions of credit to executive officers, directors and to companies in which the banks' executive officers or directors were principal owners, in the amount of $51.4 million in 2006 and $61.5 million in 2005.

(In thousands)
 
2006
 
2005
 
           
Balance, beginning of year
 
$
61,544
 
$
55,293
 
New extensions of credit
   
26,734
   
26,328
 
Repayments
   
(36,836
)
 
(20,077
)
               
Balance, end of year
 
$
51,442
 
$
61,544
 
 
In management's opinion, such loans and other extensions of credit and deposits (which were not material) were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, these extensions of credit did not involve more than the normal risk of collectability or present other unfavorable features.

NOTE 11:
EMPLOYEE BENEFIT PLANS

Retirement Plans

The Company’s 401(k) retirement plan covers substantially all employees. Contribution expense totaled $525,000, $505,000 and $408,000, in 2006, 2005 and 2004, respectively.

The Company has a discretionary profit sharing and employee stock ownership plan covering substantially all employees. Contribution expense totaled $2,370,000 for 2006, $2,258,000 for 2005 and $2,153,000 for 2004.

The Company also provides deferred compensation agreements with certain active and retired officers. The agreements provide monthly payments which, together with payments from the deferred annuities issued pursuant to the terminated pension plan, equal 50 percent of average compensation prior to retirement or death. The charges to income for the plans were $481,000 for 2006, $306,000 for 2005 and $130,000 for 2004. Such charges reflect the straight-line accrual over the employment period of the present value of benefits due each participant, as of their full eligibility date, using an 8 percent discount factor.

60


Stock-Based Compensation Plans

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.

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.

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.
 
61

The table below summarizes the transactions under the Company's stock option plans at December 31, 2006, 2005 and 2004 and changes during the years then ended:
 
   
2006
 
2005
 
2004
 
       
Weighted
     
Weighted
     
Weighted
 
       
Average
     
Average
     
Average
 
   
Shares
 
Exercisable
 
Shares
 
Exercisable
 
Shares
 
Exercisable
 
   
(000)
 
Price
 
(000)
 
Price
 
(000)
 
Price
 
                           
Outstanding, beginning of year
   
609
 
$
14.77
   
676
 
$
14.00
   
698
 
$
13.00
 
Granted
   
60
   
26.19
   
40
   
24.53
   
68
   
23.85
 
Forfeited/Expired
   
(45
)
 
13.50
   
(1
)
 
22.63
   
(21
)
 
12.89
 
Exercised
   
(107
)
 
14.19
   
(106
)
 
13.46
   
(69
)
 
14.05
 
                                       
Outstanding, end of year
   
517
   
16.32
   
609
   
14.77
   
676
   
14.00
 
                                       
Exercisable, end of year
   
452
 
$
14.97
   
595
 
$
14.55
   
535
 
$
13.25
 
 
The following table summarizes information about stock options under the plans outstanding at December 31, 2006:

   
Options Outstanding
 
Options Exercisable
 
       
Weighted
             
       
Average
 
Weighted
     
Weighted
 
   
Number
 
Remaining
 
Average
 
Number
 
Average
 
Range of
 
Outstanding
 
Contractual
 
Exercise
 
Exercisable
 
Exercise
 
Exercise Prices
 
(000)
 
Life
 
Price
 
(000)
 
Price
 
                       
$10.56 to $12.22
   
333
   
1.9 Years
 
$
12.06
   
333
 
$
12.06
 
$15.35 to $16.32
   
16
   
1.8 Years
 
$
15.84
   
16
 
$
15.84
 
$22.63 to $23.78
   
66
   
4.2 Years
 
$
23.69
   
59
 
$
23.68
 
$24.50 to $24.50
   
40
   
5.4 Years
 
$
24.50
   
35
 
$
24.50
 
$26.19 to $27.67
   
62
   
6.3 Years
 
$
26.20
   
9
 
$
26.21
 

The total intrinsic value of outstanding stock options and outstanding exercisable stock options was $6.4 million and $6.2 million at December 31, 2006. The total intrinsic value of stock options exercised was $1.6 million in 2006, $1.4 million in 2005 and $872 thousand in 2004.

As a result of applying the provisions of SFAS 123R during 2006, the Company recognized additional stock-based compensation expense related to stock options of $89 thousand. The increase in stock-based compensation expense related to stock options during 2006 resulted in no change in basic or diluted earnings per share.

