Edgar Filing: BANK OF THE OZARKS INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 0-22759

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)


ARKANSAS				71-0556208
(State or other jurisdiction of				(I.R.S. Employer
incorporation or organization)				Identification Number)

17901 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS				72223
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code: (501) 978-2265

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company in Rule 12b-2 of the Exchange Act.

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date.


Class		Outstanding at September 30, 2013
Common Stock, $0.01 par value per share		36,701,709

BANK OF THE OZARKS, INC.

FORM 10-Q

September 30, 2013

INDEX


PART I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2013 and 2012 and December 31, 2012	1

	Consolidated Statements of Income for the Three Months ended September 30, 2013 and 2012 and the Nine Months Ended September 30, 2013 and 2012	2

	Consolidated Statements of Comprehensive Income for the Three Months ended September 30, 2013 and 2012 and the Nine Months Ended September 30, 2013 and 2012	3

	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2013 and 2012	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

	Selected and Supplemental Financial Data	72

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74

Item 4.	Controls and Procedures	75

PART II.	Other Information

Item 1.	Legal Proceedings	76

Item 1A.	Risk Factors	78

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78

Item 3.	Defaults Upon Senior Securities	78

Item 4.	Mine Safety Disclosures	78

Item 5.	Other Information	78

Item 6.	Exhibits	78

Signature		79

Exhibit Index		80

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS


	Unaudited
	September 30,						December 31,
	2013			2012			2012
	(Dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks	$	123,291		$	124,995		$	206,500
Interest earning deposits		1,167			1,647			1,467

Cash and cash equivalents		124,458			126,642			207,967
Investment securities - available for sale (“AFS”)		671,393			429,935			494,266
Loans and leases		2,522,589			2,030,832			2,115,834
Purchased loans not covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements (“purchased non-covered loans”)		399,058			2,173			41,534
Loans covered by FDIC loss share agreements (“covered loans”)		409,319			652,798			596,239
Allowance for loan and lease losses		(41,660	)		(38,672	)		(38,738	)

Net loans and leases		3,289,306			2,647,131			2,714,869
FDIC loss share receivable		89,642			174,899			152,198
Premises and equipment, net		245,055			221,618			225,754
Foreclosed assets not covered by FDIC loss share agreements		11,647			13,828			13,924
Foreclosed assets covered by FDIC loss share agreements		40,452			57,632			52,951
Accrued interest receivable		15,227			11,520			13,201
Bank owned life insurance (“BOLI”)		142,311			93,819			123,846
Intangible assets, net		20,039			10,680			11,827
Other, net		56,935			35,313			29,404

Total assets	$	4,706,465		$	3,823,017		$	4,040,207

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand non-interest bearing	$	724,413		$	528,277		$	578,528
Savings and interest bearing transaction		1,952,617			1,586,098			1,741,678
Time		977,656			777,360			780,849

Total deposits		3,654,686			2,891,735			3,101,055
Repurchase agreements with customers		50,254			32,511			29,550
Other borrowings		280,905			280,771			280,763
Subordinated debentures		64,950			64,950			64,950
FDIC clawback payable		25,705			24,934			25,169
Accrued interest payable and other liabilities		18,251			46,832			27,614

Total liabilities		4,094,751			3,341,733			3,529,101

Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding at September 30, 2013 and 2012 or at December 31, 2012		0			0			0
Common stock; $0.01 par value; 50,000,000 shares authorized; 36,701,709, 34,664,580 and 35,271,724 shares issued and outstanding at September 30, 2013, September 30, 2012 and December 31, 2012, respectively		367			347			353
Additional paid-in capital		140,136			56,873			73,043
Retained earnings		468,186			407,671			423,485
Accumulated other comprehensive income (loss)		(453	)		12,960			10,783

Total stockholders’ equity before noncontrolling interest		608,236			477,851			507,664
Noncontrolling interest		3,478			3,433			3,442

Total stockholders’ equity		611,714			481,284			511,106

Total liabilities and stockholders’ equity	$	4,706,465		$	3,823,017		$	4,040,207

See accompanying notes to consolidated financial statements.

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	33,183		$	29,431		$	93,782		$	84,986
Purchased non-covered loans		5,653			55			7,366			211
Covered loans		10,501			15,347			34,845			47,710
Investment securities:
Taxable		1,988			757			4,456			2,177
Tax-exempt		4,006			3,864			11,599			12,083
Deposits with banks and federal funds sold		11			2			21			5

Total interest income		55,342			49,456			152,069			147,172

Interest expense:
Deposits		1,537			1,912			4,457			7,138
Repurchase agreements with customers		7			7			21			40
Other borrowings		2,732			2,628			8,064			8,020
Subordinated debentures		433			465			1,290			1,398

Total interest expense		4,709			5,012			13,832			16,596

Net interest income		50,633			44,444			138,237			130,576
Provision for loan and lease losses		(3,818	)		(3,080	)		(9,212	)		(9,212	)

Net interest income after provision for loan and lease losses		46,815			41,364			129,025			121,364

Non-interest income:
Service charges on deposit accounts		5,817			5,000			15,613			14,601
Mortgage lending income		1,276			1,672			4,660			4,101
Trust income		1,060			865			2,808			2,527
BOLI income		1,179			598			3,365			1,740
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		1,396			1,699			6,269			6,039
Other income from loss share and purchased non-covered loans, net		2,484			2,270			8,328			7,450
Net gains on investment securities		0			0			156			403
Gains on sales of other assets		2,501			1,425			7,586			4,377
Gain on merger and acquisition transaction		1,061			0			1,061			0
Other		1,226			962			3,498			2,774

Total non-interest income		18,000			14,491			53,344			44,012

Non-interest expense:
Salaries and employee benefits		16,456			15,040			47,445			43,666
Net occupancy and equipment		4,786			4,105			13,670			11,633
Other operating expenses		10,966			9,537			30,226			29,272

Total non-interest expense		32,208			28,682			91,341			84,571

Income before taxes		32,607			27,173			91,028			80,805
Provision for income taxes		10,224			7,883			28,255			24,417

Net income		22,383			19,290			62,773			56,388
Earnings attributable to noncontrolling interest		(33	)		(15	)		(36	)		(11	)

Net income available to common stockholders	$	22,350		$	19,275		$	62,737		$	56,377

Basic earnings per common share	$	0.62		$	0.56		$	1.76		$	1.63

Diluted earnings per common share	$	0.61		$	0.55		$	1.74		$	1.62

Dividends declared per common share	$	0.19		$	0.13		$	0.51		$	0.36

See accompanying notes to consolidated financial statements.

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Net income available to common stockholders	$	22,383		$	19,290		$	62,773		$	56,388
Other comprehensive income (loss):
Unrealized gains and losses on investment securities AFS		732			2,482			(18,333	)		6,381
Tax effect of unrealized gains and losses on investment securities AFS		(287	)		(974	)		7,191			(2,503	)
Reclassification of gains and losses on investment securities AFS included in net income		0			0			(156	)		(403	)
Tax effect of reclassification of gains and losses on investment securities AFS included in net income		0			0			62			158

Total other comprehensive income (loss)		445			1,508			(11,236	)		3,633

Total comprehensive income	$	22,828		$	20,798		$	51,537		$	60,021

See accompanying notes to consolidated financial statements.

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BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited


								Accumulated
			Additional					Other			Non-
	Common		Paid-In		Retained			Comprehensive			Controlling
	Stock		Capital		Earnings			Income (Loss)			Interest		Total
	(Dollars in thousands)
Balances – January 1, 2012	$	345	$	51,145	$	363,734		$	9,327		$	3,422	$	427,973
Net income		0		0		56,388			0			0		56,388
Earnings attributable to noncontrolling interest		0		0		(11	)		0			11		0
Total other comprehensive income (loss)		0		0		0			3,633			0		3,633
Common stock dividends		0		0		(12,440	)		0			0		(12,440	)
Issuance of 200,700 shares of common stock for exercise of stock options		2		3,120		0			0			0		3,122
Tax benefit on exercise and forfeiture of stock options		0		843		0			0			0		843
Stock-based compensation expense		0		1,765		0			0			0		1,765

Balances – September 30, 2012	$	347	$	56,873	$	407,671		$	12,960		$	3,433	$	481,284

Balances – January 1, 2013		353		73,043		423,485			10,783			3,442		511,106
Net income		0		0		62,773			0			0		62,773
Earnings attributable to noncontrolling interest		0		0		(36	)		0			36		0
Total other comprehensive income (loss)		0		0		0			(11,236	)		0		(11,236	)
Common stock dividends		0		0		(18,036	)		0			0		(18,036	)
Issuance of 178,400 shares of common stock for exercise of stock options		2		2,615		0			0			0		2,617
Tax benefit on exercise and forfeiture of stock options		0		1,458		0			0			0		1,458
Issuance of 1,257,385 shares of common stock for acquisition of The First National Bank of Shelby (“First National Bank”), net of issuance costs of $285,000		12		59,782		0			0			0		59,794
Stock-based compensation expense		0		3,238		0			0			0		3,238

Balances – September 30, 2013	$	367	$	140,136	$	468,186		$	(453	)	$	3,478	$	611,714

See accompanying notes to consolidated financial statements

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BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited


	Nine Months Ended
	September 30,
	2013			2012
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	62,773		$	56,388
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation		5,317			4,657
Amortization		1,924			1,527
Earnings attributable to noncontrolling interest		(36	)		(11	)
Provision for loan and lease losses		9,212			9,212
Provision for losses on foreclosed and other assets		1,072			1,182
Net amortization of investment securities AFS		450			26
Net gains on investment securities AFS		(156	)		(403	)
Originations of mortgage loans held for sale		(172,210	)		(182,611	)
Proceeds from sales of mortgage loans held for sale		191,570			172,345
Accretion of covered loans		(34,845	)		(47,710	)
Accretion of purchased non-covered loans		(7,366	)		(211	)
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		(6,269	)		(6,039	)
Gains on sales of other assets		(7,586	)		(4,377	)
Gain in merger and acquisition transaction		(1,061	)		0
Deferred income tax (benefit) expense		(2,070	)		765
Increase in cash surrender value of BOLI		(3,365	)		(1,740	)
Tax benefit on exercise of stock options		(1,458	)		(1,213	)
Stock-based compensation expense		3,238			1,765
Changes in assets and liabilities:
Accrued interest receivable		(900	)		1,348
Other assets, net		2,473			1,613
Accrued interest payable and other liabilities		2,137			(18,092	)

Net cash provided (used) by operating activities		42,844			(11,579	)

Cash flows from investing activities:
Proceeds from sales of investment securities AFS		999			8,525
Proceeds from maturities/calls/paydowns of investment securities AFS		71,860			46,252
Purchases of investment securities AFS		(124,193	)		(26,678	)
Net advances on loans and leases not covered by FDIC loss share agreements		(428,273	)		(138,941	)
Payments received on purchased non-covered loans		37,666			2,837
Payments received on covered loans		177,094			157,762
Payments received from FDIC under loss share agreements		66,993			122,722
Other net decreases in covered assets and FDIC loss share receivable		21,634			12,856
Purchases of premises and equipment		(7,815	)		(40,889	)
Proceeds from sales of other assets		47,975			46,311
Purchase of BOLI		0			(30,000	)
Cash (invested in) received from unconsolidated investments and noncontrolling interest		(571	)		200
Net cash proceeds received in merger and acquisition transaction		56,786			0

Net cash (used) provided by investing activities		(79,845	)		160,957

Cash flows from financing activities:
Net decrease in deposits		(46,987	)		(52,183	)
Net advances (repayments) of other borrowings		142			(21,076	)
Net increase (decrease) in repurchase agreements with customers		14,298			(299	)
Proceeds from exercise of stock options		2,617			3,122
Tax benefit on exercise of stock options		1,458			1,213
Cash dividends paid on common stock		(18,036	)		(12,440	)

Net cash used by financing activities		(46,508	)		(81,663	)

Net (decrease) increase in cash and cash equivalents		(83,509	)		67,715
Cash and cash equivalents – beginning of period		207,967			58,927

Cash and cash equivalents – end of period	$	124,458		$	126,642

See accompanying notes to consolidated financial statements.

BANK OF THE OZARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. Organization and Principles of Consolidation

Bank of the Ozarks, Inc. (the “Company”) is a bank holding company headquartered in Little Rock, Arkansas, which operates under the rules and regulations of the Board of Governors of the Federal Reserve System. The Company owns a wholly-owned state chartered bank subsidiary – Bank of the Ozarks (the “Bank”), four 100%-owned finance subsidiary business trusts – Ozark Capital Statutory Trust II (“Ozark II”), Ozark Capital Statutory Trust III (“Ozark III”), Ozark Capital Statutory Trust IV (“Ozark IV”) and Ozark Capital Statutory Trust V (“Ozark V”) (collectively, the “Trusts”) and, indirectly through the Bank, a subsidiary engaged in the development of real estate, a subsidiary that owns private aircraft and various other entities that hold foreclosed assets or tax credits or engage in other activities. The Company and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. The consolidated financial statements include the accounts of the Company, the Bank, the real estate subsidiary, the aircraft subsidiary and certain of those various other entities in accordance with accounting principles generally accepted in the United States (“GAAP”). Significant intercompany transactions and amounts have been eliminated in consolidation.

2. Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) in Article 10 of Regulation S-X and in accordance with the instructions to Form 10-Q and GAAP for interim financial information. Certain information, accounting policies and footnote disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, all adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. Operating results for the quarter or nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the full year or future periods.

Certain reclassifications of prior period amounts have been made to conform with the current period presentation. These reclassifications had no impact on previously reported net income. Additionally, as provided for under GAAP, management has up to 12 months following the date of a business combination transaction to finalize the fair values of acquired assets and assumed liabilities. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the day 1 fair values (“Day 1 Fair Values”).

3. Acquisition

On July 31, 2013, the Company completed its acquisition of The First National Bank of Shelby (“First National Bank”) whereby First National Bank merged with and into the Company’s wholly-owned bank subsidiary in a transaction valued at approximately $68.5 million. The Company issued 1,257,385 shares of its common stock valued at approximately $60.1 million, plus approximately $8.4 million in cash in exchange for all outstanding shares of First National Bank common stock. The Company also acquired certain real property from parties related to First National Bank and on which certain First National Bank offices are located for approximately $3.8 million in cash.

The acquisition of First National Bank expands the Company’s service area in North Carolina. The First National Bank had 14 offices in Shelby, North Carolina and the surrounding communities. On September 24, 2013 the Company closed one of the acquired offices in Shelby, North Carolina.

The following table provides a summary of the assets acquired and liabilities assumed as recorded by First National Bank, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, and the resultant fair values of those assets and liabilities as recorded by the Company. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The fair value adjustments and the resultant fair values shown in the following table continue to be evaluated by management and may be subject to further adjustment.


	July 31, 2013
	As Recorded by First National Bank			Fair Value Adjustments				As Recorded by the Company
	(Dollars in thousands)
Assets acquired:
Cash and due from banks	$	69,285		$	0			$	69,285
Investment securities		149,943			(599	)	a		149,344
Loans and leases		432,250			(44,183	)	b		388,067
Allowance for loan losses		(13,931	)		13,931		b		0
Premises and equipment		14,318			5,064		c		19,382
Foreclosed assets		3,073			(915	)	d		2,158
Accrued interest receivable		1,234			(110	)	e		1,124
BOLI		14,812			0				14,812
Core deposit intangible asset		0			10,136		f		10,136
Deferred income taxes		12,179			12,325		g		24,504
Other		4,277			(251	)	e		4,026

Total assets acquired		687,440			(4,602	)			682,838

Liabilities assumed:
Deposits		595,668			4,950		h		600,618
Repurchase agreements with customers		6,405			0				6,405
Accrued interest payable and other liabilities		1,296			1,164		i		2,460

Total liabilities assumed		603,369			6,114				609,483

Net assets acquired	$	84,071		$	(10,716	)			73,355

Consideration paid:
Cash									12,215
Common stock									60,079

Total consideration paid									72,294

Gain on acquisition								$	1,061

Explanation of fair value adjustments

a-	Adjustment reflects the fair value adjustment based on the Company’s pricing of the acquired investment securities portfolio.

b-	Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the recorded allowance for loan losses.

c-	Adjustment reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired.

d-	Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired foreclosed assets.

e-	Adjustment reflects the fair value adjustment based on the Company’s evaluation of accrued interest receivable and other assets.

f-	Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.

This adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal income tax purposes. This adjustment also includes acquired net operating loss carry forwards, to the extent such carry forwards are expected to be realized by the Company.

h-	Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired deposits.

i-	Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly attributable to the acquisition of First National Bank.

Beginning August 1, 2013, First National Bank operations are included in the Company’s consolidated results of operations and include $4.9 million in net interest income and $2.4 million in net income related to First National Bank for the period ended September 30, 2013. The following unaudited supplemental pro forma information is presented to show the estimated results assuming First National Bank was acquired as of the beginning of each period presented, adjusted for any estimated potential costs savings. These pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisition as of January 1, 2012 or 2013 and should not be considered as representative of future operating results.


	Nine Months Ended September 30,
	2013		2012
	(Dollars in thousands, except per share amounts)
Net interest income – pro forma (unaudited)	$	151,169	$	149,854
Net income – pro forma (unaudited)	$	66,852	$	63,942
EPS – Diluted – pro forma (unaudited)	$	1.81	$	1.77

4. Earnings Per Common Share (“EPS”)

Basic EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding after consideration of the dilutive effect, if any, of the Company’s outstanding common stock options using the treasury stock method. No options to purchase shares of the Company’s common stock for the three months ended September 30, 2013 and September 30, 2012 and for the nine months ended September 30, 2012 were excluded from the diluted EPS calculation as all options were dilutive. For the nine months ended September 30, 2013, options to purchase 2,000 shares of the Company’s common stock were excluded from the diluted EPS calculations as inclusion of these options would have been anti-dilutive.

The following table presents the computation of basic and diluted EPS for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(In thousands, except per share amounts)
Numerator:
Distributed earnings allocated to common stock	$	6,732	$	4,498	$	18,036	$	12,440
Undistributed earnings allocated to common stock		15,618		14,777		44,701		43,937

Net earnings allocated to common stock	$	22,350	$	19,275	$	62,737	$	56,377

Denominator:
Denominator for basic EPS – weighted-average common shares		36,272		34,647		35,669		34,591
Effect of dilutive securities – stock options		376		316		325		281

Denominator for diluted EPS – weighted-average common shares and assumed conversions		36,648		34,963		35,994		34,872

Basic EPS	$	0.62	$	0.56	$	1.76	$	1.63

Diluted EPS	$	0.61	$	0.55	$	1.74	$	1.62

5. Investment Securities

At September 30, 2013 and 2012 and at December 31, 2012, the Company classified all of its investment securities portfolio as AFS. Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss).

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The following table presents the amortized cost and estimated fair value of investment securities as of the dates indicated. The Company’s holdings of “other equity securities” include Federal Home Loan Bank of Dallas (“FHLB – Dallas”) and First National Banker’s Bankshares, Inc. (“FNBB”) shares, which do not have readily determinable fair values and are carried at cost.


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
September 30, 2013:
Obligations of state and political subdivisions	$	432,362	$	7,423	$	(8,217	)	$	431,568
U.S. Government agency securities		225,263		4,077		(4,029	)		225,311
Corporate obligations		717		0		0			717
Other equity securities		13,797		0		0			13,797

Total	$	672,139	$	11,500	$	(12,246	)	$	671,393

December 31, 2012:
Obligations of state and political subdivisions	$	345,224	$	16,586	$	(293	)	$	361,517
U.S. Government agency securities		116,835		1,466		(17	)		118,284
Corporate obligations		776		0		0			776
Other equity securities		13,689		0		0			13,689

Total	$	476,524	$	18,052	$	(310	)	$	494,266

September 30, 2012:
Obligations of state and political subdivisions	$	330,965	$	18,784	$	(211	)	$	349,538
U.S. Government agency securities		63,192		2,752		0			65,944
Corporate obligations		777		0		0			777
Other equity securities		13,676		0		0			13,676

Total	$	408,610	$	21,536	$	(211	)	$	429,935

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The following table shows estimated fair value of investment securities AFS having gross unrealized losses and the amount of such unrealized losses, aggregated by investment category and length of time that individual investment securities have been in a continuous unrealized loss position, as of the dates indicated.


	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
September 30, 2013:
Obligations of state and political subdivisions	$	122,614	$	7,523	$	8,020	$	694	$	130,634	$	8,217
U.S. Government agency securities		60,861		4,029		0		0		60,861		4,029

Total temporarily impaired securities	$	183,475	$	11,552	$	8,020	$	694	$	191,495	$	12,246

December 31, 2012:
Obligations of state and political subdivisions	$	14,085	$	188	$	7,324	$	105	$	21,409	$	293
U.S. Government agency securities		14,320		17		0		0		14,320		17

Total temporarily impaired securities	$	28,405	$	205	$	7,324	$	105	$	35,729	$	310

September 30, 2012:
Obligations of state and political subdivisions	$	1,796	$	75	$	7,540	$	136	$	9,336	$	211

Total temporarily impaired securities	$	1,796	$	75	$	7,540	$	136	$	9,336	$	211

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment for the investment securities portfolio, management considers the credit quality of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors. At September 30, 2013 management determined the unrealized losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality of the investments. Accordingly, management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

The following table shows the amortized cost and estimated fair value of investment securities AFS by maturity or estimated date of repayment as of the date indicated.


	September 30, 2013
Maturity or Estimated Repayment	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
One year or less	$	26,250	$	26,686
After one year to five years		91,986		93,498
After five years to ten years		136,239		136,052
After ten years		417,664		415,157

Total	$	672,139	$	671,393

For purposes of this maturity distribution, all investment securities AFS are shown based on their contractual maturity date, except (i) FHLB – Dallas and FNBB stock with no contractual maturity date are shown in the longest maturity category and (ii) U.S. Government agency securities and municipal housing authority securities backed by residential mortgages are allocated among various maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds or other estimates of prepayment speeds and interest rate levels at the measurement date. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following table presents sales activities in the Company’s investment securities AFS for the periods indicated.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(Dollars in thousands)
Sales proceeds	$	0	$	0	$	999	$	8,525

Gross realized gains	$	0	$	0	$	156	$	403
Gross realized losses		0		0		0		0

Net gains on investment securities	$	0	$	0	$	156	$	403

6. Allowance for Loan and Lease Losses (“ALLL”) and Credit Quality Indicators

Allowance for loan and lease losses

The following table is a summary of activity within the ALLL for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Beginning balance	$	39,372		$	38,862		$	38,738		$	39,169
Non-covered loans and leases charged off		(754	)		(1,763	)		(3,203	)		(5,096	)
Recoveries of non-covered loans and leases previously charged off		142			174			925			549

Net non-covered loans and leases charged off		(612	)		(1,589	)		(2,278	)		(4,547	)
Covered loans charged off		(918	)		(1,681	)		(4,012	)		(5,162	)

Net charge-offs – total loans and leases		(1,530	)		(3,270	)		(6,290	)		(9,709	)
Provision for loan and lease losses:
Non-covered loans and leases		2,900			1,399			5,200			4,050
Covered loans		918			1,681			4,012			5,162

Total provision		3,818			3,080			9,212			9,212

Ending balance	$	41,660		$	38,672		$	41,660		$	38,672

At September 30, 2013 and 2012, the Company identified covered loans acquired in its FDIC-assisted acquisitions where the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $0.9 million for such loans during the third quarter of 2013 and $4.0 million for such loans during the first nine months of 2013 compared to $1.7 million during the third quarter of 2012 and $5.2 million during the first nine months of 2012. The Company also recorded provision for loan and lease losses of $0.9 million during the third quarter of 2013 and $4.0 million during the first nine months of 2013 to cover such charge-offs compared to $1.7 million during the third quarter of 2012 and $5.2 million during the first nine months of 2012. In addition to those net charge-offs, the Company also transferred certain of these covered loans to covered foreclosed assets. As a result, the Company had $52.6 million and $31.0 million, respectively, of impaired covered loans at September 30, 2013 and 2012.

As of September 30, 2013 and 2012, and for the third quarter and first nine months of 2013 and 2012, the Company had no impaired purchased non-covered loans and recorded no charge-offs, partial charge-offs or provision for such loans.

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The following table is a summary of the Company’s allowance for loan and lease losses for the three months and nine months ended September 30, 2013.


	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Three months ended September 30, 2013:
Real estate:
Residential 1-4 family	$	4,653	$	(111	)	$	11	$	294		$	4,847
Non-farm/non-residential		12,464		(19	)		0		304			12,749
Construction/land development		11,290		(7	)		13		1,434			12,730
Agricultural		2,595		(260	)		5		182			2,522
Multifamily residential		1,854		0			0		203			2,057
Commercial and industrial		2,929		(55	)		56		(172	)		2,758
Consumer		993		(57	)		19		(13	)		942
Direct financing leases		2,041		(152	)		9		262			2,160
Other		553		(93	)		29		406			895
Covered loans		0		(918	)		0		918			0

Total	$	39,372	$	(1,672	)	$	142	$	3,818		$	41,660

Nine months ended September 30, 2013:
Real estate:
Residential 1-4 family	$	4,820	$	(528	)	$	113	$	442		$	4,847
Non-farm/non-residential		10,107		(612	)		118		3,136			12,749
Construction/land development		12,000		(136	)		21		845			12,730
Agricultural		2,878		(260	)		9		(105	)		2,522
Multifamily residential		2,030		0			0		27			2,057
Commercial and industrial		3,655		(887	)		431		(441	)		2,758
Consumer		1,015		(176	)		90		13			942
Direct financing leases		2,050		(338	)		29		419			2,160
Other		183		(266	)		114		864			895
Covered loans		0		(4,012	)		0		4,012			0

Total	$	38,738	$	(7,215	)	$	925	$	9,212		$	41,660

The following table is a summary of the Company’s allowance for loan and lease losses for the year ended December 31, 2012.


	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Year ended December 31, 2012:
Real estate:
Residential 1-4 family	$	3,848	$	(1,312	)	$	107	$	2,177		$	4,820
Non-farm/non-residential		12,203		(1,226	)		18		(888	)		10,107
Construction/land development		9,478		(466	)		106		2,882			12,000
Agricultural		3,383		(997	)		141		351			2,878
Multifamily residential		2,564		0			0		(534	)		2,030
Commercial and industrial		4,591		(1,323	)		35		352			3,655
Consumer		1,209		(732	)		238		300			1,015
Direct financing leases		1,632		(361	)		2		777			2,050
Other		261		(219	)		8		133			183
Covered loans		0		(6,195	)		0		6,195			0

Total	$	39,169	$	(12,831	)	$	655	$	11,745		$	38,738

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The following table is a summary of the Company’s allowance for loan and lease losses for the three months and nine months ended September 30, 2012.


