Edgar Filing: BANK OF THE OZARKS INC

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Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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 March 31, 2014

¨	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 March 31, 2014
Common Stock, $0.01 par value per share		36,944,152

BANK OF THE OZARKS, INC.

FORM 10-Q

March 31, 2014

INDEX


PART I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 31, 2014 and 2013 and December 31, 2013	1

	Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013	2

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013	3

	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2014 and 2013	4

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

	Selected and Supplemental Financial Data	74

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	76

Item 4.	Controls and Procedures	77

PART II.	Other Information

Item 1.	Legal Proceedings	78

Item 1A.	Risk Factors	79

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79

Item 3.	Defaults Upon Senior Securities	79

Item 4.	Mine Safety Disclosures	79

Item 5.	Other Information	79

Item 6.	Exhibits	79

Signature		80

Exhibit Index		81

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS


	Unaudited
	March 31,						December 31,
	2014			2013			2013
	(Dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks	$	187,101		$	160,699		$	195,094
Interest earning deposits		1,250			1,876			881

Cash and cash equivalents		188,351			162,575			195,975
Investment securities - available for sale (“AFS”)		687,661			487,648			669,384
Loans and leases		2,778,503			2,157,771			2,632,565
Purchased loans not covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements (“purchased non-covered loans”)		488,533			38,071			372,723
Loans covered by FDIC loss share agreements (“covered loans”)		304,955			544,268			351,791
Allowance for loan and lease losses		(43,861	)		(38,422	)		(42,945	)

Net loans and leases		3,528,130			2,701,688			3,314,134
FDIC loss share receivable		57,782			132,699			71,854
Premises and equipment, net		254,973			227,458			245,472
Foreclosed assets not covered by FDIC loss share agreements		17,076			11,290			11,851
Foreclosed assets covered by FDIC loss share agreements		43,793			51,040			37,960
Accrued interest receivable		15,486			12,785			14,359
Bank owned life insurance (“BOLI”)		144,601			124,928			143,473
Intangible assets, net		20,993			11,258			19,158
Other, net		70,047			28,449			63,448

Total assets	$	5,028,893		$	3,951,818		$	4,787,068

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand non-interest bearing	$	886,341		$	588,841		$	746,320
Savings and interest bearing transaction		2,199,545			1,653,886			2,073,497
Time		830,318			748,345			897,210

Total deposits		3,916,204			2,991,072			3,717,027
Repurchase agreements with customers		51,140			30,714			53,103
Other borrowings		280,885			280,756			280,895
Subordinated debentures		64,950			64,950			64,950
FDIC clawback payable		26,202			25,384			25,897
Accrued interest payable and other liabilities		32,842			31,810			16,768

Total liabilities		4,372,223			3,424,686			4,158,640

Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding at March 31, 2014 and 2013 or at December 31, 2013		0			0			0
Common stock; $0.01 par value; 50,000,000 shares authorized; 36,944,152, 35,366,824 and 36,855,852 shares issued and outstanding at March 31, 2014, March 31, 2013 and December 31, 2013, respectively		369			354			369
Additional paid-in capital		147,584			76,102			143,385
Retained earnings		502,044			438,194			484,876
Accumulated other comprehensive income (loss)		3,211			9,029			(3,672	)

Total stockholders’ equity before noncontrolling interest		653,208			523,679			624,958
Noncontrolling interest		3,462			3,453			3,470

Total stockholders’ equity		656,670			527,132			628,428

Total liabilities and stockholders’ equity	$	5,028,893		$	3,951,818		$	4,787,068

See accompanying notes to consolidated financial statements.

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited


	Three Months Ended
	March 31,
	2014			2013
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	33,412		$	29,880
Purchased non-covered loans		7,480			989
Covered loans		9,405			12,864
Investment securities:
Taxable		2,360			1,285
Tax-exempt		4,397			3,744
Deposits with banks and federal funds sold		3			7

Total interest income		57,057			48,769

Interest expense:
Deposits		1,581			1,546
Repurchase agreements with customers		12			7
Other borrowings		2,655			2,649
Subordinated debentures		413			428

Total interest expense		4,661			4,630

Net interest income		52,396			44,139
Provision for loan and lease losses		(1,304	)		(2,728	)

Net interest income after provision for loan and lease losses		51,092			41,411

Non-interest income:
Service charges on deposit accounts		5,639			4,722
Mortgage lending income		954			1,741
Trust income		1,316			883
BOLI income		1,130			1,083
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		692			2,392
Other income from loss share and purchased non-covered loans, net		3,311			2,155
Net gains on investment securities		5			156
Gains on sales of other assets		974			1,974
Gain on merger and acquisition transaction		4,667			0
Other		1,672			1,251

Total non-interest income		20,360			16,357

Non-interest expense:
Salaries and employee benefits		17,689			15,694
Net occupancy and equipment		5,044			4,514
Other operating expenses		14,721			9,023

Total non-interest expense		37,454			29,231

Income before taxes		33,998			28,537
Provision for income taxes		8,730			8,526

Net income		25,268			20,011
Earnings attributable to noncontrolling interest		8			(11	)

Net income available to common stockholders	$	25,276		$	20,000

Basic earnings per common share	$	0.68		$	0.57

Diluted earnings per common share	$	0.68		$	0.56

Dividends declared per common share	$	0.22		$	0.15

See accompanying notes to consolidated financial statements.