Stock-based compensation expense totaled $233 thousand in 2006, $117 thousand in 2005 and $118 thousand in 2004. 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 $287 thousand at December 31, 2006. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 2.00 years. Unrecognized stock-based compensation expense related to non-vested stock awards was $437 thousand at December 31, 2006. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 2.24 years.

As of December 31, 2006, there was $724 thousand 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 2.15 years.
62

 
The fair value of the Company’s employee stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value of stock options granted was $5.01 for 2006, $5.11 for 2005 and $5.56 for 2004. The Company estimated expected market price volatility and expected term of the options based on historical data and other factors. The weighted-average assumptions used to determine the fair value of options granted are detailed in the table below:
 
 
 
 2006 
 
2005
 
2004
 
Expected dividend yield
   
2.67%
 
 
2.61%
 
 
2.54%
 
Expected stock price volatility
   
17.74%
 
 
16.00%
 
 
16.00
 
Risk-free interest rate
   
4.84%
 
 
5.17%
 
 
5.17%
 
Expected life of options
   
5 - 10 Years
   
7 Years
   
10 Years
 
 
The following pro forma information presents net income and earnings per share for 2005 and 2004 as if the fair value method of SFAS 123R had been applied to measure compensation cost for stock-based compensation plans.
 
(In thousands, except per share data)
 
2005
 
2004
 
Net income, as reported
 
$
26,962
 
$
24,446
 
Add: Stock-based employee compensation included
             
in reported net income, net of related tax effects
   
73
   
73
 
Less: Total stock-based employee compensation
             
expense determined under fair value based method
             
for all awards, net of related tax effects
   
(544
)
 
(283
)
Pro forma net income
 
$
26,491
 
$
24,236
 
Earnings per share:
             
Basic - as reported
 
$
1.88
 
$
1.68
 
Basic - pro forma
 
$
1.84
 
$
1.67
 
               
Diluted - as reported
 
$
1.84
 
$
1.65
 
Diluted - pro forma
 
$
1.80
 
$
1.63
 
 
NOTE 12:
ADDITIONAL CASH FLOW INFORMATION

In connection with cash acquisitions accounted for using the purchase method, the Company acquired assets and assumed liabilities as follows:
 
(In thousands)
 
2006
 
2005
 
2004
 
               
Liabilities assumed
 
$
--
 
$
2,156
 
$
152,955
 
Fair value of assets acquired
   
--
   
311
   
159,637
 
Cash received (disbursed)
   
--
   
1,845
   
(6,682
)
Funds acquired
   
--
   
100
   
3,739
 
Net funds received (disbursed)
 
$
--
 
$
1,945
 
$
(2,943
)
                     
Additional cash payment information
                   
                     
Interest paid
 
$
65,108
 
$
41,007
 
$
30,245
 
Income taxes paid
   
7,926
   
11,232
   
10,090
 
 
63

 
NOTE 13:
OTHER OPERATING EXPENSES
 
Other operating expenses consist of the following:

(In thousands)
 
2006
 
2005
 
2004
 
               
Professional services
 
$
2,490
 
$
2,201
 
$
2,029
 
Postage
   
2,278
   
2,281
   
2,256
 
Telephone
   
1,961
   
1,847
   
1,784
 
Credit card expense
   
3,235
   
2,693
   
2,374
 
Operating supplies
   
1,611
   
1,555
   
1,528
 
Amortization of core deposit premiums
   
830
   
830
   
791
 
Write off of deferred debt issuance cost
   
--
   
--
   
771
 
Other expense
   
10,712
   
10,839
   
10,543
 
Total
 
$
23,117
 
$
22,246
 
$
22,076
 

The Company had aggregate annual equipment rental expense of approximately $534,000 in 2006, $481,000 in 2005 and $406,000 in 2004. The Company had aggregate annual occupancy rental expense of approximately $1,106,000 in 2006, $1,111,000 in 2005 and $1,079,000 in 2004.

NOTE 14:
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents

The carrying amount for cash and cash equivalents approximates fair value.

Investment Securities

Fair values for investment securities equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities.