	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Three months ended September 30, 2012:
Real estate:
Residential 1-4 family	$	4,957	$	(385	)	$	42	$	313		$	4,927
Non-farm/non-residential		9,916		(94	)		1		(138	)		9,685
Construction/land development		11,805		(26	)		70		391			12,240
Agricultural		2,959		(767	)		3		807			3,002
Multifamily residential		1,870		0			0		(207	)		1,663
Commercial and industrial		4,136		(127	)		8		(89	)		3,928
Consumer		1,089		(114	)		22		41			1,038
Direct financing leases		1,886		(101	)		2		201			1,988
Other		244		(149	)		26		80			201
Covered loans		0		(1,681	)		0		1,681			0

Total	$	38,862	$	(3,444	)	$	174	$	3,080		$	38,672

Nine months ended September 30, 2012:
Real estate:
Residential 1-4 family	$	3,848	$	(1,016	)	$	99	$	1,996		$	4,927
Non-farm/non-residential		12,203		(800	)		13		(1,731	)		9,685
Construction/land development		9,478		(369	)		101		3,030			12,240
Agricultural		3,383		(985	)		129		475			3,002
Multifamily residential		2,564		0			0		(901	)		1,663
Commercial and industrial		4,591		(917	)		29		225			3,928
Consumer		1,209		(324	)		88		65			1,038
Direct financing leases		1,632		(295	)		1		650			1,988
Other		261		(390	)		89		241			201
Covered loans		0		(5,162	)		0		5,162			0

Total	$	39,169	$	(10,258	)	$	549	$	9,212		$	38,672

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The following table is a summary of the Company’s ALLL and recorded investment in loans and leases, excluding purchased non-covered loans and covered loans, as of the dates indicated.


	Allowance for Loan and Lease Losses						Loans and Leases Excluding Purchased Non-Covered Loans and Covered Loans
	ALLL for Individually Evaluated Impaired Loans and Leases		ALLL for All Other Loans and Leases		Total ALLL		Individually Evaluated Impaired Loans and Leases		All Other Loans and Leases		Total Loans and Leases
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	490	$	4,357	$	4,847	$	3,535	$	247,491	$	251,026
Non-farm/non-residential		6		12,743		12,749		3,572		1,032,046		1,035,618
Construction/land development		2		12,728		12,730		217		713,981		714,198
Agricultural		187		2,335		2,522		951		47,002		47,953
Multifamily residential		0		2,057		2,057		310		163,606		163,916
Commercial and industrial		613		2,145		2,758		739		121,424		122,163
Consumer		4		938		942		33		27,265		27,298
Direct financing leases		0		2,160		2,160		0		81,984		81,984
Other		1		894		895		20		78,413		78,433

Total	$	1,303	$	40,357	$	41,660	$	9,377	$	2,513,212	$	2,522,589

December 31, 2012:
Real estate:
Residential 1-4 family	$	518	$	4,302	$	4,820	$	2,906	$	269,146	$	272,052
Non-farm/non-residential		53		10,054		10,107		2,898		805,008		807,906
Construction/land development		7		11,993		12,000		542		578,234		578,776
Agricultural		254		2,624		2,878		985		49,634		50,619
Multifamily residential		0		2,030		2,030		0		141,243		141,243
Commercial and industrial		649		3,006		3,655		761		159,043		159,804
Consumer		0		1,015		1,015		33		29,748		29,781
Direct financing leases		0		2,050		2,050		0		68,022		68,022
Other		2		181		183		22		7,609		7,631

Total	$	1,483	$	37,255	$	38,738	$	8,147	$	2,107,687	$	2,115,834

September 30, 2012:
Real estate:
Residential 1-4 family	$	457	$	4,470	$	4,927	$	3,221	$	269,465	$	272,686
Non-farm/non-residential		54		9,631		9,685		2,521		794,287		796,808
Construction/land development		57		12,183		12,240		321		567,891		568,212
Agricultural		256		2,746		3,002		1,096		52,511		53,607
Multifamily residential		0		1,663		1,663		0		105,854		105,854
Commercial and industrial		693		3,235		3,928		864		127,217		128,081
Consumer		1		1,037		1,038		33		30,856		30,889
Direct financing leases		0		1,988		1,988		0		65,395		65,395
Other		2		199		201		24		9,276		9,300

Total	$	1,520	$	37,152	$	38,672	$	8,080	$	2,022,752	$	2,030,832

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The following table is a summary of impaired loans and leases, excluding purchased non-covered loans and covered loans, as of and for the three months and nine months ended September 30, 2013.


	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Three Months Ended September 30, 2013		Weighted Average Carrying Value – Nine Months Ended September 30, 2013
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,601	$	(1,662	)	$	1,939	$	490	$	1,624	$	1,569
Non-farm/non-residential		37		0			37		6		24		105
Construction/land development		129		(112	)		17		2		8		17
Agricultural		459		(42	)		417		187		421		525
Commercial and industrial⁽¹⁾		2,270		(1,713	)		557		613		558		570
Consumer		39		(13	)		26		4		13		7
Other		145		(137	)		8		1		8		9

Total impaired loans and leases with a related ALLL		6,680		(3,679	)		3,001		1,303		2,656		2,802

Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		2,244		(648	)		1,596		0		1,507		1,394
Non-farm/non-residential		4,645		(1,110	)		3,535		0		6,957		4,902
Construction/land development		281		(81	)		200		0		236		324
Agricultural		801		(267	)		534		0		386		401
Multifamily residential		443		(133	)		310		0		311		155
Commercial and industrial		397		(215	)		182		0		166		196
Consumer		19		(12	)		7		0		7		23
Other		32		(20	)		12		0		8		8

Total impaired loans and leases without a related ALLL		8,862		(2,486	)		6,376		0		9,578		7,403

Total impaired loans and leases	$	15,542	$	(6,165	)	$	9,377	$	1,303	$	12,234	$	10,205

(1)	Includes $76,000 of specific allowance related to the unfunded portion of an unexpired letter of credit for a previous customer of the Bank.

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The following table is a summary of impaired loans and leases, excluding purchased non-covered loans and covered loans, as of and for the year ended December 31, 2012.


	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Year Ended December 31, 2012
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,316	$	(1,648	)	$	1,668	$	518	$	1,622
Non-farm/non-residential		203		0			203		53		234
Construction/land development		141		(90	)		51		7		38
Agricultural		632		(73	)		559		254		291
Commercial and industrial⁽¹⁾		2,085		(1,523	)		562		649		620
Consumer		15		(12	)		3		0		8
Other		223		(213	)		10		2		24

Total impaired loans and leases with a related ALLL		6,615		(3,559	)		3,056		1,483		2,837

Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		1,531		(293	)		1,238		0		1,721
Non-farm/non-residential		3,363		(668	)		2,695		0		2,432
Construction/land development		628		(137	)		491		0		600
Agricultural		733		(307	)		426		0		374
Multifamily residential		133		(133	)		0		0		0
Commercial and industrial		614		(415	)		199		0		426
Consumer		50		(20	)		30		0		31
Other		65		(53	)		12		0		13

Total impaired loans and leases without a related ALLL		7,117		(2,026	)		5,091		0		5,597

Total impaired loans and leases	$	13,732	$	(5,585	)	$	8,147	$	1,483	$	8,434

(1)	Includes $95,000 of specific allowance related to the unfunded portion of an unexpired letter of credit for a previous customer of the Bank.

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The following table is a summary of impaired loans and leases, excluding purchased non-covered loans and covered loans, as of and for the three months and nine months ended September 30, 2012.


	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Three Months Ended September 30, 2012		Weighted Average Carrying Value – Nine Months Ended September 30, 2012
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,307	$	(1,683	)	$	1,624	$	457	$	1,684	$	1,606
Non-farm/non-residential		211		(7	)		204		54		231		245
Construction/land development		139		(38	)		101		57		50		34
Agricultural		618		(176	)		442		256		262		202
Commercial and industrial⁽¹⁾		2,045		(1,426	)		619		693		605		640
Consumer		953		(950	)		3		1		3		10
Other		305		(295	)		10		2		38		29

Total impaired loans and leases with a related ALLL		7,578		(4,575	)		3,003		1,520		2,873		2,766

Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		1,802		(205	)		1,597		0		1,725		1,882
Non-farm/non-residential		2,322		(5	)		2,317		0		2,232		2,344
Construction/land development		342		(122	)		220		0		400		636
Agricultural		972		(318	)		654		0		390		357
Multifamily residential		161		(161	)		0		0		0		0
Commercial and industrial		285		(40	)		245		0		294		502
Consumer		549		(519	)		30		0		30		31
Other		14		0			14		0		15		13

Total impaired loans and leases without a related ALLL		6,447		(1,370	)		5,077		0		5,086		5,765

Total impaired loans and leases	$	14,025	$	(5,945	)	$	8,080	$	1,520	$	7,959	$	8,531

(1)	Includes $104,000 of specific allowance related to the unfunded portion of an unexpired letter of credit for a previous customer of the Bank.

Management has determined that certain of the Company’s impaired loans and leases do not require any specific allowance at September 30, 2013 and 2012 or at December 31, 2012 because (i) management’s analysis of such individual loans and leases resulted in no impairment or (ii) all identified impairment on such loans and leases has previously been charged off.

Interest income on impaired loans and leases is recognized on a cash basis when and if actually collected. Total interest income recognized on impaired loans and leases for the three months and nine months ended September 30, 2013 and 2012 and for the year ended December 31, 2012 was not material.

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Credit Quality Indicators

Loans and Leases, Excluding Purchased Non-Covered Loans and Covered Loans

The following table is a summary of credit quality indicators for the Company’s total loans and leases as of the dates indicated.


	Satisfactory		Moderate		Watch		Substandard		Total
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family ⁽¹⁾	$	242,202	$	0	$	1,438	$	7,386	$	251,026
Non-farm/non-residential		839,345		134,754		51,589		9,930		1,035,618
Construction/land development		544,324		136,270		29,122		4,482		714,198
Agricultural		23,926		11,688		9,317		3,022		47,953
Multifamily residential		132,722		29,716		394		1,084		163,916
Commercial and industrial		91,913		26,843		1,210		2,197		122,163
Consumer ⁽¹⁾		26,763		0		172		363		27,298
Direct financing leases		80,967		992		0		25		81,984
Other ⁽¹⁾		74,221		4,005		132		75		78,433

Total	$	2,056,383	$	344,268	$	93,374	$	28,564	$	2,522,589

December 31, 2012:
Real estate:
Residential 1-4 family ⁽¹⁾	$	263,737	$	0	$	3,146	$	5,169	$	272,052
Non-farm/non-residential		649,494		109,429		38,231		10,752		807,906
Construction/land development		395,821		130,057		37,069		15,829		578,776
Agricultural		25,854		12,105		9,509		3,151		50,619
Multifamily residential		112,360		24,092		4,009		782		141,243
Commercial and industrial		121,898		31,338		3,950		2,618		159,804
Consumer ⁽¹⁾		29,079		0		424		278		29,781
Direct financing leases		66,657		1,365		0		0		68,022
Other ⁽¹⁾		6,116		1,204		239		72		7,631

Total	$	1,671,016	$	309,590	$	96,577	$	38,651	$	2,115,834

September 30, 2012:
Real estate:
Residential 1-4 family⁽¹⁾	$	264,831	$	0	$	1,666	$	6,189	$	272,686
Non-farm/non-residential		643,663		102,293		40,412		10,440		796,808
Construction/land development		352,131		160,107		40,015		15,959		568,212
Agricultural		27,014		12,886		10,237		3,470		53,607
Multifamily residential		78,241		23,128		3,701		784		105,854
Commercial and industrial		90,550		30,654		3,223		3,654		128,081
Consumer⁽¹⁾		30,445		0		89		355		30,889
Direct financing leases		63,916		1,454		0		25		65,395
Other⁽¹⁾		7,474		1,499		253		74		9,300

Total	$	1,558,265	$	332,021	$	99,596	$	40,950	$	2,030,832

(1)

The Company does not risk rate its residential 1-4 family loans, its consumer loans, and certain “other” loans. However, for purposes of the above table, the Company considers such loans to be (i) satisfactory – if they are performing and less than 30 days past due, (ii) watch – if they are performing and 30 to 89 days past due or (iii) substandard – if they are nonperforming or 90 days or more past due.

The Company’s credit quality indicators consist of an internal grading system used to assign grades to all loans and leases except residential 1-4 family loans, consumer loans and certain other loans. The grade for each individual loan or lease is determined by the account officer and other approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing assessment of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by senior management and as part of the Company’s internal loan review process. The risk elements considered by management in its determination of the appropriate grade for individual loans and leases include the following, among others: (1) for non-farm/non-residential, multifamily residential, and agricultural real estate loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan repayment requirements), operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age, condition, value, nature and marketability of the collateral and the specific risks and volatility of income, property value and operating results typical of properties of that type; (2) for construction and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or ability to lease property constructed for lease, the quality and nature of contracts for presale or preleasing, if any, experience and ability of the developer and loan-to-value and loan-to-cost ratios;

(3) for commercial and industrial loans and leases, the operating results of the commercial, industrial or professional enterprise, the borrower’s or lessee’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in the applicable industry and the age, condition, value, nature and marketability of collateral; and (4) for other loans and leases, the operating results, experience and ability of the borrower or lessee, historical and expected market conditions and the age, condition, value, nature and marketability of the collateral. In addition, for each category the Company considers secondary sources of income and the financial strength of the borrower or lessee and any guarantors. The following categories of credit quality indicators are used by the Company.

Satisfactory – Loans and leases in this category are considered to be a satisfactory credit risk and are generally considered to be collectible in full.

Moderate – Loans and leases in this category are considered to be a marginally satisfactory credit risk and are generally considered to be collectible in full.

Watch – Loans and leases in this category are presently protected from apparent loss, however weaknesses exist which could cause future impairment of repayment of principal or interest.

Substandard – Loans and leases in this category are characterized by deterioration in quality exhibited by a number of weaknesses requiring corrective action and posing risk of some loss.

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The following table is an aging analysis of past due loans and leases as of the dates indicated.


	30-89 Days Past Due ⁽¹⁾		90 Days or More ⁽²⁾		Total Past Due		Current ⁽³⁾		Total
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	1,661	$	2,376	$	4,037	$	246,989	$	251,026
Non-farm/non-residential		2,321		3,312		5,633		1,029,985		1,035,618
Construction/land development		1,662		136		1,798		712,400		714,198
Agricultural		322		571		893		47,060		47,953
Multifamily residential		0		310		310		163,606		163,916
Commercial and industrial		349		131		480		121,683		122,163
Consumer		177		66		243		27,055		27,298
Direct financing leases		111		25		136		81,848		81,984
Other		17		0		17		78,416		78,433

Total	$	6,620	$	6,927	$	13,547	$	2,509,042	$	2,522,589

December 31, 2012:
Real estate:
Residential 1-4 family	$	3,656	$	1,160	$	4,816	$	267,236	$	272,052
Non-farm/non-residential		3,284		2,524		5,808		802,098		807,906
Construction/land development		868		329		1,197		577,579		578,776
Agricultural		952		570		1,522		49,097		50,619
Multifamily residential		312		0		312		140,931		141,243
Commercial and industrial		1,091		185		1,276		158,528		159,804
Consumer		425		57		482		29,299		29,781
Direct financing leases		0		0		0		68,022		68,022
Other		9		0		9		7,622		7,631

Total	$	10,597	$	4,825	$	15,422	$	2,100,412	$	2,115,834

September 30, 2012:
Real estate:
Residential 1-4 family	$	2,533	$	1,624	$	4,157	$	268,529	$	272,686
Non-farm/non-residential		2,959		2,043		5,002		791,806		796,808
Construction/land development		698		108		806		567,406		568,212
Agricultural		944		335		1,279		52,328		53,607
Multifamily residential		0		0		0		105,854		105,854
Commercial and industrial		500		281		781		127,300		128,081
Consumer		159		86		245		30,644		30,889
Direct financing leases		0		25		25		65,370		65,395
Other		26		0		26		9,274		9,300

Total	$	7,819	$	4,502	$	12,321	$	2,018,511	$	2,030,832

(1)	Includes $0.4 million, $1.0 million and $1.0 million at September 30, 2013, December 31, 2012 and September 30, 2012, respectively, of loans and leases on nonaccrual status.

(2)	All loans and leases greater than 90 days past due were on nonaccrual status at September 30, 2013 and 2012 and December 31, 2012.

(3)	Includes $3.1 million, $3.3 million and $3.2 million of loans and leases on nonaccrual status at September 30, 2013, December 31, 2012 and September 30, 2012, respectively.

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Covered Loans

The following table is a summary of credit quality indicators for the Company’s covered loans as of the dates indicated.


	FV 1		FV 2		Total Covered Loans
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	114,163	$	6,379	$	120,542
Non-farm/non-residential		171,886		25,566		197,452
Construction/land development		40,172		19,214		59,386
Agricultural		11,203		1,138		12,341
Multifamily residential		9,153		215		9,368
Commercial and industrial		9,877		57		9,934
Consumer		132		6		138
Other		158		0		158

Total	$	356,744	$	52,575	$	409,319

December 31, 2012:
Real estate:
Residential 1-4 family	$	146,687	$	5,661	$	152,348
Non-farm/non-residential		271,705		16,399		288,104
Construction/land development		90,321		14,766		105,087
Agricultural		18,937		753		19,690
Multifamily residential		9,871		830		10,701
Commercial and industrial		18,495		1		18,496
Consumer		123		53		176
Other		1,637		0		1,637

Total	$	557,776	$	38,463	$	596,239

September 30, 2012:
Real estate:
Residential 1-4 family	$	162,762	$	4,125	$	166,887
Non-farm/non-residential		299,494		14,833		314,327
Construction/land development		105,844		10,840		116,684
Agricultural		20,815		73		20,888
Multifamily residential		10,060		869		10,929
Commercial and industrial		21,848		47		21,895
Consumer		211		0		211
Other		977		0		977

Total	$	622,011	$	30,787	$	652,798

For covered loans, management separately monitors this portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. To the extent that a loan is performing in accordance with or exceeding management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 1, is not included in any of the Company’s credit quality ratios, is not considered to be an impaired loan and is not considered in the determination of the required allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 2, is included in certain of the Company’s credit quality metrics, is considered an impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. At September 30, 2013 and 2012 and December 31, 2012, the Company had no allowance for its covered loans because all losses had been charged off on covered loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

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The following table is an aging analysis of past due covered loans as of the dates indicated.


	30-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Covered Loans
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	6,260	$	13,658	$	19,918	$	100,623	$	120,541
Non-farm/non-residential		8,557		39,841		48,398		149,054		197,452
Construction/land development		848		27,584		28,432		30,955		59,387
Agricultural		1,234		1,250		2,484		9,857		12,341
Multifamily residential		195		3,689		3,884		5,484		9,368
Commercial and industrial		27		2,961		2,988		6,946		9,934
Consumer		0		2		2		136		138
Other		0		0		0		158		158

Total	$	17,121	$	88,985	$	106,106	$	303,213	$	409,319

December 31, 2012:
Real estate:
Residential 1-4 family	$	9,539	$	20,958	$	30,497	$	121,851	$	152,348
Non-farm/non-residential		18,476		55,753		74,229		213,875		288,104
Construction/land development		6,693		42,604		49,297		55,790		105,087
Agricultural		1,063		3,338		4,401		15,289		19,690
Multifamily residential		0		3,345		3,345		7,356		10,701
Commercial and industrial		901		4,133		5,034		13,462		18,496
Consumer		29		5		34		142		176
Other		0		0		0		1,637		1,637

Total	$	36,701	$	130,136	$	166,837	$	429,402	$	596,239

September 30, 2012:
Real estate:
Residential 1-4 family	$	9,379	$	22,470	$	31,849	$	135,038	$	166,887
Non-farm/non-residential		13,776		51,407		65,183		249,144		314,327
Construction/land development		4,497		48,161		52,658		64,026		116,684
Agricultural		1,292		3,921		5,213		15,675		20,888
Multifamily residential		0		3,489		3,489		7,440		10,929
Commercial and industrial		1,321		3,105		4,426		17,469		21,895
Consumer		0		0		0		211		211
Other		0		0		0		977		977

Total	$	30,265	$	132,553	$	162,818	$	489,980	$	652,798

At September 30, 2013 and 2012 and December 31, 2012, a significant portion of the Company’s covered loans were contractually past due, including many that were 90 days or more past due. However, the elevated level of delinquencies of covered loans at the dates of acquisition was considered in the Company’s performance expectations used in its determination of the Day 1 Fair Values for all covered loans. Accordingly, all covered loans continue to accrete interest income and all covered loans rated FV 1 continue to perform in accordance with management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

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Purchased Non-Covered Loans

The following table is a summary of credit quality indicators for the Company’s purchased non-covered loans as of the dates indicated.


	Purchased Non-Covered Loans Without Evidence of Credit Deterioration at Acquisition										Purchased Non-Covered Loans With Evidence of Credit Deterioration at Acquisition				Total Purchased Non-Covered
	FV 33		FV 44		FV 55		FV 36		FV 77		FV 66		FV 88		Loans
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 Family	$	28,486	$	34,113	$	21,592	$	36,221	$	0	$	16,311	$	0	$	136,723
Non-farm/non-residential		46,201		71,637		25,591		3,509		0		16,786		0		163,724
Construction/land development		5,973		8,578		2,495		4,680		0		5,052		0		26,778
Agricultural		2,109		6,705		851		173		0		242		0		10,080
Multifamily residential		3,621		5,662		5,322		978		0		2,419		0		18,002
Commercial and industrial		10,684		10,793		3,150		4,004		0		1,598		0		30,229
Consumer		1,980		147		181		5,990		0		878		0		9,176
Other		1,333		2,323		163		329		0		198		0		4,346

Total	$	100,387	$	139,958	$	59,345	$	55,884	$	0	$	43,484	$	0	$	399,058

December 31, 2012:
Real estate:
Residential 1-4 Family	$	3,400	$	7,363	$	4,937	$	921	$	0	$	2,601	$	0	$	19,222
Non-farm/non-residential		420		1,370		2,680		10		0		362		0		4,842
Construction/land development		438		659		130		134		0		589		0		1,950
Agricultural		784		826		710		164		0		537		0		3,021
Multifamily residential		0		0		0		0		0		0		0		0
Commercial and industrial		576		1,802		1,788		384		0		783		0		5,333
Consumer		857		231		79		1,341		0		1,660		0		4,168
Other		222		110		107		2,336		0		223		0		2,998

Total	$	6,697	$	12,361	$	10,431	$	5,290	$	0	$	6,755	$	0	$	41,534

September 30, 2012:
Real estate:
Residential 1-4 Family	$	0	$	0	$	0	$	0	$	0	$	42	$	0	$	42
Non-farm/non-residential		0		0		0		0		0		0		0		0
Construction/land development		0		0		0		0		0		15		0		15
Agricultural		0		0		0		0		0		0		0		0
Multifamily residential		0		0		0		0		0		0		0		0
Commercial and industrial		0		0		0		0		0		225		0		225
Consumer		0		0		0		0		0		1,889		0		1,889
Other		0		0		0		0		0		2		0		2

Total	$	0	$	0	$	0	$	0	$	0	$	2,173	$	0	$	2,173

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At the time of acquisition of purchased non-covered loans, management individually evaluates substantially all loans acquired in the transaction. For those purchased loans without evidence of credit deterioration, management evaluates each reviewed loan using an internal grading system with a grade assigned to each loan at the date of acquisition. The grade for each purchased non-covered loan is reviewed subsequent to the date of acquisition any time a loan is renewed or extended or at any time information becomes available to the Company that provides material insight regarding the loan’s performance, the borrower or the underlying collateral. To the extent that a loan is performing in accordance with management’s initial expectations, such loan is not considered impaired and is not considered in the determination of the required allowance for loan and lease losses. To the extent that current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereon, such loan is considered impaired and is considered in the determination of the required level of allowance for loan and lease losses.

The following grades are used for purchased non-covered loans without evidence of credit deterioration.

FV 33 – Loans in this category are considered to be satisfactory with minimal credit risk and are generally considered collectible.

FV 44 – Loans in this category are considered to be marginally satisfactory with minimal to moderate credit risk and are generally considered collectible.

FV 55 – Loans in this category exhibit weakness and are considered to have elevated credit risk and elevated risk of repayment.

FV 36 – Loans in this category were not individually reviewed at the date of purchase and are assumed to have characteristics similar to the characteristics of the aggregate acquired portfolio.

FV 77 – Loans in this category have deteriorated since the date of purchase and are considered impaired.

In determining the Day 1 Fair Values of purchased non-covered loans without evidence of credit deterioration at the date of acquisition, management includes (i) no carry over of any previously recorded allowance for loan losses and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk profile and grade assigned to each loan. This adjustment is accreted into earnings as an adjustment to the yield on purchased non-covered loans, using the effective yield method, over the remaining life of each loan.

Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated credit quality. At the time such purchased non-covered loans with evidence of credit deterioration are acquired, management individually evaluates each loan to determine the estimated fair value of each loan. This evaluation includes no carryover of any previously recorded allowance for loan and lease losses. In determining the estimated fair value of purchased non-covered loans with evidence of credit deterioration, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received.

Management separately monitors purchased non-covered loans with evidence of credit deterioration on the date of purchase and periodically reviews such loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed or extended, (ii) at any other time additional information becomes available to the Company that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio. Management separately reviews the performance of the portfolio of purchased non-covered loans with evidence of credit deterioration on an annual basis, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’ performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values or since management’s most recent review of such portfolio’s performance. To the extent that a loan is performing in accordance with or exceeding management’s performance expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 66, is not included in any of the credit quality ratios, is not considered to be a nonaccrual or impaired loan, and is not considered in the determination of the required allowance for loan and lease losses. Additionally, for any loan that is exceeding management’s performance expectation established in conjunction with the determination of Day 1 Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance, which has a positive impact on interest income. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 88, is included in certain of the Company’s credit quality metrics, is considered an impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. Any improvement in the expected performance of such loan would result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

The Company had no loans rated FV 88 at September 30, 2013 and 2012 or December 31, 2012. Additionally, the Company had no allowance for its purchased non-covered loans at September 30, 2013 and 2012 or December 31, 2012 as (i) all such loans were performing in accordance with management’s expectations established in conjunction with the determination of the Day 1 Fair Values or (ii) all losses on purchased non-covered loans whose performance had deteriorated from management’s expectations established in conjunction with the deterioration of the Day 1 Fair Values had been charged off.

The following table is an aging analysis of past due purchased non-covered loans as of the dates indicated.


