SIMMONS FIRST NATIONAL CORP — Annual Report 2003

Feb 26, 2004

10-K 1 d58415_10k.htm SIMMONS FIRST 10-K HTML PUBLIC "-//W3C//DTD HTML 3.2 Final//EN" Form 10-K MARKER FORMAT-SHEET="Page Width Begin"

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K

(Mark One)
[X]	Annual Report Pursuant to Section 13 or 15(d) of the Exchange Act of 1934 For the fiscal year ended: December 31, 2003
OR
[ ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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Commission file number 0-6253 SIMMONS FIRST NATIONAL CORPORATION (Exact name of registrant as specified in its charter)

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Arkansas (State or other jurisdiction of incorporation or organization) 71-0407808 (I.R.S. employer identification No.)

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501 Main Street, Pine Bluff, Arkansas (Address of principal executive offices) 71601 (Zip Code)

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(870) 541-1000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
None	None

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Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $1.00 par value (Title of Class) 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. Yes X 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. [X] The aggregate market value of common stock, par value $1.00 per share, held by non-affiliates on, February 10, 2004, was approximately $339,629,010. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No The number of shares outstanding of the Registrant’s Common Stock as of February 10, 2004 was 14,112,919. Part III is incorporated by reference from the Registrant’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on March 30, 2004.

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Introduction This year, the Company has chosen to combine our Annual Report to Shareholders with our Form 10-K, which is a document that U.S. pubic 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 — Item 1	Business	1
Item 2	Properties	6
Item 3	Legal Proceedings	6
Item 4	Submission of Matters to a Vote of Security-Holders	6
Part II
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters	7
Item 6	Selected Consolidated Financial Data	9
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	36
Item 8	Consolidated Financial Statements and Supplementary Data	39
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68
Item 9A	Controls and Procedures	68
Part III
Item 10	Directors and Executive Officers of the Company	68
Item 11	Executive Compensation	68
Item 12	Security Ownership of Certain Beneficial Owners and Management	68
Item 13	Certain Relationships and Related Transactions	68
Item 14	Principal Accounting Fees and Services	68
Part IV
Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K	69
	Signatures	71

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PART I

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ITEM 1. BUSINESS

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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. During the year ended 2003, the Company organized a securities brokerage subsidiary. At December 31, 2003, the subsidiary was not capitalized. However, the Company plans to capitalize it during the first quarter of 2004. The Company was the largest publicly traded financial holding company headquartered in Arkansas with consolidated total assets of $2.2 billion, consolidated loans of $1.4 billion, consolidated deposits of $1.8 billion and total equity capital of $210 million as of December 31, 2003. The Company owns seven community banks in Arkansas. Upon the completion of recently announced acquisitions, the Company’s banking subsidiaries will conduct their operations through 79 offices, of which 77 are financial centers, located in 45 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, 2003, the Bank had total assets of $1.2 billion, total loans of $732 million and total deposits of $965 million. Simmons First Trust Company N.A., a wholly owned subsidiary of the Bank, performs the Company’s trust and fiduciary business operations. 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, 2003, Simmons/Jonesboro had total assets of $190 million, total loans of $156 million and total deposits of $168 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, 2003, Simmons/South had total assets of $134 million, total loans of $73 million and total deposits of $121 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, 2003, Simmons/Northwest had total assets of $230 million, total loans of $161 million and total deposits of $199 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, 2003, Simmons/Russellville had total assets of $196 million, total loans of $125 million and total deposits of $148 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, 2003, Simmons/Searcy had total assets of $118 million, total loans of $79 million and total deposits of $92 million. 1

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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, 2003, Simmons/El Dorado had total assets of $193 million, total loans of $91 million and total deposits of $160 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 a part of the ongoing risk assessment, the Bank has a Loan Loss Reserve Committee that meets monthly to review the adequacy of the allowance for loan losses. The Committee reviews the status of past due, non-performing and other impaired loans on a loan-by-loan basis, including historical loan loss information, except for loans such as credit cards, 1-4 family owner occupied residential real estate loans and other consumer loans, which are collectively evaluated based on recent loss experience and current economic conditions. The allowance for loan losses is determined based upon the aforementioned factors and allocated to the individual loan categories. 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 Committee reviews their analysis with management and the Bank’s Board of Directors on a monthly basis. The Company has an independent loan review department. For the Bank, this department reviews the allowance for loan loss on a monthly basis, performs an independent loan analysis and prepares a detailed report on their analysis of the adequacy of the allowance for loan losses on a quarterly basis. This quarterly report is presented to the Bank’s Board of Directors. The Board of Directors of the other subsidiary banks review the adequacy of their allowance for loan losses on a monthly basis giving consideration to past due loans, non-performing loans, other impaired loans and current economic conditions. Monthly, the other subsidiary banks loan information is provided to the Company’s loan review department for their review. The loan review department prepares a detailed report of their analysis of the allowance for loan losses for each bank approximately twice a year. This report is then presented to the Company’s Audit and Security Committee. As a follow up, approximately twice a year, the loan review department performs an on-site detailed review of the loan files to verify the accuracy of information being provided on a monthly basis. Growth Strategy The Company’s growth strategy is to focus on the State of Arkansas with a goal of a 10% statewide deposit market share. More specifically, the Company is interested in expansion by opening new financial centers or by acquisitions of financial centers with $200 million or more in total assets in growth or strategic markets. For example in 2004, the Company is planning additional branch locations in the Little Rock metropolitan area and will be completing the acquisition of Alliance Bancorporation, Inc. of Hot Springs, Arkansas with approximately $140 million in total assets. 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. However, the Alliance acquisition is anticipated to be slightly EPS accretive during 2004. With an increased presence in Arkansas, ongoing investments in technology, and enhanced products and services, the Company is in position to meet the customer demands of the State of Arkansas. 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. 2

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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. Employees As of December 31, 2003, the Company and its subsidiaries had 1,042 full time equivalent employees. None of the employees are 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	57	Chairman, President and Chief Executive Officer	17
Barry L. Crow	60	Executive Vice President and Chief Financial Officer	33
Tommie K. Jones	56	Senior Vice President and Human Resources Director	29
Robert A. Fehlman	39	Senior Vice President and Controller	15
John L. Rush	69	Secretary	36

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Board of Directors of the Company The following is a list of the Board of Directors of the Company as of December 31, 2003, along with their principal occupation.

NAME	PRINCIPAL OCCUPATION
William E. Clark	Chairman and Chief Executive Officer
	CDI Contractors, LLC
Lara F. Hutt, III	President
	Hutt Building Material Company, Inc.
George A. Makris, Jr	President
	M.K. Distributors, Inc.
J. Thomas May	Chairman, President and Chief Executive Officer
	Simmons First National Corporation
David R. Perdue	Vice President
	JDR, Inc.
Harry L. Ryburn, D.D.S	Orthodontist
Henry F. Trotter, Jr	President
	Trotter Ford, Lincoln, Mercury, Toyota, KIA

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During the first quarter of 2004, the Company announced that Steven A. Cossé has joined the board of directors. Mr. Cossé is Senior Vice President and General Counsel of Murphy Oil Corporation. 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. 3

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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. Those bank holding companies, including the Company, which have elected to qualify as financial holding companies are also 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 and Simmons/Northwest, 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, which included 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 would set 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. All of the Company’s subsidiary banks are members of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000 per deposit relationship. For this protection, each bank pays a statutory assessment to the FDIC each year. 4

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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, that 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 of the Notes to Consolidated Financial Statements. A banking organization’s qualifying total capital consists of two components: Tier 1 Capital (core capital) and Tier 2 Capital (supplementary 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. 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. 5

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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. Securities and Exchange Commission Filings The Company maintains an Internet website at www.simmonsfirst.com . On this website under the section, investor relation — documents, the Company makes the filings with the Securities and Exchange Commission available free of charge.

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ITEM 2. PROPERTIES

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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. The building and adjacent office space is comprised of approximately 119,000 square feet of usable floor space, approximately 7,000 square feet of which is leased to a tenant as office space. The Company and its subsidiaries own or lease additional offices throughout the State of Arkansas. As of December 31, 2003, the Company’s seven banks are conducting financial operations from 73 offices, of which 71 are financial centers, in 43 communities throughout Arkansas.

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ITEM 3. LEGAL PROCEEDINGS

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The Company and/or its subsidiary banks 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. Management is currently conducting an internal review of the facts and circumstances surrounding this matter and has filed a Motion to Dismiss. At this time, no basis for any material liability has been identified. The banks plan to vigorously defend the claims asserted in the suit.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

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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. 6

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PART II

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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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The Company’s common stock trades on The Nasdaq Stock Market ® in the National Market System under the symbol “SFNC”. The following table sets forth, for all the periods indicated, cash dividends paid, and the high and low closing bid prices for the Company’s common stock, adjusted to reflect the effect of the two for one stock split on May 1, 2003.

	Price Per Common Share — High	Low	Share
2003
1st quarter	$ 18.45	$ 17.06	$ 0.125
2nd
quarter	21.50	18.13	0.130
3rd quarter	26.31	20.90	0.130
4th
quarter	28.90	23.95	0.140
2002
1st
quarter	$ 16.53	$ 15.64	$ 0.115
2nd quarter	21.30	16.25	0.120
3rd
quarter	20.57	16.95	0.120
4th quarter	19.22	17.20	0.125

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At December 31, 2003, the Common Stock was held of record by approximately 1,389 stockholders. On February 10, 2004, the last sale price for the Common Stock as reported by The Nasdaq Stock Market ® was $28.25 per share. 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, must be approved by the Office of the Comptroller of the Currency. Further, as to Simmons/Jonesboro, Simmons/Northwest, Simmons/South, 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, 2003, approximately $16 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 of Notes to Consolidated Financial Statements. Recent Sales of Unregistered Securities The following transactions are sales of unregistered shares of Class A Common Stock of the registrant, for the fourth quarter of 2003, which were issued to executive and senior management officers upon the exercise of rights granted under one of the Company’s stock option plans. No underwriters were involved and no underwriter’s discount or commissions were involved. Exemption from registration is claimed under Section 4(2) of the Securities Act of 1933 as private placements. The Company received cash and/or exchanged shares of the Company’s Class A Common Stock as the consideration for the transactions. 7

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| Identity — 2
Officers | Date of Sale — October,
2003 | 1,700 | 12.8333 | Type of Transaction — Incentive
Stock Option |
| --- | --- | --- | --- | --- |
| 2 Officers | November,
2003 | 1,500 | 10.2500 | Incentive
Stock Option |
| 9
Officers | November,
2003 | 7,000 | 12.8333 | Incentive
Stock Option |
| 1 Officer | December,
2003 | 200 | 7.9166 | Incentive
Stock Option |
| 3
Officers | December,
2003 | 1,500 | 10.2500 | Incentive
Stock Option |
| 1 Officer | December,
2003 | 200 | 10.5625 | Incentive
Stock Option |
| 1
Officer | December,
2003 | 6,000 | 12.1250 | Incentive
Stock Option |
| 1 Officer | December,
2003 | 400 | 12.2187 | Incentive
Stock Option |
| 1
Officer | December,
2003 | 2,400 | 12.8333 | Incentive
Stock Option |
| 3 Officers | December,
2003 | 1,500 | 16.0000 | Incentive
Stock Option |
| 1 Officer | December,
2003 | 400 | 22.6250 | Incentive
Stock Option |

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Notes:

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1. The per share price paid for incentive stock options represents the fair market value of the stock as determined under the terms of the Plan on the date the incentive stock option was granted to the officer. The price paid and number of shares issued have been adjusted to reflect the effect of the 50% stock dividend paid on December 6, 1996 and the two for one stock split on May 1, 2003.

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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. 8

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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

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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, 2003, 2002, 2001, 2000, and 1999 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. 9

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SELECTED CONSOLIDATED FINANCIAL DATA

(In thousands, except per share data)	Years Ended December 31 (1) — 2003	2002	2001	2000	1999
Income
statement data:
Net interest income	$ 77,870	$ 75,708	$ 67,405	$ 67,061	$ 64,731
Provision
for loan losses	8,786	10,223	9,958	7,531	6,551
Net interest income after provision
for loan losses	69,084	65,485	57,447	59,530	58,180
Non-interest
income	38,717	35,303	33,569	30,355	28,277
Non-interest expense	73,117	69,013	68,130	62,556	61,929
Provision
for income taxes	10,894	9,697	6,358	8,460	7,360
Net income	23,790	22,078	16,528	18,869	17,168
Per share data:
Basic earnings	1.69	1.56	1.16	1.30	1.18
Diluted
earnings	1.65	1.54	1.15	1.29	1.17
Book value	14.89	13.97	12.87	12.07	10.89
Dividends	0.53	0.48	0.44	0.40	0.36
Balance sheet data at period end:
Assets	2,235,778	1,977,579	2,016,918	1,912,493	1,697,430
Loans	1,418,314	1,257,305	1,258,784	1,294,710	1,113,635
Allowance
for loan losses	25,347	21,948	20,496	21,157	17,085
Deposits	1,803,468	1,619,196	1,686,404	1,605,586	1,410,633
Long-term
debt	100,916	54,282	42,150	41,681	46,219
Stockholders’ equity	209,995	197,605	182,363	173,343	159,371
Capital
ratios at period end:
Stockholders’ equity to
total assets	9.39 %	9.99 %	9.04 %	9.06 %	9.39 %
Leverage
(2)	9.89 %	9.29 %	8.26 %	8.41 %	9.10 %
Tier 1	14.12 %	14.02 %	12.76 %	11.97 %	13.67 %
Total
risk-based	15.40 %	15.30 %	14.04 %	13.26 %	14.96 %
Selected ratios:
Return
on average assets	1.18 %	1.12 %	0.84 %	1.05 %	1.02 %
Return on average equity	11.57 %	11.56 %	9.23 %	11.33 %	10.92 %
Net
interest margin (3)	4.34 %	4.37 %	3.92 %	4.24 %	4.41 %
Allowance/nonperforming loans	219.13 %	179.07 %	137.12 %	192.97 %	167.37 %
Allowance
for loan losses as a
percentage
of period-end loans	1.79 %	1.75 %	1.63 %	1.63 %	1.53 %
Nonperforming loans as a percentage
of period-end loans	0.82 %	0.97 %	1.19 %	0.85 %	0.92 %
Net
charge-offs as a percentage
of
average total assets	0.41 %	0.46 %	0.54 %	0.34 %	0.37 %
Dividend payout	31.14 %	30.75 %	37.76 %	30.85 %	31.26 %

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(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) Leverage ratio is Tier 1 capital to quarterly average total assets less intangible assets and gross unrealized gains/losses on available-for-sale investments. (3) Fully taxable equivalent (assuming an effective income tax rate of 37.5%). 10

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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2003 Overview

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Simmons First National Corporation recorded record earnings of $23,790,000, or $1.65 diluted earnings per share for the twelve-month period ended December 31, 2003. These earnings reflect an increase of $1,712,000, or $0.11 per share from the December 31, 2002 earnings of $22,078,000, or $1.54 diluted earnings per share. The increase in earnings over last year is primarily attributable to the increased volume in the Company’s mortgage banking operation, a nonrecurring gain on the sale of mortgage servicing, growth in the loan portfolio, and a lower provision for loan losses, which correlates to the improved asset quality ratios. The Company’s return on average assets and return on average stockholders’ equity for the year ended December 31, 2003, was 1.18% and 11.57%, compared to 1.12% and 11.56%, respectively, for the year ended 2002. At December 31, 2003, the Company’s loan portfolio totaled $1.418 billion, which is a $161.0 million, or a 12.8%, increase from the same period last year. This increase is due partially to the recently completed acquisition of nine branches in North Central and Northeast Arkansas during the fourth quarter of 2003, which included $98.9 million in loans. The additional growth was attributable to increased loan demand the Company experienced in its construction and commercial real estate loan portfolios. As of December 2003, asset quality remained strong with non-performing loans lower by $690,000 from the same period last year. Non-performing loans to total loans improved to 0.82% from 0.97% from the same period last year, and the allowance for loan losses improved to 219% of non-performing loans, compared to 179% from the same period last year. At year-end, the allowance for loan losses equaled 1.79% of total loans, which is an improvement of 4 basis points from the 1.75% reflected at year-end 2002. Total assets for the Company at December 31, 2003, were $2.236 billion, an increase of $258.2 million, or 13.1%, over the same figure at December 31, 2002. Stockholders’ equity at December 31, 2003, was $210.0 million, a $12.4 million, or 6.3%, increase from December 31, 2002. Upon completion of the recently announced acquisitions, Simmons First National Corporation, a financial holding company, will have assets of approximately $2.4 billion, with eight community banks in Pine Bluff, Lake Village, Jonesboro, Rogers, Searcy, Russellville, El Dorado, and Hot Springs, Arkansas. The Company’s eight banks will conduct financial operations from 79 offices, of which 77 are financial centers, in 45 communities.