Loans

The fair value of loans is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Deposits

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount). The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

Federal Funds Purchased, Securities Sold Under Agreement to Repurchase
and Short-Term Debt

The carrying amount for Federal funds purchased, securities sold under agreement to repurchase and short-term debt are a reasonable estimate of fair value.
 
64


Long-Term Debt

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Commitments to Extend Credit, Letters of Credit and Lines of Credit

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

The following table represents estimated fair values of the Company's financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows. This method involves significant judgments by management considering the uncertainties of economic conditions and other factors inherent in the risk management of financial instruments. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

   
December 31, 2006
 
December 31, 2005
 
   
Carrying
 
Fair
 
Carrying
 
Fair
 
(In thousands)
 
Amount
 
Value
 
Amount
 
Value
 
                   
Financial assets
                 
Cash and cash equivalents
 
$
151,151
 
$
151,151
 
$
101,573
 
$
101,573
 
Held-to-maturity securities
   
179,944
   
179,816
   
150,299
   
149,173
 
Available-for-sale securities
   
347,182
   
347,182
   
371,490
   
371,490
 
Assets held in trading accounts
   
4,487
   
4,487
   
4,631
   
4,631
 
Mortgage loans held for sale
   
7,091
   
7,091
   
7,857
   
7,857
 
Interest receivable
   
21,974
   
21,974
   
18,754
   
18,754
 
Loans, net
   
1,758,110
   
1,777,257
   
1,691,184
   
1,702,119
 
                           
Financial liabilities
                         
Non-interest bearing transaction accounts
   
305,327
   
305,327
   
331,113
   
331,113
 
Interest bearing transaction accounts and
                         
savings deposits
   
738,763
   
738,763
   
749,925
   
749,925
 
Time deposits
   
1,131,441
   
1,150,274
   
978,920
   
992,789
 
Federal funds purchased and securities
                         
sold under agreements to repurchase
   
105,036
   
105,036
   
107,223
   
107,223
 
Short-term debt
   
6,114
   
6,114
   
8,031
   
8,031
 
Long-term debt
   
83,311
   
85,125
   
87,020
   
87,930
 
Interest payable
   
7,296
   
7,296
   
4,846
   
4,846
 

The fair value of commitments to extend credit and letters of credit is not presented since management believes the fair value to be insignificant.
 
65


NOTE 15:
SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Accounting principles generally accepted in the United Sates of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses and certain concentrations of credit risk are reflected in Note 4, Loans and Allowance for Loan Losses.

NOTE 16:
COMMITMENTS AND CREDIT RISK

The Company grants agri-business, credit card, commercial and residential loans to customers throughout Arkansas. 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 December 31, 2006, the Company had outstanding commitments to extend credit aggregating approximately $202,047,000 and $529,697,000 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 $5,477,000 and $4,573,000 at December 31, 2006 and 2005, respectively, with terms ranging from 90 days to three years. The Company’s deferred revenue under standby letter of credit agreements was approximately $35,000 and $43,000 at December 31, 2006 and 2005, respectively.

At December 31, 2006, the Company did not have concentrations of 5% or more of the investment portfolio in bonds issued by a single municipality.

NOTE 17:
NEW ACCOUNTING STANDARDS

SFAS No. 123, Share-Based Payment (Revised 2004), establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. 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 adopted the provisions of SFAS 123R on January 1, 2006. Details related to the adoption of SFAS 123R and the impact to the Company’s financial statements are more fully discussed in Note 11, Employee Benefit Plans.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109, prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Interpretation 48 is effective for the Company on January 1, 2007 and is not expected to have a significant impact on the Company’s financial statements.
 
66


Presently, the Company is not aware of any other changes from the Financial Accounting Standards Board that will have a material impact on the Company’s present or future financial statements.

NOTE 18:
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 continue 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 Company and the bank plan to vigorously defend the claims asserted in the suit.

NOTE 19:
STOCKHOLDERS’ EQUITY

The Company’s subsidiaries 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 Office of the Comptroller of the Currency is required, if the total of all the 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 the current year earnings plus 75% of the retained net earnings of the preceding year. At December 31, 2006, the Company subsidiaries had approximately $12.7 million in undivided profits available for payment of dividends to the Company, without prior approval of the regulatory agencies.

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). Management believes that, as of December 31, 2006, the Company meets all capital adequacy requirements to which it is subject.
 