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited


	Three Months Ended
	March 31,
	2014			2013
	(Dollars in thousands)
Net income	$	25,268		$	20,011
Other comprehensive income (loss):
Unrealized gains and losses on investment securities AFS		11,330			(2,729	)
Tax effect of unrealized gains and losses on investment securities AFS		(4,444	)		1,069
Reclassification of gains and losses on investment securities AFS included in net income		(5	)		(156	)
Tax effect of reclassification of gains and losses on investment securities AFS included in net income		2			62

Total other comprehensive income (loss)		6,883			(1,754	)

Total comprehensive income	$	32,151		$	18,257

See accompanying notes to consolidated financial statements.

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited


	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interest			Total
	(Dollars in thousands)
Balances – January 1, 2013	$	353	$	73,043	$	423,485		$	10,783		$	3,442		$	511,106
Net income		0		0		20,011			0			0			20,011
Earnings attributable to noncontrolling interest		0		0		(11	)		0			11			0
Total other comprehensive income (loss)		0		0		0			(1,754	)		0			(1,754	)
Common stock dividends		0		0		(5,291	)		0			0			(5,291	)
Issuance of 95,100 shares of common stock for exercise of stock options		1		1,367		0			0			0			1,368
Excess tax benefit on exercise and forfeiture of stock options		0		700		0			0			0			700
Stock-based compensation expense		0		992		0			0			0			992

Balances – March 31, 2013	$	354	$	76,102	$	438,194		$	9,029		$	3,453		$	527,132

Balances – January 1, 2014	$	369	$	143,385	$	484,876		$	(3,672	)	$	3,470		$	628,428
Net income		0		0		25,268			0			0			25,268
Earnings attributable to noncontrolling interest		0		0		8			0			(8	)		0
Total other comprehensive income (loss)		0		0		0			6,883			0			6,883
Common stock dividends		0		0		(8,108	)		0			0			(8,108	)
Issuance of 88,300 shares of common stock for exercise of stock options		0		1,505		0			0			0			1,505
Excess tax benefit on exercise and forfeiture of stock options		0		1,323		0			0			0			1,323
Stock-based compensation expense		0		1,371		0			0			0			1,371

Balances – March 31, 2014	$	369	$	147,584	$	502,044		$	3,211		$	3,462		$	656,670

See accompanying notes to consolidated financial statements

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited


	Three Months Ended
	March 31,
	2014			2013
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	25,268		$	20,011
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,855			1,891
Amortization		813			568
Earnings attributable to noncontrolling interest		8			(11	)
Provision for loan and lease losses		1,304			2,728
Provision for losses on foreclosed assets		64			121
Net amortization of investment securities AFS		111			106
Net gains on investment securities AFS		(5	)		(156	)
Originations of mortgage loans held for sale		(38,748	)		(59,880	)
Proceeds from sales of mortgage loans held for sale		38,535			76,103
Accretion of covered loans		(9,405	)		(12,864	)
Accretion of purchased non-covered loans		(7,480	)		(989	)
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		(692	)		(2,392	)
Gains on sales of other assets		(974	)		(1,974	)
Gain on merger and acquisition transaction		(4,667	)		0
Deferred income tax (benefit) expense		(242	)		67
Increase in cash surrender value of BOLI		(1,130	)		(1,083	)
Excess tax benefit on exercise and forfeiture of stock options		(1,323	)		(700	)
Stock-based compensation expense		1,371			992
Changes in assets and liabilities:
Accrued interest receivable		(813	)		416
Other assets, net		(285	)		1,017
Accrued interest payable and other liabilities		14,631			7,374