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CRITICAL ACCOUNTING POLICIES

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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 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. 11

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Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is maintained at a level considered adequate to provide for potential loan losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan portfolio that have been incurred as of period end. This estimate is based on management’s evaluation of the loan portfolio, as well as on prevailing and anticipated economic conditions and historical losses by loan category. General reserves have been established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances are accrued on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral. The unallocated reserve generally serves to compensate for the uncertainty in estimating loan losses, including the possibility of changes in risk ratings and specific reserve allocations in the loan portfolio as a result of the Company’s ongoing risk management system. 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. Although goodwill is not being amortized, it is tested annually for impairment. 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. Employee Benefit Plans The Company has a stock-based employee compensation plan. The Company accounts for this plan under recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. 12

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Acquisitions

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On October 8, 2003, the Company announced the execution of a definitive agreement under the terms of which, Alliance Bancorporation, Inc. (ABI) will be merged into Simmons First National Corporation. ABI owns Alliance Bank of Hot Springs, Hot Springs, Arkansas with consolidated assets of approximately $140 million. The transaction is expected to close during the first quarter of 2004. After the merger, Alliance will continue to operate as a separate community bank with the same board of directors, management and staff. On November 21, 2003, the Company completed the purchase of nine financial centers from Union Planters Bank, N.A. Six locations in North Central Arkansas include Clinton, Marshall, Mountain View, Fairfield Bay, Leslie and Bee Branch. Three locations in Northeast Arkansas communities include Hardy, Cherokee Village and Mammoth Spring. The nine locations have combined deposits of $130 million with acquired assets of $119 million including selected loans, premises, cash and other assets. As a result of this transaction, the Company recorded additional goodwill and core deposits of $12,282,000 and $4,817,000, respectively On July 19, 2002, the Company expanded its coverage in South Arkansas with the purchase of the Monticello location from HEARTLAND Community Bank. Simmons First Bank of South Arkansas, a wholly owned subsidiary of the Company, acquired the Monticello office. As of July 19, 2002, the new location had total loans of $8 million and total deposits of $13 million. As a result of this transaction, the Company recorded additional goodwill and core deposits of $1,058,000 and $217,000, respectively.

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Sale of Mortgage Servicing

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During the second quarter 2003, the Company recorded a nonrecurring $0.03 addition to earnings per share. On June 30, 1998, the Company sold its $1.2 billion residential mortgage-servicing portfolio. As a result of this sale, the Company established a reserve for potential liabilities due to certain representations and warranties made on the sale date. The time period for making claims under the terms of the mortgage servicing sale’s representations and warranties expired on June 30, 2003. Thus, the Company reversed this remaining reserve in the second quarter of 2003, which is reflected in the $771,000 pre-tax gain on sale of mortgage servicing. Excluding this nonrecurring gain, the Company would have reported $1.62 diluted earnings per share for the year ended December 31, 2003.

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Net Interest Income

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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%. Throughout 2001, the Federal Reserve Bank steadily decreased the Federal Funds rate by a total of 475 basis points to 1.75% in an effort to stimulate economic growth. In 2002, the Federal Reserve continued to decrease the Federal Funds rate from 1.75% at the end of 2001 to 1.25% at the end of 2002. This decline has continued in 2003, with another 25 basis point decrease, bringing the Federal Funds rate to 1.00% at December 31, 2003. This declining rate environment contributed to the decline in interest income. This decline was more than offset by a decline in interest expense, driven by the low interest rate environment, which resulted in growth in net interest income. 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 85% of the Company’s time deposits have repriced in one year or less. These historical amounts are consistent with current repricing. 13

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For the year ended December 31, 2003, net interest income on a fully taxable equivalent basis was $81.0 million, an increase of $2.0 million, or 2.5%, from the same period in 2002. The increase in net interest income was the result of an $8.7 million decrease in interest income and a $10.7 million decrease in interest expense. As a result, the net interest margin decreased 3 basis points to 4.34% for the year ended December 31, 2003, when compared to 4.37% for 2002. The $8.7 million decrease in interest income for the year ended December 31, 2003, primarily is the result of a 67 basis point decrease in the yield earned on earning assets associated with the lower interest rate environment. The lower interest rates resulted in a $12.4 million decrease in interest income. More specifically, $9.1 million of the decrease 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 decreased 71 basis points from 7.62% to 6.91%. Offsetting the decline in interest rates for 2003 was growth in the Company’s loans portfolio. The loan growth contributed $3.5 million of additional interest income for 2003 versus 2002. The $10.7 million decrease in interest expense for the year ended December 31, 2003, primarily is the result of a 73 basis point decrease in cost of funds, due to repricing opportunities during the lower interest rate environment. More specifically, $8.1 million of the decrease is associated with management’s ability to reprice the Company’s time deposits that resulted from time deposits maturing during the period or were tied to a rate that fluctuated with changes in market rates. As a result, the average rate paid on time deposits decreased 98 basis points from 3.43% to 2.45%. For the year ended December 31, 2002, net interest income on a fully taxable equivalent basis was $79.0 million, an increase of $8.4 million, or 12.0%, from the same period in 2001. The increase in net interest income was the result of a $19.6 million decrease in fully taxable equivalent interest income and a $28.0 million decrease in interest expense. The decrease in interest income was the result of a lower yield earned on earning assets. The decrease in interest expense was the result of a lower cost of funds. The net interest margin improved 45 basis points to 4.37% for the year ended December 31, 2002, when compared to 3.92% for the same period in 2001. The year ended 2002 represents the first full year that the Company was able to fully utilize the changes in the Arkansas usury law made possible through the Gramm-Leach-Bliley Act, which was upheld by the Eighth Circuit Court of Appeals in October 2001. This ability to reprice the loan portfolio, coupled with the ongoing repricing of the deposit base that was driven by the Federal Reserve’s lowering of interest rates, enabled the Company to achieve considerable improvement in both net interest income and net interest margin. Table 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2003, 2002 and 2001, respectively, as well as changes in fully taxable equivalent net interest margin for the years 2003 versus 2002 and 2002 versus 2001. 14

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Table 1: Analysis of Net Interest Income

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(FTE =Fully Taxable Equivalent)

(In thousands)	2003	2002	2001
Interest income	$ 107,607	$ 116,142	$ 135,868
FTE adjustment	3,112	3,325	3,183
Interest income - FTE	110,719	119,467	139,051
Interest expense	29,737	40,434	68,463
Net interest income - FTE	$ 80,982	$ 79,033	$ 70,588
Yield on earning assets - FTE	5.94 %	6.61 %	7.72 %
Cost of interest bearing liabilities	1.91 %	2.64 %	4.41 %
Net interest spread - FTE	4.03 %	3.97 %	3.31 %
Net interest margin - FTE	4.34 %	4.37 %	3.92 %

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Table 2: Changes in Fully Taxable Equivalent Net Interest Margin

(In thousands) — Increase (decrease) due to change in earning assets	$ 3,655	$	(1,325	)
Decrease due
to change in earning asset yields	(12,403	)	(18,259	)
Increase due to change in interest rates paid on
interest bearing liabilities	11,298		25,010
(Decrease)
increase due to change in interest bearing liabilities	(601	)	3,019
Increase in
net interest income	$ 1,949	$	8,445

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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, 2003. 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. 15

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Table 3: Average Balance Sheets and Net Interest Income Analysis

| | Years
Ended December 31 | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | 2003 | | | 2002 | | | 2001 | | |
| (In
thousands) | Average Balance | Income/ Expense | Yield/ Rate(%) | Average Balance | Income/ Expense | Yield/ Rate(%) | Average Balance | Income/ Expense | Yield/ Rate(%) |
| ASSETS | | | | | | | | | |
| Earning
Assets | | | | | | | | | |
| Interest
bearing balances | | | | | | | | | |
| due
from banks | $ 51,325 | $ 494 | 0.96 | $ 41,314 | $ 650 | 1.57 | $ 44,238 | $ 1,472 | 3.33 |
| Federal
funds sold | 63,642 | 652 | 1.02 | 65,199 | 996 | 1.53 | 52,742 | 1,877 | 3.56 |
| Investment
securities - taxable | 311,722 | 10,958 | 3.52 | 311,476 | 13,094 | 4.20 | 271,864 | 15,053 | 5.54 |
| Investment
securities - non-taxable | 115,416 | 7,641 | 6.62 | 119,388 | 8,310 | 6.96 | 121,068 | 8,591 | 7.10 |
| Mortgage
loans held for sale | 22,692 | 1,220 | 5.38 | 16,560 | 1,007 | 6.08 | 18,486 | 1,143 | 6.18 |
| Assets
held in trading accounts | 1,146 | 37 | 3.23 | 1,784 | 88 | 4.93 | 786 | 38 | 4.83 |
| Loans | 1,298,127 | 89,717 | 6.91 | 1,251,072 | 95,322 | 7.62 | 1,291,808 | 110,877 | 8.58 |
| Total
interest earning assets | 1,864,070 | 110,719 | 5.94 | 1,806,793 | 119,467 | 6.61 | 1,800,992 | 139,051 | 7.72 |
| Non-earning
assets | 157,469 | | | 156,551 | | | 158,956 | | |
| Total
assets | $ 2,021,539 | | | $ 1,963,344 | | | $ 1,959,948 | | |
| LIABILITIES
AND | | | | | | | | | |
| STOCKHOLDERS’
EQUITY | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest
bearing liabilities | | | | | | | | | |
| Interest
bearing transaction | | | | | | | | | |
| and
savings deposits | $ 579,618 | $ 4,594 | 0.79 | $ 540,454 | $ 6,304 | 1.17 | $ 470,708 | $ 10,008 | 2.13 |
| Time
deposits | 813,973 | 19,921 | 2.45 | 859,542 | 29,503 | 3.43 | 948,172 | 51,948 | 5.48 |
| Total
interest bearing deposits | 1,393,591 | 24,515 | 1.76 | 1,399,996 | 35,807 | 2.56 | 1,418,880 | 61,956 | 4.37 |
| Federal
funds purchased and | | | | | | | | | |
| securities
sold under agreement | | | | | | | | | |
| to
repurchase | 87,847 | 941 | 1.07 | 78,518 | 1,198 | 1.53 | 82,371 | 2,874 | 3.49 |
| Other
borrowed funds | | | | | | | | | |
| Short-term
debt | 5,489 | 89 | 1.62 | 5,435 | 110 | 2.02 | 7,413 | 333 | 4.49 |
| Long-term
debt | 72,211 | 4,192 | 5.81 | 47,117 | 3,319 | 7.04 | 42,275 | 3,300 | 7.81 |
| Total
interest bearing liabilities | 1,559,138 | 29,737 | 1.91 | 1,531,066 | 40,434 | 2.64 | 1,550,939 | 68,463 | 4.41 |
| Non-interest
bearing liabilities | | | | | | | | | |
| Non-interest
bearing deposits | 242,902 | | | 226,128 | | | 211,052 | | |
| Other
liabilities | 13,816 | | | 15,203 | | | 18,848 | | |
| Total
liabilities | 1,815,856 | | | 1,772,397 | | | 1,780,839 | | |
| Stockholders’
equity | 205,683 | | | 190,947 | | | 179,109 | | |
| Total
liabilities and | | | | | | | | | |
| stockholders’
equity | $ 2,021,539 | | | $ 1,963,344 | | | $ 1,959,948 | | |
| Net
interest spread | | | 4.03 | | | 3.97 | | | 3.31 |
| Net
interest margin | | $ 80,982 | 4.34 | | $ 79,033 | 4.37 | | $ 70,588 | 3.92 |

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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, 2003 and 2002, 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. 16

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Table 4: Volume/Rate Analysis

	Years Ended December 31
	2003 over 2002						2002 over 2001
(In thousands, on a fully taxable equivalent basis)	Volume	Yield/ Rate			Total		Volume		Yield/ Rate		Total
Increase
(decrease) in
Interest income
Interest
bearing balances
due
from banks	$ 134	$	(290	)	$ (156	)	$ (91	)	$ (731	)	$ (822	)
Federal funds sold	(23	)	(321	)	(344	)	369		(1,250	)	(881	)
Investment
securities - taxable	10		(2,146	)	(2,136	)	1,994		(3,953	)	(1,959	)
Investment securities - non-taxable	(270	)	(399	)	(669	)	(118	)	(163	)	(281	)
Mortgage
loans held for sale	340		(127	)	213		(117	)	(19	)	(136	)
Assets held in trading accounts	(25	)	(26	)	(51	)	49		1		50
Loans	3,489		(9,094	)	(5,605	)	(3,411	)	(12,144	)	(15,555	)
Total	3,655		(12,403	)	(8,748	)	(1,325	)	(18,259	)	(19,584	)
Interest
expense
Interest
bearing transaction and
savings
deposits	430		(2,140	)	(1,710	)	1,318		(5,022	)	(3,704	)
Time
deposits	(1,494	)	(8,088	)	(9,582	)	(4,493	)	(17,952	)	(22,445	)
Federal
funds purchased
and
securities sold under
agreements
to repurchase	130		(387	)	(257	)	(129	)	(1,547	)	(1,676	)
Other
borrowed funds
Short-term
debt	1		(22	)	(21	)	(73	)	(150	)	(223	)
Long-term
debt	1,534		(661	)	873		358		(339	)	19
Total	601		(11,298	)	(10,697	)	(3,019	)	(25,010	)	(28,029	)
Increase
(decrease) in
net
interest income	$ 3,054	$	(1,105	)	$ 1,949		$ 1,694		$ 6,751		$ 8,445

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Provision for Loan Losses

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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 provision for 2003, 2002 and 2001 was $8.8, $10.2 and $10.0 million, respectively. The decrease in the provision for loan losses for 2003 reflects the improvement in the Company’s asset quality ratios from 2002. On a historical note, during the reporting year ended 2001, the Company experienced an increase in classified assets at one community bank subsidiary. Thus, the Company increased the provision for loan losses at that subsidiary during the year ended 2001. While the Company’s asset quality improved during 2002, there continued to be significant uncertainties in the United States economy and concerns over the downturn in the catfish industry that affects one of the Company’s community banks. For that reason, management continued with an increased level of provision during 2002. 17

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Non-Interest Income

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Total non-interest income was $38.7 million in 2003, compared to $35.3 million in 2002 and $33.6 million in 2001. 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 and investment banking profits. Refer to the Sale of Mortgage Servicing discussion for additional information regarding the Company’s nonrecurring gain. Table 5 shows non-interest income for the years ended December 31, 2003, 2002 and 2001, respectively, as well as changes in 2003 from 2002 and in 2002 from 2001.