67


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.
 
68


The Company’s actual capital amounts and ratios along with the Company’s most significant subsidiaries are presented in the following table.

                   
To Be Well
 
           
Minimum
 
Capitalized Under
 
           
For Capital
 
Prompt Corrective
 
   
Actual
 
Adequacy Purposes
 
Action Provision
 
(In thousands)
 
Amount
 
Ratio-%
 
Amount
 
Ratio-%
 
Amount
 
Ratio-%
 
                           
As of December 31, 2006
                         
Total Risk-Based Capital Ratio
                         
Simmons First National Corporation
 
$
250,000
   
13.6
 
$
147,059
   
8.0
 
$
N/A
       
Simmons First National Bank
   
100,895
   
11.3
   
71,430
   
8.0
   
89,288
   
10.0
 
Simmons First Bank of Jonesboro
   
23,743
   
11.8
   
16,097
   
8.0
   
20,121
   
10.0
 
Simmons First Bank of Russellville
   
19,789
   
15.4
   
10,280
   
8.0
   
12,850
   
10.0
 
Simmons First Bank of Northwest Arkansas
   
22,699
   
10.6
   
17,131
   
8.0
   
21,414
   
10.0
 
Simmons First Bank of El Dorado
   
18,728
   
14.0
   
10,702
   
8.0
   
13,377
   
10.0
 
Tier 1 Capital Ratio
         
 
         
 
             