	30-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Purchased Non-Covered Loans
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	4,026	$	3,647	$	7,673	$	129,050	$	136,723
Non-farm/non-residential		3,319		4,136		7,455		156,269		163,724
Construction/land development		4,601		7,367		11,968		14,810		26,778
Agriculture		0		101		101		9,979		10,080
Multifamily residential		177		1,326		1,503		16,499		18,002
Commercial and industrial		357		535		892		29,337		30,229
Consumer		310		223		533		8,643		9,176
Other		38		182		220		4,126		4,346

Total	$	12,828	$	17,517	$	30,345	$	368,713	$	399,058

December 31, 2012:
Real estate:
Residential 1-4 family	$	2,322	$	1,594	$	3,916	$	15,306	$	19,222
Non-farm/non-residential		319		205		524		4,318		4,842
Construction/land development		148		322		470		1,480		1,950
Agriculture		272		904		1,176		1,845		3,021
Commercial and industrial		855		2,589		3,444		1,889		5,333
Consumer		431		1,295		1,726		2,442		4,168
Other		434		259		693		2,305		2,998

Total	$	4,781	$	7,168	$	11,949	$	29,585	$	41,534

September 30, 2012:
Real estate:
Residential 1-4 family	$	0	$	0	$	0	$	42	$	42
Construction/land development		0		0		0		15		15
Commercial and industrial		0		0		0		225		225
Consumer		152		78		230		1,659		1,889
Other		0		0		0		2		2

Total	$	152	$	78	$	230	$	1,943	$	2,173

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7. Foreclosed Assets Not Covered by FDIC Loss Share Agreements

The following table is a summary of the amount and type of foreclosed assets not covered by FDIC loss share agreements as of the dates indicated.


	September 30,				December 31,
	2013		2012		2012
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	1,059	$	1,505	$	2,863
Non-farm/non-residential		3,038		3,468		2,481
Construction/land development		7,320		8,564		8,072
Agricultural		22		160		378

Total real estate		11,439		13,697		13,794
Commercial and industrial		190		91		102
Consumer		18		40		28

Foreclosed assets not covered by FDIC loss share agreements	$	11,647	$	13,828	$	13,924

The following table is a summary of activity within foreclosed assets not covered by FDIC loss share agreements for the periods indicated.


	Nine Months Ended September 30,
	2013			2012
	(Dollars in thousands)
Balance – beginning of period	$	13,924		$	31,762
Loans and other assets transferred into foreclosed assets		4,497			7,021
Foreclosed assets acquired from First National Bank		2,158			0
Sales of foreclosed assets		(8,240	)		(23,773	)
Writedowns of foreclosed assets		(692	)		(1,182	)

Balance – end of period	$	11,647		$	13,828

8. Supplemental Data for Cash Flows

The following table provides supplemental cash flow information for the periods indicated.


	Nine Months Ended
	September 30,
	2013			2012
	(Dollars in thousands)
Cash paid during the period for:
Interest	$	14,038		$	17,400
Taxes		35,515			39,478
Supplemental schedule of non-cash investing and financing activities:
Net change in unrealized gains/losses on investment securities AFS		(18,488	)		5,978
Common stock issued in acquisition of First National Bank		60,079			0
Loans and other assets transferred to foreclosed assets not covered by FDIC loss share agreements		4,497			7,021
Loans advanced for sales of foreclosed assets not covered by FDIC loss share agreements		2,942			12,710
Covered loans transferred to covered foreclosed assets		24,306			21,808
Unsettled AFS investment security purchases		730			12,771

9. Guarantees and Commitments

Outstanding standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer in third party arrangements. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2013 was $6.0 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at September 30, 2013 totaled $5.8 million.

At September 30, 2013 the Company had outstanding commitments to extend credit, excluding mortgage interest rate lock commitments, totaling $1.1 billion. While many of these commitments are expected to be disbursed within the next 12 months, the following table shows the contractual maturities of outstanding commitments to extend credit at September 30, 2013.


Contractual Maturities at September 30, 2013
Maturity	Amount
(Dollars in thousands)
2013	$	26,252
2014		157,339
2015		159,918
2016		431,067
2017		211,918
Thereafter		144,602

Total	$	1,131,096

10. Stock-Based Compensation

The Company has a nonqualified stock option plan for certain employees of the Company. This plan provides for the granting of nonqualified options to purchase shares of common stock in the Company. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under this plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. While the vesting period and the termination date for the employee plan options are determined when options are granted, all such employee options outstanding at September 30, 2013 were issued with a vesting date three years after issuance and an expiration date seven years after issuance.

The Company also has a nonqualified stock option plan for non-employee directors. This plan permits each director who is not otherwise an employee of the Company, or any subsidiary, to receive options to purchase 2,000 shares of the Company’s common stock on the day following his or her election as a director of the Company at each annual meeting of stockholders and up to 2,000 shares upon election or appointment for the first time as a director of the Company. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. These options are exercisable immediately and expire ten years after issuance.

All shares issued in connection with options exercised under both the employee and non-employee director stock option plans are in the form of newly issued shares.

The following table summarizes stock option activity for both the employee and non-employee director stock option plans for the nine months ended September 30, 2013.


	Options			Weighted-Average Exercise Price/ Share		Weighted-Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)⁽¹⁾
Outstanding – January 1, 2013		957,150		$	22.12
Granted		24,000			40.87
Exercised		(178,400	)		14.67
Forfeited		(38,700	)		25.71

Outstanding – September 30, 2013		764,050			24.27		5.0	$	18,084	⁽¹⁾

Fully vested and exercisable – September 30, 2013		165,700		$	19.36		4.5	$	4,734	⁽¹⁾

Expected to vest in future periods		487,385

Fully vested and expected to vest – September 30, 2013⁽²⁾		653,085		$	23.95		5.0	$	15,666	⁽¹⁾

(1)	Based on closing price of $47.94 per share on September 30, 2013.

(2)	At September 30, 2013 the Company estimates that outstanding options to purchase 110,965 shares of its common stock will not vest and will be forfeited prior to their vesting date.

Intrinsic value for stock options is defined as the amount by which the current market price of the underlying stock exceeds the exercise price. For those stock options where the exercise price exceeds the current market price of the underlying stock, the intrinsic value is zero. The total intrinsic value of options exercised during the nine months ended September 30, 2013 and 2012 was $4.7 million and $3.1 million, respectively.

Options to purchase 24,000 shares and 11,000 shares of the Company’s stock were issued during the nine months ended September 30, 2013 and 2012, respectively. Stock-based compensation expense for stock options included in non-interest expense was $0.4 million and $0.2 million for the quarters ended September 30, 2013 and 2012, respectively, and $1.3 million and $0.8 million for the nine months ended September 30, 2013 and 2012, respectively. Total unrecognized compensation cost related to non-vested stock option grants was $1.8 million at September 30, 2013 and is expected to be recognized over a weighted-average period of 1.8 years.

The Company has a restricted stock plan that permits issuance of up to 800,000 shares of restricted stock or restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock plan. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under the restricted stock plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. Shares of common stock issued under the restricted stock plan may be shares of original issuance, shares held in treasury or shares that have been reacquired by the Company. All restricted stock awards outstanding at September 30, 2013 were issued with a vesting date of three years after issuance.

The following table summarizes non-vested restricted stock activity for the period indicated.


	Nine Months Ended
	September 30, 2013
Outstanding – January 1, 2013		295,250
Granted		0
Forfeited		(5,800	)
Vested		0

Outstanding – September 30, 2013		289,450

Weighted-average grant date fair value	$	26.05

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in non-interest expense was $0.6 million and $0.3 million for the quarters ended September 30, 2013 and 2012, respectively, and $1.9 million and $1.0 million for the nine months ended September 30, 2013 and 2012, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $3.6 million at September 30, 2013 and is expected to be recognized over a weighted-average period of 1.8 years.

On November 4, 2013 the Company’s Personnel and Compensation Committee approved the issuance of (i) options to purchase 240,550 shares of the Company’s common stock and (ii) restricted stock awards for 109,800 shares of restricted stock. Total compensation expense for these option grants and restricted stock awards is expected to be approximately $7.6 million and is expected to be recognized ratably over the three-year vesting period.

11. Fair Value Measurements

The Company measures certain of its assets and liabilities on a fair value basis using various valuation techniques and assumptions, depending on the nature of the asset or liability. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, fair value is used either annually or on a non-recurring basis to evaluate certain assets and liabilities for impairment or for disclosure purposes.

The Company applies the following fair value hierarchy.

Level 1 –

Quoted prices for identical instruments in active markets.

Level 2 –

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.

Level 3 –

Instruments whose inputs are unobservable.

The following table sets forth the Company’s assets and liabilities for the dates indicated that are accounted for at fair value.


	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
September 30, 2013:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	412,770	$	18,798	$	431,568
U.S. Government agency securities		0		225,311		0		225,311
Corporate obligations		0		717		0		717

Total investment securities AFS		0		638,798		18,798		657,596
Impaired non-covered loans and leases		0		0		8,074		8,074
Impaired covered loans		0		0		52,575		52,575
Foreclosed assets not covered by FDIC loss share agreements		0		0		11,647		11,647
Foreclosed assets covered by FDIC loss share agreements		0		0		40,452		40,452

Total assets at fair value	$	0	$	638,798	$	131,546	$	770,344

December 31, 2012:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	332,107	$	29,410	$	361,517
U.S. Government agency securities		0		43,522		74,762		118,284
Corporate obligations		0		776		0		776

Total investment securities AFS		0		376,405		104,172		480,577
Impaired non-covered loans and leases		0		0		6,664		6,664
Impaired covered loans		0		0		38,463		38,463
Foreclosed assets not covered by FDIC loss share agreements		0		0		13,924		13,924
Foreclosed assets covered by FDIC loss share agreements		0		0		52,951		52,951

Total assets at fair value	$	0	$	376,405	$	216,174	$	592,579

September 30, 2012:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	326,396	$	23,142	$	349,538
U.S. Government agency securities		0		65,944		0		65,944
Corporate obligations		0		777		0		777

Total investment securities AFS		0		393,117		23,142		416,259
Impaired non-covered loans and leases		0		0		6,560		6,560
Impaired covered loans		0		0		30,787		30,787
Foreclosed assets not covered by FDIC loss share agreements		0		0		13,828		13,828
Foreclosed assets covered by FDIC loss share agreements		0		0		57,632		57,632

Total assets at fair value	$	0	$	393,117	$	131,949	$	525,066

(1)	Does not include $13.8 million at September 30, 2013; $13.7 million at December 31, 2012 and $13.7 million at September 30, 2012 of FHLB – Dallas and FNBB stock that do not have readily determinable fair values and are carried at cost.

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The following table presents information related to Level 3 non-recurring fair value measurements at September 30, 2013.


Description	Fair Values at September 30, 2013	Technique	Unobservable Inputs
(Dollars in thousands)
Impaired non-covered loans and leases	$ 8,074	Third party appraisal or discounted cash flows	1. Management discount based on underlying collateral characteristics and market conditions 2. Life of loan

Impaired covered loans	$52,575	Third party appraisal and/or discounted cash flows	1. Life of loan 2. Discount rate

Foreclosed assets not covered by FDIC loss share agreements	$11,647	Third party appraisals, broker price opinions and/or discounted cash flows	1. Management discount based on asset characteristics and market conditions 2. Discount rate 3. Holding period

Foreclosed assets covered by FDIC loss share agreements	$40,452	Third party appraisals and/or discounted cash flows	1. Discount rate 2. Holding period

The following methods and assumptions are used to estimate the fair value of the Company’s assets and liabilities that are accounted for at fair value.

Investment securities – The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes, comprehensive interest rate tables and pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. All fair value estimates of the Company’s investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

The Company has determined that certain of its investment securities had a limited to non-existent trading market at September 30, 2013. As a result, the Company considers these investments as Level 3 in the fair value hierarchy. Specifically, the fair values of certain obligations of state and political subdivisions consisting primarily of certain unrated private placement bonds (the “private placement bonds”) in the amount of $18.8 million at September 30, 2013 were calculated using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active”. This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades for the private placement bonds. The private placement bonds are generally prepayable at par value at the option of the issuer. As a result, management believes the private placement bonds should be individually valued at the lower of (i) the matrix pricing provided by the Company’s third party pricing services for comparable unrated municipal securities or (ii) par value. At September 30, 2013, the third parties’ pricing matrices valued the Company’s portfolio of private placement bonds at $18.8 million which was equal to the par value of the private placement bonds.

Impaired non-covered loans and leases – Fair values are measured on a nonrecurring basis and are based on the underlying collateral value of the impaired loan or lease, net of holding and selling costs, or the estimated discounted cash flows for such loan or lease. At September 30, 2013, the Company had reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $7.5 million to the estimated fair value of $8.1 million. The $7.5 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $6.2 million of partial charge-offs and $1.3 million of specific loan and lease loss allocations.

Impaired covered loans – Impaired covered loans are measured at fair value on a non-recurring basis. In determining such fair value, management considers a number of factors including, among other things, the remaining life of the loan, estimated collateral value, estimated holding period and net present value of cash flows expected to be received. As a result, impaired covered loans include both a non-accretable difference (the credit component of the impaired loan) and an accretable difference (the yield component of the impaired loan). The accretable difference is the difference between

the expected cash flows and the net present value of expected cash flows and is accreted into earnings using the effective yield method. In determining the net present value of expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per annum. As of September 30, 2013, the Company identified purchased loans covered by FDIC loss share agreements acquired in its FDIC-assisted acquisitions where the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $0.9 million and $1.7 million for such loans during the third quarter of 2013 and 2012, respectively, and $4.0 million and $5.2 million for such loans during the first nine months of 2013 and 2012, respectively. The Company also recorded provision for loan and lease losses of $0.9 million and $1.7 million during the third quarter of 2013 and 2012, respectively, and $4.0 million and $5.2 million for the first nine months of 2013 and 2012, respectively, to cover such charge-offs. As a result, the Company had $52.6 million and $31.0 million of impaired covered loans at September 30, 2013 and 2012, respectively.

Foreclosed assets not covered by FDIC loss share agreements – Repossessed personal properties and real estate acquired through or in lieu of foreclosure are measured on a non-recurring basis and are initially recorded at the lesser of current principal investment or fair value less estimated cost to sell (generally 8% to 10%) at the date of repossession or foreclosure. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of foreclosed and repossessed assets are generally based on third party appraisals, broker price opinions or other valuations of the property.

Foreclosed assets covered by FDIC loss share agreements – Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are measured on a non-recurring basis and recorded at estimated fair value on the date of acquisition. In estimating the fair value of covered foreclosed assets, management considers a number of factors including, among others, appraised value, estimated selling prices, estimated selling costs, estimated holding periods and net present value of cash flows expected to be received. A discount rate ranging from 8.0% to 9.5% per annum was used to determine the net present value of covered foreclosed assets. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted to the then estimated fair value net of estimated selling costs, if lower, until disposition.

The following table presents additional information for the periods indicated about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value.


	Investment Securities AFS
	(Dollars in thousands)
Balance – January 1, 2013	$	104,172
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		(1,940	)
Paydowns and maturities		(32,647	)
Transfers in and/or out of Level 3		(50,787	)

Balance – September 30, 2013	$	18,798

Balance – January 1, 2012	$	24,192
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		363
Paydowns and maturities		(1,063	)
Sales		(350	)
Transfers in and/or out of Level 3		0

Balance – September 30, 2012	$	23,142

The investment securities the Company acquired with the acquisition of Genala Banc, Inc. (“Genala”) on December 31, 2012 were comprised of U.S. Government agency securities and obligations of state and political subdivisions. Previously, unobservable discount factors were applied by management to approximately $51 million of these acquired U.S. Government agency securities with optional call dates that had elapsed or had a relatively short time until they elapsed as management had concluded such discount factors were necessary to appropriately value these individual securities. Due primarily to the increase in interest rates during the second and third quarter of 2013, and the fact that these securities with optional call dates are no longer “in the money” and are not likely to be called given current interest rates, such securities were individually valued utilizing the matrix pricing provided by the Company’s third party pricing service. Accordingly, the Company has classified these investment securities as Level 2 instruments in the fair value hierarchy.

12. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of financial instruments.

Cash and due from banks – For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities – The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes, comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. All fair value estimates of the Company’s investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer. The Company’s investments in the common stock of the FHLB – Dallas and FNBB totaling $13.8 million at September 30, 2013, $13.7 million at December 31, 2012 and $13.7 million at September 30, 2012 do not have readily determinable fair values and are carried at cost.

Loans and leases – The fair value of loans and leases net of allowance for loan and lease losses is estimated by discounting the contractual cash flows to be received in future periods using the current rate at which similar loans or leases would be made to borrowers or lessees with similar credit ratings and for the same remaining maturities.

FDIC loss share receivable – The fair value of the FDIC loss share receivable is based on the net present value of future cash proceeds expected to be received from the FDIC under the provisions of the loss share agreements using a discount rate that is based on current market rates.

Deposit liabilities – The fair value of demand deposits, savings accounts, money market deposits and other transaction accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity time deposits is estimated using the rate currently available for deposits of similar remaining maturities.

Repurchase agreements – For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Other borrowed funds – For these short-term instruments, the carrying amount is a reasonable estimate of fair value. The fair value of long-term instruments is estimated based on the current rates available to the Company for borrowings with similar terms and remaining maturities.

Clawback payable – The fair value of the FDIC clawback payable is based on the net present value of future cash payments expected to be remitted to the FDIC in accordance with the provisions of the loss share agreements using a discount rate that is based on current market rates.

Subordinated debentures – The fair values of these instruments are based primarily upon discounted cash flows using rates for securities with similar terms and remaining maturities.

Off-balance sheet instruments – The fair values of commercial loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, and were not material at September 30, 2013 and 2012 or at December 31, 2012.

The fair values of certain of these instruments were calculated by discounting expected cash flows, which contain numerous uncertainties and involve significant judgments by management. 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 represent values at which the respective financial instruments could be sold individually or in the aggregate.

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The following table presents the carrying amounts and estimated fair values for the dates indicated and the fair value hierarchy of the Company’s financial instruments.


		September 30,
		2013				2012				December 31, 2012
	Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		(Dollars in thousands)
Financial assets:
Cash and cash equivalents	Level 1	$	124,458	$	124,458	$	126,642	$	126,642	$	207,967	$	207,967
Investment securities AFS	Levels 2 and 3		671,393		671,393		429,935		429,935		494,266		494,266
Loans and leases, net of ALLL	Level 3		3,289,306		3,263,428		2,647,131		2,637,527		2,714,869		2,683,896
FDIC loss share receivable	Level 3		89,642		89,617		174,899		174,804		152,198		152,565
Financial liabilities:
Demand, savings and interest bearing transaction deposits	Level 1	$	2,677,030	$	2,677,030	$	2,114,375	$	2,114,375	$	2,320,206	$	2,320,206
Time deposits	Level 2		977,656		978,202		777,360		785,026		780,849		781,784
Repurchase agreements with customers	Level 1		50,254		50,254		32,511		32,511		29,550		29,550
Other borrowings	Level 2		280,905		322,171		280,771		331,784		280,763		328,881
FDIC clawback payable	Level 3		25,705		25,705		24,934		24,934		25,169		25,169
Subordinated debentures	Level 2		64,950		30,815		64,950		30,511		64,950		30,523

13. Changes In and Reclassifications From Accumulated Other Comprehensive Income (“AOCI”)

The following table presents changes in AOCI for the dates indicated.


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2012		2013			2012
	(Dollars in thousands)
Beginning balance of AOCI – unrealized gains and losses on investment securities AFS	$	(898	)	$	11,452	$	10,783		$	9,327
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications		445			1,508		(11,142	)		3,878
Amounts reclassified from AOCI		0			0		(94	)		(245	)

Total other comprehensive income (loss)		445			1,508		(11,236	)		3,633

Ending balance of AOCI – unrealized gains and losses on investment securities AFS	$	(453	)	$	12,960	$	(453	)	$	12,960

Amounts reclassified from AOCI to net gains on investment securities in the consolidated statements of income related entirely to unrealized gains/losses on investment securities AFS. For the three months ended September 30, 2013 and September 30, 2012, there were no amounts reclassified from AOCI. For the nine months ended September 30, 2013 and 2012 amounts reclassified for net gains on investment securities were $156,000 and $403,000, respectively, with related tax effects of $62,000 and $158,000, respectively.

14. Recent Accounting Pronouncements

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities present comprehensive income in their financial statements. The provisions of ASU 2011-05 require reporting the components of comprehensive income in either (i) a continuous statement of comprehensive income or (ii) two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income but

rather removes the presentation option of including other comprehensive income in the statement of stockholders’ equity. The presentation disclosures required by ASU 2011-05 were effective for interim and annual periods beginning after January 1, 2012. As this ASU amended only the presentation of comprehensive income, the adoption did not have an impact on the Company’s financial position, results of operations or liquidity.

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income,” that requires disclosure, either in a single footnote or parenthetically on the face of the financial statements, of the effect of significant items reclassified from accumulated other comprehensive income to their respective line items in the statement of net income. The effective date of this ASU 2013-02 was for reporting periods beginning January 1, 2013. The adoption of these provisions did not have a material impact on the Company’s financial position, results of operations or liquidity, but did increase the Company’s disclosures regarding amounts reclassified out of accumulated comprehensive income.

In July 2012, the FASB issued ASU No. 2012-02 “Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment” that amends the guidance related to testing indefinite-lived intangible assets, other than goodwill, for impairment. The provisions of ASU 2012-02 allow for a qualitative assessment in testing an indefinite-lived intangible asset for impairment before calculating the fair value of the asset. If the qualitative assessment determines that it is more likely than not that the asset is impaired, then a quantitative assessment of the fair value of the asset is required; otherwise, the quantitative calculation is not necessary. The provisions of ASU 2012-02 were effective January 1, 2013 and did not have a material impact on the Company’s financial position, results of operations, or liquidity.

In October 2012, the FASB issued ASU No. 2012-06 “Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution,” to address diversity in practice about how to subsequently measure an indemnification asset for a government-assisted acquisition that includes a loss-sharing agreement. Specifically, this standard update requires a reporting entity to account for a change in the subsequent measurement of the indemnification asset on the same basis as the changes in the asset subject to indemnification. As a result, for any change in expected cash flows of an indemnified asset that is immediately recognized in earnings, the associated change in the indemnification asset is immediately recognized in earnings. For any change in expected cash flows of an indemnified asset that is amortized or accreted into earnings over time, the associated change in the indemnification asset is accreted or amortized into earnings over the shorter of the contractual term of the indemnification agreement or the remaining life of the indemnified asset. The provisions of ASU 2012-06 are being applied prospectively beginning January 1, 2013. The adoption of these provisions did not have a material change on the accounting for the Company’s loss share receivable from the FDIC under its current loss share agreements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Bank of the Ozarks, Inc. (the “Company”) is a bank holding company whose primary business is commercial banking conducted through its wholly-owned state chartered bank subsidiary – Bank of the Ozarks (the “Bank”). The Company’s results of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans, leases, purchased loans not covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements (“purchased non-covered loans”), loans covered by FDIC loss share agreements (“covered loans”) and investments, and the interest expense incurred on interest bearing liabilities, such as deposits, borrowings and subordinated debentures. The Company also generates non-interest income, including service charges on deposit accounts, mortgage lending income, trust income, bank owned life insurance (“BOLI”) income, accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable, other income from loss share and purchased non-covered loans, and gains on investment securities and from sales of other assets.

The Company’s non-interest expense consists primarily of employee compensation and benefits, net occupancy and equipment expense and other operating expenses. The Company’s results of operations are significantly affected by its provision for loan and lease losses and its provision for income taxes. This management’s discussion and analysis of financial condition and results of operations provides a summary of the Company’s operations for the third quarter and first nine months of 2013 and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. The Company’s determination of (i) the provision to and the adequacy of the allowance for loan and lease losses (“ALLL”), (ii) the fair value of its investment securities portfolio, (iii) the fair value of foreclosed assets not covered by FDIC loss share agreements and (iv) the fair value of the assets acquired and liabilities assumed pursuant to business combination transactions all involve a higher degree of judgment and complexity than its other significant accounting policies. Accordingly, the Company considers the determination of (i) provision to and the adequacy of the ALLL, (ii) the fair value of its investment securities portfolio, (iii) the fair value of foreclosed assets not covered by FDIC loss share agreements and (iv) the fair value of the assets acquired and liabilities assumed pursuant to business combination transactions to be critical accounting policies.

Provision to and adequacy of the allowance for loan and lease losses. The ALLL is established through a provision for loan and lease losses charged against income. All or portions of loans or leases deemed to be uncollectible are charged against the ALLL when management believes that collectability of all or some portion of outstanding principal is unlikely. Subsequent recoveries, if any, of loans or leases previously charged off are credited to the ALLL.

The ALLL is maintained at a level management believes will be adequate to absorb probable incurred losses in the loan and lease portfolio. Provision to and the adequacy of the ALLL are based on evaluations of the loan and lease portfolio utilizing objective and subjective criteria. The objective criteria primarily include an internal grading system and specific allowances. In addition to these objective criteria, the Company subjectively assesses the adequacy of the ALLL and the need for additions thereto, with consideration given to the nature and mix of the portfolio, including concentrations of credit; general economic and business conditions, including national, regional and local business and economic conditions that may affect borrowers’ or lessees’ ability to pay; expectations regarding the current business cycle; trends that could affect collateral values and other relevant factors. The Company also utilizes a peer group analysis and a historical analysis to validate the overall adequacy of its ALLL. Changes in any of these criteria or the availability of new information could require adjustment of the ALLL in future periods. While a specific allowance has been calculated for impaired loans and leases and for loans and leases where the Company has otherwise determined a specific reserve is appropriate, no portion of the Company’s ALLL is restricted to any individual loan or lease or group of loans or leases, and the entire ALLL is available to absorb losses from any and all loans and leases.

The Company’s internal grading system assigns one of nine grades to all loans and leases except residential 1-4 family loans, consumer loans, purchased non-covered loans, covered loans, and certain other loans, with each grade being assigned a specific allowance allocation percentage.

The grade for each graded individual loan or lease is determined by the account officer and other approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing assessment of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by senior management and as part of the Company’s internal loan review process. The risk elements considered by management in its determination of the appropriate grade for individual loans and leases include the following, among others: (1) for non-farm/non-residential, multifamily residential, and

agricultural real estate loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan repayment requirements), operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age, condition, value, nature and marketability of the collateral and the specific risks and volatility of income, property value and operating results typical of properties of that type; (2) for construction and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or ability to lease property constructed for lease, the quality and nature of contracts for presale or preleasing, if any, experience and ability of the developer and loan-to-cost and loan-to-value ratios; (3) for commercial and industrial loans and leases, the operating results of the commercial, industrial or professional enterprise, the borrower’s or lessee’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in the applicable industry and the age, condition, value, nature and marketability of collateral; and (4) for non-real estate agricultural loans and leases, the operating results, experience and ability of the borrower or lessee, historical and expected market conditions and the age, condition, value, nature and marketability of collateral. In addition, for each category the Company considers secondary sources of income and the financial strength of the borrower or lessee and any guarantors.

Residential 1-4 family, consumer loans and certain other loans, are assigned an allowance allocation percentage based on past due status.

Allowance allocation percentages for the various risk grades and past due categories for residential 1-4 family, consumer loans and certain other loans are determined by management and are adjusted periodically. In determining these allowance allocation percentages, management considers, among other factors, historical loss percentages and a variety of subjective criteria in determining the allowance allocation percentages.