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Table 5: Non-Interest Income

| (In
thousands) | Years
Ended December 31 — 2003 | 2002 | | 2001 | | 2003 Change from — 2002 | | | 2002 Change from — 2001 | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Trust
income | $ 5,487 | $ | 5,258 | $ | 5,409 | $ 229 | | 4.36 % | $ (151 | ) | -2.79 | % |
| Service
charges on deposit accounts | 10,589 | | 10,084 | | 8,951 | 505 | | 5.01 | 1,133 | | 12.66 | |
| Other
service charges and fees | 1,508 | | 1,450 | | 1,588 | 58 | | 4.00 | (138 | ) | -8.69 | |
| Income
on sale of mortgage loans, | | | | | | | | | | | | |
| net
of commissions | 4,931 | | 3,792 | | 3,148 | 1,139 | | 30.04 | 644 | | 20.46 | |
| Income
on investment banking, | | | | | | | | | | | | |
| net
of commissions | 1,887 | | 1,087 | | 957 | 800 | | 73.60 | 130 | | 13.58 | |
| Credit
card fees | 9,782 | | 10,161 | | 10,485 | (379 | ) | -3.73 | (324 | ) | -3.09 | |
| Other
income | 3,776 | | 3,481 | | 3,020 | 295 | | 8.47 | 461 | | 15.26 | |
| Gain
on sale of mortgage servicing | 771 | | — | | — | 771 | | 100.00 | | | | |
| (Loss)
gain on sale of securities, net | (14 | ) | (10 | ) | 11 | (4 | ) | 40.00 | (21 | ) | -190.9 | 1 |
| Total
non-interest income | $ 38,717 | $ | 35,303 | $ | 33,569 | $ 3,414 | | 9.67 % | $ 1,734 | | 5.17 | % |

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Recurring fee income for 2003 was $27.4 million, an increase of $413,000, or 1.5%, when compared with the 2002 figures. This increase was attributable to the growth in trust fees and service charges on deposit accounts offset by the decease in credit card fees. The increase in trust fees is the result of general improvement in market conditions. The increase in service charges was primarily the result of growth in transaction accounts. The decrease in credit card fees was the result of a decline in the number of cardholders in the credit card portfolio, due to continuing competitive pressure in the credit card industry. Recurring fee income for 2002 was $27.0 million, an increase of $520,000, or 2.0%, when compared with the 2001 figures. This increase was attributable to the growth in service charges on deposit accounts offset by the decease in trust fees and credit card fees. The increase in service charges on deposit accounts for 2002 is the result of an improved fee structure. The decrease in trust fees was primarily the result of lower market valuations in the managed assets of the Trust Company, which was driven by the downturn in the market conditions in the United States. The decrease in credit card fees is the result of increased competitive pressures for that product, which has resulted in a decline of the Company’s credit card portfolio. During the years ended December 31, 2003 and 2002, combined income on the sale of mortgage loans and income on investment banking increased $1,939,000 and $774,000, respectively, from the years ended in 2002 and 2001. The increases were the result of a higher volume for those products during 2003 and 2002. The lower interest rate environment during 2003 and 2002 primarily drove the volume increases. The Company records several items in other income. The primary increase in other income was from an increase of the premiums received on the sale of student loans that moved into repayment status. 18

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Non-Interest Expense

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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 2003 was $73.1million, an increase of $4.1 million or 5.9%, from 2002. The increase in non-interest expense during 2003, compared to 2002 is primarily attributed to the increase in salary and employee benefits combined with the increase in credit card expenses. The salary and employee benefits increase is associated with normal salary adjustments and the increased cost of health insurance. The credit card expense increase was primarily attributable the Company’s airline miles reward program. The current year ended was the Company’s third year in this program, which is typically the time frame when cardholders have accumulated enough miles to begin exercising their accrued miles. Based on continuing analysis of projected air miles usage, the Company increased the estimated liability associated with this program by $530,000 in 2003, of which $498,000 was accrued during the fourth quarter of 2003. Non-interest expense for 2002 was $69.0 million, an increase of $883,000 or 1.3%, from 2001. The relatively flat non-interest expense is primarily due to the increase in salary and employee benefits offset by the decrease in the amortization of goodwill and other intangibles. The salary and employee benefits increase is associated with normal salary adjustments, increased cost of health insurance, the opening of a new downtown financial center in Little Rock, during 2001, and a change in the Company’s vacation policy. The vacation policy change created a special non-cash expense of $189,000 during the first quarter of 2002. The decrease in the amortization of intangibles was due to the Company adopting the Financial Accounting Standards Board SFAS No. 142, Goodwill and Other Intangible Assets effective January 1, 2002. The new rule eliminated most of the Company’s amortization for 2002. Core deposit amortization expense recorded for the years ended December 31, 2003, 2002 and 2001, was $172,000, $78,000 and $101,000, respectively. The Company’s estimated amortization expense for each of the following five years is: 2004 — $688,000; 2005 — $687,000; 2006 — $684,000; 2007 — $672,000: and 2008 — $661,000, which does not include the additional amortization from the announced acquisition of ABI. The Company will be conducting an ABI core deposit study to determine the appropriate level of core deposit intangibles. Management expects those figures to be available after the completion of the ABI acquisition. Table 6 below shows non-interest expense for the years ended December 31, 2003, 2002 and 2001, respectively, as well as changes in 2003 from 2002 and in 2002 from 2001. 19

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Table 6: Non-Interest Expense

| (In
thousands) | Years
Ended December 31 — 2003 | 2002 | 2001 | 2003 Change from — 2002 | | | 2002 Change from — 2001 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Salaries and employee benefits | $ 42,979 | $ 40,039 | $ 36,218 | $ 2,940 | | 7.34 % | $ 3,821 | | 10.55 % |
| Occupancy expense, net | 5,080 | 4,747 | 4,610 | 333 | | 7.01 | 137 | | 2.97 |
| Furniture and equipment expense | 5,195 | 5,434 | 5,251 | (239 | ) | -4.40 | 183 | | 3.49 |
| Loss on foreclosed assets | 269 | 177 | 366 | 92 | | 51.98 | (189 | ) | -51.64 |
| Other operating expenses | | | | | | | | | |
| Professional services | 1,999 | 1,877 | 1,759 | 122 | | 6.50 | 118 | | 6.71 |
| Postage | 2,024 | 1,881 | 2,016 | 143 | | 7.60 | (135 | ) | -6.70 |
| Telephone | 1,498 | 1,542 | 1,530 | (44 | ) | -2.85 | 12 | | 0.78 |
| Credit card expenses | 2,679 | 1,933 | 1,808 | 746 | | 38.59 | 125 | | 6.91 |
| Operating supplies | 1,488 | 1,385 | 1,632 | 103 | | 7.44 | (247 | ) | -15.13 |
| FDIC insurance | 273 | 296 | 306 | (23 | ) | -7.77 | (10 | ) | -3.27 |
| Amortization of goodwill and | | | | | | | | | |
| core deposits | 172 | 78 | 3,024 | 94 | | 120.51 | (2,946 | ) | -97.42 |
| Other expense | 9,461 | 9,624 | 9,610 | (163 | ) | -1.69 | 14 | | 0.15 |
| Total non-interest expense | $ 73,117 | $ 69,013 | $ 68,130 | $ 4,104 | | 5.95 % | $ 883 | | 1.30 % |

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Income Taxes

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The provision for income taxes for 2003 was $10.9 million, compared to $9.7 million in 2002 and $6.4 million in 2001. The effective income tax rates for the years ended 2003, 2002 and 2001 were 31.4%, 30.5% and 27.8%, respectively.

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Loan Portfolio

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The Company’s loan portfolio averaged $1.298 billion during 2003 and $1.251 billion during 2002. As of December 31, 2003, total loans were $1.418 billion, compared to $1.257 billion on December 31, 2002. The most significant components of the loan portfolio were loans to businesses (commercial loans and commercial real estate loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans). The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral, obtaining and monitoring collateral, providing an adequate allowance for loan losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry and, in the case of credit card loans, which are unsecured, by geographic region. The Company seeks to use diversification within the loan portfolio to reduce credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. The Company uses the allowance for loan losses as a method to value the loan portfolio at its estimated collectible amount. Loans are regularly reviewed to facilitate the identification and monitoring of deteriorating credits. Consumer loans consist of credit card loans, student loans and other consumer loans. Consumer loans were $395.2 million at December 31, 2003, or 27.9% of total loans, compared to $417.4 million, or 33.2% of total loans at December 31, 2002. The consumer loan decrease from 2002 to 2003 is the result of a decline in credit cards and indirect lending, which was partially offset by an increase in student loans. The consumer market, particularly credit card and indirect lending, continues to be one of the Company’s greatest challenges. The credit card portfolio continued its decline as the result of an on-going decrease in the number of cardholder accounts, due to competitive pressure in the credit card industry. The decline in the indirect consumer loan portfolio was the result of the on-going special finance incentives from car manufacturers and the impact of Arkansas’s usury law on indirect lending. The increase in student loans was a result of greater demand for that product. 20

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Real estate loans consist of construction loans, single-family residential loans and commercial loans. Real estate loans were $782.0 million at December 31, 2003, or 55.1% of total loans, compared to $614.4 million, or 48.9% of total loans at December 31, 2002. The real estate loan increase is the result of the acquisition of nine financial centers during the fourth quarter of 2003 combined with an improved demand for real estate loans. Commercial loans consist of commercial loans, agricultural loans and financial institution loans. Commercial loans were $225.9 million at December 31, 2003, or 15.9% of total loans, compared to the $209.8 million, or 16.7% of total loans at December 31, 2002. The commercial loan increase is primarily the result of the acquisition of nine financial centers during the fourth quarter of 2003. The amounts of loans outstanding at the indicated dates are reflected in table 7, according to type of loan.

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Table 7: Loan Portfolio

(In thousands)	Years Ended December 31 — 2003	2002	2001	2000	1999
Consumer
Credit cards	$ 165,919	$ 180,439	$ 196,710	$ 197,567	$ 187,242
Student loans	86,301	83,890	74,860	67,145	66,739
Other consumer	142,995	153,103	179,138	192,595	181,380
Real Estate
Construction	111,567	90,736	83,628	69,169	53,925
Single family residential	261,936	233,193	224,122	244,377	202,886
Other commercial	408,452	290,469	263,539	287,170	240,259
Commercial
Commercial	162,122	144,678	153,617	161,134	137,827
Agricultural	57,393	58,585	60,794	57,164	35,337
Financial institutions	6,370	6,504	5,861	2,339	3,165
Other	15,259	15,708	16,515	16,050	4,875
Total loans	$ 1,418,314	$ 1,257,305	$ 1,258,784	$ 1,294,710	$ 1,113,635

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Table 8 reflects the remaining maturities and interest rate sensitivity of loans at December 31, 2003.

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Table 8: Maturity and Interest Rate Sensitivity of Loans

(In thousands)	1 year or less	Over 1 year through 5 years	Over 5 years	Total
Consumer	$ 340,155	$ 54,975	$ 85	$ 395,215
Real estate	538,990	230,212	12,753	781,955
Commercial	175,480	47,227	3,178	225,885
Other	7,339	6,086	1,834	15,259
Total	$ 1,061,964	$ 338,500	$ 17,850	$ 1,418,314
Predetermined rate	$ 577,405	$ 331,726	$ 14,848	$ 923,979
Floating
rate	484,559	6,774	3,002	494,335
Total	$ 1,061,964	$ 338,500	$ 17,850	$ 1,418,314

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21

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Asset Quality

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

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Table 9: Non-performing Assets

(In thousands)	Years Ended December 31 — 2003	2002	2001	2000	1999
Nonaccrual loans	$ 10,049	$ 10,443	$ 11,956	$ 8,212	$ 7,666
Loans past due 90 days or more
(principal or interest payments)	1,518	1,814	2,991	2,752	2,542
Restructured	—	—	—	—	—
Total non-performing loans	11,567	12,257	14,947	10,964	10,208
Other non-performing assets
Foreclosed assets held for sale	2,979	2,705	1,084	1,104	747
Other non-performing assets	393	426	631	196	56
Total other non-performing assets	3,372	3,131	1,715	1,300	803
Total non-performing assets	$ 14,939	$ 15,388	$ 16,662	$ 12,264	$ 11,011
Allowance for loan losses to
non-performing loans	219.13 %	179.07 %	137.12 %	192.97 %	167.37 %
Non-performing loans to total loans	0.82 %	0.97 %	1.19 %	0.85 %	0.92 %
Non-performing assets to total assets	0.67 %	0.78 %	0.83 %	0.64 %	0.65 %

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Approximately $694,000, $796,000 and $1,026,000 of interest income would have been recorded for the periods ended December 31, 2003, 2002 and 2001, respectively, if the nonaccrual loans had been accruing interest in accordance with their original terms. There was no interest income on the nonaccrual loans recorded for the years ended December 31, 2003, 2002 and 2001. 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. 22

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At December 31, 2003, impaired loans were $19.0 million compared to $14.6 million in 2002. The increase in impaired loans from December 31, 2002, primarily relates to the increase of borrowers that are still performing, but for which management has internally identified as impaired. This increase is the result of three borrowers that was internally classified by management as substandard, which offset the removal of one agricultural credit during the year. Furthermore, management has evaluated the underlying collateral on these commercial real estate credits and has allocated specific reserves to cover potential losses. Also, management has evaluated the underlying collateral on the remaining impaired loans and has allocated specific reserves in order to absorb potential losses if the collateral were ultimately foreclosed. In conclusion, at this time, management does not view the downgrading of these particular credits as a trend in the Company’s overall portfolio. Thus, while impaired loans did increase from year-end, the Company views asset quality ratios as improved when compared to the same period last year.