Simmons First National Corporation
   
226,880
   
12.4
   
73,187
   
4.0
   
N/A
       
Simmons First National Bank
   
91,859
   
10.3
   
35,673
   
4.0
   
53,510
   
  6.0
 
Simmons First Bank of Jonesboro
   
21,217
   
10.5
   
8,083
   
4.0
   
12,124
   
  6.0
 
Simmons First Bank of Russellville
   
18,176
   
14.1
   
5,156
   
4.0
   
7,734
   
  6.0
 
Simmons First Bank of Northwest Arkansas
   
20,133
   
  9.4
   
8,567
   
4.0
   
12,851
   
  6.0
 
Simmons First Bank of El Dorado
   
17,278
   
12.9
   
5,358
   
4.0
   
8,036
   
  6.0
 
Leverage Ratio
                                     
Simmons First National Corporation
   
226,880
   
  8.8
   
103,127
   
4.0
   
N/A
       
Simmons First National Bank
   
91,859
   
  7.4
   
50,334
   
4.0
   
62,917
   
  5.0
 
Simmons First Bank of Jonesboro
   
21,217
   
  8.0
   
10,609
   
4.0
   
13,261
   
  5.0
 
Simmons First Bank of Russellville
   
18,176
   
  9.8
   
7,419
   
4.0
   
9,273
   
  5.0
 
Simmons First Bank of Northwest Arkansas
   
20,133
   
  7.4
   
11,032
   
4.0
   
13,790
   
  5.0
 
Simmons First Bank of El Dorado
   
17,278
   
  7.9
   
8,748
   
4.0
   
10,935
   
  5.0
 
As of December 31, 2005
                                     
Total Risk-Based Capital Ratio
                                     
Simmons First National Corporation
 
$
235,316
   
13.5
 
$
139,447
   
8.0
 
$
N/A
       
Simmons First National Bank
   
95,633
   
11.5
   
66,527
   
8.0
   
83,159
   
10.0
 
Simmons First Bank of Jonesboro
   
21,806
   
10.9
   
16,004
   
8.0
   
20,006
   
10.0
 
Simmons First Bank of Russellville
   
22,096
   
16.7
   
10,585
   
8.0
   
13,231
   
10.0
 
Simmons First Bank of Northwest Arkansas
   
21,393
   
10.8
   
15,847
   
8.0
   
19,808
   
10.0
 
Simmons First Bank of El Dorado
   
18,158
   
14.6
   
9,950
   
8.0
   
12,437
   
10.0
 
Tier 1 Capital Ratio
                                     
Simmons First National Corporation
   
213,167
   
12.3
   
69,323
   
4.0
   
N/A
       
Simmons First National Bank
   
87,353
   
10.5
   
33,277
   
4.0
   
49,916
   
  6.0
 
Simmons First Bank of Jonesboro
   
19,294
   
  9.6
   
8,039
   
4.0
   
12,059
   
  6.0
 
Simmons First Bank of Russellville
   
20,444
   
15.5
   
5,276
   
4.0
   
7,914
   
  6.0
 
Simmons First Bank of Northwest Arkansas
   
18,917
   
  9.6
   
7,882
   
4.0
   
11,823
   
  6.0
 
Simmons First Bank of El Dorado
   
16,628
   
13.4
   
4,964
   
4.0
   
7,445
   
  6.0
 
Leverage Ratio
                                     
Simmons First National Corporation
   
213,167
   
  8.6
   
99,147
   
4.0
   
N/A
       
Simmons First National Bank
   
87,353
   
  7.4
   
47,218
   
4.0
   
59,022
   
  5.0
 
Simmons First Bank of Jonesboro
   
19,294
   
  7.4
   
10,429
   
4.0
   
13,036
   
  5.0
 
Simmons First Bank of Russellville
   
20,444
   
11.2
   
7,301
   
4.0
   
9,127
   
  5.0
 
Simmons First Bank of Northwest Arkansas
   
18,917
   
  7.3
   
10,365
   
4.0
   
12,957
   
  5.0
 
Simmons First Bank of El Dorado
   
16,628
   
  7.9
   
8,419
   
4.0
   
10,524
   
  5.0
 
 
69


NOTE 20:
CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

CONDENSED BALANCE SHEETS
DECEMBER 31, 2006 and 2005
           
(In thousands)
 
2006
 
2005
 
           
ASSETS
         
Cash and cash equivalents
 
$
6,858
 
$
4,853
 
Investment securities
   
2,490
   
3,030
 
Investments in wholly-owned subsidiaries
   
275,872
   
265,714
 
Intangible assets, net
   
134
   
134
 
Premises and equipment
   
2,664
   
2,248
 
Other assets
   
7,006
   
6,173
 
TOTAL ASSETS
 
$
295,024
 
$
282,152
 
               
LIABILITIES
             
Long-term debt
 
$
32,930
 
$
34,930
 
Other liabilities
   
3,078
   
3,137
 
Total liabilities
   
36,008
   
38,067
 
               
STOCKHOLDERS’ EQUITY
             
Common stock
   
142
   
143
 
Surplus
   
48,678
   
53,723
 
Undivided profits
   
212,394
   
194,579
 
Accumulated other comprehensive income (loss)
             
Unrealized depreciation on available-for-sale
             
securities, net of income tax credits of $1,319 at 2006
             
and $2,615 at 2005
   
(2,198
)
 
(4,360
)
Total stockholders’ equity
   
259,016
   
244,085
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
295,024
 
$
282,152
 
 
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
               
(In thousands)
 
2006
 
2005
 
2004
 
               
INCOME
             
Dividends from subsidiaries
 
$
20,472
 
$
18,394
 
$
15,650
 
Other income
   
5,809
   
5,473
   
4,486
 
     
26,281
   
23,867
   
20,136
 
EXPENSE
   
10,111
   
9,346
   
10,349
 
Income before income taxes and equity in
                   
undistributed net income of subsidiaries
   
16,170
   
14,521
   
9,787
 
Provision for income taxes
   
(1,546
)
 
(1,342
)
 
(2,098
)
                   
Income before equity in undistributed net
                   
income of subsidiaries
   
17,716
   
15,863
   
11,885
 
Equity in undistributed net income of subsidiaries
   
9,765
   
11,099
   
12,561
 
                     
NET INCOME
 
$
27,481
 
$
26,962
 
$
24,446
 
 
70


CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
               
(In thousands)
 
2006
 
2005
 
2004
 
               
CASH FLOWS FROM OPERATING ACTIVITIES
             
               
Net income
 
$
27,481
 
$
26,962
 
$
24,446
 
Items not requiring (providing) cash
                   
Depreciation and amortization
   
213
   
178
   
164
 
Deferred income taxes
   
226
   
(134
)
 
149
 
Equity in undistributed income of bank subsidiaries
   
(9,765
)
 
(11,099
)
 
(12,561
)
                     
Changes in
                   
Other assets
   
(996
)
 
1,066
   
(646
)
Other liabilities
   
(58
)
 