As provided for under GAAP, management has up to 12 months following the date of a business combination transaction to finalize the fair values of acquired assets and assumed liabilities. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the day 1 fair values (“Day 1 Fair Values”).

For purchased non-covered loans, management segregates this portfolio into loans that contain evidence of credit deterioration on the date of purchase and loans that do not contain evidence of credit deterioration on the date of purchase. Purchased non-covered loans with evidence of credit deterioration are regularly monitored and are periodically reviewed by management. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is considered in the determination of the required level of ALLL. To the extent that a revised loss estimate exceeds the loss estimate established in the determination of Day 1 Fair Values, such determination will result in an allowance allocation or a charge-off.

All other purchased non-covered loans are graded by management at the time of purchase. The grades on these purchased non-covered loans are reviewed regularly as part of the ongoing assessment of such loans. To the extent that current information indicates it is possible that the Company will not be able to collect all amounts according to the contractual terms thereof, such loan is considered in the determination of the required level of ALLL and may result in an allowance allocation or a charge-off.

At September 30, 2013 and 2012 and at December 31, 2012, the Company had no allowance for its purchased non-covered loans and its covered loans because all losses had been charged off on such loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

The Company generally places a loan or lease, excluding purchased non-covered loans with evidence of credit deterioration on the date of purchase and covered loans, on nonaccrual status when such loan or lease is (i) deemed impaired or (ii) 90 days or more past due, or earlier when doubt exists as to the ultimate collection of payments. The Company may continue to accrue interest on certain loans or leases contractually past due 90 days or more if such loans or leases are both well secured and in the process of collection. At the time a loan or lease is placed on nonaccrual status, interest previously accrued but uncollected is generally reversed and charged against interest income. Nonaccrual loans and leases are generally returned to accrual status when payments are less than 90 days past due and the Company reasonably expects to collect all payments. If a loan or lease is determined to be uncollectible, the portion of the principal determined to be uncollectible is charged against the ALLL. Any loan for which the terms have been modified and for which (i) the borrower is experiencing

financial difficulties and (ii) a concession has been granted to the borrower by the Company is considered a troubled debt restructuring (“TDR”) and is included in impaired loans and leases. Income on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs which continue to accrue interest, is recognized on a cash basis when and if actually collected.

All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan or lease, excluding purchased non-covered loans and covered loans, to be impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms thereof. The Company considers a purchased non-covered loan with evidence of credit deterioration at the date of purchase and a covered loan to be impaired once a decrease in expected cash flows or other deterioration in the loan’s expected performance, subsequent to the determination of the Day 1 Fair Values, results in an allowance allocation, a partial or full charge-off or in a provision for loan and lease losses. Purchased non-covered loans without evidence of credit deterioration at the date of purchase are considered impaired when current information indicates it is probable that the Company will not be able to collect all amounts due according to the contractual terms thereof. Most of the Company’s nonaccrual loans and leases, excluding purchased non-covered loans and covered loans, and all TDRs are considered impaired. The majority of the Company’s impaired loans and leases are dependent upon collateral for repayment. For such loans and leases, impairment is measured by comparing collateral value, net of holding and selling costs, to the current investment in the loan or lease. For all other impaired loans and leases, the Company compares estimated discounted cash flows to the current investment in the loan or lease. To the extent that the Company’s current investment in a particular loan or lease exceeds its estimated net collateral value or its estimated discounted cash flows, the impaired amount is specifically considered in the determination of the ALLL or is charged off as a reduction of the ALLL.

The Company also maintains an ALLL for certain loans and leases, excluding purchased non-covered loans and covered loans, not considered impaired where (i) the customer is continuing to make regular payments, although payments may be past due, (ii) there is a reasonable basis to believe the customer may continue to make regular payments, although there may also be an elevated risk that the customer may default, and (iii) the collateral or other repayment sources are likely to be insufficient to recover the current investment in the loan or lease if a default occurs. The Company individually evaluates such loans and leases to determine if an ALLL is needed for these loans and leases. For the purpose of calculating the amount of such ALLL, management typically assumes that (i) no further regular payments occur and (ii) all sums recovered will come from liquidation of collateral and collection efforts from other payment sources. To the extent that the Company’s current investment in a particular loan or lease evaluated for such an ALLL exceeds its net collateral value or its estimated discounted cash flows, such excess is considered allocated ALLL for purposes of the determination of the ALLL.

The Company may also include further allowance allocation for risk-rated loans, including commercial real estate loans and excluding purchased non-covered loans and covered loans, that are in markets determined by management to be “stressed”. Stressed markets may include any specific geography experiencing (i) high unemployment substantially above the U.S. average, (ii) significant over-development in one or more commercial real estate categories, (iii) recent or announced loss of a major employer or significant workforce reductions, (iv) significant declines in real estate values and (v) various other factors. The additional ALLL for such stressed markets compensates for the expectation that a higher risk of loss is anticipated for the “work-out” or liquidation of a real estate loan in a stressed market versus a market that is not experiencing any significant levels of stress. The required allocation percentage applicable to real estate loans in stressed markets may be applied to the total market or it may be determined at the individual loan level based on collateral value, loan-to-value or loan-to-cost ratios, strength of the borrower and/or guarantor, viability of the underlying project and other factors. The Company had no allowance allocation for loans in stressed markets at September 30, 2013 and 2012 or December 31, 2012.

The Company also includes specific ALLL allocations for qualitative factors including, among other factors, (i) concentrations of credit, (ii) general economic and business conditions, (iii) trends that could affect collateral values and (iv) expectations regarding the current business cycle. The Company may also consider other qualitative factors in future periods for additional ALLL allocations, including, among other factors, (1) credit quality trends (including trends in nonperforming loans and leases expected to result from existing conditions), (2) seasoning of the loan and lease portfolio, (3) specific industry conditions affecting portfolio segments, (4) the Company’s expansion into new markets and (5) the offering of new loan and lease products.

Changes in the criteria used in this evaluation or the availability of new information could cause the ALLL to be increased or decreased in future periods. In addition bank regulatory agencies, as part of their examination process, may require adjustments to the ALLL based on their judgment and estimates.

Fair value of the investment securities portfolio. The Company has classified all of its investment securities as available for sale (“AFS”). Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income taxes, reported as a separate component of stockholders’ equity and any related changes are included in accumulated other comprehensive income.

The Company utilizes independent third parties as its principal sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, the fair values are obtained from independent pricing services and are based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes, comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. Additionally, the valuation of investment securities acquired in FDIC-assisted or traditional acquisitions may include certain unobservable inputs. All fair value estimates of the Company’s investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

The fair values of the Company’s investment securities traded in both active and inactive markets can be volatile and may be influenced by a number of factors including market interest rates, prepayment speeds, discount rates, credit quality of the issuer, general market conditions including market liquidity conditions and other factors. Factors and conditions are constantly changing and fair values could be subject to material variations from period to period that may significantly impact the Company’s financial condition, results of operations and liquidity.

Fair value of foreclosed assets not covered by FDIC loss share agreements. Repossessed personal properties and real estate acquired through or in lieu of foreclosure are initially recorded at the lesser of current principal investment or fair value less estimated cost to sell at the date of repossession or foreclosure. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest expense to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of these assets are generally based on third party appraisals, broker price opinions or other valuations of the property.

Fair value of assets acquired and liabilities assumed pursuant to business combination transactions. Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. Loans covered by FDIC loss share agreements, or covered loans, are accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated credit quality and pursuant to the American Institutes of Certified Public Accountants’ (“AICPA”) December 18, 2009 letter in which the AICPA summarized the Securities and Exchange Commission’s (“SEC”) view regarding the accounting in subsequent periods for discount accretion associated with non-credit impaired loans acquired in a business combination or asset purchase. Considering, among other factors, the general lack of adequate underwriting, proper documentation, appropriate loan structure and insufficient equity contributions for a large number of these acquired loans, and the uncertainty of the borrowers’ and/or guarantors’ ability or willingness to make contractually required (or any) principal and interest payments, management has determined that a significant portion of the loans acquired in FDIC-assisted acquisitions had evidence of credit deterioration since origination. Accordingly, management has elected to apply the provisions of GAAP applicable to loans acquired with deteriorated credit quality as provided by the AICPA’s December 18, 2009 letter, to all loans acquired in its FDIC-assisted acquisitions.

At the time such covered loans are acquired, management individually evaluates substantially all loans acquired in the transaction. This evaluation allows management to determine the estimated fair value of the covered loans (not considering any FDIC loss sharing agreements) and includes no carryover of any previously recorded ALLL. In determining the estimated fair value of covered loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received. To the extent that any covered loan is not specifically reviewed, management applies a loss estimate to that loan based on the average expected loss rates for the purchased loans that were individually reviewed in that covered loan portfolio.

In determining the Day 1 Fair Values of covered loans, management calculates a non-accretable difference (the credit component of the covered loans) and an accretable difference (the yield component of the covered loans). The non-accretable difference is the difference between the contractually required payments and the cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent increases in expected cash flows will generally result in an adjustment to accretable yield, which will have a positive impact on interest income. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in cash flows following any previous decrease will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which will have a positive impact on interest income. Any increase or decrease in expected cash flows will result in a corresponding adjustment of the FDIC loss share receivable or the accretion thereof for the portion of such reduced or additional loss expected to be collected from the FDIC.

The accretable difference on covered loans is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. In determining the net present value of the expected cash flows for purposes of establishing the Day 1 Fair Values, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan. At September 30, 2013, the weighted average period during which management expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment under the FDIC loss share agreements) is 2.4 years.

Management separately monitors the covered loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is typically reviewed (i) when it is modified or extended, (ii) when material information becomes available to the Company that provides additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows which include a substantial portion of each acquired covered loan portfolio. Management separately reviews the performance of the portfolio of covered loans on an annual basis, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’ performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values or since management’s most recent review of such portfolio’s performance. To the extent that a loan is performing in accordance with or exceeding management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is not included in any of the Company’s credit quality ratios, is not considered to be an impaired loan, and is not considered in the determination of the required ALLL. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is included in certain of the Company’s credit quality metrics, is considered an impaired loan, and is considered in the determination of the required level of ALLL. Any improvement in the expected performance of a covered loan would result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

At the time of acquisition of purchased non-covered loans, management individually evaluates substantially all loans acquired in the transaction. For those purchased loans without evidence of credit deterioration, management evaluates each reviewed loan using an internal grading system with a grade assigned to each loan at the date of acquisition. To the extent that any purchased non-covered loan is not specifically reviewed, such loan is assumed to have characteristics similar to the characteristics of the aggregate acquired portfolio. The grade for each purchased non-covered loan is reviewed subsequent to the date of acquisition any time a loan is renewed or extended or at any time information becomes available to the Company that provides material insight regarding the loan’s performance, the borrower or the underlying collateral. To the extent that a loan is performing in accordance with management’s initial expectations, such loan is not considered impaired and is not considered in the determination of the required ALLL. To the extent that current information indicates it is possible that the Company will not be able to collect all amounts according to the contractual terms thereof, such loan is considered impaired and is considered in the determination of the required level of ALLL.

In determining the Day 1 Fair Values of purchased non-covered loans without evidence of credit deterioration at the date of acquisition, management includes (i) no carry over of any previously recorded ALLL and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk profile and grade assigned to each loan. This adjustment will be accreted into earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.

Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated credit quality. At the time such purchased non-covered loans with evidence of credit deterioration are acquired, management individually evaluates each loan to determine the estimated fair value of each loan. This evaluation includes no carryover of any previously recorded ALLL. In determining the estimated fair value of purchased non-covered loans with evidence of credit deterioration, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received.

In determining the Day 1 Fair Values of purchased non-covered loans with evidence of credit deterioration, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans). The non-accretable difference is the difference between the contractually required payments and the cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in cash flows will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

The accretable difference on purchased non-covered loans with evidence of credit deterioration is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. In determining the net present value of the expected cash flows for purposes of establishing the Day 1 Fair Values, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan.

Management separately monitors purchased non-covered loans with evidence of credit deterioration on the date of purchase and periodically reviews such loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed or extended, (ii) at any other time additional information becomes available to the Company that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio. Management separately reviews the performance of the portfolio of purchased non-covered loans with evidence of credit deterioration on an annual basis, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’ performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values or since management’s most recent review of such portfolio’s performance. To the extent that a loan is performing in accordance with or exceeding management’s performance expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is not included in any of the credit quality ratios, is not considered to be a nonaccrual or impaired loan, and is not considered in the determination of the required ALLL. Additionally, for any loan that is exceeding management’s performance expectation established in conjunction with the determination of Day 1 Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance, which has a positive impact on interest income. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is included in certain of the Company’s credit quality metrics, is considered an impaired loan, and is considered in the determination of the required level of ALLL. Any improvement in the expected performance of such loan would result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are initially recorded at Day 1 Fair Values. In estimating the Day 1 Fair Values of covered foreclosed assets, management considers a number of factors including, among others, appraised value, estimated selling prices, estimated selling costs, estimated holding periods and net present value of cash flows expected to be received. Discount rates ranging from 8.0% to 9.5% per annum were used to determine the net present value of covered foreclosed assets for purposes of establishing the Day 1 Fair Values. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest income to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of these assets are generally based on third party appraisals, broker price opinions or other valuations of the property.

In connection with the Company’s FDIC-assisted acquisitions, the Company has recorded an FDIC loss share receivable to reflect the indemnification provided by the FDIC. Currently, the expected losses on covered assets for each of the Company’s loss share agreements would result in expected recovery of approximately 80% of incurred losses. Since the indemnified items are covered loans and covered foreclosed assets, which are measured at Day 1 Fair Values, the FDIC loss share receivable is also measured and recorded at Day 1 Fair Values, and is calculated by discounting the cash flows expected to be received from the FDIC. An initial discount rate of 5.0% per annum was used to determine the net present value of the FDIC loss share receivable for purposes of establishing the Day 1 Fair Values. These cash flows are estimated by multiplying estimated losses by the reimbursement rates as set forth in the loss share agreements. The balance of the FDIC loss share receivable and the accretion thereof are adjusted periodically to reflect changes in expectations of discounted cash flows, expense reimbursements under the loss share agreements and other factors. The Company is accreting the present value discount on its FDIC loss share receivable over the shorter of (i) the contractual term of the indemnification agreement (ten years for the single family loss share agreement, and five years for the non-single family loss share agreements) or (ii) the remaining life of the indemnified asset.

Pursuant to the clawback provisions of the loss share agreements for the Company’s FDIC-assisted acquisitions, the Company may be required to reimburse the FDIC should actual losses be less than certain thresholds established in each loss share agreement. The amount of the clawback provision for each acquisition is measured and recorded at Day 1 Fair Values. It is calculated as the difference between management’s estimated losses on covered loans and covered foreclosed assets and the loss threshold contained in each loss share agreement, multiplied by the applicable clawback provisions contained in each loss share agreement. This clawback amount, which is payable to the FDIC upon termination of the applicable loss share agreement, is then discounted back to net present value, generally over 10 years, using a discount rate of 5.0% per annum. To the extent that actual losses on covered loans and covered foreclosed assets are less than estimated losses, the applicable clawback payable to the FDIC upon termination of the loss share agreements will increase. To the extent that actual losses on covered loans and covered foreclosed assets are more than estimated losses, the applicable clawback payable to the FDIC upon termination of the loss share agreements will decrease. The balance of the FDIC clawback payable and the amortization thereof are adjusted periodically to reflect changes in expected losses on covered assets and the impact of such changes on the clawback payable and other factors.

The Day 1 Fair Values of investment securities acquired in business combinations are generally based on quoted market prices, broker quotes, comprehensive interest rate tables, pricing matrices, or a combination thereof. Additionally, these valuations may include certain unobservable inputs. The Day 1 Fair Values of other assets acquired in business combinations are generally based on third party appraisals and other valuations of the assets. The Day 1 Fair Values of assumed liabilities in business combinations are generally the amount payable by the Company necessary to completely satisfy the assumed obligations.

ANALYSIS OF RESULTS OF OPERATIONS

The following discussion explains the Company’s financial position and results of operations as of and for the three months and nine months ended September 30, 2013 and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report. Annualized results for these interim periods may not be indicative of results for the full year or future periods

General

Net income available to common stockholders for the Company was $22.4 million for the third quarter of 2013, a 16.0% increase from $19.3 million for the third quarter of 2012. Diluted earnings per common share were $0.61 for the third quarter of 2013, a 10.9% increase from $0.55 for the third quarter of 2012. For the first nine months of 2013, net income available to common stockholders totaled $62.7 million, an 11.3% increase from $56.4 million the first nine months of 2012. Diluted earnings per common share for the first nine months of 2013 were $1.74, a 7.4% increase from $1.62 for the first nine months of 2012.

The Company’s annualized return on average assets was 1.99% for the third quarter of 2013 compared to 2.05% for the third quarter of 2012. Its annualized return on average common stockholders’ equity was 15.40% for the third quarter of 2013 compared to 16.40% for the third quarter of 2012. The Company’s annualized return on average assets was 2.05% for the first nine months of 2013 compared to 2.00% for the first nine months of 2012. Its annualized return on average common stockholders’ equity was 15.55% for the first nine months of 2013 compared to 16.73% for the first nine months of 2012.

Total assets were $4.71 billion at September 30, 2013 compared to $4.04 billion at December 31, 2012. Loans and leases, excluding purchased non-covered loans and covered loans, were $2.52 billion at September 30, 2013 compared to $2.12 billion at December 31, 2012. Total loans and leases, including purchased non-covered loans and covered loans, were $3.33 billion at September 30, 2013 compared to $2.75 billion at December 31, 2012. Deposits were $3.65 billion at September 30, 2013 compared to $3.10 billion at December 31, 2012.

Common stockholders’ equity was $608 million at September 30, 2013 compared to $508 million at December 31, 2012. Book value per common share was $16.57 at September 30, 2013 compared to $14.39 at December 31, 2012. Tangible book value per common share was $16.03 at September 30, 2013 compared to $14.06 at December 31, 2012. Changes in common stockholders’ equity, book value per common share and tangible book value per common share reflect earnings, dividends paid, stock option and stock grant transactions, changes in unrealized gains and losses on investment securities AFS, and, for tangible book value per common share, changes in intangible assets.

Effective July 31, 2013, the Company completed its acquisition of The First National Bank of Shelby (“First National Bank”). A summary of the assets acquired and liabilities assumed in this acquisition is included in Note 3 to the consolidated financial statements. Because the acquisition was effective on July 31, 2013, the Company’s consolidated results of operations include only two months of the acquired operations of First National Bank.

Net Interest Income

Net interest income is analyzed in this discussion and the following tables on a fully taxable equivalent (“FTE”) basis. The adjustment to convert certain income to a FTE basis consists of dividing federal tax-exempt income by one minus the Company’s statutory federal income tax rate of 35%. The FTE adjustments to net interest income were $2.2 million and $2.1 million for the quarters ended September 30, 2013 and 2012, respectively, and $6.3 million and $6.5 million for the nine months ended September 30, 2013 and 2012, respectively. No adjustments have been made in this analysis for income exempt from state income taxes or for interest expense deductions disallowed under the provisions of the Internal Revenue Code as a result of investment in certain tax-exempt securities.

Net interest income for the third quarter of 2013 increased 13.5% to $52.8 million compared to $46.6 million for the third quarter of 2012. Net interest income for the nine months ended September 30, 2013 increased 5.4% to $144.5 million compared to $137.1 million for the nine months ended September 30, 2012. Net interest margin was 5.55% for the third quarter and 5.63% for the first nine months of 2013 compared to 5.97% for the third quarter and 5.93% for the first nine months of 2012. The increase in net interest income for the third quarter and first nine months of 2013 compared to the same periods in 2012 was primarily due to the increase in average earning assets, which increased to $3.78 billion for the third quarter and $3.43 billion for the first nine months of 2013, compared to $3.10 billion and $3.09 billion for the comparable periods in 2012 and the increase in the ratio of average earning assets to average interest bearing liabilities for the third quarter and first nine months of 2013 compared to the same periods in 2012, partially offset by the decrease in net interest margin.

The Company’s net interest margin decreased 42 basis points (“bps”) to 5.55% for the third quarter of 2013 compared to 5.97% for the same period in 2012. This decrease was primarily due to a 58 bps decrease in yields on average earning assets, partially offset by a 14 bps reduction in rates paid on interest bearing liabilities. The Company’s net interest margin decreased 30 bps to 5.63% for the first nine months of 2013 compared to 5.93% for the same period in 2012. This decrease was primarily due to a 48 bps decrease in the yield on average earning assets, partially offset by a 17 bps reduction in the rates paid on interest bearing liabilities.

Yields on earning assets decreased 58 bps to 6.04% for the third quarter of 2013 and decreased 48 bps to 6.17% for the first nine months of 2013 compared to 6.62% for the third quarter of 2012 and 6.65% for the first nine months of 2012. The yield on the Company’s portfolio of loans and leases, excluding purchased non-covered loans and covered loans, decreased 50 bps for the third quarter and 37 bps for the first nine months of 2013 compared to the same periods in 2012. The decrease in yield on the Company’s loan and lease portfolio was primarily attributable to the extremely low interest rate environment experienced in recent years and increased pricing competition from many of the Company’s competitors. Additionally, the yield on the Company’s aggregate investment securities portfolio decreased 102 bps for the third quarter and 89 bps for the first nine months of 2013 compared to the same periods in 2012 primarily as a result of changes in the composition of the Company’s investment securities portfolio between taxable and tax-exempt investment securities. These decreases were partially offset by the 54 bps increase in the yield on covered loans for the third quarter of 2013 compared to the same period in 2012 and the 49 bps increase in yield on covered loans for the first nine months of 2013 compared to the same period in 2012. The increase in yields on covered loans was primarily due to increases of expected cash flows on a number of covered loans. The Company’s yield on earning assets was also impacted by the addition of purchased non-covered loans from the acquisition of First National Bank.

The decline in rates on average interest bearing liabilities was primarily due to the declines in rates on interest bearing deposits, the largest component of the Company’s interest bearing liabilities. Rates on interest bearing deposits decreased 10 bps for the third quarter and 16 bps for the first nine months of 2013 compared to the same periods in 2012. This decrease in the rate on interest bearing deposits was principally due to effectively managing the repricing of both time deposits and savings and interest bearing transaction deposits which resulted in lower rates paid on deposits as they were renewed or otherwise repriced. During the third quarter of 2013, the Company increased deposit pricing in several target markets to fund growth in loans and leases. To the extent the Company continues to increase deposit pricing in additional markets to fund future growth in assets, if any, such increased deposit pricing is expected to result in increased deposit costs in future periods.

The Company’s other borrowing sources include (i) repurchase agreements with customers (“repos”), (ii) other borrowings comprised primarily of federal funds purchased and Federal Home Loan Bank of Dallas (“FHLB – Dallas”) advances, and (iii) subordinated debentures. The rates on repos decreased two bps for the third quarter and seven bps for the first nine months of 2013 compared to the same periods of 2012. The rate on the Company’s other borrowings, which consist primarily of fixed rate callable FHLB – Dallas advances, increased four bps in the third quarter and increased six bps for the first nine months of 2013 compared to the same periods of 2012. The rates paid on the Company’s subordinated debentures, which are tied to a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically, decreased 21 bps in the third quarter and 23 bps for the first nine months of 2013 compared to the same periods of 2012.

The increase in average earning assets for the third quarter of 2013 compared to the third quarter of 2012 was due to increases in the average balances of loans and leases of $459 million and, primarily as a result of the acquisition of First National Bank, an increase in average balances of purchased non-covered loans of $281 million and an increase in average balances of investment securities of $181 million. These increases were partially offset by a decrease in the average balance of covered loans and leases of $244 million. The increase in average earning assets for the first nine months of 2013 compared to the first nine months of 2012 was primarily due to increases in average balance of loans and leases of $347 million and, primarily as a result of the acquisition of First National Bank, an increase in average balances of purchased non-covered loans of $117 million and an increase in average balances of investment securities of $103 million. These increases were partially offset by a $224 million decrease in the average balance of covered loans.

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Average Consolidated Balance Sheets and Net Interest Analysis – FTE


	Three Months Ended September 30,														Nine Months Ended September 30,
	2013							2012							2013							2012
	Average		Income/		Yield/			Average		Income/		Yield/			Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate			Balance		Expense		Rate			Balance		Expense		Rate
	(Dollars in thousands)
ASSETS
Earning assets:
Interest earning deposits and federal funds sold	$	1,223	$	11		3.63	%	$	1,226	$	2		0.61	%	$	1,135	$	21		2.47	%	$	1,138	$	5		0.59	%
Investment securities:
Taxable		235,216		1,988		3.35			85,845		757		3.51			176,793		4,456		3.37			84,732		2,177		3.43
Tax-exempt – FTE		357,438		6,163		6.84			325,756		5,945		7.26			348,054		17,844		6.85			337,591		18,589		7.36
Loans and leases – FTE		2,459,427		33,187		5.35			2,000,594		29,437		5.85			2,276,801		93,794		5.51			1,929,490		85,006		5.88
Purchased non-covered loans		283,364		5,653		7.92			2,419		55		9.05			120,339		7,366		8.18			3,218		211		8.76
Covered loans		438,913		10,501		9.49			682,506		15,347		8.95			507,708		34,845		9.18			731,658		47,710		8.69

Total earning assets – FTE		3,775,581		57,503		6.04			3,098,346		51,543		6.62			3,430,830		158,326		6.17			3,087,827		153,698		6.65
Non-interest earning assets		672,447							640,824							667,161							680,379

Total assets	$	4,448,028						$	3,739,170						$	4,097,991						$	3,768,206

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest bearing transaction	$	1,843,060	$	913		0.20	%	$	1,559,520	$	1,002		0.26	%	$	1,721,794	$	2,583		0.20	%	$	1,561,417	$	3,517		0.30	%
Time deposits of $100,000 or more		430,586		296		0.27			332,122		377		0.45			365,846		828		0.30			358,956		1,539		0.57
Other time deposits		465,759		328		0.28			422,632		533		0.50			432,436		1,046		0.32			457,445		2,082		0.61

Total interest bearing deposits		2,739,405		1,537		0.22			2,314,274		1,912		0.33			2,520,076		4,457		0.24			2,377,818		7,138		0.40
Repurchase agreements with customers		41,879		7		0.07			32,288		7		0.09			35,244		21		0.08			35,626		40		0.15
Other borrowings		308,875		2,732		3.51			301,673		2,628		3.47			292,221		8,064		3.69			295,342		8,020		3.63
Subordinated debentures		64,950		433		2.64			64,950		465		2.85			64,950		1,290		2.65			64,950		1,398		2.88

Total interest bearing liabilities		3,155,109		4,709		0.59			2,713,185		5,012		0.73			2,912,491		13,832		0.63			2,773,736		16,596		0.80
Non-interest bearing liabilities:
Non-interest bearing deposits		673,215							498,529							601,146							480,593
Other non-interest bearing liabilities		40,589							56,588							41,431							60,411

Total liabilities		3,868,913							3,268,302							3,555,068							3,314,740
Common stockholders’ equity		575,647							467,449							539,470							450,044
Noncontrolling interest		3,468							3,419							3,453							3,422

Total liabilities and stockholders’ equity	$	4,448,028						$	3,739,170						$	4,097,991						$	3,768,206

Net interest income – FTE			$	52,794						$	46,531						$	144,494						$	137,102

Net interest margin – FTE						5.55	%						5.97	%						5.63	%						5.93	%

The following table reflects how changes in the volume of interest earning assets and interest bearing liabilities and changes in interest rates have affected the Company’s interest income, interest expense and net interest income for the periods indicated. Information is provided in each category with respect to changes attributable to (1) changes in volume (changes in volume multiplied by prior yield/rate); (2) changes in yield/rate (changes in yield/rate multiplied by prior volume); and (3) changes in both yield/rate and volume (changes in yield/rate multiplied by changes in volume). The changes attributable to the combined impact of volume and yield/rate have all been allocated to the changes due to volume.