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Allowance for Loan Losses

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Overview The Company maintains an allowance for loan losses. This allowance is created through charges to income and maintained at a sufficient level to absorb expected losses in the Company’s loan portfolio. The allowance for loan losses is determined monthly based on management’s assessment of several factors such as 1) historical loss experience based on volumes and types, 2) reviews or evaluations of the loan portfolio and allowance for loan losses, 3) trends in volume, maturity and composition, 4) off balance sheet credit risk, 5) volume and trends in delinquencies and non-accruals, 6) lending policies and procedures including those for loan losses, collections and recoveries, 7) national and local economic trends and conditions, 8) concentrations of credit that might affect loss experience across one or more components of the loan portfolio, 9) the experience, ability and depth of lending management and staff and 10) other factors and trends, which will affect specific loans and categories of loans. As the Company evaluates the allowance for loan losses, it is categorized as follows: 1) specific allocations, 2) allocations for classified assets with no specific allocation, 3) general allocations for each major loan category and 4) miscellaneous allocations. 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. 23

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Miscellaneous Allocations Allowance allocations other than specific, classified and general for the Company are included in the miscellaneous section. This primarily consists of unfunded loan commitments. An analysis of the allowance for loan losses for the last five years is shown in table 10.

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Table 10: Allowance for Loan Losses

(In thousands)	2003	2002	2001	2000	1999
Balance, beginning of year	$ 21,948	$ 20,496	$ 21,157	$ 17,085	$ 16,812
Loans charged off
Credit card	4,705	4,703	4,431	3,384	3,156
Other consumer	1,987	2,320	3,063	2,349	2,419
Real estate	1,504	1,813	1,378	606	621
Commercial	2,674	2,310	3,476	1,410	1,498
Total loans charged off	10,870	11,146	12,348	7,749	7,694
Recoveries of loans previously charged off
Credit card	670	640	515	468	444
Other consumer	644	677	668	800	588
Real estate	218	253	146	92	231
Commercial	987	558	400	325	153
Total recoveries	2,519	2,128	1,729	1,685	1,416
Net loans charged off	8,351	9,018	10,619	6,064	6,278
Allowance for loan losses of
acquired institutions	2,964	247	—	2,605	—
Provision for loan losses	8,786	10,223	9,958	7,531	6,551
Balance, end of year	$ 25,347	$ 21,948	$ 20,496	$ 21,157	$ 17,085
Net charge-offs to average loans	0.64 %	0.72 %	0.82 %	0.51 %	0.60 %
Allowance for loan losses to period-end loans	1.79 %	1.75 %	1.63 %	1.63 %	1.53 %
Allowance for loan losses to net charge-offs	303.5 %	243.4 %	193.0 %	348.9 %	272.1 %

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Provision for loan losses The amount of provision to the allowance during the year 2003, 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 loans and net losses from loans charged off for the last five years. It is management’s practice to review the allowance on a monthly basis to determine whether additional provisions should be 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. 24

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During the year ended December 31, 2003, the Company experienced an increase of $1.3 million in the real estate allocation of the allowance for loan losses. This increase is primarily associated the $167.6 million increase in the real estate loan portfolio combined with three impaired borrowers in that product. The increase in real estate loans is associated with the acquisition of nine branches during the fourth quarter of 2003 combined with the funding of outstanding real estate loan commitments. Concerning the three impaired borrowers, the two largest are still performing but were internally classified by management as substandard. Additionally, there is one borrower that is secured by commercial real estate that was previously classified as substandard but has been placed on nonaccrual status. For the year ended December 31, 2003, the Company has experienced a $715,000 increase in the allocation of the allowance for loan losses in the commercial loan category. This increase is primarily due to internal classifications related to the catfish industry. The change during 2003 in the allocation of the allowance for loan losses for credit cards and other consumer loans is consistent with the change in the outstanding loan portfolio for those products from December 31, 2002. The unallocated allowance increased $1.9 million during the year ended 2003. This increase is primarily the result of the acquisition of nine branches with loans totaling approximately $100 million. As a result of this transaction the Company recorded an addition to the allowance for loan losses of $3.0 million. Because the Company has not had enough experience with these loans to obtain reliable loss statistics from which to calculate estimated losses, management believes this addition was necessary to appropriately reflect the inherent risk of loss on this transaction based on losses experienced on previous acquisitions. The Company allocated approximately $2.0 million of this addition in the unallocated portion of the allowance for loan losses until more experience with the acquired loans is obtained. While the Company still has some concerns over the uncertainty of the economy and the impact of foreign imports on the catfish industry in Arkansas during 2004, management believes the allowance for loan losses is adequate for the year ended December 31, 2003. In 2004, management will actively monitor the status of the catfish industry in general as it relates to the Company’s loan portfolio specifically and make 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.

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Table 11: Allocation of Allowance for Loan Losses

	December 31 — 2003		2002		2001		2000		1999
(In
thousands)	Allowance Amount	% of loans*	Allowance Amount	% of loans*	Allowance Amount	% of loans*	Allowance Amount	% of loans*	Allowance Amount	% of loans*
Credit
cards	$ 3,913	11.7%	$ 4,270	14.4%	$ 4,156	15.6%	$ 3,947	15.3%	$ 3,300	16.8%
Other
consumer	1,597	16.2%	1,745	18.8%	2,042	20.2%	2,167	20.1%	1,918	22.3%
Real
Estate	8,723	55.1%	7,393	48.9%	8,029	45.4%	7,602	46.4%	7,155	44.7%
Commercial	5,113	15.9%	4,398	16.7%	3,485	17.5%	3,603	17.0%	3,244	15.8%
Other	4	1.1%	—	1.2%	—	1.3%	—	1.2%	—	0.4%
Unallocated	5,997		4,142		2,784		3,838		1,468
Total	$ 25,347	100.0%	$ 21,948	100.0%	$ 20,496	100.0%	$ 21,157	100.0%	$ 17,085	100.0%

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*Percentage of loans in each category to total loans.

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Investments and Securities

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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 (HTM), available-for-sale (AFS) 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. 25

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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. Held-to-maturity and available-for-sale investment securities were $176.6 million and $315.4 million, respectively, at December 31, 2003, compared to the held-to-maturity amount of $207.3 million and available-for-sale amount of $196.7 million at December 31, 2002. As of December 31, 2003, $42.6 million, or 24.1%, of the held-to-maturity securities were invested in U.S. Treasury securities and obligations of U.S. government agencies, 90.6% of which will mature in less than five years. In the available-for-sale securities, $297.0 million, or 94.2% were in U.S. Treasury and U.S. government agency securities, 64.0% of which will mature in less than five years. In order to reduce the Company’s income tax burden, an additional $113.3 million, or 64.2%, of the held-to-maturity securities portfolio, as of December 31, 2003, was invested in tax-exempt obligations of state and political subdivisions. In the available-for-sale securities, $4.8 million, or 1.5% 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, 2003. The Company has approximately $550,000, or 0.3%, in mortgaged-backed securities in the held-to-maturity portfolio at December 31, 2003. In the available-for-sale securities, $1.4 million, or 0.4% were invested in mortgaged-backed securities. As of December 31, 2003, the held-to-maturity investment portfolio had gross unrealized gains of $3.1 million and gross unrealized losses of $184,000. Gross realized gains of $2,000, $19,000 and $46,000 resulting from sales and/or calls of securities were realized for the years ended December 31, 2003, 2002 and 2001, respectively. Gross realized losses of $16,000, $29,000 and $35,000 resulting from sales and/or calls of securities were realized for the years ended December 31, 2003, 2002 and 2001, 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. Table 12 presents the carrying value and fair value of investment securities for each of the years indicated. 26

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Table 12: Investment Securities

| | Years Ended
December 31 | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | 2003 | | | | | 2002 | | | | |
| (In
thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | | Estimated Fair Value |
| Held-to-Maturity | | | | | | | | | | |
| U.S. Treasury | $ 12,583 | $ 205 | $ — | | $ 12,788 | $ 26,153 | $ 618 | $ — | | $ 26,771 |
| U.S.
Government | | | | | | | | | | |
| agencies | 30,017 | 194 | (30 | ) | 30,181 | 59,324 | 622 | (1 | ) | 59,945 |
| Mortgage-backed | | | | | | | | | | |
| securities | 553 | 12 | — | | 565 | 1,510 | 41 | — | | 1,551 |
| State
and political | | | | | | | | | | |
| subdivisions | 113,306 | 2,700 | (154 | ) | 115,852 | 120,230 | 3,827 | (9 | ) | 124,048 |
| Other securities | 20,108 | — | — | | 20,108 | 100 | — | — | | 100 |
| Total
HTM | $ 176,567 | $ 3,111 | $ (184 | ) | $ 179,494 | $ 207,317 | $ 5,108 | $ (10 | ) | $ 212,415 |
| Available-for-Sale | | | | | | | | | | |
| U.S.
Treasury | $ 16,252 | $ 79 | $ — | | $ 16,331 | $ 14,591 | $ 287 | $ — | | $ 14,878 |
| U.S. Government | | | | | | | | | | |
| agencies | 282,190 | 1,019 | (2,537 | ) | 280,672 | 161,042 | 2,442 | — | | 163,484 |
| Mortgage-backed | | | | | | | | | | |
| securities | 1,394 | 2 | (14 | ) | 1,382 | 3,017 | 17 | (19 | ) | 3,015 |
| State and political | | | | | | | | | | |
| subdivisions | 4,575 | 274 | — | | 4,849 | 4,979 | 324 | — | | 5,303 |
| Other
securities | 11,425 | 724 | — | | 12,149 | 9,244 | 807 | — | | 10,051 |
| Total AFS | $ 315,836 | $ 2,098 | $ (2,551 | ) | $ 315,383 | $ 192,873 | $ 3,877 | $ (19 | ) | $ 196,731 |

| | Year Ended
December 31 | | | | |
| --- | --- | --- | --- | --- | --- |
| | 2001 | | | | |
| (In
thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | | Estimated Fair Value |
| Held-to-Maturity | | | | | |
| U.S. Treasury | $ 27,528 | $ 826 | $ — | | $ 28,354 |
| U.S.
Government | | | | | |
| agencies | 36,992 | 451 | (108 | ) | 37,335 |
| Mortgage-backed | | | | | |
| securities | 6,681 | 105 | — | | 6,786 |
| State
and political | | | | | |
| subdivisions | 119,824 | 2,255 | (152 | ) | 121,927 |
| Other securities | 100 | — | — | | 100 |
| Total
HTM | $ 191,125 | $ 3,637 | $ (260 | ) | $ 194,502 |
| Available-for-Sale | | | | | |
| U.S.
Treasury | $ 18,071 | $ 349 | $ (12 | ) | $ 18,408 |
| U.S. Government | | | | | |
| agencies | 214,190 | 1,792 | (492 | ) | 215,490 |
| Mortgage-backed | | | | | |
| securities | 6,975 | 69 | (40 | ) | 7,004 |
| State and political | | | | | |
| subdivisions | 5,194 | 205 | — | | 5,399 |
| Other
securities | 9,056 | 823 | — | | 9,879 |
| Total AFS | $ 253,486 | $ 3,238 | $ (544 | ) | $ 256,180 |

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Table 13 reflects the amortized cost and estimated fair value of debt securities at December 31, 2003, 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.

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Table 13: Maturity Distribution of Investment Securities

(In thousands)	December 31, 2003 — 1 year or less	Over 1 year through 5 years	Over 5 years through 10 years	Over 10 years	No fixed maturity	Total	Par Value	Fair Value
Held-to-Maturity
U.S. Treasury	$ 9,561	$ 3,022	$ —	$ —	$ —	$ 12,583	$ 12,500	$ 12,788
U.S.
Government
agencies	4,017	22,000	4,000	—	—	30,017	30,000	30,181
Mortgage-backed
securities	1	—	16	536	—	553	549	565
State
and political
subdivisions	14,734	49,102	40,550	8,920	—	113,306	113,365	115,852
Other securities	20,008	—	—	—	100	20,108	20,108	20,108
Total
HTM	$ 48,321	$ 74,124	$ 44,566	$ 9,456	$ 100	$ 176,567	$ 176,522	$ 179,494
Percentage
of total	27.4 %	41.9 %	25.2 %	5.4 %	0.1 %	100.0 %
Weighted
average yield	2.8 %	3.7 %	4.5 %	4.2 %	3.8 %	3.7 %
Available-for-Sale
U.S.
Treasury	$ 6,764	$ 9,488	$ —	$ —	$ —	$ 16,252	$ 16,250	$ 16,331
U.S. Government
agencies	30,477	144,414	107,299	—	—	282,190	282,210	280,672
Mortgage-backed
securities	—	126	400	868	—	1,394	1,358	1,382
State and political
subdivisions	250	3,201	1,124	—	—	4,575	4,580	4,849
Other
securities	—	—	—	—	11,425	11,425	9,244	12,149
Total
AFS	$ 37,491	$ 157,229	$ 108,823	$ 868	$ 11,425	$ 315,836	$ 313,642	$ 315,383
Percentage
of total	11.9 %	49.7 %	34.5 %	0.3 %	3.6 %	100.0 %
Weighted average
yield	3.5 %	3.3 %	4.8 %	2.0 %	3.3 %	3.8 %

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Deposits

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Deposits are the Company’s primary source of funding for earning assets and are primarily developed through the Company’s network of 71 financial centers as of December 31, 2003. 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. As of December 31, 2003, core deposits comprised 81.3% 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. Although interest rates are at historical lows, the Company believes it is paying a competitive rate, when compared with pricing in those markets. As a result, internal deposit growth and acquired deposits were $53.5 million and $130.8 million, respectively, for a total increase of $184.3 million. More specifically, total deposits as of December 31, 2003, were $1.803 billion versus $1.619 billion on December 31, 2002. Although the Company lowered the interest rates on its time deposits, total time deposits increased $3.6 million and $44.0 million as a result of internal deposit growth and acquired deposits, respectively, to $862.2 million from $814.6 million at December 31, 2002. Non-interest bearing transaction accounts increased by $13.7 million and $17.1 million as a result of internal deposit growth and acquired deposits, respectively, to $270.3 million compared to $239.5 million at December 31, 2002. Interest bearing transaction and savings accounts was $670.9 million, which is a $36.2 million and $69.7 million increase as a result of internal deposit growth and acquired deposits, respectively, when compared to the $565.0 million on December 31, 2002. The Company will continue to manage 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. 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, 2003.