Net cash provided by operating activities		18,196			31,345

Cash flows from investing activities:
Proceeds from sales of investment securities AFS		1,224			999
Proceeds from maturities/calls/paydowns of investment securities AFS		13,279			39,540
Purchases of investment securities AFS		(18,349	)		(38,249	)
Net advances on loans and leases, excluding covered loans and purchased non-covered loans		(148,100	)		(60,050	)
Payments received on purchased non-covered loans		46,846			4,451
Payments received on covered loans		39,843			48,633
Payments received from FDIC under loss share agreements		10,610			22,565
Other net decreases in covered assets and FDIC loss share receivable		5,423			8,322
Purchases of premises and equipment		(3,433	)		(4,121	)
Proceeds from sales of other assets		11,313			13,294
Cash invested in unconsolidated investments		(881	)		(72	)
Net cash received in merger and acquisition transaction		80,656			0

Net cash provided by investing activities		38,431			35,312

Cash flows from financing activities:
Net decrease in deposits		(56,742	)		(109,983	)
Net repayments of other borrowings		(266	)		(7	)
Net (decrease) increase in repurchase agreements with customers		(1,963	)		1,164
Proceeds from exercise of stock options		1,505			1,368
Excess tax benefit on exercise and forfeiture of stock options		1,323			700
Cash dividends paid on common stock		(8,108	)		(5,291	)

Net cash used by financing activities		(64,251	)		(112,049	)

Net decrease in cash and cash equivalents		(7,624	)		(45,392	)
Cash and cash equivalents – beginning of period		195,975			207,967

Cash and cash equivalents – end of period	$	188,351		$	162,575

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.

At March 31, 2014, the Company had 141 offices, including 66 in Arkansas, 28 in Georgia, 21 in Texas, 15 in North Carolina, five in Florida, three in Alabama, and one office each in South Carolina, New York and California.

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, 2013.

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 three months ended March 31, 2014 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. Acquisitions

Bancshares, Inc.

On March 5, 2014, the Company completed its acquisition of Bancshares, Inc. (“Bancshares”) of Houston, Texas and OMNIBANK, N.A., its wholly-owned bank subsidiary for an aggregate of $21.5 million in cash. The acquisition of Bancshares expanded the Company’s service area in South Texas by adding three offices in Houston and one office each in Austin, Cedar Park, Lockhart, and San Antonio.

The following table provides a summary of the assets acquired and liabilities assumed as recorded by Bancshares, 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.


	March 5, 2014
	As Recorded by Bancshares			Fair Value Adjustments			As Recorded by the Company
	(Dollars in thousands)
Assets acquired:
Cash and due from banks	$	102,156		$	0		$	102,156
Investment securities		1,860			(1	)a		1,859
Loans and leases		165,939			(10,764	)b		155,175
Allowance for loan losses		(5,280	)		5,280	b		0
Premises and equipment		6,259			1,619	c		7,878
Foreclosed assets		7,634			(2,916	)d		4,718
Accrued interest receivable and other assets		608			(294	)e		314
Core deposit intangible asset		0			2,648	f		2,648
Deferred income taxes		7,110			1,881	g		8,991

Total assets acquired		286,286			(2,547	)		283,739

Liabilities assumed:
Deposits		255,798			121	h		255,919
Accrued interest payable and other liabilities		1,358			295	i		1,653

Total liabilities assumed		257,156			416			257,572

Net assets acquired	$	29,130		$	(2,963	)		26,167

Total cash consideration paid								(21,500	)

Gain on acquisition							$	4,667

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 their basis for federal income tax purposes. Management has determined that acquired net operating loss carryforwards are expected to be settled in future periods where the realization of such benefits would be subject to limitations under section 382 of the Internal Revenue Code (“section 382 limitations”). Accordingly, as of the date of acquisition, the Company had established a deferred tax valuation allowance of approximately $0.4 million to reflect its assessment that the realization of the benefits from the settlement of these acquired net operating losses is expected to be subject to section 382 limitations. To the extent that additional information becomes available, management may be required to adjust its estimates and assumptions regarding the realization of the benefits associated with these acquired net operating losses by adjusting this deferred tax valuation allowance.

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 Bancshares.

The Company’s consolidated results of operations include the operating results for Bancshares beginning March 6, 2014 through the end of the reporting period. Bancshares’ operating results contributed $1.0 million of net interest income and $5.1 million of net income, including the $4.7 million of tax-exempt bargain purchase gain, to the Company’s results of operations for the three months ended March 31, 2014.

The First National Bank of Shelby

On July 31, 2013, the Company completed the First National Bank of Shelby (“First National Bank”) acquisition whereby First National Bank merged with and into the Company’s wholly-owned bank subsidiary in a transaction valued at $68.5 million. The Company issued 1,257,385 shares of its common stock valued at $60.1 million, plus $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 $3.8 million in cash.