Analysis of Changes in Net Interest Income – FTE


	Three Months Ended September 30, 2013 Over Three Months Ended September 30, 2012									Nine Months Ended September 30, 2013 Over Nine Months Ended September 30, 2012
				Yield/			Net						Yield/			Net
	Volume			Rate			Change			Volume			Rate			Change
	(Dollars on thousands)
Increase (decrease) in:
Interest income – FTE:
Interest earning deposits and federal funds sold	$	—		$	9		$	9		$	—		$	16		$	16
Investment securities:
Taxable		1,262			(31	)		1,231			2,320			(41	)		2,279
Tax-exempt – FTE		546			(328	)		218			536			(1,281	)		(745	)
Loans and leases – FTE		6,191			(2,441	)		3,750			14,308			(5,520	)		8,788
Purchased non-covered loans		5,605			(7	)		5,598			7,169			(14	)		7,155
Covered loans		(5,828	)		982			(4,846	)		(15,370	)		2,505			(12,865	)

Total interest income – FTE		7,776			(1,816	)		5,960			8,963			(4,335	)		4,628

Interest expense:
Savings and interest bearing transaction		140			(229	)		(89	)		241			(1,175	)		(934	)
Time deposits of $100,000 or more		68			(149	)		(81	)		16			(727	)		(711	)
Other time deposits		30			(235	)		(205	)		(60	)		(976	)		(1,036	)
Repurchase agreements with customers		2			(2	)		—			—			(19	)		(19	)
Other borrowings		64			40			104			(86	)		130			44
Subordinated debentures		—			(32	)		(32	)		—			(108	)		(108	)

Total interest expense		304			(607	)		(303	)		111			(2,875	)		(2,764	)

Increase in net interest income – FTE	$	7,472		$	(2,423	)	$	6,263		$	8,852		$	(1,460	)	$	7,392

Non-Interest Income

The Company’s non-interest income consists primarily of service charges on deposit accounts, mortgage lending income, trust income, BOLI income, accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable, other income from loss share and purchased non-covered loans, and gains on investment securities and on sales of other assets.

Non-interest income for the third quarter of 2013 increased 24.2% to $18.0 million compared to $14.5 million for the third quarter of 2012. Non-interest income for the first nine months of 2013 increased 21.2% to $53.3 million compared to $44.0 million for the first nine months of 2012. The Company’s results for the third quarter and first nine months of 2013 included $1.06 million of bargain purchase gain from the acquisition of First National Bank. The Company’s results for the third quarter and first nine months of 2012 included no acquisition or bargain purchase gain.

Service charges on deposit accounts increased 16.3% to $5.8 million for the third quarter of 2013 compared to $5.0 million for the third quarter of 2012. Service charges on deposit accounts increased 6.9% to $15.6 million for the first nine months of 2013 compared to $14.6 million for the same period in 2012. These increases in service charges on deposit accounts were primarily a result of the acquisition of First National Bank.

Mortgage lending income decreased 23.7% to $1.3 million for the third quarter of 2013 compared to $1.7 million for the third quarter of 2012. Mortgage lending income increased 13.6% to $4.7 million for the first nine months of 2013 compared to $4.1 million for the same period in 2012. The volume of originations of mortgage loans available for sale decreased 33.6% and 5.6%, respectively, for the third quarter and first nine months of 2013 compared to the same periods in 2012. During the third quarter of 2013, approximately 40% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 60% were related to new home purchases, compared to approximately 61% for refinancings and approximately 39% for new home purchases in the third quarter of 2012. During the first nine months of 2013, approximately 51% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 49% were related to new home purchases compared to approximately 60% for refinancings and approximately 40% for new home purchases in the first nine months of 2012.

Trust income was $1.1 million in the third quarter of 2013, an increase of 22.5% from $0.9 million for the third quarter of 2012. Trust income was $2.8 million for the nine months ended September 30, 2013, an increase of 11.1% from $2.5 million for the same period in 2012. These increases in trust income were primarily a result of the acquisition of First National Bank.

The Company recognized $1.4 million of income from the accretion of the FDIC loss share receivable, net of amortization of the FDIC clawback payable, during the third quarter and $6.3 million during the first nine months of 2013 compared to $1.7 million during the third quarter and $6.0 million during the first nine months of 2012. The FDIC loss share receivable reflects the indemnification provided by the FDIC in FDIC-assisted acquisitions, and the FDIC clawback payable represents the obligation of the Company to reimburse the FDIC should actual losses be less than certain thresholds established in each loss share agreement. The FDIC loss share receivable and the FDIC clawback payable are both carried at net present value. As the Company collects payments in future periods from the FDIC under the loss share agreements, the balance of the FDIC loss share receivable, absent any significant revisions to the timing or the amounts expected to be collected under the loss share agreements, will decline, resulting in a corresponding decrease in the accretion of the FDIC loss share receivable. Because any amounts due under the FDIC clawback payable are due at the conclusion of the loss share agreements, absent any significant revision of the amounts expected to be paid to the FDIC under the clawback provisions of the loss share agreements, the amortization of this liability is not expected to change significantly over the next several quarters.

Other income from loss share and purchased non-covered loans was $2.5 million in the third quarter of 2013 compared to $2.3 million in the third quarter of 2012 and $8.3 million in the first nine months of 2013 compared to $7.5 million in the first nine months of 2012.

Net gains on sales of other assets were $2.5 million in the third quarter of 2013 compared to $1.4 million in the third quarter of 2012. Net gains on sales of other assets were $7.6 million in the first nine months of 2013 compared to $4.4 million in the first nine months of 2012.

The following table presents non-interest income for the three months and nine months ended September 30, 2013 and 2012.

Non-Interest Income


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(Dollars in thousands)
Service charges on deposit accounts	$	5,817	$	5,000	$	15,613	$	14,601
Mortgage lending income		1,276		1,672		4,660		4,101
Trust income		1,060		865		2,808		2,527
BOLI income		1,179		598		3,365		1,740
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		1,396		1,699		6,269		6,039
Other income from loss share and purchased non-covered loans, net		2,484		2,270		8,328		7,450
Gains on investment securities		—		—		156		403
Gains on sales of other assets		2,501		1,425		7,585		4,377
Gain on acquisition		1,061		—		1,061		—
Other		1,226		962		3,499		2,774

Total non-interest income	$	18,000	$	14,491	$	53,344	$	44,012

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Non-Interest Expense

The Company’s non-interest expense consists of salaries and employee benefits, net occupancy and equipment and other operating expenses. Non-interest expense increased 12.3% to $32.2 million for the third quarter of 2013 compared to $28.7 million for the third quarter of 2012. Non-interest expense increased 8.0% to $91.3 million for the first nine months of 2013 compared to $84.6 million for the first nine months of 2012. Non-interest expense for the third quarter and first nine months of 2013 included $1.37 million of acquisition and conversion costs from the acquisition of First National Bank. Non-interest expense for the third quarter and first nine months of 2012 included no acquisition or conversion costs.

Salaries and employee benefits, the Company’s largest components of non-interest expense, increased 9.4% to $16.5 million in the third quarter of 2013 compared to $15.0 million in the third quarter of 2012. Salaries and employee benefits increased 8.7% to $47.4 million for the first nine months of 2013 compared to $43.7 million for the first nine months of 2012. The Company had 1,246 full-time equivalent employees at September 30, 2013 compared to 1,105 full-time equivalent employees at September 30, 2012.

Net occupancy and equipment expense for the third quarter of 2013 increased 16.6% to $4.8 million compared to $4.1 million for the third quarter of 2012. Net occupancy and equipment expenses increased 17.5% to $13.7 million for the first nine months of 2013 compared to $11.6 million for the first nine months of 2012. At September 30, 2013 the Company had 131 offices compared to 116 offices at September 30, 2012.

The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 45.5% for the third quarter of 2013 compared to 47.0% for the third quarter of 2012. The Company’s efficiency ratio was 46.2% for the first nine months of 2013 compared to 46.7% for the first nine months of 2012.

The following table presents non-interest expense for the three months and nine months ended September 30, 2013 and 2012.

Non-Interest Expense


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(Dollars in thousands)
Salaries and employee benefits	$	16,456	$	15,040	$	47,445	$	43,666
Net occupancy and equipment		4,786		4,105		13,670		11,633
Other operating expenses:
Postage and supplies		775		740		2,396		2,423
Advertising and public relations		559		1,243		1,424		3,417
Telephone and data lines		825		904		2,529		2,534
Professional and outside services		2,212		1,067		4,963		2,854
Software expense		1,374		808		4,106		2,250
Travel and meals		788		679		2,159		1,928
FDIC insurance		450		450		1,305		1,135
FDIC and state assessments		174		175		521		529
ATM expense		282		227		723		653
Loan collection and repossession expense		861		1,216		2,534		4,564
Writedowns of foreclosed and other assets		502		108		1,072		1,182
Amortization of intangibles		788		509		1,924		1,527
Other		1,376		1,411		4,570		4,276

Total non-interest expense	$	32,208	$	28,682	$	91,341	$	84,571

Income Taxes

The provision for income taxes was $10.2 million for the third quarter and $28.3 million for the first nine months of 2013 compared to $7.9 million for the third quarter and $24.4 million for the first nine months of 2012. The effective income tax rate was 31.4% for the third quarter and 31.0% for the first nine months of 2013 compared to 29.0% for the third quarter and 30.2% for the first nine months of 2012. The effective tax rates for the periods were affected by various factors including non-taxable income and non-deductible expenses.

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ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Portfolio

At September 30, 2013 the Company’s loan and lease portfolio, excluding purchased non-covered loans and covered loans, was $2.52 billion, compared to $2.12 billion at December 31, 2012 and $2.03 billion at September 30, 2012. Real estate loans, the Company’s largest category of loans, consist of all loans secured by real estate as evidenced by mortgages or other liens, including all loans made to finance the development of real property construction projects, provided such loans are secured by real estate. Total real estate loans were $2.21 billion at September 30, 2013, compared to $1.85 billion at December 31, 2012 and $1.80 billion at September 30, 2012. The amount and type of loans and leases outstanding, excluding purchased non-covered loans and covered loans, at September 30, 2013 and 2012 and at December 31, 2012 and their respective percentage of the total loan and lease portfolio are reflected in the following table.

Loan and Lease Portfolio


	September 30,								December 31,
	2013				2012				2012
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	251,026	10.0	%	$	272,686	13.4	%	$	272,052	12.9	%
Non-farm/non-residential		1,035,618	41.1			796,808	39.2			807,906	38.1
Construction/land development		714,198	28.3			568,212	28.0			578,776	27.4
Agricultural		47,953	1.9			53,607	2.6			50,619	2.4
Multifamily residential		163,916	6.5			105,854	5.2			141,243	6.7

Total real estate		2,212,711	87.8			1,797,167	88.4			1,850,596	87.5
Commercial and industrial		122,163	4.8			128,081	6.4			159,804	7.6
Consumer		27,298	1.1			30,889	1.5			29,781	1.4
Direct financing leases		81,984	3.2			65,395	3.2			68,022	3.2
Other		78,433	3.1			9,300	0.5			7,631	0.3

Total loans and leases	$	2,522,589	100.0	%	$	2,030,832	100.0	%	$	2,115,834	100.0	%

The amount and percentage of the Company’s loan and lease portfolio, excluding purchased non-covered loans and covered loans, by office of origination are reflected in the following table.

Loan and Lease Portfolio by State of Originating Office


Loans and Leases	September 30,								December 31,
Attributable to Offices In	2013				2012				2012
	(Dollars in thousands)
Texas	$	1,260,015	49.9	%	$	877,001	43.1	%	$	935,593	44.2	%
Arkansas		1,051,047	41.7			1,037,040	51.0			1,048,102	49.5
North Carolina		138,093	5.5			81,050	4.0			87,859	4.2
Georgia		59,450	2.4			34,092	1.8			40,391	1.9
Alabama		12,885	0.5			951	0.1			3,337	0.2
South Carolina		864	—			52	—			91	—
Florida		235	—			646	—			461	—

Total	$	2,522,589	100.0	%	$	2,030,832	100.0	%	$	2,115,834	100.0	%

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The amount and type of the Company’s real estate loans, excluding covered loans and purchased non-covered loans, at September 30, 2013, based on the metropolitan statistical area (“MSA”) and other geographic areas in which the principal collateral is located, are reflected in the following table. Data for individual states and MSAs is separately presented when aggregate real estate loans, excluding covered loans and purchased non-covered loans, in that state or MSA exceed $10.0 million.

Geographic Distribution of Real Estate Loans


	Residential 1-4 Family		Non- Farm/Non- Residential		Construction/ Land Development		Agricultural		Multifamily Residential		Total
	(Dollars in thousands)
Arkansas:
Little Rock – North Little Rock – Conway, AR MSA	$	99,135	$	200,046	$	112,621	$	9,424	$	9,919	$	431,145
Northern Arkansas ⁽¹⁾		43,921		16,921		6,499		16,480		941		84,762
Fort Smith, AR – OK MSA		27,792		21,174		5,853		3,369		7,571		65,759
Western Arkansas ⁽²⁾		23,091		30,806		5,282		6,072		1,439		66,690
Fayetteville – Springdale – Rogers, AR – MO MSA		9,370		27,212		16,798		5,060		3,437		61,877
Hot Springs, AR MSA		3,905		11,345		7,377		—		1,088		23,715
All other Arkansas ⁽³⁾		6,423		13,390		2,148		3,245		1,698		26,904

Total Arkansas		213,637		320,894		156,578		43,650		26,093		760,852

Texas:
Dallas–Fort Worth–Arlington, TX MSA		15,514		161,482		190,107		—		32,366		399,469
Houston – The Woodlands – Baytown, TX MSA		—		33,951		66,437		—		15,208		115,596
San Antonio – New Braunfels, TX MSA		—		2,711		14,575		—		20,200		37,486
Austin – Round Rock, TX MSA		—		—		37,942		—		—		37,942
Texarkana, TX – AR MSA		8,507		6,504		7,436		583		992		24,022
College Station – Bryan, TX MSA		—		—		—		—		18,059		18,059
Beaumont – Port Arthur, TX MSA		—		—		—		—		16,303		16,303
All other Texas ⁽³⁾		1,246		33,146		4,138		142		4,209		42,881

Total Texas		25,267		237,794		320,635		725		107,337		691,758

North Carolina/South Carolina:
Charlotte – Gastonia – Concord, NC – SC MSA		2,283		51,465		29,560		—		1,580		84,888
Wilmington, NC MSA		191		15,737		1,054		459		—		17,441
Charleston-North Charleston, SC MSA		—		3,808		749		—		6,020		10,577
All other North Carolina ⁽³⁾		2,241		33,480		34,379		—		—		70,100
All other South Carolina⁽³⁾		1,474		4,466		7,475		—		—		13,415

Total North Carolina/South Carolina		6,189		108,956		73,217		459		7,600		196,421

California:
Los Angeles – Long Beach – Santa Ana, CA MSA		—		33,771		—		—		—		33,771
San Francisco – Oakland – Fremont, CA MSA		—		59,142		870		—		—		60,012
Sacramento – Roseville – Arden – Arcade, CA MSA		—		—		43,763		—		—		43,763
All other California⁽³⁾		—		10,136		—		—		—		10,136

Total California		—		103,049		44,633		—		—		147,682

Georgia:
Atlanta – Sandy Springs – Roswell, GA MSA		1,533		26,380		3,306		419		10,320		41,958
All other Georgia ⁽³⁾		1,138		15,404		1,873		1,691		4,315		24,421

Total Georgia		2,671		41,784		5,179		2,110		14,635		66,379

Geographic Distribution of Real Estate Loans – continued


	Residential 1-4 Family		Non- Farm/Non- Residential		Construction/ Land Development		Agricultural		Multifamily Residential		Total
	(Dollars in thousands)
Phoenix – Mesa – Glendale, AZ MSA		—		54,628		—		—		—		54,628
Virginia:
Washington – Arlington – Alexandria, DC – VA – MD – WV MSA		—		352		26,701		—		—		27,053
Harrisburg, VA MSA		—		—		13,489		—		—		13,489

Total Virginia		—		352		40,190		—		—		40,542

Oklahoma:
Lawton, OK MSA		—		—		19,077		—		—		19,077
All other Oklahoma ⁽³⁾		132		2,844		4,257		—		—		7,233

Total Oklahoma		132		2,844		23,334		—		—		26,310

New York – Northern New Jersey – Long Island, NY – NJ – PA MSA		—		27,065		—		—		—		27,065
Seattle – Tacoma – Bellevue, WA MSA		—		—		26,250		—		—		26,250
Missouri:
Kansas City, MO – KS MSA		120		1,807		17,726		41		—		19,694
All other Missouri ⁽³⁾		519		2,025		179		298		—		3,021

Total Missouri		639		3,832		17,905		339		—		22,715

Boston – Cambridge – Quincy, MA MSA		—		21,709		—		—		—		21,709
Tennessee:
Memphis, TN – MS – AR MSA		108		18,659		—		—		—		18,767
All other Tennessee ⁽³⁾		—		1,747		—		—		—		1,747

Total Tennessee		108		20,406		—		—		—		20,514

Florida:
Jacksonville, FL MSA		—		7,316		—		—		4,413		11,729
All other Florida		521		—		2,930		649		—		4,100

Total Florida		521		7,316		2,930		649		4,413		15,829

Baltimore – Columbia – Townson, MD MSA		—		15,285		—		—		—		15,285
Alabama		1,182		7,166		960		21		3,838		13,137
Gulfport – Biloxi – Pascagoula, MS MSA		—		12,998		—		—		—		12,998
All other states ⁽⁴⁾		680		39,726		2,387		—		—		42,793

Total real estate loans	$	251,026	$	1,035,618	$	714,198	$	47,953	$	163,916	$	2,212,711

(1)	This geographic area includes the following counties in Northern Arkansas: Baxter, Boone, Marion, Newton, Searcy and Van Buren.

(2)	This geographic area includes the following counties in Western Arkansas: Johnson, Logan, Pope and Yell.

(3)	These geographic areas include all MSA and non-MSA areas that are not separately reported.

(4)	Includes all states not separately presented above.

The amount and type of non-farm/non-residential loans, excluding purchased non-covered loans and covered loans, at September 30, 2013 and 2012 and at December 31, 2012, and their respective percentage of the total non-farm/non-residential loan portfolio are reflected in the following table.

Non-Farm/Non-Residential Loans


	September 30,								December 31,
	2013				2012				2012
	(Dollars in thousands)
Retail, including shopping centers and strip centers	$	308,121	29.8	%	$	309,053	38.8	%	$	323,017	40.0	%
Churches and schools		44,127	4.3			38,531	4.8			42,270	5.2
Office, including medical offices		245,698	23.7			119,051	14.9			123,534	15.3
Office warehouse, warehouse and mini-storage		45,220	4.4			38,577	4.9			38,355	4.7
Gasoline stations and convenience stores		7,498	0.7			10,465	1.3			8,752	1.1
Hotels and motels		209,127	20.2			101,085	12.7			92,298	11.4
Restaurants and bars		37,327	3.6			33,656	4.2			33,421	4.1
Manufacturing and industrial facilities		30,798	3.0			32,506	4.1			32,950	4.1
Nursing homes and assisted living centers		29,218	2.8			29,782	3.7			29,501	3.7
Hospitals, surgery centers and other medical		51,787	5.0			50,403	6.3			49,797	6.2
Golf courses, entertainment and recreational facilities		2,609	0.3			11,668	1.5			10,022	1.2
Other non-farm/non residential		24,088	2.2			22,031	2.8			23,989	3.0

Total	$	1,035,618	100.0	%	$	796,808	100.0	%	$	807,906	100.0	%

The amount and type of construction/land development loans, excluding purchased non-covered loans and covered loans, at September 30, 2013 and 2012 and at December 31, 2012, and their respective percentage of the total construction/land development loan portfolio are reflected in the following table.

Construction/Land Development Loans


	September 30,								December 31,
	2013				2012				2012
	(Dollars in thousands)
Unimproved land	$	96,210	13.5	%	$	94,614	16.6	%	$	89,379	15.5	%
Land development and lots:
1-4 family residential and multifamily		173,554	24.3			178,704	31.5			175,929	30.4
Non-residential		70,084	9.8			104,498	18.4			70,861	12.2
Construction:
1-4 family residential:
Owner occupied		14,772	2.1			12,900	2.3			13,785	2.4
Non-owner occupied:
Pre-sold		6,392	0.9			6,415	1.1			6,218	1.1
Speculative		48,237	6.7			34,015	6.0			32,554	5.6
Multifamily		171,617	24.0			54,087	9.5			89,770	15.5
Industrial, commercial and other		133,332	18.7			82,979	14.6			100,280	17.3

Total	$	714,198	100.0	%	$	568,212	100.0	%	$	578,776	100.0	%

Many of the Company’s construction and development loans provide for the use of interest reserves. When the Company underwrites construction and development loans, it considers the expected total project costs, including hard costs such as land, site work and construction costs and soft costs such as architectural and engineering fees, closing costs, leasing commissions and construction period interest. Based on the total project costs and other factors, the Company determines the required borrower cash equity contribution and the maximum amount the Company is willing to loan. In the vast majority of cases, the Company requires that all of the borrower’s cash equity contribution be contributed prior to any material loan advances. This ensures that the borrower’s cash equity required to complete the project will be available for such purposes. As a result of this practice, the borrower’s cash equity typically goes toward the purchase of the land and early stage hard

costs and soft costs. This results in the Company funding the loan later as the project progresses, and accordingly the Company typically funds the majority of the construction period interest through loan advances. However, when the Company initially determines the borrower’s cash equity requirement, the Company typically requires borrower’s cash equity in an amount to cover a majority, or all, of the soft costs, including an amount equal to construction period interest, and an appropriate portion of the hard costs. The Company advanced construction period interest on construction and development loans totaling $2.8 million in the third quarter of 2013. While the Company advanced these sums as part of the funding process, the Company believes that the borrowers in effect had in most cases already provided for these sums as part of their initial equity contribution. Specifically, the maximum committed balance of all construction and development loans which provide for the use of interest reserves at September 30, 2013 was approximately $1.18 billion, of which $497 million was outstanding at September 30, 2013 and $687 million remained to be advanced. The weighted average loan-to-cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 55%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 45%. The weighted average final loan-to-value ratio on such loans, based on the most recent appraisals and assuming such loans are ultimately fully advanced, is expected to be approximately 50%.

The following table reflects loans and leases, excluding purchased non-covered loans and covered loans, as of September 30, 2013 grouped by expected amortizations, expected paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing schedule approximates the Company’s ability to reprice the outstanding principal of loans and leases either by adjusting rates on existing loans and leases or reinvesting principal cash flow in new loans and leases.

Loan and Lease Cash Flows or Repricing


				Over 1			Over 2
	1 Year			Through			Through			Over
	or Less			2 Years			3 Years			3 Years			Total
	(Dollars in thousands)
Fixed rate	$	302,705		$	158,497		$	150,004			359,303		$	970,509
Floating rate (not at a floor or ceiling rate)		108,100			226			126			—			108,452
Floating rate (at floor rate)⁽¹⁾		1,440,612			59			2,213			744			1,443,628
Floating rate (at ceiling rate)		—			—			—			—			—

Total	$	1,851,417		$	158,782		$	152,343		$	360,047		$	2,522,589

Percentage of total		73.4	%		6.3	%		6.0	%		14.3	%		100.0	%
Cumulative percentage of total		73.4			79.7			85.7			100.0

(1)

The Company has included a floor rate in many of its loans and leases. As a result of such floor rates, many loans and leases will not immediately reprice in a rising rate environment if the interest rate index and margin on such loans and leases continue to result in a computed interest rate less than the applicable floor rate. The earnings simulation model results included in the Quantitative and Qualitative Disclosures about Market Risk section of this Management’s Discussion and Analysis include consideration of the impact of all interest rate floors and ceilings in loans and leases.

Purchased Non-Covered Loans

The amount and type of purchased non-covered loans outstanding are reflected in the following table.

Purchased Non-Covered Loan Portfolio



	September 30,				December 31, 2012
	2013		2012		December 31, 2012
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	136,723	$	42	$	19,222
Non-farm/non-residential		163,724		—		4,842
Construction/land development		26,778		15		1,950
Agricultural		10,080		—		3,021
Multifamily residential		18,002		—		—
Commercial and industrial		30,229		225		5,333
Consumer		9,176		1,889		4,168
Other		4,346		2		2,998

Total	$	399,058	$	2,173	$	41,534

The amount and percentage of the Company’s purchased non-covered loans, by state of originating office, are reflected in the following table.

Purchased Non-Covered Loans by State of Originating Office


	September 30,										December 31,
Purchased Non-Covered Loans	2013					2012					2012
Attributable to Offices In	Amount		%			Amount		%			Amount		%
	(Dollars in thousands)
North Carolina	$	371,573		93.1	%	$	172		7.9	%	$	200		0.5	%
Alabama		26,737		6.7			308		14.2			39,845		95.9
Georgia		633		0.2			1,481		68.2			1,231		3.0
Florida		115		0.0			207		9.5			226		0.5
South Carolina		—		—			5		0.2			32		0.1

Total	$	399,058		100.0	%	$	2,173		100.0	%	$	41,534		100.0	%

The amount of unpaid principal balance, the valuation discount and the carrying value of purchased non-covered loans as of the dates indicated are reflected in the following table.

Purchased Non-Covered Loans


	September 30,						December 31,
	2013			2012			2012
	(Dollars in thousands)
Loans without evidence of credit deterioration at date of purchase:
Unpaid principal balance	$	369,538		$	—		$	35,800
Valuation discount		(13,962	)		—			(1,021	)

Carrying value		355,575			—			34,779

Loans with evidence of credit deterioration at date of purchase:
Unpaid principal balance		75,936			5,364			12,171
Valuation discount		(32,453	)		(3,191	)		(5,416	)

Carrying value		43,483			2,173			6,755

Total carrying value	$	399,058		$	2,173		$	41,534

The following table is a summary of the loans acquired in the First National Bank acquisition with evidence of credit deterioration at the date of purchase.