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Table 14: Average Deposit Balances and Rates

| | December
31 — 2003 | | 2002 | | 2001 | |
| --- | --- | --- | --- | --- | --- | --- |
| (In
thousands) | Average Amount | Average Rate Paid | Average Amount | Average Rate Paid | Average Amount | Average Rate Paid |
| Non-interest
bearing transaction | | | | | | |
| accounts | $ 242,902 | — | $ 226,128 | — | $ 211,052 | — |
| Interest
bearing transaction and | | | | | | |
| savings
deposits | 579,618 | 0.79% | 540,454 | 1.17% | 470,708 | 2.13% |
| Time
deposits | | | | | | |
| $100,000
or more | 316,245 | 2.34% | 326,735 | 3.32% | 356,017 | 5.51% |
| Other
time deposits | 497,728 | 2.52% | 532,807 | 3.50% | 592,155 | 5.46% |
| Total | $ 1,636,493 | 1.50% | $ 1,626,124 | 2.20% | $ 1,629,932 | 3.80% |

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The Company’s maturities of large denomination time deposits at December 31, 2003 and 2002 are presented in table 15.

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Table 15: Maturities of Large Denomination Time Deposits

| | Time Certificates
of Deposit ($100,000 or more) December 31 — 2003 | | 2002 | |
| --- | --- | --- | --- | --- |
| (In
thousands) | Balance | Percent | Balance | Percent |
| Maturing | | | | |
| Three
months or less | $ 118,324 | 35.17% | $ 128,021 | 41.22% |
| Over
3 months to 6 months | 88,693 | 26.36% | 72,911 | 23.48% |
| Over
6 months to 12 months | 82,141 | 24.42% | 76,651 | 24.68% |
| Over
12 months | 47,253 | 14.05% | 32,998 | 10.62% |
| Total | $ 336,411 | 100.00% | $ 310,581 | 100.00% |

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Short-Term Debt

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Federal funds purchased and securities sold under agreements to repurchase were $100.2 million at December 31, 2003, as compared to $86.7 million at December 31, 2002. Other short-term borrowings, consisting of U.S. TT&L Notes and short-term FHLB borrowings, were $6.8 million at December 31, 2003, as compared to $3.6 million at December 31, 2002. The Company has historically funded its growth in earning assets through the use of core deposits, large certificates of deposits from local markets, FHLB short-term borrowings and federal funds purchased. Management anticipates that these sources will provide necessary funding in the foreseeable future. The Company’s general policy is to avoid the use of brokered deposits.

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Long-Term Debt

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The Company’s long-term debt was $100.9 million and $54.3 million at December 31, 2003 and 2002, respectively. The outstanding balance for December 31, 2003, includes $8.0 million in long-term debt, $45.6 in FHLB long-term advances and $47.3 million of trust preferred securities. The outstanding balance for December 31, 2002, includes $10.0 million in long-term debt, $27.0 in FHLB long-term advances and $17.3 million of trust preferred securities. During the year ended December 31, 2003, the Company increased FHLB long-term debt by $18.6 million, or 68.9% from December 31, 2002. The increase is a result of the Company increasing the Federal Home Loan Bank borrowings in its community banking network. The Company made this strategic decision to better manage interest rate risk on specific new loan fundings and commitments made during 2003. On December 16, 2003, the Company completed a private placement of trust preferred securities in an aggregate principal amount of $30,000,000. Presently, the funds raised from the offerings will qualify as Tier I capital for regulatory purposes, subject to the applicable limit, with the balance qualifying as Tier II capital. The transaction was structured as a placement of three separate securities, each in an aggregate principal amount of $10.0 million, maturing in December 2033 and interest payable on a quarterly basis, on the following terms: 30

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• A floating rate $10.0 million security bears interest at a floating rate of 2.80% above the three-month LIBOR rate, reset quarterly, and is callable in five years without penalty.

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• A floating/fixed rate $10.0 million security bears interest at a fixed rate of 6.97% during the first seven years and at a floating rate of 2.80% above the three-month LIBOR rate, reset quarterly, thereafter and is callable in seven years without penalty.

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• A fixed rate $10.0 million security bears interest at a fixed rate of 8.25% during the 30 year term and is callable in five years without penalty.

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The Company used $17.0 million of the net proceeds of the offerings to retire interim financing received in connection with the fourth quarter acquisition of nine banking branches. The remaining proceeds will be used to finance the $11.5 million cash portion of the consideration to be paid by the Company in its pending merger with Alliance Bancorporation with the remainder for general corporate purposes. The Financial Accounting Standards Board recently issued and revised Interpretation No. 46 (FIN 46 — Revised), Consolidation of Variable Interest Entities, which is effective for the first reporting period ending after March 15, 2004. FIN 46 – Revised requires deconsolidation of trusts in trust preferred structures upon adoption of FIN 46 – Revised. The primary impact of this change will be to report the Company’s subordinated debt to the trust as long-term debt rather than trust preferred securities, as is currently presented. After adopting FIN 46 – Revised, this change will increase the Company’s long-term debt and total assets by approximately $1.5 million, while having no impact on stockholders equity or net income. The Company will make this change prospectively. Aggregate annual maturities of long-term debt at December 31, 2003 are presented in table 16.

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Table 16: Maturities of Long-Term Debt

| (In
thousands) | Annual Maturities |
| --- | --- |
| 2004 | $ 7,709 |
| 2005 | 7,860 |
| 2006 | 9,602 |
| 2007 | 8,344 |
| 2008 | 5,514 |
| Thereafter | 61,887 |
| Total | $ 100,916 |

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Capital

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Overview At December 31, 2003, total capital reached $210.0 million. Capital represents shareholder ownership in the Company — the book value of assets in excess of liabilities. At December 31, 2003, the Company’s equity to asset ratio was 9.39% compared to 9.99% at year-end 2002. Stock Split On May 1, 2003, the Company completed a two for one stock split by issuing one additional share to shareholders of record as of April 18, 2003. As a result of the stock split, the accompanying consolidated financial statements reflect an increase in the number of outstanding shares of common stock and the transfer of the par value of these additional shares from surplus. All share and per share amounts have been restated to reflect the retroactive effect of the stock split, except for the capitalization of the Company. 31

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Stock Repurchase The Company has a stock repurchase program, which is authorized to repurchase up to 800,000 common 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, 2003, the Company repurchased 82,000 common shares of stock with a weighted average repurchase price of $20.99 per share. As of December 31, 2003, the Company has repurchased a total of 743,564 common shares of stock with a weighted average repurchase price of $12.86 per share. Upon completion of the current plan, the Company expects to renew the repurchase program. All information on the stock repurchase plan has been adjusted for the two for one stock split, which was distributed to shareholders effective May 1, 2003. Cash Dividends The Company declared cash dividends on its common stock of $0.525 per share (split adjusted) for the twelve months ended 2003 compared to $0.48 per share (split adjusted) for the twelve months ended 2002. In recent years, the Company increased dividends no less than annually and presently plans to continue with this practice. Parent Company Liquidity The primary sources for payment of dividends by the Company to its shareholders and the share repurchase plan are the current cash on hand at the parent company plus the future dividends received from the seven affiliate banks. Payment of dividends by the seven 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, 2003, 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. 32

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The Company’s risk-based capital ratios at December 31, 2003 and 2002 are presented in table 17.

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Table 17: Risk-Based Capital

(In thousands)	December 31 — 2003	2002
Tier
1 capital
Stockholders’ equity	$ 209,995	$	197,605
Trust
preferred securities	47,250		17,250
Goodwill and core deposits	(50,417	)	(33,490	)
Unrealized loss (gain) on available-
for-sale
securities	286		(2,231	)
Other	(1,160	)	(845	)
Total
Tier 1 capital	205,954		178,289
Tier 2 capital
Qualifying unrealized gain on
available-for-sale
equity securities	326		363
Qualifying allowance for loan losses	18,320		15,976
Total
Tier 2 capital	18,646		16,339
Total risk-based capital	$ 224,600	$	194,628
Risk
weighted assets	$ 1,458,583	$	1,272,104
Ratios at end of year
Leverage
ratio	9.89	%	9.29	%
Tier 1 capital	14.12	%	14.02	%
Total
risk-based capital	15.40	%	15.30	%
Minimum guidelines
Leverage
ratio	4.00	%	4.00	%
Tier 1 capital	4.00	%	4.00	%
Total
risk-based capital	8.00	%	8.00	%

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

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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, 2003, includes note 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 not considered material 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. The funding requirements of the Company’s most significant financial commitments, at December 31, 2003 are shown in table 18.

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Table 18: Funding Requirements of Financial Commitments

(In thousands)	Payments due by period — Less than 1 Year	1-3 Years	3-5 Years	Greater than 5 Years	Total
Long-term debt	$ 7,709	$ 17,462	$ 13,858	$ 61,887	$ 100,916
Credit card loan commitments	200,401	—	—	—	200,401
Other loan commitments	236,967	76,854	3,457	3,380	320,658
Letters of credit	3,671	10,509	—	—	14,180

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Quarterly Results

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Selected unaudited quarterly financial information for the last eight quarters is shown in table 19.

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Table 19: Quarterly Results

(In thousands, except per share data)	Quarter — First	Second	Third	Fourth	Total
2003
Net interest income	$ 18,880	$ 19,258	$ 19,864	$ 19,868	$ 77,870
Provision for loan losses	2,197	2,196	2,196	2,197	8,786
Non-interest income	9,304	10,416	9,948	9,063	38,731
Non-interest expense	18,194	17,937	17,948	19,038	73,117
Losses on sale of securities, net	—	—	—	14	14
Net income	5,332	6,529	6,611	5,318	23,790
Basic earnings per share	0.38	0.46	0.47	0.38	1.69
Diluted earnings per share	0.37	0.45	0.46	0.37	1.65
2002
Net interest income	$ 18,061	$ 19,051	$ 19,417	$ 19,179	$ 75,708
Provision for loan losses	2,361	2,436	2,864	2,562	10,223
Non-interest income	8,372	8,535	9,145	9,261	35,313
Non-interest expense	17,029	16,849	17,520	17,615	69,013
Losses on sale of securities, net	—	—	—	10	10
Net income	4,941	5,705	5,769	5,663	22,078
Basic earnings per share	0.35	0.40	0.41	0.40	1.56
Diluted earnings per share	0.34	0.40	0.40	0.40	1.54

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Liquidity and Market Risk Management

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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, 2003, undivided profits of the Company’s subsidiaries were approximately $112 million, of which approximately $16 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, 2003, each subsidiary bank was within established guidelines and total corporate liquidity remains strong. At December 31, 2003, cash and cash equivalents, trading and available-for-sale securities and mortgage loans held for sale were 23.7% of total assets, as compared to 21.3% at December 31, 2002. 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 at the forefront of not only funding needs, but 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 $97 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 $48 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. 36

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Secondly, the Company uses a laddered investment portfolio that insures 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. The Company has begun designating a higher percentage of new investment purchases into the available-for-sale securities classification to provide additional flexibility in liquidity management. During 2003, the Company modified the investment policy from a target of maintaining 50% of total securities portfolio in AFS to a new target of 75%. Management believes that this new target level will facilitate the management of the Company’s overall liquidity. As of December 31, 2003, approximately 64.1% of the investment portfolio is classified as AFS. The Company also uses securities held in the securities portfolio to pledge when obtaining public funds. A third source of liquidity is the retail deposits available through the Company’s network of affiliate banks throughout Arkansas. Although this method can be somewhat of a more expensive alternative to supplying liquidity, this source can be used to meet intermediate term liquidity needs. Fourth, 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 fifth source of liquidity is the ability to access brokered deposits. On an on-going basis the Company has chosen not to tap this source of funding. However, for short-term liquidity needs, it remains a viable option. Finally, the Company’s affiliate banks have lines of credit available with Federal Home Loan Bank. While the Company has used portions of those lines only to match off longer-term mortgage loans, the Company could use those lines to meet liquidity needs. Approximately $258 million under these lines of credit are currently available, if needed. The Company believes the various sources available are ample liquidity for short-term, intermediate-term, and long-term liquidity. Market Risk Management Market risk arises from changes in interest rates. The Company has risk management policies to monitor and limit exposure to market risk. In asset and liability management activities, policies are in place that are designed to minimize structural interest rate risk. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Interest Rate Sensitivity Interest rate risk represents the potential impact of interest rate changes on net income and capital resulting from mismatches in repricing opportunities of assets and liabilities over a period of time. A number of tools are used to monitor and manage interest rate risk, including simulation models and interest sensitivity (Gap) analysis. Management uses simulation models to estimate the effects of changing interest rates and various balance sheet strategies on the level of the Company’s net income and capital. As a means of limiting interest rate risk to an acceptable level, management may alter the mix of floating and fixed-rate assets and liabilities, change pricing schedules and manage investment maturities during future security purchases. The simulation models incorporate management’s assumptions regarding the level of interest rates or balance changes for indeterminate maturity deposits for a given level of market rate changes. These assumptions have been developed through anticipated pricing behavior. Key assumptions in the simulation models include the relative timing of prepayments, cash flows and maturities. In addition, the impact of planned growth and anticipated new business is factored into the simulation models. These assumptions are inherently uncertain and, as a result, the models cannot precisely estimate net interest income or precisely predict the impact of a change in interest rates on net income or capital. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. 37

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The table below presents the Company’s interest rate sensitivity position at December 31, 2003. This Gap analysis is based on a point in time and may not be meaningful because assets and liabilities are categorized according to contractual maturities (investment securities are according to call dates) and repricing periods rather than estimating more realistic behaviors, as is done in the simulation models. Also, the Gap analysis does not consider subsequent changes in interest rate level or spreads between asset and liability categories.

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Table: Interest Rate Sensitivity

(In thousands, except ratios)	Interest Rate Sensitivity Period — 0-30 Days	31-90 Days	91-180 Days		181-365 Days	1-2 Years	2-5 Years	Over 5 Years	Total
Earning
assets
Short-term investments	$ 123,410	$ —	$ —		$ —	$ —	$ —	$ —	$ 123,410
Assets
held in trading
accounts	90	—	—		—	—	—	—	90
Investment securities	4,284	9,027	22,932		25,120	44,698	190,140	195,749	491,950
Mortgage
loans held for sale	12,211	—	—		—	—	—	—	12,211
Loans	392,136	275,204	134,253		260,371	194,873	143,627	17,850	1,418,314
Total
earning assets	532,131	284,231	157,185		285,491	239,571	333,767	213,599	2,045,975
Interest bearing liabilities
Interest
bearing transaction
and
savings deposits	286,073	—	—		—	76,967	230,901	76,967	670,908
Time deposits	118,205	150,742	197,119		229,032	139,102	28,017	—	862,217
Short-term
debt	102,542	—	4,500		—	—	—	—	107,042
Long-term debt	362	727	1,750		4,871	7,859	23,460	61,887	100,916
Total
interest bearing
liabilities	507,182	151,469	203,369		233,903	223,928	282,378	138,854	1,741,083
Interest rate sensitivity Gap	$ 24,949	$ 132,762	$ (46,184	)	$ 51,588	$ 15,643	$ 51,389	$ 74,745	$ 304,892
Cumulative
interest rate
sensitivity
Gap	$ 24,949	$ 157,711	$ 111,527		$ 163,115	$ 178,758	$ 230,147	$ 304,892
Cumulative rate sensitive assets
to rate sensitive liabilities	104.9 %	123.9 %	112.9	%	114.9 %	113.5 %	114.4 %	117.5 %
Cumulative
Gap as a % of
earning
assets	1.2 %	7.7 %	5.5	%	8.0 %	8.7 %	11.2 %	14.9 %

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38

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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INDEX

Independent Accountants’ Report	40
Consolidated Balance Sheets, December 31, 2003 and 2002	41
Consolidated Statements of Income, Years Ended
December 31, 2003, 2002 and 2001	42
Consolidated Statements of Cash Flows, Years Ended
December 31, 2003, 2002 and 2001	43
Consolidated Statements of Stockholders’ Equity, Years Ended
December 31, 2003, 2002 and 2001	44
Notes to Consolidated Financial Statements,
December 31, 2003, 2002 and 2001	45

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 35 hereof.

