Simmons First National - 10-Q quarterly report FY

See Condensed Notes to Consolidated Financial Statements.

Time deposits include approximately $389,021,000 and $364,177,000 of certificates of deposit of $100,000 or more at March 31, 2006 and December 31, 2005 respectively.

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

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below:

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

At March 31, 2006 the Company had Federal Home Loan Bank (“FHLB”) advances with original maturities of one year or less of $2.0 million with a weighted average rate of 4.79% which are not included in the above table.

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

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

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

On 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 exercises, payment of future stock dividends and general corporate purposes.

During the three-month period ended March 31, 2006, the Company repurchased 89,500 shares of stock under the repurchase plan with a weighted average repurchase price of $28.12 per share. Under the current stock repurchase plan, the Company can repurchase an additional 454,567 shares.

As a result of applying the provisions of SFAS 123R during the three months ended March 31, 2006, the Company recognized additional stock-based compensation expense related to stock options of $4,210. The increase in stock-based compensation expense related to stock options during the three months ended March 31, 2006, resulted in no change in basic or diluted earnings per share.

Stock-based compensation expense totaled $14,614 and $10,404 during the three months ended March 31, 2006 and 2005. Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards. Unrecognized stock-based compensation expense related to stock options totaled $71,897 at March 31, 2006. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.56 years. Unrecognized stock-based compensation expense related to non-vested stock awards was $512,996 at March 31, 2006. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.79 years.

The following pro forma information presents net income and earnings per share for the three months ended March 31, 2005, as if the fair value method of SFAS 123R had been applied.

The table below summarizes the transactions under the Company's stock option plans for the three months ended March 31, 2006:

Total intrinsic value of options exercised for the three months ended March 31, 2006, was $639,581. No options were granted during the three months ended March 31, 2006. As of March 31, 2006, there was $584,893 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 1.77 years.

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

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

At March 31, 2006, the Company had outstanding commitments to extend credit aggregating approximately $207,767,000 and $478,806,000 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 $3,701,000 and $4,573,000 at March 31, 2006 and December 31, 2005, respectively, with terms ranging from 90 days to three years. At March 31, 2006 and December 31, 2005 the Company’s deferred revenue under standby letter of credit agreements is approximately $11,000 and $43,000, respectively.

Certified Public Accountants

200 East Eleventh

Pine Bluff, Arkansas

Audit Committee, Board of Directors and Stockholders

Simmons First National Corporation

Pine Bluff, Arkansas

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2005, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein), and in our report dated February 15, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Pine Bluff, Arkansas

May 5, 2006

Asset quality remained strong through March 31, 2006, continuing the trend of the past several quarters. The non-performing assets ratio was 62 basis points and 58 basis points at March 31, 2006 and December 31, 2005, respectively. Non-performing loans to total loans were 52 basis points at the end of the quarter, compared to 49 basis points at December 31, 2005. The allowance for loan losses equaled 301% of non-performing loans as of March 31, 2006, compared to 319% as of year-end 2005. The allowance for loan losses as a percent of total loans equaled 1.56% and 1.57 % as of March 31, 2006 and December 31, 2005, respectively.

Annualized net charge-offs to total loans for the first quarter of 2006 were 15 basis points. Excluding credit cards, annualized net charge-offs to total loans were 7 basis points. The credit card annualized net charge-offs as a percent of the credit card portfolio were 1.07% for the quarter ended March 31, 2006, more than 400 basis points below the industry average. Credit card charge-offs increased during the fourth quarter of 2005 due to the new bankruptcy law that went into effect in October. While bankruptcy filings have declined significantly from fourth quarter highs, the Company does not expect that the first quarter results will be maintained throughout the year, but that credit card charge-offs will gradually return to a normalized level of approximately 2.50%.

Total assets for the Company at March 31, 2006, were $2.538 billion, an increase of $14.7 million, or 0.6% from December 31, 2005. Stockholders’ equity at the end of the first quarter of 2006 was $245.2 million, a $1.1million, or 0.5% increase from December 31, 2005.

Simmons First National Corporation is an Arkansas based financial holding company with eight community banks in Pine Bluff, Lake Village, Jonesboro, Rogers, Searcy, Russellville, El Dorado and Hot Springs, Arkansas. The Company's eight banks conduct financial operations from 82 offices, of which 80 are financial centers, located in 46 communities.

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

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

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

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

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

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

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

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

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.

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 12 - Stock-Based Compensation 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.

On November 1, 2005, the Company completed a branch purchase in which Simmons First National Bank, a subsidiary of the Company, acquired from Bank of Little Rock its Southwest Little Rock, Arkansas location at 8500 Geyer Springs Road. 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.

The systems integration for the 2005 acquisition was completed on the acquisition date.

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

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

For the three-month period ended March 31, 2006, net interest income on a fully taxable equivalent basis was $22.7 million, a decrease of $200,000, or 0.9%, from the same period in 2005. The decrease in net interest income was the result of a $5.0 million increase in interest expense offset by a $4.8 million increase in interest income.

The $5.0 million increase in interest expense primarily is the result of a 97 basis point increase in cost of funds due to competitive repricing during a higher interest rate environment, coupled with a $52.8 million increase in average interest bearing liabilities generated through internal growth. The higher interest rates accounted for a $4.6 million increase in interest expense. The most significant component of this increase was the $3.0 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 124 basis points from 2.31% to 3.55%. The higher level of average interest bearing liabilities resulted in a $1.0 million increase in interest expense. More specifically, the higher level of average interest bearing liabilities was the result of increases of approximately $46.6 million from internal deposit growth and $15.6 million from fed funds purchased and short-term debt, offset by a $9.4 million reduction in average long-term debt.

The $4.8 million increase in interest income primarily is the result of internal growth in loans along with a 73 basis point increase in yield on earning assets associated with the repricing to a higher interest rate environment. The growth in average interest earning assets resulted in a $1.4 million improvement in interest income. The higher interest rates accounted for a $3.4 million increase in interest income. More specifically, $2.6 million of the increase 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 65 basis points from 6.56% to 7.21%.

The Company’s net interest margin decreased 12 basis points to 4.05% for the three-month period ended March 31, 2006, when compared to 4.17% for the same period in 2005. This decrease in the net interest margin can be primarily attributed to the following. First, one of the Company’s higher yielding products, credit card loans, decreased approximately $12.0 million from March 31, 2005 to March 31, 2006, resulting in a negative margin impact of approximately 5 basis points. The remainder of the margin compression was due to the increase in the cost of funds resulting from deposit repricing, coupled with the effect of the flat yield curve. The Company expects to see continuing competitive pressure in deposit repricing in the short term, and anticipates slight margin compression for the remainder of 2006.

Table 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three-month periods ended March 31, 2006 and 2005, respectively, as well as changes in fully taxable equivalent net interest margin for the three-month periods ended March 31, 2006 versus March 31, 2005.

(FTE =Fully Taxable Equivalent)

Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the periods ended March 31, 2006 and 2005. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.