The acquisition of First National Bank expanded the Company’s service area in North Carolina by adding 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 their basis for federal income tax purposes. Management has determined that acquired net operating loss carryforwards and other acquired assets with built-in losses are expected to be settled or otherwise recovered in future periods where the realization of such benefits would be subject to section 382 limitations. Accordingly, as of the date of acquisition, the Company established a deferred tax valuation allowance of approximately $4.1 million to reflect its assessment that the realization of the benefits from the settlement or recovery of certain of these acquired assets and net operating losses is expected to be subject to section 382 limitations. To the extent that additional information becomes available, management may be required to adjust its estimates and assumptions regarding the realization of the benefits associated with these acquired assets by adjusting this deferred tax valuation allowance.

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.

Summit Bancorp, Inc.

On January 30, 2014, the Company entered into a definitive agreement and plan of merger (the “Summit Agreement”) with Summit Bancorp, Inc. (“Summit”), and its wholly-owned bank subsidiary Summit Bank, headquartered in Arkadelphia, Arkansas, whereby the Company will acquire all of the outstanding common stock of Summit in a transaction valued at approximately $216.0 million. Summit operates 24 branch locations in nine Arkansas counties. At December 31, 2013, Summit’s total assets were $1.2 billion which consisted primarily of $763 million of loans and $315 million of investment securities, its total deposits were $994 million, and its total stockholders’ equity was $135 million.

Under the terms of the Summit Agreement, each outstanding share of common stock of Summit will be converted, at the election of each Summit shareholder, into the right to receive shares of the Company’s common stock, plus cash in lieu of any fractional share, or the right to receive cash, all subject to certain conditions and potential adjustments, provided that at least 80% of the merger consideration paid to Summit shareholders will consist of shares of the Company’s common stock. The number of Company shares to be issued will be determined based on Summit shareholder elections and the Company’s 10-day average closing stock price as of the fifth business day prior to the closing date, subject to a minimum price of $43.58 per share and a maximum price of $72.63 per share. Completion of the transaction is subject to certain closing conditions. This acquisition is expected to close on or about May 16, 2014.

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 March 31, 2014 were excluded from the diluted EPS calculation as all options were dilutive. Options to purchase 254,550 shares of the Company’s common stock for the three months ended March 31, 2013 were excluded from the diluted EPS calculations as inclusion would have been anti-dilutive.

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


	Three Months Ended
	March 31,
	2014		2013
	(In thousands, except per share amounts)
Numerator:
Distributed earnings allocated to common stock	$	8,108	$	5,291
Undistributed earnings allocated to common stock		17,168		14,709

Net earnings allocated to common stock	$	25,276	$	20,000

Denominator:
Denominator for basic EPS – weighted-average common shares		36,901		35,322
Effect of dilutive securities – stock options		346		309

Denominator for diluted EPS – weighted-average common shares and assumed conversions		37,247		35,631

Basic EPS	$	0.68	$	0.57

Diluted EPS	$	0.68	$	0.56

5. Investment Securities

At March 31, 2014 and 2013 and at December 31, 2013, 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).

The following table presents the amortized cost and estimated fair value of investment securities AFS 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)
March 31, 2014:
Obligations of state and political subdivisions	$	447,368	$	10,010	$	(4,630	)	$	452,748
U.S. Government agency securities		219,836		3,526		(3,622	)		219,740
Corporate obligations		686		0		0			686
Other equity securities		14,487		0		0			14,487

Total	$	682,377	$	13,536	$	(8,252	)	$	687,661

December 31, 2013:
Obligations of state and political subdivisions	$	438,390	$	6,230	$	(8,631	)	$	435,989
U.S. Government agency securities		222,510		2,352		(5,993	)		218,869
Corporate obligations		716		0		0			716
Other equity securities		13,810		0		0			13,810

Total	$	675,426	$	8,582	$	(14,624	)	$	669,384

March 31, 2013:
Obligations of state and political subdivisions	$	366,753	$	14,441	$	(958	)	$	380,236
U.S. Government agency securities		91,589		1,488		(114	)		92,963
Corporate obligations		748		0		0			748
Other equity securities		13,701		0		0			13,701

Total	$	472,791	$	15,929	$	(1,072	)	$	487,648

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)
March 31, 2014:
Obligations of state and political subdivisions	$	51,961	$	2,048	$	47,890	$	2,582	$	99,851	$	4,630
U.S. Government agency securities		69,783		3,582		1,038		40		70,821		3,622

Total temporarily impaired securities	$	121,744	$	5,630	$	48,928	$	2,622	$	170,672	$	8,252

December 31, 2013:
Obligations of states and political subdivisions	$	132,568	$	7,237	$	10,823	$	1,394	$	143,391	$	8,631
U.S. Government agency securities		127,274		5,993		0		0		127,274		5,993

Total temporarily impaired securities	$	259,842	$	13,230	$	10,823	$	1,394	$	270,665	$	14,624

March 31, 2013:
Obligations of state and political subdivisions	$	49,071	$	850	$	7,267	$	108	$	56,338	$	958
U.S. Government agency securities		21,436		114		0		0		21,436		114

Total temporarily impaired securities	$	70,507	$	964	$	7,267	$	108	$	77,774	$	1,072

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment of its 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 March 31, 2014 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.