First National Bank Acquisition Fair Value Adjustments for

Purchased Non-Covered Loans With Evidence of Credit Deterioration


	July 31, 2013
	(Dollars in thousands)
Contractually required principal and interest	$	77,258
Nonaccretable difference		(30,569	)

Cash flows expected to be collected		46,689
Accretable difference		(6,932	)

Day 1 Fair Value	$	39,757

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A summary of changes in the accretable difference on purchased non-covered loans with evidence of credit deterioration at the date of purchase is shown below for the nine months ended September 30, 2013 and 2012.

Accretable Difference on Non-covered Loans With Evidence of Credit Deterioration


	Nine Months Ended September 30,
	2013			2012
	(Dollars in thousands)
Accretable difference at January 1	$	969		$	395
Accretable difference acquired – First National Bank		6,932			—
Accretion		(857	)		(211	)
Other, net		(68	)		135

Accretable difference at September 30	$	6,976		$	319

The following table presents purchased non-covered loans grouped by remaining maturities at September 30, 2013 by type and by fixed or floating interest rates. This table is based on contractual maturities and does not reflect amortizations, projected paydowns, the earliest repricing for floating rate loans, accretion or management’s estimate of projected cash flows. Many loans have principal paydowns scheduled in periods prior to the period in which they mature, and many variable rate loans are subject to repricing in periods prior to the period in which they mature. Additionally, because income on purchased non-covered loans with evidence of credit deterioration on the date of purchase is recognized by accretion of the discount of estimated cash flows, such loans are not considered to be floating or adjustable rate loans and are reported below as fixed rate loans.

Purchased Non-Covered Loan Maturities


			Over 1
	1 Year		Through		Over
	or Less		5 Years		5 Years		Total
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	18,185	$	51,948	$	66,590	$	136,723
Non-farm/non-residential		33,234		102,775		27,715		163,724
Construction/land development		8,160		13,755		4,863		26,778
Agricultural		1,714		5,936		2,430		10,080
Multifamily residential		4,758		12,706		538		18,002
Commercial and industrial		9,275		17,687		3,267		30,229
Consumer		3,746		5,154		276		9,176
Other		761		1,960		1,625		4,346

Total	$	79,833	$	211,921	$	107,304	$	399,058

Fixed rate	$	51,885	$	157,967	$	68,381	$	278,233
Floating rate		27,948		53,954		38,923		120,825

Total	$	79,833	$	211,921	$	107,304	$	399,058

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Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable

During 2010 and 2011, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of seven failed financial institutions in FDIC-assisted acquisitions. A summary of each acquisition is as follows:

Failed Bank Acquisitions


Date of FDIC-Assisted Acquisition	Failed Financial Institution	Location
March 26, 2010	Unity National Bank (“Unity”)	Cartersville, Georgia
July 16, 2010	Woodlands Bank (“Woodlands”)	Bluffton, South Carolina
September 10, 2010	Horizon Bank (“Horizon”)	Bradenton, Florida
December 17, 2010	Chestatee State Bank (“Chestatee”)	Dawsonville, Georgia
January 14, 2011	Oglethorpe Bank (“Oglethorpe”)	Brunswick, Georgia
April 29, 2011	First Choice Community Bank (“First Choice”)	Dallas, Georgia
April 29, 2011	The Park Avenue Bank (“Park Avenue”)	Valdosta, Georgia

Loans comprise the majority of the assets acquired in each of these FDIC–assisted acquisitions and, with the exception of Unity, all but a small amount of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets. In the Unity acquisition, all loans, including consumer loans, are subject to loss share agreement with the FDIC.

In conjunction with each of these acquisitions, the Bank entered into loss share agreements with the FDIC such that the Bank and the FDIC will share in the losses on assets covered under the loss share agreements. Pursuant to the terms of the loss share agreements for the Unity acquisition, on losses up to $65 million, the FDIC will reimburse the Bank for 80% of losses. On losses exceeding $65 million, the FDIC will reimburse the Bank for 95% of losses. Pursuant to the terms of the loss share agreements for the Woodlands, Chestatee, Oglethorpe and First Choice acquisitions, the FDIC will reimburse the Bank for 80% of losses. Pursuant to the terms of the loss share agreements for the Horizon acquisition, the FDIC will reimburse the Bank on single family residential loans and related foreclosed assets for (i) 80% of losses up to $11.8 million, (ii) 30% of losses between $11.8 million and $17.9 million and (iii) 80% of losses in excess of $17.9 million. For non-single family residential loans and related foreclosed assets, the FDIC will reimburse the Bank for (i) 80% of losses up to $32.3 million, (ii) 0% of losses between $32.3 million and $42.8 million and (iii) 80% of losses in excess of $42.8 million. Pursuant to the terms of the loss share agreements for the Park Avenue acquisition, the FDIC will reimburse the Bank for (i) 80% of losses up to $218.2 million, (ii) 0% of losses between $218.2 million and $267.5 million and (iii) 80% of losses in excess of $267.5 million.

The loss share agreements applicable to single family residential mortgage loans and related foreclosed assets provide for FDIC loss sharing and the Bank’s reimbursement to the FDIC for recoveries of covered losses for ten years from the date on which each applicable loss share agreement was entered. The loss share agreements applicable to commercial loans and related foreclosed assets provide for FDIC loss sharing for five years from the date on which each applicable loss share agreement was entered and the Bank’s reimbursement to the FDIC for recoveries of covered losses for an additional three years thereafter.

To the extent that actual losses incurred by the Bank are less than (i) $65 million on the Unity assets covered under the loss share agreements, (ii) $107 million on the Woodlands assets covered under the loss share agreements, (iii) $60 million on the Horizon assets covered under the loss share agreements, (iv) $66 million on the Chestatee assets covered under the loss share agreements, (v) $66 million on the Oglethorpe assets covered under the loss share agreements, (vi) $87 million on the First Choice assets covered under the loss share agreements or (vii) $269 million on the Park Avenue assets covered under loss share agreements, the Bank may be required to reimburse the FDIC under the clawback provisions of the loss share agreements.

The terms of the purchase and assumption agreements for the Unity, Woodlands, Horizon, Chestatee, Oglethorpe, First Choice and Park Avenue acquisitions provide for the FDIC to indemnify the Bank against certain claims, including claims with respect to assets, liabilities or any affiliate not acquired or otherwise assumed by the Bank and with respect to claims based on any action by directors, officers or employees of Unity, Woodlands, Horizon, Chestatee, Oglethorpe, First Choice or Park Avenue.

The covered loans and covered foreclosed assets (collectively “covered assets”) and the related FDIC loss share receivable and the FDIC clawback payable are reported at the net present value of expected future amounts to be paid or received.

The following is a summary of the covered assets, the FDIC loss share receivable and the FDIC clawback payable at September 30, 2013 and 2012 and at December 31, 2012.

Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable


	September 30,				December 31,
	2013		2012		2012
	(Dollars in thousands)
Covered loans	$	409,319	$	652,798	$	596,239
FDIC loss share receivable		89,642		174,899		152,198
Covered foreclosed assets		40,452		57,632		52,951

Total	$	539,413	$	885,329	$	801,388

FDIC clawback payable	$	25,705	$	24,934	$	25,169

Covered Loans

The following table presents a summary, by acquisition, of activity within covered loans during the periods indicated.

Covered Loans


	Unity			Woodlands			Horizon			Chestatee			Oglethorpe			First Choice			Park Avenue			Total
	(Dollars in thousands)
Carrying value at January 1, 2012	$	96,360		$	131,775		$	79,798		$	74,701		$	64,391		$	131,923		$	227,974		$	806,922
Accretion		4,794			7,821			4,403			4,418			4,399			7,612			14,263			47,710
Transfers to covered foreclosed assets		(1,066	)		(3,663	)		(3,267	)		(1,978	)		(2,466	)		(4,289	)		(5,079	)		(21,808	)
Payments received		(14,451	)		(21,123	)		(11,882	)		(13,813	)		(11,851	)		(34,371	)		(50,271	)		(157,762	)
Charge-offs		(3,969	)		(8,170	)		(3,227	)		(1,128	)		(683	)		(2,307	)		(1,299	)		(20,783	)
Other activity, net		(189	)		(437	)		(128	)		(213	)		(208	)		(284	)		(22	)		(1,481	)

Carrying value at September 30, 2012	$	81,479		$	106,203		$	65,697		$	61,987		$	53,582		$	98,284		$	185,566		$	652,798

Carrying value at January 1, 2013	$	72,849		$	99,734		$	63,193		$	56,668		$	48,093		$	91,081		$	164,621		$	596,239
Accretion		4,415			5,756			3,499			3,114			3,153			5,433			9,475			34,845
Transfers to covered foreclosed assets		(2,588	)		(3,965	)		(2,809	)		(1,203	)		(4,774	)		(1,524	)		(7,443	)		(24,306	)
Payments received		(18,863	)		(27,551	)		(14,960	)		(21,630	)		(11,774	)		(22,277	)		(60,039	)		(177,094	)
Charge-offs		(2,739	)		(3,796	)		(2,713	)		(1,339	)		(542	)		(2,348	)		(5,443	)		(18,920	)
Other activity, net		(390	)		(90	)		(195	)		(142	)		9			(188	)		(449	)		(1,445	)

Carrying value at September 30, 2013	$	52,684		$	70,088		$	46,015		$	35,468		$	34,165		$	70,177		$	100,722		$	409,319

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The following table presents a summary of the carrying value and type of covered loans at September 30, 2013 and 2012 and at December 31, 2012.

Covered Loan Portfolio


	September 30,				December 31,
	2013		2012		2012
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	120,541	$	166,887	$	152,348
Non-farm/non-residential		197,453		314,327		288,104
Construction/land development		59,386		116,684		105,087
Agricultural		12,341		20,888		19,690
Multifamily residential		9,368		10,929		10,701

Total real estate		399,089		629,715		575,930
Commercial and industrial		9,934		21,895		18,496
Consumer		138		211		176
Other		158		977		1,637

Total covered loans	$	409,319	$	652,798	$	596,239

The following table presents covered loans grouped by remaining maturities and by type at September 30, 2013. This table is based on contractual maturities and does not reflect accretion of the accretable difference or management’s estimate of projected cash flows. Most covered loans have scheduled accretion and/or cash flows projected by management to occur in periods prior to maturity. In addition, because income on covered loans is recognized by accretion of the accretable difference, none of the covered loans are considered to be floating or adjustable rate loans.

Covered Loan Maturities


	1 Year or Less		Over 1 Through 5 Years		Over 5 Years		Total
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	40,596	$	49,428	$	30,517	$	120,541
Non-farm/non-residential		92,036		78,955		26,462		197,453
Construction/land development		43,892		14,201		1,293		59,386
Agricultural		8,434		2,401		1,506		12,341
Multifamily residential		4,234		3,860		1,274		9,368

Total real estate		189,192		148,845		61,052		399,089
Commercial and industrial		4,155		1,923		3,856		9,934
Consumer		64		74		—		138
Other		14		144		—		158

Total covered loans	$	193,425	$	150,986	$	64,908	$	409,319

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The following table presents a summary, by acquisition, of changes in the accretable difference on covered loans during the periods indicated.

Accretable Difference on Covered Loans


	Unity			Woodlands			Horizon			Chestatee			Oglethorpe			First Choice			Park Avenue			Total
	(Dollars in thousands)
Accretable difference at January 1, 2012	$	10,614		$	24,555		$	24,432		$	10,663		$	17,338		$	16,900		$	47,147		$	151,649
Accretion		(4,794	)		(7,821	)		(4,403	)		(4,418	)		(4,399	)		(7,612	)		(14,263	)		(47,710	)
Transfers to covered foreclosed assets		(22	)		(364	)		(162	)		(349	)		(456	)		(439	)		(1,239	)		(3,031	)
Covered loans paid off		(288	)		(984	)		(968	)		(667	)		(979	)		(1,359	)		(2,789	)		(8,034	)
Cash flow revisions as a result of renewals and/or modifications		3,776			3,909			(737	)		1,040			1,181			2,865			2,610			14,644
Other, net		2			124			46			180			142			18			92			604

Accretable difference at September 30, 2012	$	9,288		$	19,419		$	18,208		$	6,449		$	12,827		$	10,373		$	31,558		$	108,122

Accretable difference at January 1, 2013	$	8,574		$	17,452		$	16,524		$	5,712		$	11,372		$	9,919		$	27,942		$	97,495
Accretion		(4,415	)		(5,756	)		(3,499	)		(3,114	)		(3,153	)		(5,433	)		(9,475	)		(34,845	)
Transfers to covered foreclosed assets		(542	)		(220	)		(46	)		(95	)		(260	)		(40	)		(864	)		(2,067	)
Covered loans paid off		(645	)		(428	)		(1,722	)		(806	)		(633	)		(1,028	)		(3,563	)		(8,825	)
Cash flow revisions as a result of renewals and/or modifications		6,127			6,137			4,976			2,376			1,359			7,888			5,478			34,341
Other, net		33			170			87			232			119			(24	)		366			983

Accretable difference at September 30, 2013	$	9,132		$	17,355		$	16,320		$	4,305		$	8,804		$	11,282		$	19,884		$	87,082

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FDIC Loss Share Receivable

The following table presents a summary, by acquisition, of activity within the FDIC loss share receivable during the periods indicated.

FDIC Loss Share Receivable


	Unity			Woodlands			Horizon			Chestatee			Oglethorpe			First Choice			Park Avenue			Total
	(Dollars in thousands)
Carrying value at January 1, 2012	$	27,575		$	29,177		$	21,757		$	29,382		$	37,720		$	48,442		$	84,992		$	279,045
Accretion income		573			850			588			592			1,051			1,273			2,006			6,933
Cash received from FDIC		(10,573	)		(11,440	)		(5,191	)		(20,170	)		(9,985	)		(27,761	)		(37,602	)		(122,722	)
Reductions of FDIC loss share receivable for payments on covered loans in excess of carrying value		(968	)		(2,506	)		(677	)		(1,171	)		(3,641	)		(4,466	)		(8,166	)		(21,595	)
Increases in FDIC loss share receivable for:
Charge-offs of covered loans		2,807			6,287			1,907			841			546			1,846			940			15,174
Write downs of covered foreclosed assets		1,314			1,011			419			1,800			63			111			2,969			7,687
Expenses on covered assets reimbursable by FDIC		1,080			1,145			1,014			877			901			747			2,282			8,046
Other activity, net		369			566			401			735			(255	)		47			468			2,331

Carrying value at September 30, 2012	$	22,177		$	25,090		$	20,218		$	12,886		$	26,400		$	20,239		$	47,889		$	174,899

Carrying value at January 1, 2013	$	19,818		$	22,373		$	16,859		$	11,162		$	23,996		$	17,918		$	40,072		$	152,198
Accretion income		33			366			163			406			814			1,929			3,486			7,197
Cash received from FDIC		(5,942	)		(7,631	)		(6,764	)		(4,260	)		(7,844	)		(10,250	)		(24,302	)		(66,993	)
Reductions of FDIC loss share receivable for payments on covered loans in excess of carrying value		(2,433	)		(2,896	)		(3,078	)		(4,096	)		(3,607	)		(2,848	)		(7,602	)		(26,560	)
Increases in FDIC loss share receivable for:
Charge-offs of covered loans		1,511			2,995			2,503			1,072			433			1,993			4,115			14,622
Writedowns of covered foreclosed assets		575			243			83			257			16			340			2,236			3,750
Expenses on covered assets reimbursable by FDIC		791			1,090			842			299			1,015			773			1,913			6,723
Other activity, net		131			(158	)		(170	)		(268	)		(1,507	)		(200	)		877			(1,295	)

Carrying value at September 30, 2013	$	14,484		$	16,382		$	10,438		$	4,572		$	13,316		$	9,655		$	20,795		$	89,642

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Foreclosed Assets Covered by FDIC Loss Share Agreements

The following table presents a summary, by acquisition, of activity within covered foreclosed assets during the periods indicated.

Foreclosed Assets Covered by FDIC Loss Share Agreements


	Unity			Woodlands			Horizon			Chestatee			Oglethorpe			First Choice			Park Avenue			Total
	(Dollars in thousands)
Carrying value at January 1, 2012	$	10,272		$	14,435		$	3,677		$	9,677		$	7,132		$	2,224		$	25,490		$	72,907
Transfers from covered loans		1,066			3,663			3,267			1,978			2,466			4,289			5,079			21,808
Sales of covered foreclosed assets		(3,728	)		(6,989	)		(3,055	)		(4,924	)		(3,075	)		(1,267	)		(6,293	)		(29,331	)
Writedowns of covered foreclosed assets		(1,325	)		(1,442	)		(540	)		(1,619	)		(48	)		(194	)		(2,584	)		(7,752	)

Carrying value at September 30, 2012	$	6,285		$	9,667		$	3,349		$	5,112		$	6,475		$	5,052		$	21,692		$	57,632

Carrying value at January 1, 2013	$	8,187		$	8,050		$	2,538		$	4,211		$	6,797		$	3,584		$	19,584		$	52,951
Transfers from covered loans		2,588			3,965			2,809			1,203			4,774			1,524			7,443			24,306
Sales of covered foreclosed assets		(4,528	)		(3,895	)		(2,142	)		(2,253	)		(6,497	)		(2,656	)		(12,314	)		(34,285	)
Writedowns of covered foreclosed assets		(653	)		(236	)		(92	)		(294	)		(34	)		(371	)		(840	)		(2,520	)

Carrying value at September 30, 2013	$	5,594		$	7,884		$	3,113		$	2,867		$	5,040		$	2,081		$	13,873		$	40,452

The following table presents a summary of the carrying value and type of covered foreclosed assets at September 30, 2013 and 2012 and December 31, 2012.

Covered Foreclosed Assets


	September 30,				December 31,
	2013		2012		2012
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	7,929	$	10,490	$	12,279
Non-farm/non-residential		10,837		11,718		9,570
Construction/land development		20,226		35,252		30,602
Agricultural		1,053		99		449
Multifamily residential		407		73		51

Total real estate		40,452		57,632		52,951
Repossessions		—		—		—

Total covered foreclosed assets	$	40,452	$	57,632	$	52,951

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FDIC Clawback Payable

The following table presents a summary, by acquisition, of activity within the FDIC clawback payable during the periods indicated.

FDIC Clawback Payable


	Unity			Woodlands			Horizon			Chestatee		Oglethorpe		First Choice		Park Avenue			Total
	(Dollars in thousands)
Carrying value at January 1, 2012	$	1,709		$	3,153		$	1,552		$	759	$	1,099	$	923	$	15,450		$	24,645
Amortization expense		60			105			55			26		40		34		574			894
Changes in FDIC clawback payable related to changes in expected losses on covered assets		(144	)		(305	)		(156	)		—		—		—		—			(605	)

Carrying value at September 30, 2012	$	1,625		$	2,953		$	1,451		$	785	$	1,139	$	957	$	16,024		$	24,934

Carrying value at January 1, 2013	$	1,644		$	2,986		$	1,468		$	794	$	1,083	$	968	$	16,226		$	25,169
Amortization expense		59			99			54			27		39		33		617			928
Changes in FDIC clawback payable related to changes in expected losses on covered assets		(93	)		(82	)		(120	)		—		—		—		(97	)		(392	)

Carrying value at September 30, 2013	$	1,610		$	3,003		$	1,402		$	821	$	1,122	$	1,001	$	16,746		$	25,705

Nonperforming Assets

Nonperforming assets consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days or more past due, (3) certain troubled and restructured loans for which a concession has been granted by the Company to the borrower because of a deterioration in the financial position of the borrower (TDRs) and (4) real estate or other assets that have been acquired in partial or full satisfaction of loan or lease obligations or upon foreclosure. Purchased non-covered loans and covered assets are not considered to be nonperforming by the Company for purposes of calculation of the nonperforming loans and leases to total loans and leases ratio and the nonperforming assets to total assets ratio, except for their inclusion in total assets. Because purchased non-covered loans and covered assets are not included in the calculations of the Company’s nonperforming loans and leases ratio and nonperforming assets ratio, the Company’s nonperforming loans and leases ratio and nonperforming assets ratio may not be comparable from period to period or with such ratios of other financial institutions, including institutions that have made FDIC-assisted or traditional acquisitions.

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The following table presents information, excluding purchased non-covered loans and covered assets, concerning nonperforming assets, including nonaccrual loans and leases, TDRs, and foreclosed assets as of the dates indicated.

Nonperforming Assets


	September 30,						December 31, 2012
	2013			2012			December 31, 2012
	(Dollars in thousands)
Nonaccrual loans and leases	$	10,405		$	8,882		$	9,109
Accruing loans and leases 90 days or more past due		—			—			—
TDRs		—			—			—

Total nonperforming loans and leases		10,405			8,882			9,109
Foreclosed assets not covered by FDIC loss share agreements⁽¹⁾		11,647			13,828			13,924

Total nonperforming assets	$	22,052		$	22,710		$	23,033

Nonperforming loans and leases to total loans and leases⁽²⁾		0.41	%		0.44	%		0.43	%
Nonperforming assets to total assets⁽²⁾		0.47			0.59			0.57

(1)

Repossessed personal properties and real estate acquired through or in lieu of foreclosure are initially recorded at the lesser of current principal investment or estimated market value less estimated cost to sell at the date of repossession or foreclosure. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest expense to the then estimated market value net of estimated selling costs, if lower, until disposition.

(2)	Excludes purchased non-covered loans and covered assets except for their inclusion in total assets.

As of September 30, 2013, the Company had identified covered loans where the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $0.9 million for such loans during the third quarter and $4.0 million during the first nine months of 2013 compared to $1.7 million during the third quarter and $5.2 million during the first nine months of 2012. The Company also recorded provision for loan and lease losses of $0.9 million during the third quarter and $4.0 million during the first nine months of 2013 compared to $1.7 million during the third quarter and $5.2 million during the first nine months of 2012 to cover such charge-offs. The Company had $52.6 million of impaired covered loans at September 30, 2013 compared to $31.0 million of impaired covered loans at September 30, 2012.

If an adequate current determination of collateral value has not been performed, once a loan or lease is considered impaired, management seeks to establish an appropriate value for the collateral. This assessment may include (i) obtaining an updated appraisal, (ii) obtaining one or more broker price opinions or comprehensive market analyses, (iii) internal evaluations or (iv) other methods deemed appropriate considering the size and complexity of the loan and the underlying collateral. On an ongoing basis, typically at least quarterly, the Company evaluates the underlying collateral on all impaired loans and leases and, if needed, due to changes in market or property conditions, the underlying collateral is reassessed and the estimated fair value is revised. The determination of collateral value includes any adjustments considered necessary related to estimated holding periods and estimated selling costs.

At September 30, 2013, the Company had reduced the carrying value of its loans and leases deemed impaired (all of which were included in nonaccrual loans and leases) by $7.5 million to the estimated fair value of such loans and leases of $8.1 million. The adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $6.2 million of partial charge-offs and $1.3 million of specific loan and lease loss allocations. These amounts do not include the Company’s $52.6 million of impaired covered loans at September 30, 2013.

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The following table presents information concerning the geographic location of nonperforming assets, excluding purchased non-covered loans and covered assets, at September 30, 2013. Nonaccrual loans and leases are reported in the physical location of the principal collateral. Foreclosed assets are reported in the physical location of the asset. Repossessions are reported at the physical location where the borrower resided or had its principal place of business at the time of repossession.

Geographic Distribution of Nonperforming Assets


	Nonperforming Loans and Leases		Foreclosed Assets		Total Nonperforming Assets
	(Dollars in thousands)
Arkansas	$	9,165	$	5,684	$	14,849
Texas		207		640		847
North Carolina		—		3,285		3,285
South Carolina		976		1,219		2,195
Georgia		10		—		10
Alabama		10		190		200
Florida		—		140		140
All other		37		489		526

Total	$	10,405	$	11,647	$	22,052

Allowance and Provision for Loan and Lease Losses

The Company’s ALLL was $41.7 million, or 1.65% of total loans and leases, excluding purchased non-covered loans and covered loans, at September 30, 2013, compared to $38.7 million, or 1.83% of total loans and leases, excluding purchased non-covered loans and covered loans, at December 31, 2012 and $38.7 million, or 1.90% of total loans and leases, excluding purchased non-covered loans and covered loans, at September 30, 2012. The Company had no ALLL for purchased non-covered loans or for covered loans at September 30, 2013, December 31, 2012 or September 30, 2012 because all losses had been charged off on purchased non-covered loans and covered loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values. Excluding covered loans and purchased non-covered loans, the Company’s ALLL was equal to 400% of its total nonperforming loans and leases at September 30, 2013 compared to 425% at December 31, 2012 and 440% at September 30, 2012. While the Company believes the current ALLL is appropriate, changing economic and other conditions may require future adjustments to the ALLL.

The amount of provision to the ALLL is based on the Company’s analysis of the adequacy of the ALLL utilizing the criteria discussed in the Critical Accounting Policies caption of this Management’s Discussion and Analysis. The provision for loan and lease losses for the third quarter of 2013 was $3.8 million, including $2.9 million for non-covered loans and leases and $0.9 million for covered loans, compared to $3.1 million for the third quarter of 2012, including $1.4 million for non-covered loans and leases and $1.7 million for covered loans. The provision for loan and lease losses for the first nine months of 2013 was $9.2 million, including $5.2 million for non-covered loans and leases and $4.0 million for covered loans, compared to $9.2 million for the first nine months of 2012, including $4.0 million for non-covered loans and leases and $5.2 million for covered loans.

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An analysis of the allowance for loan and lease losses for the periods indicated is shown in the following table.

Analysis of the Allowance for Loan and Lease Losses


	Nine Months Ended September 30,						Year Ended December 31, 2012
	2013			2012			Year Ended December 31, 2012
	(Dollars in thousands)
Balance, beginning of period	$	38,738		$	39,169		$	39,169
Non-covered loans and leases charged off:
Real estate		(1,535	)		(3,170	)		(4,001	)
Commercial and industrial		(887	)		(917	)		(1,323	)
Consumer		(176	)		(324	)		(732	)
Direct financing leases		(338	)		(295	)		(361	)
Other		(267	)		(390	)		(219	)

Total non-covered loans and leases charged off		(3,203	)		(5,096	)		(6,636	)

Recoveries of non-covered loans and leases previously charged off:
Real estate		260			342			372
Commercial and industrial		431			29			35
Consumer		90			88			238
Direct financing leases		29			—			2
Other		115			90			8

Total recoveries of non-covered loans and leases previously charged off		925			549			655

Net non-covered loans and leases charged off		(2,278	)		(4,547	)		(5,981	)
Covered loans charged off		(4,012	)		(5,162	)		(6,195	)

Net charge-offs – total loans and leases		(6,290	)		(9,709	)		(12,176	)
Provision for loan and lease losses:
Non-covered loans and leases		5,200			4,050			5,550
Covered loans		4,012			5,162			6,195

Total provision		9,212			9,212			11,745

Balance, end of period	$	41,660		$	38,672		$	38,738

Net charge-offs of non-covered loans and leases to average non-covered loans and leases ⁽¹⁾		0.13	%⁽²⁾		0.32	%⁽²⁾		0.30	%
Net charge-offs of total loans and leases, including covered loans and purchased non-covered loans, to total loans and leases		0.29	%⁽²⁾		0.49	%⁽²⁾		0.46	%
Allowance for loan and lease losses to total loans and leases ⁽³⁾		1.65	%		1.90	%		1.83	%
Allowance for loan and lease losses to nonperforming loans and leases ⁽³⁾		400	%		440	%		425	%

(1)	Excludes covered loans and net charge-offs related to covered loans.

