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.

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.

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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.

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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.

        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.

        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.

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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.

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(FTE =Fully Taxable Equivalent)

        Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for 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.

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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.

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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.

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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.

        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.

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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.

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