	March 31, 2014
Maturity or Estimated Repayment	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
One year or less	$	26,941	$	27,336
After one year to five years		86,815		88,008
After five years to ten years		140,304		140,653
After ten years		428,317		431,664

Total	$	682,377	$	687,661

For purposes of this maturity distribution, all investment securities AFS are shown based on their contractual maturity date or estimated date of repayment, 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 is a summary of sales activities in the Company’s investment securities AFS for the periods indicated.


	Three Months Ended March 31,
	2014		2013
	(Dollars in thousands)
Sales proceeds	$	1,224	$	999

Gross realized gains	$	5	$	156
Gross realized losses		0		0

Net gains on investment securities	$	5	$	156

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 March 31,
	2014			2013
	(Dollars in thousands)
Beginning balance	$	42,945		$	38,738
Non-covered loans and leases charged off		(920	)		(1,347	)
Recoveries of non-covered loans and leases previously charged off		736			331

Net non-covered loans and leases charged off		(184	)		(1,016	)
Covered loans charged off		(204	)		(2,028	)

Net charge-offs – total loans and leases		(388	)		(3,044	)
Provision for loan and lease losses:
Non-covered loans and leases		1,100			700
Covered loans		204			2,028

Total provision		1,304			2,728

Ending balance	$	43,861		$	38,422

At March 31, 2014 and 2013, 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 $0.2 million for such loans during the first quarter of 2014 and $2.0 million for such loans during the first quarter of 2013. The Company also recorded provision for loan and lease losses of $0.2 million during the first quarter of 2014 and $2.0 million during the first quarter of 2013 to cover such charge-offs. In addition to those net charge-offs, the Company transferred certain of these covered loans to covered foreclosed assets. As a result, the Company had $29.3 million and $51.2 million, respectively, of impaired covered loans at March 31, 2014 and 2013.

As of and for the three months ended March 31, 2014 and 2013, the Company had no impaired purchased non-covered loans and recorded no charge-offs, partial charge-offs or provision for such loans.

The following table is a summary of the Company’s ALLL for the periods indicated.


	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Three months ended March 31, 2014:
Real estate:
Residential 1-4 family	$	4,701	$	(199	)	$	22	$	98		$	4,622
Non-farm/non-residential		13,633		(73	)		3		450			14,013
Construction/land development		12,306		0			8		514			12,828
Agricultural		3,000		(15	)		5		28			3,018
Multifamily residential		2,504		0			0		(75	)		2,429
Commercial and industrial		2,855		(374	)		628		(371	)		2,738
Consumer		917		(41	)		18		(63	)		831
Direct financing leases		2,266		(146	)		6		312			2,438
Other		763		(72	)		46		207			944
Covered loans		0		(204	)		0		204			0
Purchased non-covered loans		0		0			0		0			0

Total	$	42,945	$	(1,124	)	$	736	$	1,304		$	43,861

Year ended December 31, 2013:
Real estate:
Residential 1-4 family	$	4,820	$	(837	)	$	106	$	612		$	4,701
Non-farm/non-residential		10,107		(1,111	)		122		4,515			13,633
Construction/land development		12,000		(137	)		174		269			12,306
Agricultural		2,878		(261	)		14		369			3,000
Multifamily residential		2,030		(4	)		4		474			2,504
Commercial and industrial		3,655		(922	)		433		(311	)		2,855
Consumer		1,015		(214	)		104		12			917
Direct financing leases		2,050		(482	)		33		665			2,266
Other		183		(359	)		144		795			763
Covered loans		0		(4,675	)		0		4,675			0
Purchased non-covered loans		0		0			0		0			0

Total	$	38,738	$	(9,002	)	$	1,134	$	12,075		$	42,945

Three months ended March 31, 2013:
Real estate:
Residential 1-4 family	$	4,820	$	(280	)	$	95	$	(78	)	$	4,557
Non-farm/non-residential		10,107		(41	)		102		893			11,061
Construction/land development		12,000		(58	)		5		(631	)		11,316
Agricultural		2,878		0			2		23			2,903
Multifamily residential		2,030		0			0		(40	)		1,990
Commercial and industrial		3,655		(716	)		9		113			3,061
Consumer		1,015		(61	)		58		22			1,034
Direct financing leases		2,050		(80	)		9		161			2,140
Other		183		(111	)		51		237			360
Covered loans		0		(2,028	)		0		2,028			0
Purchased non-covered loans		0		0			0		0			0