(2)	Annualized.

(3)	Excludes purchased non-covered loans and covered loans.

As of and for the nine months ended September 30, 2013 and 2012 and as of and for the year ended December 31, 2012, the Company had no impaired purchased non-covered loans and recorded no charge-offs, partial charge-offs or provision for such loans.

Investment Securities

At September 30, 2013 and 2012 and at December 31, 2012, the Company classified all of its investment securities portfolio as available for sale (“AFS”). Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with the unrealized gains and losses, net of related income tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income.

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The following table presents the amortized cost and estimated fair value of investment securities AFS at September 30, 2013 and 2012 and at December 31, 2012. The Company’s holdings of “other equity securities” include FHLB – Dallas and First National Banker’s Bankshares, Inc. (“FNBB”) shares which do not have readily determinable fair values and are carried at cost.

Investment Securities


	September 30,								December 31,
	2013				2012				2012
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
	(Dollars in thousands)
Obligations of state and political subdivisions	$	432,362	$	431,568	$	330,965	$	349,538	$	345,224	$	361,517
U.S. Government agency securities		225,263		225,311		63,192		65,944		116,835		118,284
Corporate obligations		717		717		777		777		776		776
Other equity securities		13,797		13,797		13,676		13,676		13,689		13,689

Total	$	672,139	$	671,393	$	408,610	$	429,935	$	476,524	$	494,266

The Company’s investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $11.5 million and gross unrealized losses of $12.2 million at September 30, 2013; gross unrealized gains of $18.1 million and gross unrealized losses of $0.3 million at December 31, 2012; and gross unrealized gains of $21.5 million and gross unrealized losses of $0.2 million at September 30, 2012. Management believes that all of its unrealized losses on individual investment securities at September 30, 2013 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of these investments. Accordingly, management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

The following table presents unaccreted discounts and unamortized premiums of the Company’s investment securities for the dates indicated.

Unaccreted Discounts and Unamortized Premiums


	Amortized Cost		Unaccreted Discount		Unamortized Premium			Par Value
	(Dollars in thousands)
September 30, 2013:
Obligations of states and political subdivisions	$	432,362	$	8,241	$	(3,264	)	$	437,339
U.S. Government agency securities		225,263		4,956		(4,644	)		225,575
Corporate obligations		717		—		(19	)		698
Other equity securities		13,797		—		—			13,797

Total	$	672,139	$	13,197	$	(7,927	)	$	677,409

December 31, 2012:
Obligations of states and political subdivisions	$	345,224	$	6,324	$	(516	)	$	351,032
U.S. Government agency securities		116,835		279		(4,935	)		112,179
Corporate obligations		776		—		(23	)		753
Other equity securities		13,689		—		—			13,689

Total	$	476,524	$	6,603	$	(5,474	)	$	477,653

September 30, 2012:
Obligations of states and political subdivisions	$	330,965	$	4,415	$	(166	)	$	335,214
U.S. Government agency securities		63,192		—		(2,170	)		61,022
Corporate obligations		777		—		(24	)		753
Other equity securities		13,676		—		—			13,676

Total	$	408,610	$	4,415	$	(2,360	)	$	410,665

The Company had no sales of investment securities in the third quarter of 2013 or 2012. The Company had net gains of $0.2 million from the sale of $0.8 million of investment securities in the first nine months of 2013 compared with net gains of $0.4 million from the sale of $8.0 million of investment securities in the first nine months of 2012. During the third quarter of 2013 and 2012, respectively, investment securities totaling $19.5 million and $16.0 million matured, were called or were paid down by the issuer. During the first nine months of 2013 and 2012, respectively, investment securities totaling $71.9 million and $46.0 million matured, were called or paid down by the issuer. The Company purchased $49.5 million and $17.0 million of investment securities during the third quarter of 2013 and 2012, respectively, and purchased $124.1 million and $27.0 million of investment securities during the first nine months of 2013 and 2012, respectively. On July 31, 2013, the Company acquired $149 million of investment securities as a result of its acquisition of First National Bank.

The Company invests in securities it believes offer good relative value at the time of purchase, and it will, from time to time, reposition its investment securities portfolio. In making decisions to sell or purchase securities, the Company considers credit quality, call features, maturity dates, relative yields, current market factors, interest rate risk and other relevant factors.

The following table presents the types and estimated fair values of the Company’s investment securities AFS at September 30, 2013 based on credit ratings by one or more nationally-recognized credit rating agency.

Credit Ratings of Investment Securities


	AAA⁽¹⁾			AA⁽²⁾			A⁽³⁾			BBB⁽⁴⁾			Non- Rated⁽⁵⁾			Total
	(Dollars in thousands)
Obligations of states and political subdivisions:
Arkansas	$	—		$	83,023		$	10,143		$	6,916		$	138,658		$	238,740
Texas		1,144			45,934			5,076			19,115			15,289			86,558
Alabama		—			703			1,732			4,484			3,075			9,994
North Carolina		—			8,481			—			—			—			8,481
Pennsylvania		—			6,571			982			—			—			7,553
Louisiana		—			4,922			—			1,995			—			6,917
New Hampshire		—			6,651			—			—			—			6,651
Maryland		—			6,081			—			—			—			6,081
Georgia		—			1,464			2,274			301			1,876			5,915
Kansas		—			—			—			5,209			—			5,209
Florida		—			3,916			—			—			1,234			5,150
West Virginia		—			—			—			3,231			1,360			4,591
Montana		—			3,691			—			—			—			3,691
Wyoming		—			—			—			3,277			—			3,277
Rhode Island		—			2,363			—			—			884			3,247
Washington		—			—			—			—			2,740			2,740
Massachusetts		—			804			—			—			1,887			2,691
Connecticut		—			—			2,673			—			—			2,673
Missouri		—			—			—			—			2,647			2,647
Iowa		—			—			2,528			—			—			2,528
Alaska		1,995			—			—			—			—			1,995
Colorado		—			—			369			—			1,522			1,891
South Carolina		1,889			—			—			—			—			1,889
New York		—			—			—			1,822			—			1,822
New Mexico		—			—			—			—			1,811			1,811
Oklahoma		—			—			—			—			1,750			1,750
California		1,716			—			—			—			—			1,716
Tennessee		—			1,697			—			—			—			1,697
Mississippi		—			—			1,014			—			—			1,014
Utah		—			650			—			—			—			650
U.S. Government agency securities		—			225,311			—			—			—			225,311
Corporate obligations		—			—			716			—			—			716
Other equity securities		—			—			—			—			13,797			13,797

Total	$	6,744		$	402,262		$	27,507		$	46,350		$	188,530		$	671,393

Percentage of total		1.0	%		59.9	%		4.1	%		6.9	%		28.1	%		100.0	%
Cumulative percentage of total		1.0	%		60.9	%		65.0	%		71.9	%		100.0	%

(1)	Includes securities rated Aaa by Moody’s, AAA by Standard & Poor’s (“S&P”) or a comparable rating by other nationally-recognized credit rating agencies.

(2)	Includes securities rated Aa1 to Aa3 by Moody’s, AA+ to AA- by S&P or a comparable rating by other nationally-recognized credit rating agencies.

(3)	Includes securities rated A1 to A3 by Moody’s, A+ to A- by S&P or a comparable rating by other nationally-recognized credit rating agencies.

(4)	Includes securities rated Baa1 to Baa3 by Moody’s, BBB+ to BBB- by S&P or a comparable rating by other nationally-recognized credit rating agencies.

(5)

Includes all securities that are not rated or securities that are not rated but that have a rated credit enhancement where the Company has ignored such credit enhancement. For these securities, the Company has performed its own evaluation of the security and/or the underlying issuer and believes that such security or its issuer has credit characteristics equivalent to those which would warrant a credit rating of investment grade (i.e., Baa3 or better by Moody’s or BBB- or better by S&P or a comparable rating by another nationally-recognized credit rating agency).

Deposits

The Company’s lending and investment activities are funded primarily by deposits. The amount and type of deposits outstanding at September 30, 2013 and 2012 and at December 31, 2012 and their respective percentage of the total deposits are reflected in the following table. On July 31, 2013, the Company assumed $601 million of deposits as a result of its acquisition of First National Bank.

Deposits


	September 30,								December 31,
	2013				2012				2012
	(Dollars in thousands)
Non-interest bearing	$	724,413	19.8	%	$	528,278	18.3	%	$	578,528	18.6	%
Interest bearing:
Transaction (NOW)		798,931	21.8			698,094	24.1			806,293	26.0
Savings and money market		1,153,686	31.5			888,003	30.7			935,385	30.2
Time deposits less than $100,000		502,322	13.8			428,776	14.8			443,233	14.3
Time deposits of $100,000 or more		475,334	13.1			348,584	12.1			337,616	10.9

Total deposits	$	3,654,686	100.0	%	$	2,891,735	100.0	%	$	3,101,055	100.0	%

The amount and percentage of the Company’s deposits at September 30, 2013 and 2012 and December 31, 2012, by state of originating office, are reflected in the following table.

Deposits by State of Originating Office


Deposits Attributable	September 30,								December 31,
to Offices In	2013				2012				2012
	(Dollars in thousands)
Arkansas	$	1,705,560	46.7	%	$	1,670,455	57.8	%	$	1,714,455	55.3	%
Georgia		641,454	17.6			678,462	23.4			673,702	21.7
Texas		395,646	10.8			365,664	12.6			390,532	12.6
Alabama		137,141	3.8			8,477	0.3			152,653	4.9
Florida		123,591	3.4			140,445	4.9			135,957	4.4
North Carolina		626,916	17.1			16,787	0.6			20,057	0.7
South Carolina		24,378	0.6			11,445	0.4			13,699	0.4

Total	$	3,654,686	100.0	%	$	2,891,735	100.0	%	$	3,101,055	100.0	%

Other Interest Bearing Liabilities

The Company relies on other interest bearing liabilities to supplement the funding of its lending and investing activities. Such liabilities consist of repurchase agreements with customers, other borrowings (primarily federal funds purchased and FHLB – Dallas advances) and subordinated debentures.

The following table reflects the average balance and rate paid for each category of other interest bearing liabilities for the three months and nine months ended September 30, 2013 and 2012.

Average Balances and Rates of Other Interest Bearing Liabilities


	Three Months Ended September 30,										Nine Months Ended September 30,
	2013					2012					2013					2012
	Average Balance		Rate Paid			Average Balance		Rate Paid			Average Balance		Rate Paid			Average Balance		Rate Paid
	(Dollars in thousands)
Repurchase agreements with customers	$	41,879		0.07	%	$	32,288		0.09	%	$	35,244		0.08	%	$	35,626		0.15	%
Other borrowings ⁽¹⁾		308,875		3.51			301,673		3.47			292,221		3.69			295,342		3.63
Subordinated debentures		64,950		2.64			64,950		2.85			64,950		2.65			64,950		2.88

Total other interest bearing liabilities	$	415,704		3.03	%	$	398,911		3.09	%	$	392,415		3.19	%	$	395,918		3.19	%

(1)	Included in other borrowings at September 30, 2013 and 2012 are FHLB – Dallas advances that contain quarterly call features and mature as follows: 2017, $260 million at 3.90% weighted-average interest rate and 2018, $20 million at 2.53% weighted-average interest rate.

CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Subordinated Debentures. At September 30, 2013, the Company had an aggregate of $64.9 million of subordinated debentures and related trust preferred securities outstanding consisting of (i) $20.6 million of subordinated debentures and securities issued in 2006 that bear interest, adjustable quarterly, at LIBOR plus 1.60%; (ii) $15.4 million of subordinated debentures and securities issued in 2004 that bear interest, adjustable quarterly, at LIBOR plus 2.22%; and (iii) $28.9 million of subordinated debentures and securities issued in 2003 that bear interest, adjustable quarterly, at a weighted-average rate of LIBOR plus 2.93%. These subordinated debentures and securities generally mature 30 years after issuance and may be prepaid at par, subject to regulatory approval, on or after approximately five years from the date of issuance, or at an earlier date upon certain changes in tax laws, investment company laws or regulatory capital requirements. These subordinated debentures and the related trust preferred securities provide the Company additional regulatory capital to support its expected future growth and expansion.

Common Stockholders’ Equity and Tangible Common Stockholder’s Equity. The Company uses its common stockholders’ equity ratio and its tangible common stockholders’ equity ratio as the principal measures of the strength of its capital. The calculation of the Company’s common stockholders’ equity ratio and its tangible common stockholders’ equity ratio at September 30, 2013 and 2012 and December 31, 2012 are presented in the following table.

Common Stockholders’ Equity and Tangible Common Stockholders’ Equity


	September 30,						December 31,
	2013			2012			2012
	(Dollars in thousands)
Total stockholders’ equity before non-controlling interest	$	608,236		$	477,851		$	507,664
Less: intangible assets		(20,039	)		(10,680	)		(11,827	)

Total tangible common stockholders’ equity	$	588,197		$	467,171		$	495,837

Total assets	$	4,706,465		$	3,823,017		$	4,040,207
Less: intangible assets		(20,039	)		(10,680	)		(11,827	)

Total tangible assets	$	4,686,426		$	3,812,337		$	4,028,380

Common stockholders’ equity to total assets		12.92	%		12.50	%		12.57	%
Tangible common stockholders’ equity to tangible assets		12.55	%		12.25	%		12.31	%

Common Stock Dividend Policy. During the quarter ended September 30, 2013, the Company paid a dividend of $0.19 per common share compared to $0.13 per common share in the quarter ended September 30, 2012. During the first nine months of 2013, the Company paid dividends totaling $0.51 per common share compared to $0.36 per common share in the nine months ended September 30, 2012. On October 1, 2013, the Company’s board of directors approved a dividend of $0.21 per common share that was paid on October 18, 2013. The determination of future dividends on the Company’s common stock will depend on conditions existing at that time.

Capital Compliance

Regulatory Capital Requirements. Bank regulatory authorities in the United States impose certain capital standards on all bank holding companies and banks. These capital standards require compliance with certain minimum “risk-based capital ratios” and a minimum “leverage ratio.” The risk-based capital ratios consist of (1) Tier 1 capital (i.e. common stockholders’ equity excluding goodwill, certain intangibles and net unrealized gains and losses on AFS investment securities, and including, subject to limitations, trust preferred securities (“TPS”), certain types of preferred stock and other qualifying items) to risk-weighted assets and (2) total capital (Tier 1 capital plus Tier 2 capital, including the qualifying portion of the allowance for loan and lease losses and the portion of TPS not counted as Tier 1 capital) to risk-weighted assets. The leverage ratio is measured as Tier 1 capital to adjusted quarterly average assets.

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The Company’s and the Bank’s risk-based capital and leverage ratios exceeded these minimum requirements, as well as the minimum requirements to be considered “well capitalized”, at both September 30, 2013 and December 31, 2012, and are presented in the following tables.

Consolidated Capital Ratios


	September 30,			December 31,
	2013			2012
	(Dollars in thousands)
Tier 1 capital:
Common stockholders’ equity	$	608,236		$	507,664
Allowed amount of trust preferred securities		63,000			63,000
Net unrealized (gains) losses on investment securities AFS		453			(10,783	)
Less goodwill and certain intangible assets		(20,039	)		(11,827	)

Total tier 1 capital		651,650			548,054
Tier 2 capital:
Qualifying allowance for loan and lease losses		41,660			37,820

Total risk-based capital	$	693,310		$	585,874

Risk-weighted assets	$	4,087,726		$	3,026,495

Adjusted quarterly average assets	$	4,427,989		$	3,806,635

Ratios at end of period:
Tier 1 leverage		14.72	%		14.40	%
Tier 1 risk-based capital		15.94			18.11
Total risk-based capital		16.96			19.36
Minimum ratio guidelines:
Tier 1 leverage ⁽¹⁾		3.00	%		3.00	%
Tier 1 risk-based capital		4.00			4.00
Total risk-based capital		8.00			8.00
Minimum ratio guidelines to be “well capitalized”:
Tier 1 leverage		5.00	%		5.00	%
Tier 1 risk-based capital		6.00			6.00
Total risk-based capital		10.00			10.00

(1)	Regulatory authorities require institutions to operate at varying levels (ranging from 100-200 bps) above a minimum Tier 1 leverage ratio of 3% depending upon capitalization classification.

Capital Ratios of the Bank


	September 30, 2013			December 31, 2012
	(Dollars in thousands)
Stockholders’ equity – Tier 1	$	637,257		$	536,084
Tier 1 leverage ratio		14.42	%		14.13	%
Tier 1 risk-based capital ratio		15.60			17.70
Total risk-based capital ratio		16.62			18.95

Final Rule for Notices of Proposed Rulemaking (“NPR”). On July 2, 2013, the Board of the Federal Reserve System (“FRB”) approved as a final rule several outstanding Notices of Proposed Rulemaking (“NPR”) related to revisions to the Basel capital framework. On July 9, 2013 the FDIC approved the NPR’s, in their same form as approved by the FRB, as final interim rules. The final rules combine the three proposed NPR’s issued in July 2012 and apply to all banking organizations and bank holding companies; however, certain differences are noted in implementing certain provisions for banks with less than $250 billion in consolidated total assets. The provisions for banks with less than $250 billion in consolidated total assets are as follows:

•

A new common equity tier 1 capital requirement of 4.5%;

•

Clarify certain deductions from common equity tier 1 capital to include, goodwill and intangibles, other than mortgage servicing assets, net of any deferred tax liabilities, deferred tax assets that are due to net operating losses or credit carryforwards, net of any deferred tax liabilities;

•

A tier 1 capital ratio requirement of 6.0%;

•

A total capital ratio of 8%;

•

A tier 1 capital to average consolidated assets (leverage ratio) of 4.0%;

•

A capital conservation buffer of 2.5% of total risk weighted assets beyond the minimum risk based capital ratio;

•

A one-time election to include AOCI in determining capital requirements;

•

A grandfathering of trust preferred securities into the calculation of Tier 1 capital for institutions with total consolidated assets of less than $15 billion as of December 31, 2009;

•

Deductions from common equity tier 1 capital to include, goodwill and intangibles, other than mortgage servicing assets, net of any deferred tax liabilities, deferred tax assets that are due to net operating losses or credit carryforwards, net of any deferred tax liabilities;

•

Revise the risk weights for certain risk weighted assets including assets related to counterparty risk and credit valuation adjustments, securitizations, equity investments and market risk calculations.

The provision will impose restrictions on the payouts of dividends and discretionary bonuses if the capital conservation buffer ratio is not maintained. The effective date of compliance with the above begins January 1, 2015 for all banks with consolidated assets of less than $250 billion. Banks with more than $250 billion in total consolidated assets would be required to comply with certain additional provisions not listed above. Management is currently evaluating these final rules in order to determine the effect these provisions will have on both the Bank’s and the Company’s regulatory capital requirements.

Liquidity

Bank Liquidity. Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Liquidity risk arises from the possibility the Company may be unable to satisfy current or future funding requirements and needs. The ALCO and Investments Committee (“ALCO”), which reports to the board of directors, has primary responsibility for oversight of the Company’s liquidity, funds management, asset/liability (interest rate risk) position and investment portfolio functions.

The objective of managing liquidity risk is to ensure the cash flow requirements resulting from depositor, borrower and other creditor demands are met, as well as operating cash needs of the Company, and the cost of funding such requirements and needs is reasonable. The Company maintains an interest rate risk, liquidity and funds management policy and a contingency funding plan that, among other things, include policies and procedures for managing liquidity risk. Generally the Company relies on deposits, repayments of loans, leases, covered loans and purchased non-covered loans, and repayments of its investment securities as its primary sources of funds. The principal deposit sources utilized by the Company include consumer, commercial and public funds customers in the Company’s markets. The Company has used these funds, together with wholesale deposit sources such as brokered deposits, along with FHLB-Dallas advances, federal funds purchased and other sources of short-term borrowings, to make loans and leases, acquire investment securities and other assets and to fund continuing operations.

Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other factors. Loan and lease repayments, including repayments of covered loans and purchased non-covered loans, are generally a relatively stable source of funds but are subject to the borrowers’ and lessees’ ability to repay the loans and leases, which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and other factors. Furthermore, loans and leases generally are not readily convertible to cash. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet growth in loans and leases and deposit withdrawal demands or otherwise fund operations. Such secondary sources include FHLB-Dallas advances, secured and unsecured federal funds lines of credit from correspondent banks, wholesale deposit sources and FRB borrowings.

At September 30, 2013 the Company had substantial unused borrowing availability. This availability was primarily comprised of the following four options: (1) $572 million of available blanket borrowing capacity with the FHLB-Dallas, (2) $178 million of investment securities available to pledge for federal funds or other borrowings, (3) $144 million of available unsecured federal funds borrowing lines and (4) up to $95 million of available borrowing capacity from borrowing programs of the FRB.

The Company anticipates it will continue to rely primarily on deposits, repayments of loans and leases, covered loans and purchased non-covered loans, and repayments of its investment securities to provide liquidity, as well as other funding sources as appropriate. Additionally, where necessary, the sources of borrowed funds described above will be used to augment the Company’s primary funding sources.

Sources and Uses of Funds. Operating activities provided $42.8 million for the first nine months of 2013 and used $11.6 million for the first nine months of 2012. Net cash used or provided by operating activities is comprised primarily of net income, adjusted for non-cash items and for changes in operating assets and liabilities.

Investing activities used $79.8 million in the first nine months of 2013 and provided $161.0 million in the first nine months of 2012. Net activity in the Company’s investment securities portfolio used $51.3 million and provided $28.1 million in the first nine months of 2013 and 2012, respectively. Net non-covered loans and leases used $428.3 million and $138.9 million in the first nine months of 2013 and 2012, respectively. Payments received on purchased non-covered loans provided $37.7 million and $2.8 million for the first nine months of 2013 and 2012, respectively. Payments received on covered loans provided $177.1 million and $157.9 million for the first nine months of 2013 and 2012, respectively, and payments received from the FDIC under loss share agreements provided $67.0 million and $122.7 million for the first nine months of 2013 and 2012, respectively. Other loss share activity provided $21.6 million and $12.9 million in the first nine months of 2013 and 2012, respectively. The Company had proceeds from sales of other assets of $48.0 million and $46.3 million in the first nine months of 2013 and 2012, respectively. Purchases of premises and equipment used $7.8 million and $40.9 million in the first nine months of 2013 and 2012, respectively. Net proceeds received in merger and acquisition transaction provided $56.8 million in the first nine months of 2013. The purchase of BOLI used $30.0 million in the first nine months of 2012.

Financing activities used $46.5 million and $81.7 million in the first nine months of 2013 and 2012, respectively. Net changes in deposit accounts used $47.1 million and $52.1 million in the first nine months of 2013 and 2012, respectively. Net repayments of other borrowings and repurchase agreements with customers provided $14.4 million and used $21.4 million in the first nine months of 2013 and 2012, respectively. The Company paid common stock cash dividends of $18.0 million and $12.4 million in the first nine months of 2013 and 2012, respectively. Proceeds from and current tax benefits on exercise of stock options provided $4.1 million and $4.3 million during the first nine months of 2013 and 2012, respectively.

Growth and Expansion

The Company expects to continue its growth and de novo branching strategy, although it has slowed the pace of new office openings in recent years. In March 2013, the Company replaced its existing Charlotte, North Carolina loan production office with a full-service banking office. On July 5, 2013, the Company opened a loan production office in New York, New York. In North Carolina the Company is constructing a new full-service banking office in Cornelius which is expected to open in the first or second quarter of 2014. In Bradenton, Florida, the Company completed construction on a new banking office in August 2013 that is replacing an existing office, and it is developing a new banking office scheduled to open in the first quarter of 2014 that will be an addition to its branch network. In Savannah, Georgia, the Company is developing a new banking office, with an expected opening in the first quarter of 2014, to replace its current leased facility.

On July 31, 2013, the Company completed its acquisition of First National Bank which operated 14 North Carolina banking offices in a four county area west of Charlotte including nine offices in Cleveland County, three offices in Gaston County, and one office each in Lincoln and Rutherford Counties. On September 24, 2014, the Company closed one of the acquired offices in Shelby, Cleveland County, North Carolina.

Opening new offices is subject to availability of qualified personnel and suitable sites, designing, constructing, equipping and staffing such offices, obtaining regulatory and other approvals and many other conditions and contingencies that the Company cannot predict with certainty. The Company may increase or decrease its expected number of new offices as a result of a variety of factors including the Company’s financial results, changes in economic or competitive conditions, strategic opportunities or other factors.

During the first nine months of 2013, the Company spent $7.8 million on capital expenditures for premises and equipment, excluding amounts allocated to premises and equipment acquired in the acquisition of First National Bank. The Company’s capital expenditures for the full year of 2013 are expected to be in the range of $10 million to $18 million and include progress payments on construction projects expected to be completed in 2013 or 2014, furniture and equipment costs and acquisition of sites for future development. Actual expenditures may vary significantly from those expected, depending on the number and cost of additional sites acquired for future development, progress or delays encountered on ongoing and new construction projects, delays in or inability to obtain required approvals and other factors.

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RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 14 to the Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.

FORWARD-LOOKING INFORMATION

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, other filings made by the Company with the Securities and Exchange Commission and other oral and written statements or reports by the Company and its management include certain forward-looking statements including, without limitation, statements about economic, real estate market, competitive, employment, credit market and interest rate conditions; plans, goals, beliefs, expectations, thoughts, estimates and outlook for the future; revenue growth; net income and earnings per common share; net interest margin; net interest income; non-interest income, including service charges on deposit accounts, mortgage lending and trust income, gains (losses) on investment securities and sales of other assets; income from accretion of the FDIC loss share receivable, net of amortization of the FDIC clawback payable; other income from loss share and purchased non-covered loans; non-interest expense; efficiency ratio; anticipated future operating results and financial performance; asset quality and asset quality ratios, including the effects of current economic and real estate market conditions; nonperforming loans and leases; nonperforming assets; net charge-offs; net charge-off ratio; provision and allowance for loan and lease losses; past due loans and leases; current or future litigation; interest rate sensitivity, including the effects of possible interest rate changes; future growth and expansion opportunities including plans for making additional FDIC-assisted and traditional acquisitions and plans for opening new offices and relocating or closing existing offices; opportunities and goals for future market share growth; expected capital expenditures; loan and lease growth; deposit growth; changes in covered assets; changes in the volume, yield and value of the Company’s investment securities portfolio; availability of unused borrowings and other similar forecasts and statements of expectation. Words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “hope,” “intend,” “look,” “may,” “plan,” “project,” “seek,” “target,” “trend,” “will,” “would,” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs, plans and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.

Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management due to certain risks, uncertainties and assumptions. Certain factors that may affect operating results of the Company include, but are not limited to, potential delays or other problems in implementing the Company’s growth and expansion strategy including delays in identifying satisfactory sites, hiring or retaining qualified personnel, obtaining regulatory or other approvals, obtaining permits and designing, constructing and opening new offices; the ability to enter into additional FDIC-assisted or traditional acquisitions or problems with integrating or managing acquisitions; opportunities to profitably deploy capital; the ability to attract new or retain existing deposits, loans and leases; the ability to generate future revenue growth or to control future growth in non-interest expense; interest rate fluctuations, including changes in the yield curve between short-term and long-term interest rates; competitive factors and pricing pressures, including their effect on the Company’s net interest margin; general economic, unemployment, credit market and real estate market conditions, including their effect on the creditworthiness of borrowers and lessees, collateral values, the value of investment securities and asset recovery values, including the value of the FDIC loss share receivable and covered assets; changes in legal and regulatory requirements; recently enacted and potential legislation and regulatory actions, including legislation and regulatory actions intended to stabilize economic conditions and credit markets, strengthen the capital of financial institutions, increase regulation of the financial services industry and protect homeowners or consumers; changes in U.S. government monetary and fiscal policy; possible further downgrade of U.S. Treasury securities; adoption of new accounting standards or changes in existing standards; and adverse results in current or future litigation as well as other factors described in this and other Company reports and statements. Should one or more of the foregoing risks materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described in the forward-looking statements.

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SELECTED AND SUPPLEMENTAL FINANCIAL DATA

The following tables set forth selected consolidated financial data of the Company for the three months and nine months ended September 30, 2013 and 2012 and supplemental quarterly financial data of the Company for each of the most recent eight quarters beginning with the fourth quarter of 2011 through the third quarter of 2013. These tables are qualified in their entirety by the consolidated financial statements and related notes presented elsewhere in this report.

Selected Consolidated Financial Data


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands, except per share amounts)
Income statement data:
Interest income	$	55,342		$	49,456		$	152,069		$	147,172
Interest expense		4,709			5,012			13,832			16,596
Net interest income		50,633			44,444			138,237			130,576
Provision for loan and lease losses		3,818			3,080			9,212			9,212
Non-interest income		18,000			14,491			53,344			44,012
Non-interest expense		32,208			28,682			91,341			84,571
Net income available to common stockholders		22,350			19,275			62,737			56,377
Common share and per common share data:
Earnings – diluted	$	0.61		$	0.55		$	1.74		$	1.62
Book value		16.57			13.78			16.57			13.78
Dividends		0.19			0.13			0.51			0.36
Weighted-average diluted shares outstanding (thousands)		36,648			34,963			35,994			34,872
End of period shares outstanding (thousands)		36,702			34,665			36,702			34,665
Balance sheet data at period end:
Total assets	$	4,706,465		$	3,823,017		$	4,706,465		$	3,823,017
Loans and leases		2,522,589			2,030,832			2,522,589			2,030,832
Purchased non-covered loans		399,058			2,173			399,058			2,173
Covered loans		409,319			652,798			409,319			652,798
Allowance for loan and lease losses		41,660			38,672			41,660			38,672
FDIC loss share receivable		89,642			174,899			89,642			174,899
Investment securities AFS		671,393			429,935			671,393			429,935
Covered foreclosed assets		40,452			57,632			40,452			57,632
Total deposits		3,654,686			2,891,735			3,654,686			2,891,735
Repurchase agreements with customers		50,254			32,511			50,254			32,511
Other borrowings		280,905			280,771			280,905			280,771
Subordinated debentures		64,950			64,950			64,950			64,950
Total common stockholders’ equity		608,236			477,851			608,236			477,851
Loan and lease (including covered loans and purchased non-covered loans) to deposit ratio		91.14	%		92.88	%		91.14	%		92.88	%
Average balance sheet data:
Total average assets	$	4,448,028		$	3,739,170		$	4,097,991		$	3,768,206
Total average common stockholders’ equity		575,647			467,449			539,470			450,044
Average common equity to average assets		12.94	%		12.50	%		13.16	%		11.94	%
Performance ratios:
Return on average assets*		1.99	%		2.05	%		2.05	%		2.00	%
Return on average common stockholders’ equity*		15.40			16.40			15.55			16.73
Net interest margin – FTE*		5.55			5.97			5.63			5.93
Efficiency ratio		45.49			47.00			46.17			46.69
Common stock dividend payout ratio		30.12			23.64			28.75			22.69
Asset quality ratios:
Net charge-offs to average total loans and leases*⁽¹⁾		0.09	%		0.32	%		0.13	%		0.31	%
Nonperforming loans and leases to total loans and leases⁽²⁾		0.41			0.43			0.41			0.43
Nonperforming assets to total assets⁽²⁾		0.47			0.59			0.47			0.59
Allowance for loan and lease losses as a percentage of:
Total loans and leases⁽²⁾		1.65	%		1.90	%		1.65	%		1.90	%
Nonperforming loans and leases⁽²⁾		400	%		440	%		400	%		440	%
Capital ratios at period end:
Tier 1 leverage		14.72	%		13.87	%		14.72	%		13.87	%
Tier 1 risk-based capital		15.94			17.82			15.94			17.82
Total risk-based capital		16.96			19.07			16.96			19.07

*	Ratios annualized based on actual days.

(1)	Excludes covered loans and net charge-offs related to covered loans.

(2)	Excludes purchased non-covered loans, covered loans and covered foreclosed assets, except for their inclusion in total assets.

Supplemental Quarterly Financial Data

(Dollars in thousands, except per share amounts)


	12/31/11			3/31/12			6/30/12			9/30/12			12/31/12			3/31/13			6/30/13			9/30/13
Earnings Summary:
Net interest income	$	45,839		$	43,833		$	42,298		$	44,444		$	43,771		$	44,139		$	43,465		$	50,633
Federal tax (FTE) adjustment		2,210			2,288			2,151			2,087			2,009			2,020			2,076			2,161

Net interest income (FTE)		48,049			46,121			44,449			46,531			45,780			46,159			45,541			52,794
Provision for loan and lease losses		(4,275	)		(3,076	)		(3,055	)		(3,080	)		(2,533	)		(2,728	)		(2,666	)		(3,818	)
Non-interest income		12,964			13,810			15,710			14,491			18,848			16,357			18,987			18,000
Non-interest expense		(29,339	)		(28,607	)		(27,282	)		(28,682	)		(29,891	)		(29,231	)		(29,901	)		(32,208	)

Pretax income (FTE)		27,399			28,248			29,822			29,260			32,204			30,557			31,961			34,768
FTE adjustment		(2,210	)		(2,288	)		(2,151	)		(2,087	)		(2,009	)		(2,020	)		(2,076	)		(2,161	)
Provision for income taxes		(7,604	)		(7,950	)		(8,584	)		(7,883	)		(9,519	)		(8,526	)		(9,506	)		(10,224	)
Noncontrolling interest		(15	)		(1	)		5			(15	)		(9	)		(11	)		8			(33	)

Net income available to common stockholders	$	17,570		$	18,009		$	19,092		$	19,275		$	20,667		$	20,000		$	20,387		$	22,350

Earnings per common share – diluted	$	0.51		$	0.52		$	0.55		$	0.55		$	0.59		$	0.56		$	0.57		$	0.61
Non-interest Income:
Service charges on deposit accounts	$	4,936		$	4,693		$	4,908		$	5,000		$	4,799		$	4,722		$	5,074		$	5,817
Mortgage lending income		1,147			1,101			1,328			1,672			1,483			1,741			1,643			1,276
Trust income		811			774			888			865			928			883			865			1,060
BOLI income		580			576			567			598			1,027			1,083			1,104			1,179
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		2,359			2,305			2,035			1,699			1,336			2,392			2,481			1,396
Other income from loss share and purchased non-covered loans, net		1,501			1,983			3,197			2,270			3,194			2,155			3,689			2,484
Gains (losses) on investment securities		(56	)		1			402			—			55			156			—			—
Gains on sales of other assets		899			1,555			1,397			1,425			2,431			1,974			3,110			2,501
Gains on merger and acquisition transactions		—			—			—			—			2,403			—			—			1,061
Other		787			822			988			962			1,192			1,251			1,021			1,226

Total non-interest income	$	12,964		$	13,810		$	15,710		$	14,491		$	18,848		$	16,357		$	18,987		$	18,000

Non-interest Expense:
Salaries and employee benefits	$	15,202		$	14,052		$	14,574		$	15,040		$	15,362		$	15,694		$	15,294		$	16,456
Net occupancy expense		3,522			3,878			3,650			4,105			4,160			4,514			4,370			4,786
Other operating expenses		10,106			10,168			8,549			9,028			9,860			8,455			9,669			10,178
Amortization of intangibles		509			509			509			509			509			568			568			788

Total non-interest expense	$	29,339		$	28,607		$	27,282		$	28,682		$	29,891		$	29,231		$	29,901		$	32,208

Allowance for Loan and Lease Losses:
Balance at beginning of period	$	39,136		$	39,169		$	38,632		$	38,862		$	38,672		$	38,738		$	38,422		$	39,373
Net charge-offs		(4,242	)		(3,613	)		(2,825	)		(3,270	)		(2,467	)		(3,044	)		(1,715	)		(1,531	)
Provision for loan and lease losses		4,275			3,076			3,055			3,080			2,533			2,728			2,666			3,818

Balance at end of period	$	39,169		$	38,632		$	38,862		$	38,672		$	38,738		$	38,422		$	39,373		$	41,660

Selected Ratios:
Net interest margin - FTE*		6.05	%		5.98	%		5.84	%		5.97	%		5.84	%		5.83	%		5.56	%		5.55	%
Efficiency ratio		48.09			47.73			45.35			47.00			46.25			46.76			46.34			45.49
Net charge-offs to average loans and leases*(1)		0.84			0.44			0.18			0.32			0.28			0.19			0.11			0.09
Nonperforming loans and leases to total loans and leases(2)		0.70			0.60			0.49			0.43			0.43			0.40			0.66			0.41
Nonperforming assets to total assets(2)		1.17			0.76			0.63			0.59			0.57			0.50			0.66			0.47
Allowance for loan and lease losses to total loans and leases(2)		2.08			2.04			1.96			1.90			1.83			1.78			1.61			1.65
Loans and leases past due 30 days or more, including past due non-accrual loans and leases, to total loans and leases(2)		1.53			0.83			0.74			0.61			0.73			0.56			0.74			0.54

*	Annualized based on actual days.

(1)	Excludes covered loans and net charge-offs related to covered loans.

(2)	Excludes purchased non-covered loans, covered loans and covered foreclosed assets, except for their inclusion in total assets.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk results from timing differences in the repricing of assets and liabilities or from changes in relationships between interest rate indexes. The Company’s interest rate risk management is the responsibility of ALCO, which reports to the board of directors.

The Company regularly reviews its exposure to changes in interest rates. Among the factors considered are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and repricing periods. Typically, ALCO reviews on at least a quarterly basis the Company’s relative ratio of rate sensitive assets (“RSA”) to rate sensitive liabilities (“RSL”) and the related cumulative gap for different time periods. However, the primary tool used by ALCO to analyze the Company’s interest rate risk and interest rate sensitivity is an earnings simulation model.

This earnings simulation modeling process projects a baseline net interest income (assuming no changes in interest rate levels) and estimates changes to that baseline net interest income resulting from changes in interest rate levels. The Company relies primarily on the results of this model in evaluating its interest rate risk. This model incorporates a number of additional factors including: (1) the expected exercise of call features on various assets and liabilities, (2) the expected rates at which various RSA and RSL will reprice, (3) the expected growth in various interest earning assets and interest bearing liabilities and the expected interest rates on new assets and liabilities, (4) the expected relative movements in different interest rate indexes which are used as the basis for pricing or repricing various assets and liabilities, (5) existing and expected contractual cap and floor rates on various assets and liabilities, (6) expected changes in administered rates on interest bearing transaction, savings, money market and time deposit accounts and the expected impact of competition on the pricing or repricing of such accounts and (7) the timing and amount of cash flows expected to be received on covered loans, purchased non-covered loans, and the FDIC loss share receivable and (8) other relevant factors. Inclusion of these factors in the model is intended to more accurately project the Company’s expected changes in net interest income resulting from interest rate changes. The Company typically models its change in net interest income assuming interest rates go up 100 bps, up 200 bps, up 300 bps, up 400 bps, down 100 bps, down 200 bps, down 300 bps and down 400 bps. Based on current conditions, the Company believes that modeling its change in net interest income assuming interest rates go down 100 bps, down 200 bps, down 300 bps and down 400 bps is not meaningful. For purposes of this model, the Company has assumed that the change in interest rates phases in over a 12-month period. While the Company believes this model provides a reasonably accurate projection of its interest rate risk, the model includes a number of assumptions and predictions which may or may not be correct and may impact the model results. These assumptions and predictions include inputs to compute baseline net interest income, growth rates, expected changes in administered rates on interest bearing deposit accounts, competition and a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the earnings simulation model will accurately reflect future results.

The following table presents the earnings simulation model’s projected impact of a change in interest rates on the projected baseline net interest income for the 12-month period commencing October 1, 2013. This change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in the slope of the yield curve.


Shift in Interest Rates (in bps)		% Change in Projected Baseline Net Interest Income
+400		3.6%
+300		2.1
+200		0.8
+100		0.2
-100		Not meaningful
-200		Not meaningful
-300		Not meaningful
-400		Not meaningful

In the event of a shift in interest rates, management may take certain actions intended to mitigate the negative impact to net interest income or to maximize the positive impact to net interest income. These actions may include, but are not limited to, restructuring of interest earning assets and interest bearing liabilities, seeking alternative funding sources or investment opportunities and modifying the pricing or terms of loans, leases and deposits.

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Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation as of the end of the period covered by this quarterly report was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chairman and Chief Executive Officer and the Company’s Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures,” which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting.

The Company’s management, including the Company’s Chairman and Chief Executive Officer and the Company’s Chief Financial Officer and Chief Accounting Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the quarterly period covered by this report and has concluded that there was no change during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On January 5, 2012, the Company and the Bank were served with a summons and complaint filed on December 19, 2011 in the Circuit Court of Lonoke County, Arkansas, Division III, styled Robert Walker, Ann B. Hines and Judith Belk vs. Bank of the Ozarks, Inc. and Bank of the Ozarks, No. CV-2011-777. In addition, on December 21, 2012, the Bank was served with a summons and complaint filed on December 20, 2012, in the Circuit Court of Pulaski County, Arkansas, Ninth Division, styled Audrey Muzingo v. Bank of the Ozarks, Case No. 60 CV 12-6043. The complaint in each case alleges that the Company and/or Bank have harmed the plaintiffs, current or former customers of the Bank, by improper, unfair and unconscionable assessment and collection of excessive overdraft fees from the plaintiffs. According to the complaints, plaintiffs claim that the Bank employs sophisticated software to automate its overdraft system, and that this system unfairly and inequitably manipulates and alters customers’ transaction records in order to maximize overdraft penalties, particularly utilizing a practice of posting of items in “high-to-low” order, despite the actual sequence in which such items are presented for payment. Plaintiffs claim that the Bank’s deposit agreements with customers do not adequately disclose the Bank’s overdraft assessment policies and are ambiguous, deceptive, unfair and misleading. The complaint in each case alleges that these actions and omissions constitute breach of contract, breach of the implied covenant of good faith and fair dealing, unconscionable conduct, conversion, unjust enrichment and violation of the Arkansas Deceptive Trade Practices Act. The complaint in the Walker case also includes a count for conversion. Each of the complaints seeks to have the cases certified by the court as a class action for all Bank account holders similarly situated, and seeks a declaratory judgment as to the wrongful nature of the Bank’s overdraft fee policies, restitution of overdraft fees paid by the plaintiffs and the putative class (defined as all Bank customers residing in Arkansas) as a result of the actions cited in the complaints, disgorgement of profits as a result of the alleged wrongful actions and unspecified compensatory and statutory or punitive damages, together with pre-judgment interest, costs and plaintiffs’ attorneys’ fees. The Company and Bank believe the plaintiffs’ claims are unfounded and intend to defend against these claims.

The Company and Bank filed a motion to dismiss and to compel arbitration in the Walker case. The trial court denied the motion and found that the arbitration provision contained in the controlling Consumer Deposit Account Agreement was unconscionable and thus unenforceable on the grounds that the provision was the result of unequal bargaining power. The Company and Bank appealed the trial court’s ruling to the Arkansas Court of Appeals on an interlocutory basis. On September 18, 2013, a three-judge panel of the Arkansas Court of Appeals reversed the trial court’s ruling and remanded the case to the trial court for the purpose of entering an order compelling arbitration. On October 7, 2013, the plaintiffs filed petitions for reconsideration and review before the Arkansas Court of Appeals and Arkansas Supreme Court, respectively. On October 30, 2013, the Arkansas Court of Appeals denied the plaintiffs’ petition for reconsideration. The petition for review remains pending before the Arkansas Supreme Court. During the pendency of the appeal and review process, the plaintiff in the Muzingo case has agreed to stay the proceedings in that case.

On April 8, 2011, the Company was served with a petition filed on March 31, 2011 by the Seib Family, GP, LLC, a Texas limited liability company, as General Partner of Seib Family, LP in the District Court of Dallas County, Texas, (“district court”) Cause Number 11-04057, against the Company and two entities which the plaintiff apparently believed had some type of ownership interest in a former borrower of the Bank, alleging, among other things, that the defendants fraudulently induced the plaintiff to purchase a tract of real estate consisting of approximately 60 acres located at 318 Cadiz Street in Dallas, Texas, owned by the former borrower and financed by the Bank. The petition alleges that the defendants knew that a levee protecting the property from the Trinity River flood plain did not meet federal standards, that the defendants omitted to disclose that information to plaintiff prior to the sale of the property, and that due to the problems or potential problems with the levee, the value of the property was significantly impaired, as supported by a report by the U.S. Corps of Engineers concerning the condition of the levee, released at approximately the same time as the plaintiff purchased the property from the former borrower and affiliates with the aid and assistance of the Company. The petition alleges that the plaintiff did not become aware of the U.S. Corps of Engineers’ report until a month or two after it purchased the property.

The original petition alleged that the defendants’ conduct violated the Texas Securities Act and the Texas Deceptive Trade Practices Act, and sought compensatory damages, trebled under the Texas Deceptive Trade Practices Act, plus exemplary damages, attorneys’ fees, costs, interest, and other relief the court deems just. Since the original petition was filed, the plaintiff has (i) dropped all claims against the Company, but added the Bank as a defendant in its petition and (ii) dropped all claims with respect to the Texas Deceptive Trade Practices Act. Under its amended petition, the plaintiff is seeking $15,962,677 in actual damages and $31,925,354 in exemplary damages.

On June 15, 2012, the district court granted the Bank’s motion for Summary Judgment. Subsequent to the district court’s granting of the Bank’s Motion for Summary Judgment, the plaintiff filed a notice of nonsuit with prejudice with respect to its claims against the other two defendants, which was granted. In response, the Bank filed a notice of nonsuit without prejudice with respect to the Bank’s claim for attorneys’ fees and costs against the plaintiff as to its claims under the Texas Deceptive Trade Practices Act, which resulted in dismissal of that claim without prejudice. On or about August 23, 2012, the plaintiff filed a

Notice of Appeal with the district court, which appealed the summary judgment ruling to the United States Court of Appeals for the Fifth Circuit (“Court of Appeals”). On or about November 28, 2012, plaintiff filed an appellant’s brief with the Court of Appeals. The Bank filed its response on February 5, 2013. The Company believes the allegations as contained in the petition are wholly without merit, and this belief is supported by the district court’s grant of summary judgment. The Company intends to vigorously defend against the appeal of the district court’s rulings.

On or about May 13, 2011, the Bank filed suit to collect on six defaulted promissory notes in a case styled Bank of the Ozarks, as successor in interest to, and assignee of, the Federal Deposit Insurance Corporation, as Receiver of The Park Avenue Bank, Valdosta, Georgia v. Money Bayou Group, LLC, Palm Breeze Development, LLC, Palmetto Plantation, LLC, and George P. Hamm, Jr. The case is pending in the Superior Court of Lanier County, Georgia. On or about July 14, 2011, the Bank was served with defendants’ Answer and Counterclaim (“Counterclaim”). The Counterclaim basically alleges a series of agreements between The Park Avenue Bank and defendants to provide defendants with a continuing line of credit to allow defendants to build additional speculation houses in order to fund repayment of their entire indebtedness.

Count One of the Counterclaim is a breach of contract claim, based on a series of alleged negotiations between the parties. Count Two of the Counterclaim is for fraud and alleges that The Park Avenue Bank falsely represented to defendants that it could provide a construction line of credit when it knew, or should have known, that it would be prohibited from doing so under the terms of its Memorandum of Understanding (“MoU”) with the FDIC and Georgia Department of Banking and Finance. Count Three is also a fraud count concerning an “A” Note and a “B Note,” in which defendants claim that The Park Avenue Bank falsely represented that it would forgive said B Note, when it knew, or should have known, that it would be prohibited from doing so by its MoU with the FDIC and the Georgia Department of Banking and Finance. Count Four of the Counterclaim is a RICO count in which defendants allege that The Park Avenue Bank and the Bank, through at least one employee, devised and executed a scheme to defraud defendants, constituting a pattern of racketeering as defined by the Georgia Code Annotated. Finally, the Counterclaim seeks punitive damages, alleging willful misconduct with specific intent to cause harm, and that The Park Avenue Bank and the Bank willfully acquired, or maintained an interest in, or control of, defendants’ enterprises, thereby exhibiting a pattern of racketeering activity.

A day before the scheduled hearing date on the Banks’ motion for summary judgment, Bank counsel was served with an Order (the “IT Order”), issued ex parte, alleging that the Bank may have acted in bad faith by hiding and/or destroying documents, particularly, the executed A Note and B Note, the existence of which the Bank denies. The IT Order requires the Bank to allow defendants’ information technology expert witness access to all records of the Bank, its employees, officers, and directors, in order to search for documents related to the A Note and the B Note. The Bank declined to comply with the ex parte IT Order on the basis that it is procedurally improper and that compliance with the IT Order would violate state and federal banking and privacy laws. The court denied the Bank’s Motion for Reconsideration of the IT Order, and upon a subsequent motion of the defendants, found the Bank in contempt and ordered, as sanctions, dismissal with prejudice of the Bank’s collection action on the defaulted notes, and awarded opposing counsel $105,692 in attorney’s fees (the “Contempt Order”).

The Bank filed its Notice of Appeal from the Contempt Order with the Georgia Court of Appeals, but the defendants filed a Motion to Dismiss the Bank’s appeal with the trial court (on the theory that the Contempt Order arose from a discovery dispute and was therefore, not an immediately appealable issue). A hearing on the motion was held on July 16, 2013 and the trial court ruled in favor of the defendants, dismissing the Bank’s appeal. Defendants filed another Motion for Sanctions against the Bank for alleged continued violations of the IT Order and Contempt Order. The court heard the arguments of the parties at a hearing held on October 8, 2013. A decision is expected within 30 days of the hearing date. Depending on the trial court’s ruling, the matter will proceed to trial on either the counterclaims of the defendants or to determine the amount of damages. The Bank believes that the claims of the defendants are unfounded and intends to vigorously defend against all such counterclaims and to pursue all available appeals.

The Company is party to various other legal proceedings, as both plaintiff and defendant, arising in the ordinary course of business, including claims of lender liability, predatory lending, broken promises and other similar lending-related claims, as well as legal proceedings arising from acquired operations in its FDIC-assisted acquisitions. While the ultimate resolution of these various claims and proceedings cannot be determined at this time, management of the Company believes that such claims and proceedings, individually or in the aggregate, will not have a material adverse effect on the future results of operations, financial condition or liquidity of the Company.

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Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A Risk Factors in the Company’s 2012 annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company had no unregistered sales of equity securities and did not purchase any shares of its common stock during the period covered by this report.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Reference is made to the Exhibit Index set forth immediately following the signature page of this report.

SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						Bank of the Ozarks, Inc.

DATE: November 7, 2013						/s/ Greg McKinney
						Greg McKinney
						Chief Financial Officer and
						Chief Accounting Officer

Bank of the Ozarks, Inc.

Exhibit Index


Exhibit Number

2 (a)		Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks and The First National Bank of Shelby, dated as of January 24, 2013 (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, as amended, filed with the Commission on January 25, 2013, and incorporated herein by this reference).

2 (b)		Amendment No. 1 to the Agreement and Plan of Merger among Bank of the Ozarks, Inc. Bank of the Ozarks and The First National Bank of Shelby, dated as of February 5, 2013 (previously filed as Exhibit 2(b) to the Company’s Annual Report on Form 10-K filed with the Commission on February 28, 2013, and incorporated herein by this reference).

2 (c)		Agreement of Purchase and Sale dated January 24, 2013 by and among Bank of the Ozarks, Shelby Loan and Mortgage Corporation and SLMC, LLC (previously filed as Exhibit 2.4 to the Company’s Registration Statement on Form S-4 (Registration No. 333-187564) filed with the Commission on March 27, 2013, and incorporated herein by this reference). Immaterial exhibits to this agreement are described in the agreement and are omitted from this filing. Copies of such exhibits will be furnished to the Commission upon request.

2 (d)		Amendment No. 1 to the Agreement of Purchase and Sale dated July 31, 2013 (previously filed as Exhibit 2.3 to the Company’s Current Report on Form 8-K filed with the Commission on July 31, 2013, and incorporated herein by this reference).

3 (i) (a)		Amended and Restated Articles of Incorporation of the Registrant, dated May 22, 1997 (previously filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Commission on May 22, 1997, as amended, Commission File No. 333-27641, and incorporated herein by this reference).

3 (i) (b)		Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant dated December 9, 2003 (previously filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the Commission on March 12, 2004 for the year ended December 31, 2003, and incorporated herein by this reference).

3 (i) (c)		Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant dated December 10, 2008 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 10, 2008, and incorporated herein by this reference).

3 (ii)		Amended and Restated Bylaws of the Registrant, dated December 11, 2007 (previously filed as Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007, and incorporated herein by this reference).

10.1		Form of Indemnification Agreement between the Registrant and its director newly elected by the Registrant’s board of directors on August 5, 2013 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 21, 2011 and incorporated herein by this reference).

31.1		Certification of Chairman and Chief Executive Officer.

31.2		Certification of Chief Financial Officer and Chief Accounting Officer.

32.1		Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		XBRL Taxonomy Definition Linkbase

101.LAB*		XBRL Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

Pursuant to Rule 406T of Regulations S-T, these interactive data files are not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.