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39

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INDEPENDENT ACCOUNTANTS’ REPORT Board of Directors Simmons First National Corporation Pine Bluff, Arkansas We have audited the accompanying consolidated balance sheets of SIMMONS FIRST NATIONAL CORPORATION as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

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/s/ BKD, LLP BKD, LLP

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Pine Bluff, Arkansas January 29, 2004 40

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CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 and 2002

(In thousands, except share data)	2003
ASSETS
Cash and non-interest bearing balances due from banks	$ 78,205	$	76,452
Interest
bearing balances due from banks	31,850		28,473
Federal funds sold and securities purchased
under agreements to resell	91,560		86,620
Cash
and cash equivalents	201,615		191,545
Investment securities	491,950		404,048
Mortgage
loans held for sale	12,211		33,332
Assets held in trading accounts	90		192
Loans	1,418,314		1,257,305
Allowance for loan losses	(25,347	)	(21,948	)
Net
loans	1,392,967		1,235,357
Premises and equipment	49,369		47,047
Foreclosed
assets held for sale, net	2,979		2,705
Interest receivable	12,678		13,133
Goodwill	45,159		32,877
Core deposit premiums	5,258		613
Other
assets	21,502		16,730
TOTAL ASSETS	$ 2,235,778	$	1,977,579
LIABILITIES
Non-interest bearing transaction accounts	$ 270,343	$	239,545
Interest
bearing transaction accounts and savings deposits	670,908		565,041
Time deposits	862,217		814,610
Total
deposits	1,803,468		1,619,196
Federal funds purchased and securities sold
under agreements to repurchase	100,209		86,705
Short-term
debt	6,833		3,619
Long-term debt	100,916		54,282
Accrued
interest and other liabilities	14,357		16,172
Total liabilities	2,025,783		1,779,974
STOCKHOLDERS’
EQUITY
Capital stock
Class
A, common, par value $1 a share, authorized
30,000,000
shares, 14,101,521 issued and outstanding
at
2003 and 14,142,910 (split adjusted) at 2002	14,102		7,071
Surplus	35,988		44,495
Undivided
profits	160,191		143,808
Accumulated other comprehensive (loss) income
Unrealized
(depreciation) appreciation on available-for-sale
securities,
net of income tax credits of $170 at 2003
and
income taxes of $1,446 at 2002	(286	)	2,231
Total stockholders’ equity	209,995		197,605
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 2,235,778	$	1,977,579

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See Notes to Consolidated Financial Statements. 41

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CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

(In thousands, except per share data)	2003
INTEREST INCOME
Loans	$ 89,315	$	94,892	$	110,552
Federal funds sold and securities purchased
under
agreements to resell	652		996		1,877
Investment
securities	15,889		18,509		20,786
Mortgage
loans held for sale	1,220		1,007		1,143
Assets
held in trading accounts	37		88		38
Interest
bearing balances due from banks	494		650		1,472
TOTAL
INTEREST INCOME	107,607		116,142		135,868
INTEREST
EXPENSE
Deposits	24,515		35,807		61,956
Federal
funds purchased and securities sold
under
agreements to repurchase	941		1,198		2,874
Short-term
debt	89		110		333
Long-term
debt	4,192		3,319		3,300
TOTAL
INTEREST EXPENSE	29,737		40,434		68,463
NET
INTEREST INCOME	77,870		75,708		67,405
Provision
for loan losses	8,786		10,223		9,958
NET
INTEREST INCOME AFTER PROVISION
FOR
LOAN LOSSES	69,084		65,485		57,447
NON-INTEREST
INCOME
Trust
income	5,487		5,258		5,409
Service
charges on deposit accounts	10,589		10,084		8,951
Other
service charges and fees	1,508		1,450		1,588
Income
on sale of mortgage loans, net of commissions	4,931		3,792		3,148
Income
on investment banking, net of commissions	1,887		1,087		957
Credit
card fees	9,782		10,161		10,485
Other
income	3,776		3,481		3,020
Gain
on sale of mortgage servicing	771		—		—
(Loss)
gain on sale of securities, net	(14	)	(10	)	11
TOTAL
NON-INTEREST INCOME	38,717		35,303		33,569
NON-INTEREST
EXPENSE
Salaries
and employee benefits	42,979		40,039		36,218
Occupancy
expense, net	5,080		4,747		4,610
Furniture
and equipment expense	5,195		5,434		5,251
Loss
on foreclosed assets	269		177		366
Other
operating expenses	19,594		18,616		21,685
TOTAL
NON-INTEREST EXPENSE	73,117		69,013		68,130
INCOME
BEFORE INCOME TAXES	34,684		31,775		22,886
Provision
for income taxes	10,894		9,697		6,358
NET
INCOME	$ 23,790	$	22,078	$	16,528
BASIC
EARNINGS PER SHARE (split adjusted)	$ 1.69	$	1.56	$	1.16
DILUTED
EARNINGS PER SHARE (split adjusted)	$ 1.65	$	1.54	$	1.15

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See Notes to Consolidated Financial Statements. 42

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CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

(In thousands)	2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 23,790	$	22,078	$	16,528
Items
not requiring (providing) cash
Depreciation and amortization	5,110		5,116		7,680
Provision
for loan losses	8,786		10,223		9,958
Net amortization (accretion) of investment securities	150		(176	)	(751	)
Deferred
income taxes	122		(1,342	)	1,382
Provision for foreclosed assets	128		42		172
Loss
(gain) on sale of securities, net	14		10		(11	)
Changes in
Interest
receivable	1,095		2,678		3,114
Mortgage loans held for sale	21,121		(8,361	)	(16,037	)
Assets
held in trading accounts	102		704		231
Other assets	(4,765	)	(791	)	1,395
Accrued
interest and other liabilities	(2,660	)	1,060		(4,486	)
Income taxes payable	383		741		(1,894	)
Net
cash provided by operating activities	53,376		31,982		17,281
CASH FLOWS FROM INVESTING ACTIVITIES
Net
(originations) repayment of loans	(72,616	)	(3,258	)	23,412
Purchase of branch locations, net funds received	12,546		2,477		—
Purchases
of premises and equipment, net	(3,740	)	(4,989	)	(3,565	)
Proceeds from sale of foreclosed assets	1,884		2,293		1,743
Proceeds
from sale of securities	670		4,043		4,305
Proceeds from maturities of available-for-sale securities	280,638		413,875		339,535
Purchases
of available-for-sale securities	(402,747	)	(355,090	)	(384,084	)
Proceeds from maturities of held-to-maturity securities	170,048		174,508		126,232
Purchases
of held-to-maturity securities	(139,192	)	(193,161	)	(132,535	)
Net cash (used in) provided by investing activities	(152,509	)	40,698		(24,957	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) increase in deposits	54,734		(80,408	)	80,818
Net
issuance (repayments) of short-term debt	3,214		(182	)	(269	)
Dividends paid	(7,407	)	(6,789	)	(6,241	)
Proceeds
from issuance of long-term debt	55,297		18,270		4,170
Repayment of long-term debt	(8,663	)	(6,138	)	(3,701	)
Net
increase in federal funds purchased and
securities
sold under agreements to repurchase	13,504		70		19,385
Repurchase of common stock, net	(1,476	)	(799	)	(2,780	)
Net
cash provided by (used in) financing activities	109,203		(75,976	)	91,382
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS	10,070		(3,296	)	83,706
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR	191,545		194,841		111,135
CASH AND CASH EQUIVALENTS, END OF YEAR	$ 201,615	$	191,545	$	194,841

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See Notes to Consolidated Financial Statements. 43

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

(In thousands, except share data (1)) — Balance, December 31, 2000	Common Stock — $ 7,181	$	47,964	$	(34	)	Undivided Profits — $ 118,232	$	173,343
Comprehensive income
Net income	—		—		—		16,528		16,528
Change in unrealized depreciation on
available-for-sale securities, net of
income taxes of $908	—		—		1,513		—		1,513
Comprehensive income									18,041
Exercise of stock options — 125,400 shares	63		1,195		—		—		1,258
Securities exchanged under
employee option plan	(13	)	(391	)	—		—		(404	)
Repurchase of common stock
— 287,910 shares	(144	)	(3,490	)	—		—		(3,634	)
Cash dividends declared ($0.44 per share)	—		—		—		(6,241	)	(6,241	)
Balance, December 31, 2001	7,087		45,278		1,479		128,519		182,363
Comprehensive income
Net income	—		—		—		22,078		22,078
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $559	—		—		752		—		752
Comprehensive income									22,830
Exercise of stock options — 45,800 shares	23		473		—		—		496
Securities exchanged under
employee option plan	(9	)	(306	)	—		—		(315	)
Repurchase of common stock
— 60,000 shares	(30	)	(950	)	—		—		(980	)
Cash dividends declared ($0.48 per share)	—		—		—		(6,789	)	(6,789	)
Balance, December 31, 2002	7,071		44,495		2,231		143,808		197,605
Comprehensive income
Net income	—		—		—		23,790		23,790
Change in unrealized appreciation on
available-for-sale securities, net of
income tax credits of $1,616	—		—		(2,517	)	—		(2,517	)
Comprehensive income									21,273
Exercise of stock options — 58,200 shares	53		608		—		—		661
Securities exchanged under
employee option plan	(16	)	(400	)	—		—		(416	)
Repurchase of common stock
— 82,000 shares	(72	)	(1,649	)	—		—		(1,721	)
Two for one stock split	7,066		(7,066	)	—		—		—
Cash dividends declared ($0.525 per share)	—		—		—		(7,407	)	(7,407	)
Balance, December 31, 2003	$ 14,102	$	35,988	$	(286	)	$ 160,191	$	209,995

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(1) All share and per share amounts have been restated to reflect the retroactive effect of the May 1, 2003, two for one stock split. See Notes to Consolidated Financial Statements. 44

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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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. 45

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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. 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 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. 46

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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 $2.1 million at December 31, 2003. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is maintained at a level considered adequate to provide for potential loan losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan portfolio that have been incurred as of period end. This estimate is based on management’s evaluation of the loan portfolio, as well as on prevailing and anticipated economic conditions and historical losses by loan category. General reserves have been established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances are accrued on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral. The unallocated reserve generally serves to compensate for the uncertainty in estimating loan losses, including the possibility of changes in risk ratings and specific reserve allocations in the loan portfolio as a result of the Company’s ongoing risk management system. 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. 47

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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 and Core Deposits 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. Although, goodwill is not being amortized, it is being tested annually for impairment. Core deposit premiums represents the amount allocated to the future earnings potential of acquired deposits. The unamortized core deposits are being amortized using both straight-line and accelerated methods over periods ranging from 10 to 15 years. 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. 48

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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)	2003	2002	2001
Net Income	$ 23,790	$ 22,078	$ 16,528
Average common shares outstanding	14,114	14,140	14,196
Average common share stock options outstanding	301	236	128
Average diluted common shares	14,415	14,376	14,324
Basic earnings per share	$ 1.69	$ 1.56	$ 1.16
Diluted earnings per share	$ 1.65	$ 1.54	$ 1.15

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Employee Benefit Plans At December 31, 2003, the Company has a stock-based employee compensation plan, which is described more fully in Note 11. The Company accounts for this plan under recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions for FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

(In thousands except per share data)	2003	2002	2001
Net income - as reported	$ 23,790	$ 22,078	$ 16,528
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes	155	195	239
Net income - pro forma	$ 23,635	$ 21,883	$ 16,289
Basic earnings per share - as reported	1.69	1.56	1.16
Basic earnings per share - pro forma	1.67	1.55	1.15
Diluted earnings per share - as reported	1.65	1.54	1.15
Diluted earnings per share - pro forma	1.64	1.52	1.14

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The above pro forma amounts include only the current year vesting, during 2003, 2002 and 2001 on outstanding options and therefore may not be representative of the pro forma impact in future years.

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NOTE 2: ACQUISITIONS

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On October 8, 2003, the Company announced the execution of a definitive agreement under the terms of which, Alliance Bancorporation, Inc. (ABI) will be merged into Simmons First National Corporation. ABI owns Alliance Bank of Hot Springs, Hot Springs, Arkansas with consolidated assets of approximately $140 million. The transaction is expected to close during the first quarter of 2004. After the merger, Alliance will continue to operate as a separate community bank with the same board of directors, management and staff. 49

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On November 21, 2003, the Company completed the purchase of nine financial centers from Union Planters Bank, N.A. Six locations in North Central Arkansas include Clinton, Marshall, Mountain View, Fairfield Bay, Leslie and Bee Branch. Three locations in Northeast Arkansas communities include Hardy, Cherokee Village and Mammoth Spring. The nine locations have combined deposits of $130 million with acquired assets of $119 million including selected loans, premises, cash and other assets. As a result of this transaction, the Company recorded additional goodwill and core deposits of $12,282,000 and $4,817,000, respectively On July 19, 2002, the Company expanded its coverage in South Arkansas with the purchase of the Monticello location from HEARTLAND Community Bank. Simmons First Bank of South Arkansas, a wholly owned subsidiary of the Company, acquired the Monticello office. As of July 19, 2002, the new location had total loans of $8 million and total deposits of $13 million. As a result of this transaction, the Company recorded additional goodwill and core deposits of $1,058,000 and $217,000, respectively.