Total	$	38,738	$	(3,375	)	$	331	$	2,728		$	38,422

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)
March 31, 2014:
Real estate:
Residential 1-4 family	$	385	$	4,237	$	4,622	$	3,811	$	248,977	$	252,788
Non-farm/non-residential		29		13,984		14,013		1,627		1,142,856		1,144,483
Construction/land development		2		12,826		12,828		325		795,801		796,126
Agricultural		243		2,775		3,018		817		43,091		43,908
Multifamily residential		0		2,429		2,429		0		195,332		195,332
Commercial and industrial		624		2,114		2,738		626		137,038		137,664
Consumer		3		828		831		48		23,721		23,769
Direct financing leases		0		2,438		2,438		0		92,856		92,856
Other		0		944		944		10		91,567		91,577

Total	$	1,286	$	42,575	$	43,861	$	7,264	$	2,771,239	$	2,778,503

December 31, 2013:
Real estate:
Residential 1-4 family	$	438	$	4,263	$	4,701	$	4,047	$	245,509	$	249,556
Non-farm/non-residential		15		13,618		13,633		2,159		1,101,955		1,104,114
Construction/land development		2		12,304		12,306		236		722,321		722,557
Agricultural		229		2,771		3,000		883		44,313		45,196
Multifamily residential		0		2,504		2,504		0		208,337		208,337
Commercial and industrial		652		2,203		2,855		686		123,382		124,068
Consumer		3		914		917		50		26,132		26,182
Direct financing leases		0		2,266		2,266		0		86,321		86,321
Other		2		761		763		26		66,208		66,234

Total	$	1,341	$	41,604	$	42,945	$	8,087	$	2,624,478	$	2,632,565

March 31, 2013:
Real estate:
Residential 1-4 family	$	440	$	4,117	$	4,557	$	2,681	$	253,947	$	256,628
Non-farm/non-residential		36		11,025		11,061		3,166		820,525		823,691
Construction/land development		0		11,316		11,316		334		622,968		623,302
Agricultural		349		2,554		2,903		1,106		48,354		49,460
Multifamily residential		0		1,990		1,990		0		142,714		142,714
Commercial and industrial		661		2,400		3,061		853		126,889		127,742
Consumer		0		1,034		1,034		49		28,502		28,551
Direct financing leases		0		2,140		2,140		0		71,420		71,420
Other		2		358		360		15		34,248		34,263

Total	$	1,488	$	36,934	$	38,422	$	8,204	$	2,149,567	$	2,157,771

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 ended March 31, 2014.


	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Three Months Ended March 31, 2014
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,164	$	(1,726	)	$	1,438	$	385	$	1,677
Non-farm/non-residential		188		(127	)		61		29		53
Construction/land development		38		(22	)		16		2		16
Agricultural		360		(12	)		348		243		409
Commercial and industrial		1,368		(803	)		565		624		588
Consumer		103		(80	)		23		3		23
Other		0		0			0		0		8

Total impaired loans and leases with a related ALLL		5,221		(2,770	)		2,451		1,286		2,774

Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		2,845		(472	)		2,373		0		2,252
Non-farm/non-residential		2,702		(1,136	)		1,566		0		1,840
Construction/land development		390		(81	)		309		0		264
Agricultural		513		(44	)		469		0		441
Multifamily residential		133		(133	)		0		0		0
Commercial and industrial		220		(159	)		61		0		68
Consumer		34		(9	)		25		0		26
Other		30		(20	)		10		0		10

Total impaired loans and leases without a related ALLL		6,867		(2,054	)		4,813		0		4,901

Total impaired loans and leases	$	12,088	$	(4,824	)	$	7,264	$	1,286	$	7,675

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, 2013.


	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Year Ended December 31, 2013
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,609	$	(1,692	)	$	1,917	$	438	$	1,638
Non-farm/non-residential		121		(75	)		46		15		93
Construction/land development		38		(22	)		16		2		17
Agricultural		511		(42	)		469		229		514
Commercial and industrial		2,016		(1,405	)		611		652		578
Consumer		178		(156	)		22		3		10
Other		40		(25	)		15		2		10

Total impaired loans and leases with a related ALLL		6,513		(3,417	)		3,096		1,341		2,860

Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		2,939		(808	)		2,131		0		1,541
Non-farm/non-residential		3,234		(1,120	)		2,114		0		4,344
Construction/land development		300		(81	)		219		0		303
Agricultural		426		(12	)		414		0		404
Multifamily residential		133		(133	)		0		0		124
Commercial and industrial		85		(10	)		75		0		172
Consumer		39		(12	)		27		0		24
Other		31		(20	)		11		0		9

Total impaired loans and leases without a related ALLL		7,187		(2,196	)		4,991		0		6,921

Total impaired loans and leases	$	13,700	$	(5,613	)	$	8,087	$	1,341	$	9,781

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 ended March 31, 2013.