936
   
(848
)
Net cash provided by operating activities
   
17,101
   
17,909
   
10,704
 
                     
CASH FLOWS FROM INVESTING ACTIVITIES
                   
                     
Purchases of premises and equipment
   
(629
)
 
(232
)
 
(113
)
Purchase of subsidiary
   
--
   
--
   
(10,225
)
Return of capital from subsidiary
   
1,706
   
--
   
--
 
Purchase of held-to-maturity securities
   
(4,100
)
 
(1,530
)
 
--
 
Proceeds from sale of investment securities
   
4,640
   
550
   
17,958
 
Net cash (used in) provided by investing activities
   
1,617
   
(1,212
)
 
7,620
 
                     
CASH FLOWS FROM FINANCING ACTIVITIES
                   
                     
Principal reduction on long-term debt
   
(2,000
)
 
(2,000
)
 
(19,783
)
Dividends paid
   
(9,666
)
 
(8,757
)
 
(8,263
)
Repurchase of common stock, net
   
(5,047
)
 
(9,105
)
 
(1,395
)
Net cash used in financing activities
   
(16,713
)
 
(19,862
)
 
(29,441
)
                     
INCREASE (DECREASE) IN CASH AND 
                   
CASH EQUIVALENTS
   
2,005
   
(3,165
)
 
(11,117
)
                     
CASH AND CASH EQUIVALENTS,
                   
BEGINNING OF YEAR
   
4,853
   
8,018
   
19,135
 
                     
CASH AND CASH EQUIVALENTS, END OF YEAR
 
$
6,858
 
$
4,853
 
$
8,018
 
 
71


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

No items are reportable.

CONTROLS AND PROCEDURES

(a) 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-14(c) and 15 C. F. R. 240.15-14(c)) 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.

(b) Changes in Internal Controls. 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.

OTHER INFORMATION

No items are reportable.
PART III

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held April 10, 2007, to be filed pursuant to Regulation 14A on or about March 9, 2007.

EXECUTIVE COMPENSATION

Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held April 10, 2007, to be filed pursuant to Regulation 14A on or about March 9, 2007.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held April 10, 2007, to be filed pursuant to Regulation 14A on or about March 9, 2007.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held April 10, 2007, to be filed pursuant to Regulation 14A on or about March 9, 2007.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held April 10, 2007, to be filed pursuant to Regulation 14A on or about March 9, 2007.
 
72


PART IV

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1 and 2. Financial Statements and any Financial Statement Schedules

The financial statements and financial statement schedules listed in the accompanying index to the consolidated financial statements and financial statement schedules are filed as part of this report.

(b) Listing of 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. 6253)).
     
 
3.2
Amended By-Laws of Simmons First National Corporation (incorporated by reference to Exhibit 3 (ii) to Simmons First National Corporation’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1994 (File No. 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 Bob 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. 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. 6253)).
     
 
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. 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 Bob 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. 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. 6253)).
 
73


 
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. 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 Bob 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. 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. 6253)).
     
 
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. 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. 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, Executive Vice President and 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, Executive Vice President and Chief Financial Officer.*
     
   
* Filed herewith.
 
74


SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

     
 
 /s/ John L. Rush
February 26, 2007
 
John L. Rush, Secretary
 
 

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on or about February 26, 2007.

Signature
 
Title
     
     
/s/ J. Thomas May
 
Chairman and Chief Executive Officer
J. Thomas May
 
and Director
     
     
/s/ Robert A. Fehlman
 
Executive Vice President and Chief Financial Officer
Robert A. Fehlman
 
(Principal Financial and Accounting Officer)
     
     
/s/ William E. Clark
 
Director
William E. Clark
   
     
     
/s/ Steven A. Cosse¢
 
Director
Steven A. Cosse¢
   
     
     
/s/ George A. Makris, Jr.
 
Director
George A. Makris, Jr.
   
     
     
/s/ W. Scott McGeorge
 
Director
W. Scott McGeorge
   
     
     
/s/ Stanley E. Reed
 
Director
Stanley E. Reed
   
     
     
/s/ Harry L. Ryburn
 
Director
Harry L. Ryburn
   
     
     
/s/ Robert L. Shoptaw
 
Director
Robert L. Shoptaw
   
     
     
/s/ Henry F. Trotter, Jr.
 
Director
Henry F. Trotter, Jr.
   
 
75