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NOTE 3: INVESTMENT SECURITIES

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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 | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | 2003 | | | | | 2002 | | | | |
| (In
thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | | Estimated Fair Value |
| Held-to-Maturity | | | | | | | | | | |
| U.S. Treasury | $ 12,583 | $ 205 | $ — | | $ 12,788 | $ 26,153 | $ 618 | $ — | | $ 26,771 |
| U.S.
Government | | | | | | | | | | |
| agencies | 30,017 | 194 | (30 | ) | 30,181 | 59,324 | 622 | (1 | ) | 59,945 |
| Mortgage-backed | | | | | | | | | | |
| securities | 553 | 12 | — | | 565 | 1,510 | 41 | — | | 1,551 |
| State
and political | | | | | | | | | | |
| subdivisions | 113,306 | 2,700 | (154 | ) | 115,852 | 120,230 | 3,827 | (9 | ) | 124,048 |
| Other securities | 20,108 | — | — | | 20,108 | 100 | — | — | | 100 |
| Total
HTM | $ 176,567 | $ 3,111 | $ (184 | ) | $ 179,494 | $ 207,317 | $ 5,108 | $ (10 | ) | $ 212,415 |
| Available-for-Sale | | | | | | | | | | |
| U.S.
Treasury | $ 16,252 | $ 79 | $ — | | $ 16,331 | $ 14,591 | $ 287 | $ — | | $ 14,878 |
| U.S. Government | | | | | | | | | | |
| agencies | 282,190 | 1,019 | (2,537 | ) | 280,672 | 161,042 | 2,442 | — | | 163,484 |
| Mortgage-backed | | | | | | | | | | |
| securities | 1,394 | 2 | (14 | ) | 1,382 | 3,017 | 17 | (19 | ) | 3,015 |
| State and political | | | | | | | | | | |
| subdivisions | 4,575 | 274 | — | | 4,849 | 4,979 | 324 | — | | 5,303 |
| Other
securities | 11,425 | 724 | — | | 12,149 | 9,244 | 807 | — | | 10,051 |
| Total AFS | $ 315,836 | $ 2,098 | $ (2,551 | ) | $ 315,383 | $ 192,873 | $ 3,877 | $ (19 | ) | $ 196,731 |

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50

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Certain investment securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2003, was $169.4 million, which is approximately 34.4% 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, including recent changes in market interest rates, management believes the declines in fair value for these securities are temporary. 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. 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, 2003:

(In thousands)	Less Than 12 Months — Estimated Fair Value	Gross Unrealized Losses	12 Months or More — Estimated Fair Value	Gross Unrealized Losses	Total — Estimated Fair Value	Gross Unrealized Losses
Held-to-Maturity
U.S. Government Agencies	$ 4,971	$ 30	$ —	$ —	$ 4,971	$ 30
Mortgage-backed securities	6	—	—	—	6	—
State and political subdivisions	11,825	153	40	1	11,865	154
Total HTM	$ 16,802	$ 183	$ 40	$ 1	$ 16,842	$ 184
Available-for-Sale
U.S. Treasury	$ 1,259	$ —	$ —	$ —	$ 1,259	$ —
U.S. Government Agencies	150,104	2,537	—	—	150,104	2,537
Mortgage-backed securities	38	1	1,132	13	1,170	14
Total AFS	$ 151,401	$ 2,538	$ 1,132	$ 13	$ 152,533	$ 2,551

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51

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Income earned on the above securities for the years ended December 31, 2003, 2002 and 2001 is as follows:

(In thousands)	2003	2002	2001
Taxable
Held-to-maturity	$ 2,615	$ 4,578	$ 4,992
Available-for-sale	8,343	8,516	10,061
Non-taxable
Held-to-maturity	4,676	5,144	5,400
Available-for-sale	255	271	333
Total	$ 15,889	$ 18,509	$ 20,786

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The Statement of Stockholders’ Equity includes other comprehensive income. Other comprehensive income for the Company includes the change in the unrealized appreciation (depreciation) on available-for-sale securities. The changes in the unrealized appreciation (depreciation) on available-for-sale securities for the years ended December 31, 2003, 2002 and 2001, are as follows:

(In thousands)	2003		2002	2001
Unrealized holding (losses) gains
arising during the period	$ (2,531	)	$ 742	$ 1,524
Losses (gains) realized in net income	14		10	(11	)
Net change in unrealized (depreciation) appreciation
on available-for-sale securities	$ (2,517	)	$ 752	$ 1,513

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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.

(In thousands)	Held-to-Maturity — Amortized Cost	Fair Value	Available-for-Sale — Amortized Cost	Fair Value
One
year or less	$ 48,321	$ 48,644	$ 37,491	$ 37,791
After one through five years	74,124	75,479	157,229	157,470
After
five through ten years	44,566	45,760	108,823	107,111
After ten years	9,456	9,511	868	862
Other
securities	100	100	11,425	12,149
Total	$ 176,567	$ 179,494	$ 315,836	$ 315,383

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The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $355,456,000 at December 31, 2003 and $306,082,000 at December 31, 2002. 52

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The book value of securities sold under agreements to repurchase amounted to $67,659,000 and $43,060,000 for December 31, 2003 and 2002, respectively. Gross realized gains of $2,000, $19,000 and $46,000 resulting from sales and/or calls of securities were realized for the years ended December 31, 2003, 2002 and 2001, respectively. Gross realized losses of $16,000, $29,000 and $35,000 resulting from sales and/or calls of securities were realized for the years ended December 31, 2003, 2002 and 2001, 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.

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NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

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The various categories of loans are summarized as follows:

(In thousands)	2003	2002
Consumer
Credit cards	$ 165,919	$ 180,439
Student loans	86,301	83,890
Other consumer	142,995	153,103
Real estate
Construction	111,567	90,736
Single family residential	261,936	233,193
Other commercial	408,452	290,469
Commercial
Commercial	162,122	144,678
Agricultural	57,393	58,585
Financial institutions	6,370	6,504
Other	15,259	15,708
Total loans before allowance for loan losses	$ 1,418,314	$ 1,257,305

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At December 31, 2003 and 2002, impaired loans totaled $19,033,000 and $14,646,000, respectively. All impaired loans had designated reserves for possible loan losses. Reserves relative to impaired loans at December 31, 2003, were $4,395,000 and $2,895,000 at December 31, 2002. Approximately, $532,000 and $376,000 of interest income were recognized on average impaired loans of $17,933,000 and $17,424,000 for 2003 and 2002, respectively. Interest recognized on impaired loans on a cash basis during 2003 or 2002 was immaterial. At December 31, 2003 and 2002, accruing loans delinquent 90 days or more totaled $1,518,000 and $1,814,000, respectively. Non-accruing loans at December 31, 2003 and 2002 were $10,049,000 and $10,443,000, respectively. As of December 31, 2003, credit card loans, which are unsecured, were $165,919,000 or 11.7%, of total loans versus $180,439,000 or 14.4% of total loans at December 31, 2002. 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. 53

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Transactions in the allowance for loan losses are as follows:

(In thousands)	2003	2002	2001
Balance, beginning of year	$ 21,948	$ 20,496	$ 21,157
Additions
Provision for loan losses	8,786	10,223	9,958
Allowance for loan losses of acquired branches	2,964	247	—
	33,698	30,966	31,115
Deductions
Losses charged to allowance, net of recoveries
of $2,519 for 2003, $2,128 for 2002 and $1,729 for 2001	8,351	9,018	10,619
Balance, end of year	$ 25,347	$ 21,948	$ 20,496

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NOTE 5: GOODWILL AND CORE DEPOSITS

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During 2002, the Company changed its method of accounting and financial reporting for goodwill by adopting Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangibles. This statement requires transitional disclosures regarding the change in amortization and other treatment of goodwill for the year ended December 31, 2001, as follows:

| (In
thousands) | December 31, 2001 | |
| --- | --- | --- |
| Reported
net income | $ 16,528 | |
| Add
back: Amortization | 2,923 | |
| Subtract:
Income taxes | (996 | ) |
| Adjusted net
income | $ 18,455 | |

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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. During the year ended December 31, 2003 goodwill for the Company increased $12.3 million to $45.2 million from the $32.9 million reported at December 31, 2002. This increase is the result of the acquisition of nine branches completed during the fourth quarter of 2003. The carrying basis and accumulated amortization of core deposits (net of core deposits that were fully amortized) at December 31, 2003 and 2002, were:

| (In
thousands) | December 31,
2003 — Gross Carrying Amount | Accumulated Amortization | Net | December 31,
2002 — Gross Carrying Amount | Accumulated Amortization | Net |
| --- | --- | --- | --- | --- | --- | --- |
| Core
deposits | $ 5,854 | $ 596 | $ 5,258 | $ 1,037 | $ 424 | $ 613 |

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Core deposit amortization expense recorded for the years ended December 31, 2003, 2002 and 2001, was $172,000, $78,000 and $101,000, respectively. The Company’s estimated amortization expense for each of the following five years is: 2004 — $688,000; 2005 — $687,000; 2006 — $684,000; 2007 — $672,000: and 2008 — $661,000, which does not include the additional amortization from the announced acquisition of ABI. 54

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NOTE 6: TIME DEPOSITS

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Time deposits included approximately $336,411,000 and $310,581,000 of certificates of deposit of $100,000 or more, at December 31, 2003 and 2002, respectively. At December 31, 2003, time deposits with a remaining maturity of one year or more amounted to $167,119,000. Maturities of all time deposits are as follows: 2004 — $695,098,000; 2005 — $139,102,000; 2006 — $23,466,000; 2007 — $3,523,000; 2008 — $1,028,000; 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.

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NOTE 7: INCOME TAXES

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

(In thousands) — Income taxes currently payable	2003 — $ 10,772	2002 — $ 11,039	$	4,976
Deferred income taxes	122	(1,342	)	1,382
Provision for income taxes	$ 10,894	$ 9,697	$	6,358

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

(In thousands)	2003
Deferred tax assets
Allowance for loan losses	$ 8,661	$	7,411
Valuation of foreclosed assets	126		131
Deferred compensation payable	576		600
Deferred loan fee income	—		141
Vacation compensation	614		577
Mortgage servicing reserve	—		386
Loan interest	232		183
Available-for-sale securities	170		—
Other	303		176
	10,682		9,605
Deferred tax liabilities
Accumulated depreciation	(1,006	)	(1,161	)
Available-for-sale securities	—		(1,446	)
Deferred loan fee income and expenses, net	(96	)	—
FHLB stock dividends	(585	)	(512	)
Goodwill and Core Deposit Amortization	(1,217	)	—
Other	—		(202	)
	(2,904	)	(3,321	)
Net deferred tax assets included in other assets
on balance sheets	$ 7,778	$	6,284

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55

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

(In thousands) — Computed at the statutory rate (35%)	2003 — $ 12,139	$	11,121	$	8,010
Increase (decrease) resulting from
Tax exempt income	(1,973	)	(2,174	)	(2,242	)
Non-deductible interest	158		234		386
Amortization of intangible assets	—		2		93
State income taxes	801		592		161
Other non-deductible expenses	57		96		120
Other differences, net	(288	)	(174	)	(170	)
Actual tax provision	$ 10,894	$	9,697	$	6,358

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NOTE 8: LONG-TERM DEBT

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Long-term debt at December 31, 2003 and 2002 consisted of the following components.

(In thousands)	2003	2002
Note
Payable, due 2007, at a floating rate of
0.90%
above the 30 day LIBOR rate, reset
monthly
for 2003 and 7.32% for 2002, unsecured	$ 8,000	$ 10,000
FHLB advances, due 2003 to 2023, 1.02% to 8.41%
secured by residential real estate loans	45,666	27,032
Trust preferred
securities, due 2027, fixed at 9.12%,
currently
callable without penalty	17,250	17,250
Trust preferred securities, due 2033, fixed at 8.25%,
callable in 2008 without penalty	10,000	—
Trust preferred
securities, due 2033, floating rate
of
2.80% above the three-month LIBOR rate,
reset
quarterly, callable in 2008 without penalty	10,000	—
Trust preferred securities, due 2033, fixed rate of 6.97%
during the first seven years and at a floating rate of
2.80% above the three-month LIBOR rate, reset
quarterly, thereafter, callable in 2010 without penalty	10,000	—
Total
long-term debt	$ 100,916	$ 54,282

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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. 56

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Aggregate annual maturities of long-term debt at December 31, 2003 are:

| (In
thousands) | Annual Maturities |
| --- | --- |
| 2004 | $ 7,709 |
| 2005 | 7,860 |
| 2006 | 9,602 |
| 2007 | 8,344 |
| 2008 | 5,514 |
| Thereafter | 61,887 |
| Total | $ 100,916 |

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NOTE 9: CAPITAL STOCK

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In addition to the common stock outstanding, the following classes of stock have been authorized. Class B common stock of $1.00 par value per share, authorized 300 shares: none issued. Class A preferred stock of $100.00 par value per share, authorized 50,000 shares: none issued. Class B preferred stock of $100.00 par value per share, authorized 50,000 shares: none issued. The Company has a stock repurchase program, which is authorized to repurchase up to 800,000 common 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, 2003, the Company repurchased 82,000 common shares of stock with a weighted average repurchase price of $20.99 per share. As of December 31, 2003, the Company has repurchased a total of 743,564 common shares of stock with a weighted average repurchase price of $12.86 per share. Upon completion of the current plan, the Company expects to renew the repurchase program. All information on the stock repurchase plan has been adjusted for the two for one stock split, which was distributed to shareholders effective May 1, 2003.

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NOTE 10: TRANSACTIONS WITH RELATED PARTIES

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At December 31, 2003 and 2002, 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 $42.4 million in 2003 and $35.1 million in 2002.

(In thousands) — Balance, beginning of year	2003 — $ 35,179	$	21,605
New extensions of credit	24,896		29,937
Repayments	(17,716	)	(16,363	)
Balance, end of year	$ 42,359	$	35,179

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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.

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NOTE 11: EMPLOYEE BENEFIT PLANS

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The Company’s 401(k) retirement plan covers substantially all employees. Contribution expense totaled $372,000, $335,000 and $282,000, in 2003, 2002 and 2001, respectively. The Company has a discretionary profit sharing and employee stock ownership plan covering substantially all employees. Contribution expense totaled $1,826,000 for 2003, $1,732,000 for 2002 and $1,614,000 for 2001. The Board of Directors has adopted incentive and nonqualified stock option plans. Pursuant to the plans, shares are reserved for future issuance by the Company, upon exercise of stock options granted to officers and other key employees. Also, 49,400 additional shares (split adjusted) of common stock of the Company were granted and issued to executive officers of the Company as bonus shares of restricted stock, during the year ended December 31, 2001. No additional shares of common stock of the Company were granted and issued to executive officers of the Company as bonus shares of restricted stock, during the years ended December 31, 2003 and 2002. The weighted average fair values of options granted during 2002 and 2001 were, $3.46 and $2.29 per share (split adjusted), respectively, with none being issued for 2003. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Expected dividend yield	2003 — None Issued	3.09%	3.62%
Expected
stock price volatility	None
Issued	16.00%	16.00%
Risk-free
interest rate	None
Issued	5.04%	5.28%
Expected
life of options	None
Issued	10
years	10
years

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The table below summarizes the transactions under the Company’s stock option plans (split adjusted) at December 31, 2003, 2002 and 2001 and changes during the years then ended:

Shares (000)		Weighted Average Exercisable Price	Shares (000)		Weighted Average Exercisable Price	Shares (000)		Weighted Average Exercisable Price
Outstanding,
beginning of year	766	$	13.00	802	$	12.84	470	$	12.77
Granted	—		—	12		15.86	476		10.90
Forfeited/Expired	(10	)	22.63	(2	)	16.88	(18	)	13.95
Exercised	(58	)	11.47	(46	)	10.82	(126	)	5.03
Outstanding,
end of year	698		13.00	766		13.00	802		12.84
Exercisable, end of year	513	$	13.27	474	$	13.47	412	$	13.28

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The following table summarizes information about stock options (split adjusted) under the plan outstanding at December 31, 2003:

Range of Exercise Prices	Options Outstanding — Number Outstanding (000)	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Options Exercisable — Number Exercisable (000)	Weighted Average Exercise Price
$7.92 to $10.56	57	3 Years	$10.15	49	$10.08
$12.13 to $12.13	404	8 Years	$12.13	237	$12.13
$12.22 to $13.50	157	4 Years	$13.08	157	$13.08
$15.35 to $22.63	80	3 Years	$19.37	70	$19.85

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Also, the Company has 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 $164,000 for 2003, $154,000 for 2002 and $205,000 for 2001. 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.