	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Three Months Ended March 31, 2013
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,046	$	(1,688	)	$	1,358	$	440	$	1,513
Non-farm/non-residential		175		(8	)		167		36		185
Construction/land development		90		(90	)		0		0		25
Agricultural		711		(12	)		699		349		629
Commercial and industrial		2,323		(1,723	)		600		661		581
Consumer		12		(12	)		0		0		0
Other		257		(247	)		10		2		10

Total impaired loans and leases with a related ALLL		6,614		(3,780	)		2,834		1,488		2,943

Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		1,534		(211	)		1,323		0		1,281
Non-farm/non-residential		3,606		(607	)		2,999		0		2,848
Construction/land development		466		(132	)		334		0		412
Agricultural		610		(203	)		407		0		416
Multifamily residential		133		(133	)		0		0		0
Commercial and industrial		678		(425	)		253		0		226
Consumer		72		(23	)		49		0		40
Other		25		(20	)		5		0		9

Total impaired loans and leases without a related ALLL		7,124		(1,754	)		5,370		0		5,232

Total impaired loans and leases	$	13,738	$	(5,534	)	$	8,204	$	1,488	$	8,175

Management has determined that certain of the Company’s impaired loans and leases do not require any specific allowance at March 31, 2014 and 2013 or at December 31, 2013 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 ended March 31, 2014 and 2013 and for the year ended December 31, 2013 was not material.

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)
March 31, 2014:
Real estate:
Residential 1-4 family ⁽¹⁾	$	244,259	$	0	$	2,449	$	6,080	$	252,788
Non-farm/non-residential		954,057		130,787		53,658		5,981		1,144,483
Construction/land development		613,474		155,254		23,254		4,144		796,126
Agricultural		21,228		9,914		9,747		3,019		43,908
Multifamily residential		164,062		29,625		389		1,256		195,332
Commercial and industrial		103,039		31,434		1,642		1,549		137,664
Consumer ⁽¹⁾		23,203		0		220		346		23,769
Direct financing leases		91,927		881		0		48		92,856
Other ⁽¹⁾		89,181		2,253		113		30		91,577

Total	$	2,304,430	$	360,148	$	91,472	$	22,453	$	2,778,503

December 31, 2013:
Real estate:
Residential 1-4 family ⁽¹⁾	$	239,940	$	0	$	3,140	$	6,476	$	249,556
Non-farm/non-residential		916,304		128,624		52,388		6,798		1,104,114
Construction/land development		550,436		144,435		23,574		4,112		722,557
Agricultural		21,647		11,098		9,788		2,663		45,196
Multifamily residential		177,144		30,029		391		773		208,337
Commercial and industrial		87,568		33,071		1,664		1,765		124,068
Consumer ⁽¹⁾		25,574		0		230		378		26,182
Direct financing leases		85,363		955		0		3		86,321
Other ⁽¹⁾		63,799		2,237		119		79		66,234

Total	$	2,167,775	$	350,449	$	91,294	$	23,047	$	2,632,565

March 31, 2013:
Real estate:
Residential 1-4 family⁽¹⁾	$	249,396	$	0	$	1,641	$	5,591	$	256,628
Non-farm/non-residential		665,298		97,517		48,170		12,706		823,691
Construction/land development		438,742		134,417		35,128		15,015		623,302
Agricultural		25,658		11,111		9,662		3,029		49,460
Multifamily residential		109,268		32,268		399		779		142,714
Commercial and industrial		96,163		27,126		2,355		2,098		127,742
Consumer⁽¹⁾		27,919		0		204		428		28,551
Direct financing leases		70,187		1,233		0		0		71,420
Other⁽¹⁾		32,357		1,584		261		61		34,263

Total	$	1,714,988	$	305,256	$	97,820	$	39,707	$	2,157,771

(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.

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)
March 31, 2014:
Real estate:
Residential 1-4 family	$	3,167	$	2,108	$	5,275	$	247,513	$	252,788
Non-farm/non-residential		647		1,376		2,023		1,142,460		1,144,483
Construction/land development		7,077		3,950		11,027		785,099		796,126
Agricultural		495		582		1,077		42,831		43,908
Multifamily residential		0		0		0		195,332		195,332
Commercial and industrial		891		16		907		136,757		137,664
Consumer		240		78		318		23,451		23,769
Direct financing leases		59		0		59		92,797		92,856
Other		17		9		26		91,551		91,577