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NOTE 12: ADDITIONAL CASH FLOW INFORMATION

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In connection with cash acquisitions accounted for using the purchase method, the Company acquired assets and assumed liabilities as follows:

(In thousands)	2003	2002	2001
Liabilities assumed	$ 129,878	$ 13,348	$ —
Fair value of assets acquired	118,482	11,100	—
Cash received	11,396	2,248	—
Funds acquired	1,150	229	—
Net funds received	$ 12,546	$ 2,477	$ —
Additional cash payment information
Interest paid	$ 30,272	$ 42,751	$ 70,146
Income taxes paid	10,389	10,298	6,870

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NOTE 13: OTHER EXPENSE

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Other operating expenses consist of the following:

(In thousands)	2003	2002	2001
Professional services	$ 1,999	$ 1,877	$ 1,759
Postage	2,024	1,881	2,016
Telephone	1,498	1,542	1,530
Credit card expense	2,679	1,933	1,808
Operating supplies	1,488	1,385	1,632
FDIC insurance	273	296	306
Amortization of goodwill and
core deposits	172	78	3,024
Other expense	9,461	9,624	9,610
Total	$ 19,594	$ 18,616	$ 21,685

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The Company had aggregate annual equipment rental expense of approximately $302,000 in 2003, $480,000 in 2002 and $727,000 in 2001. The Company had aggregate annual occupancy rental expense of approximately $942,000 in 2003, $898,000 in 2002 and $834,000 in 2001.

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NOTE 14: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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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. Mortgage Loans Held for Sale For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. 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. 60

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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. 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. 61

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(In thousands)	December 31, 2003 — Carrying Amount	Fair Value	December 31, 2002 — Carrying Amount	Fair Value
Financial assets
Cash and cash equivalents	$ 201,615	$ 201,615	$ 191,545	$ 191,545
Held-to-maturity securities	176,567	179,494	207,317	212,415
Available-for-sale securities	315,383	315,383	196,731	196,731
Assets held in trading accounts	90	90	192	192
Mortgage loans held for sale	12,211	12,211	33,332	33,332
Interest receivable	12,678	12,678	13,133	13,133
Loans, net	1,392,967	1,399,777	1,235,357	1,241,225
Financial liabilities
Non-interest bearing transaction accounts	270,343	270,343	239,545	239,545
Interest bearing transaction accounts and
savings deposits	670,908	670,873	565,041	565,653
Time deposits	862,217	864,687	814,610	817,065
Federal funds purchased and securities
sold under agreements to repurchase	100,209	100,209	86,705	86,705
Short-term debt	6,833	6,833	3,619	3,619
Long-term debt	100,916	107,577	54,282	61,420
Interest payable	2,636	2,636	3,171	3,171

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

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NOTE 15: SIGNIFICANT ESTIMATES AND CONCENTRATIONS

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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. 62

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NOTE 16: COMMITMENTS AND CREDIT RISK

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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, 2003, the Company had outstanding commitments to extend credit aggregating approximately $200,401,000 and $320,658,000 for credit card commitments and other loan commitments, respectively. At December 31, 2002, the Company had outstanding commitments to extend credit aggregating approximately $216,167,000 and $289,389,000 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 $14,180,000 and $2,474,000 at December 31, 2003 and 2002, respectively, with terms ranging from 90 days to three years. At December 31, 2003 the Company’s deferred revenue under standby letter of credit agreements is approximately $200,000. At December 31, 2002 the Company’s deferred revenue under standby letter of credit agreements was not material. At December 31, 2003, the Company did not have concentrations of 5% or more of the investment portfolio in bonds issued by a single municipality.

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NOTE 17: FUTURE CHANGES IN ACCOUNTING PRINCIPLE

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The Financial Accounting Standards Board recently issued and revised Interpretation No. 46 (FIN 46 — Revised), Consolidation of Variable Interest Entities, which is effective for the first reporting period ending after March 15, 2004. FIN 46 – Revised requires deconsolidation of trusts in trust preferred structures upon adoption of FIN 46 – Revised. The primary impact of this change will be to report the Company’s subordinated debt to the trust as long-term debt rather than trust preferred securities, as is currently presented. After adopting FIN 46 – Revised, this change will increase the Company’s long-term debt and total assets by approximately $1.5 million, while having no impact on stockholders equity or net income. The Company will make this change prospectively. Presently, the Company is not aware of any other changes from the Financial Accounting Standards Board that will have an impact on the Company’s present or future financial statements. 63

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NOTE 18: CONTINGENT LIABILITIES

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The Company and/or its subsidiary banks 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. Management is currently conducting an internal review of the facts and circumstances surrounding this matter and has filed a Motion to Dismiss. At this time, no basis for any material liability has been identified. The banks plan to vigorously defend the claims asserted in the suit.

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NOTE 19: STOCKHOLDERS’ EQUITY

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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, 2003, the Company subsidiaries had approximately $16 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, 2003, 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. The Company’s actual capital amounts and ratios along with the Company’s most significant subsidiaries are presented in the following table. 64

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(In thousands)	Actual — Amount	Ratio-%	For Capital Adequacy Purposes — Amount	Ratio-%	To Be Well Capitalized Under Prompt Corrective Action Provision — Amount	Ratio-%
As of December 31, 2003
Total Risk-Based Capital Ratio
Simmons First National Corporation	$ 224,600	15.4	$ 116,675	8.0	$ N/A
Simmons First National Bank	89,918	11.7	61,482	8.0	76,853	10.0
Simmons First Bank of Russellville	21,024	16.9	9,952	8.0	12,440	10.0
Simmons First Bank of Northwest Arkansas	18,461	11.7	12,623	8.0	15,779	10.0
Tier 1 Capital Ratio
Simmons First National Corporation	205,954	14.1	58,427	4.0	N/A
Simmons First National Bank	79,958	10.4	30,753	4.0	46,130	6.0
Simmons First Bank of Russellville	19,484	15.6	4,996	4.0	7,494	6.0
Simmons First Bank of Northwest Arkansas	16,458	10.3	6,391	4.0	9,587	6.0
Leverage Ratio
Simmons First National Corporation	205,954	9.9	83,213	4.0	N/A
Simmons First National Bank	79,958	7.3	43,813	4.0	54,766	5.0
Simmons First Bank of Russellville	19,484	10.2	7,641	4.0	9,551	5.0
Simmons First Bank of Northwest Arkansas	16,458	7.4	8,896	4.0	11,120	5.0
As of December 31, 2002
Total Risk-Based Capital Ratio
Simmons First National Corporation	$ 194,628	15.3	$ 101,766	8.0	$ N/A
Simmons First National Bank	85,233	13.0	52,451	8.0	65,564	10.0
Simmons First Bank of Russellville	30,545	24.8	9,853	8.0	12,317	10.0
Simmons First Bank of Northwest Arkansas	17,207	12.7	10,839	8.0	13,549	10.0
Tier 1 Capital Ratio
Simmons First National Corporation	178,289	14.0	50,940	4.0	N/A
Simmons First National Bank	76,658	11.7	26,208	4.0	39,312	6.0
Simmons First Bank of Russellville	29,002	23.5	4,937	4.0	7,405	6.0
Simmons First Bank of Northwest Arkansas	15,508	11.5	5,394	4.0	8,091	6.0
Leverage Ratio
Simmons First National Corporation	178,289	9.3	76,683	4.0	N/A
Simmons First National Bank	76,658	7.7	39,822	4.0	49,778	5.0
Simmons First Bank of Russellville	29,002	15.1	7,683	4.0	9,603	5.0
Simmons First Bank of Northwest Arkansas	15,508	8.0	7,754	4.0	9,693	5.0

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NOTE 20: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

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CONDENSED BALANCE SHEETS DECEMBER 31, 2003 and 2002

(In thousands)	2003
ASSETS
Cash and cash equivalents	$ 19,135	$	10,266
Investment securities	20,008		—
Investments in wholly-owned subsidiaries	221,626		208,363
Intangible assets, net	134		134
Premises and equipment	2,245		2,280
Other assets	6,609		6,431
TOTAL ASSETS	$ 269,757	$	227,474
LIABILITIES
Long-term debt	$ 56,713	$	27,783
Other liabilities	3,049		2,086
Total liabilities	59,762		29,869
STOCKHOLDERS’ EQUITY
Common stock	14,102		7,071
Surplus	35,988		44,495
Undivided profits	160,191		143,808
Accumulated other comprehensive (loss) income
Unrealized (depreciation) appreciation on available-for-sale
securities, net of income tax credit of $170 at 2003 and
income taxes of $1,446 at 2002	(286	)	2,231
Total stockholders’ equity	209,995		197,605
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 269,757	$	227,474

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CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

(In thousands)	2003
INCOME
Dividends from subsidiaries	$ 21,935	$	15,920	$	12,722
Other income	4,091		4,051		4,046
	26,026		19,971		16,768
EXPENSE	7,193		7,193		7,113
Income before income taxes and equity in
undistributed net income of subsidiaries	18,833		12,778		9,655
Provision for income taxes	(1,075	)	(1,169	)	(1,062	)
Income before equity in undistributed net
income of subsidiaries	19,908		13,947		10,717
Equity in undistributed net income of subsidiaries	3,882		8,131		5,811
NET INCOME	$ 23,790	$	22,078	$	16,528

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CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

(In thousands)	2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 23,790	$	22,078	$	16,528
Items not requiring (providing) cash
Depreciation and amortization	169		74		319
Deferred income taxes	(111	)	(373	)	(46	)
Equity in undistributed income of bank subsidiaries	(3,882	)	(8,131	)	(5,811	)
Changes in
Other assets	(67	)	(2,193	)	621
Other liabilities	963		718		(1,074	)
Net cash provided by operating activities	20,862		12,173		10,537
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of premises and equipment	(134	)	(81	)	(142	)
Sale of premises and equipment to subsidiary	—		—		2,032
Capital contribution to subsidiaries	(17,930	)	—		(2,000	)
Return of capital from subsidiary	6,032		—		—
Purchase of held-to-maturity securities	(20,008	)	—		—
Proceeds from maturities of available-for-sale securities	—		—		1,721
Net cash (used in) provided by investing activities	(32,040	)	(81	)	1,611
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reduction on long-term debt	(2,000	)	(2,000	)	(2,858	)
Issuance of long-term debt	30,930
Dividends paid	(7,407	)	(6,789	)	(6,241	)
Repurchase of common stock, net	(1,476	)	(799	)	(2,780	)
Net cash provided by (used in) financing activities	20,047		(9,588	)	(11,879	)
INCREASE IN CASH AND
CASH EQUIVALENTS	8,869		2,504		269
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR	10,266		7,762		7,493
CASH AND CASH EQUIVALENTS, END OF YEAR	$ 19,135	$	10,266	$	7,762

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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No items are reportable.

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ITEM 9A. CONTROLS AND PROCEDURES

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(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 a date within ninety days prior to the filing of 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. PART III

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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

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Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held March 30, 2004, filed pursuant to Regulation 14A on or about February 25, 2004.

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ITEM 11. EXECUTIVE COMPENSATION

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Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held March 30, 2004 filed pursuant to Regulation 14A on or about February 25, 2004.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held March 30, 2004, filed pursuant to Regulation 14A on or about February 25, 2004.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held March 30, 2004, filed pursuant to Regulation 14A on or about February 25, 2004.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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Incorporated herein by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held March 30, 2004, filed pursuant to Regulation 14A on or about February 25, 2004. 68

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PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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(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) Reports on Form 8-K The registrant filed Form 8-K on October 9, 2003. The report contained the text of a press release issued by the registrant concerning the announcement of acquisition of Alliance Bank of Hot Springs, Hot Springs, Arkansas. The registrant filed Form 8-K on October 16, 2003. The report contained the text of a press release issued by the registrant concerning the announcement of third quarter earnings. The registrant filed Form 8-K on December 2, 2003. The report contained the text of a press release issued by the registrant concerning the declaration of a quarterly dividend. The registrant filed Form 8-K on December 17, 2003. The report contained the text of a press release issued by the registrant concerning the announcement of raising funds through a private trust preferred securities offering. (c) Listing of Exhibits

Exhibit No. Description

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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.*

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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.*

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10.3 Junior Subordinated Indenture, dated as of December 16, 2003, among the Company and Deutsche Bank Trust Company Americas, as trustee, with respect to the junior subordinated note held by Simmons First Capital Trust II.*

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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.*

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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.*

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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.*

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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.*

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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.*

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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.*

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14 Code of Ethics, dated December 2003, for CEO, CFO, controller and other accounting officers.*

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31.1 Rule 13a-14(a)/15d-14(a) Certification - J. Thomas May, Chairman, President and Chief Executive Officer.*

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31.2 Rule 13a-14(a)/15d-14(a) Certification - Barry L. Crow, Chief Financial Officer.*

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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, President and Chief Executive Officer.*

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32.2 Certification Pursuant to 18 U.S.C. Sections 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Barry L. Crow, Chief Financial Officer.*

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• Filed herewith. 70

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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.

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/s/ John L. Rush February 12, 2004 ——————————————— John L. Rush, Secretary

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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 12, 2004.

Signature	Title
/s/ J. Thomas May J. Thomas May	President, Chairman, Chief Executive Officer and Director
/s/ Barry L. Crow Barry L. Crow	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ William E. Clark William E. Clark	Director
/s/ Steven A. Cossé Steven A. Cossé	Director
/s/ Lara F. Hutt, III Lara F. Hutt, III	Director
/s/ George Makris, Jr. George Makris, Jr.	Director
/s/ David R. Perdue David R. Perdue	Director
/s/ Harry L. Ryburn Harry L. Ryburn	Director
/s/ Henry F. Trotter, Jr. Henry F. Trotter, Jr.	Director

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71