Total	$	12,593	$	8,119	$	20,712	$	2,757,791	$	2,778,503

December 31, 2013:
Real estate:
Residential 1-4 family	$	4,228	$	2,004	$	6,232	$	243,324	$	249,556
Non-farm/non-residential		2,093		1,867		3,960		1,100,154		1,104,114
Construction/land development		235		153		388		722,169		722,557
Agricultural		517		540		1,057		44,139		45,196
Multifamily residential		773		0		773		207,564		208,337
Commercial and industrial		418		31		449		123,619		124,068
Consumer		261		78		339		25,843		26,182
Direct financing leases		0		0		0		86,321		86,321
Other		18		24		42		66,192		66,234

Total	$	8,543	$	4,697	$	13,240	$	2,619,325	$	2,632,565

March 31, 2013:
Real estate:
Residential 1-4 family	$	2,220	$	943	$	3,163	$	253,465	$	256,628
Non-farm/non-residential		3,427		2,917		6,344		817,347		823,691
Construction/land development		313		107		420		622,882		623,302
Agricultural		233		796		1,029		48,431		49,460
Multifamily residential		0		0		0		142,714		142,714
Commercial and industrial		511		221		732		127,010		127,742
Consumer		236		42		278		28,273		28,551
Direct financing leases		0		0		0		71,420		71,420
Other		10		0		10		34,253		34,263

Total	$	6,950	$	5,026	$	11,976	$	2,145,795	$	2,157,771

(1)	Includes $0.6 million, $0.8 million and $0.6 million at March 31, 2014, December 31, 2013 and March 31, 2013, respectively, of loans and leases on nonaccrual status.

(2)	All loans and leases greater than 90 days past due were on nonaccrual status at March 31, 2014 and 2013 and December 31, 2013.

(3)	Includes $3.0 million, $3.2 million and $2.9 million of loans and leases on nonaccrual status at March 31, 2014, December 31, 2013 and March 31, 2013, respectively.

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)
March 31, 2014:
Real estate:
Residential 1-4 family	$	98,333	$	3,621	$	101,954
Non-farm/non-residential		122,022		14,534		136,556
Construction/land development		28,981		10,394		39,375
Agricultural		10,690		339		11,029
Multifamily residential		7,701		310		8,011
Commercial and industrial		7,672		130		7,802
Consumer		87		4		91
Other		137		0		137

Total	$	275,623	$	29,332	$	304,955

December 31, 2013:
Real estate:
Residential 1-4 family	$	105,218	$	5,835	$	111,053
Non-farm/non-residential		138,573		25,135		163,708
Construction/land development		33,475		14,267		47,742
Agricultural		10,807		343		11,150
Multifamily residential		8,709		457		9,166
Commercial and industrial		8,582		137		8,719
Consumer		106		5		111
Other		142		0		142

Total	$	305,612	$	46,179	$	351,791

March 31, 2013:
Real estate:
Residential 1-4 family	$	138,427	$	5,872	$	144,299
Non-farm/non-residential		239,511		25,485		264,996
Construction/land development		73,589		18,700		92,289
Agricultural		17,162		1,001		18,163
Multifamily residential		9,755		142		9,897
Commercial and industrial		13,317		0		13,317
Consumer		352		43		395
Other		912		0		912

Total	$	493,025	$	51,243	$	544,268

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. 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. 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 March 31, 2014 and 2013 and December 31, 2013, 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.

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)
March 31, 2014:
Real estate:
Residential 1-4 family	$	5,555	$	9,273	$	14,828	$	87,126	$	101,954
Non-farm/non-residential		5,318		22,019		27,337		109,219		136,556
Construction/land development		1,616		13,174		14,790		24,585		39,375
Agricultural		974		1,521		2,495		8,534		11,029
Multifamily residential		0		3,145		3,145		4,866		8,011
Commercial and industrial		628		1,674		2,302		5,500		7,802
Consumer		9		0		9		82		91
Other		0		0		0		137		137

Total	$	14,100	$	50,806	$	64,906	$	240,049	$	304,955

December 31, 2013:
Real estate:
Residential 1-4 family	$	5,341	$	12,409	$	17,750	$	93,303	$	111,053
Non-farm/non-residential		6,954		32,462		39,416		124,292		163,708
Construction/land development		2,173		20,914		23,087		24,655		47,742
Agricultural		237		1,328		1,565		9,585		11,150
Multifamily residential		375		3,240		3,615		5,551		9,166
Commercial and industrial		605		2,001		2,606		6,113		8,719
Consumer		10		0		10		101		111
Other		0		0		0		142		142

Total	$	15,695	$	72,354	$	88,049	$	263,742	$	351,791

March 31, 2013:
Real estate:
Residential 1-4 family	$	10,263	$	19,527	$	29,790	$	114,509	$	144,299
Non-farm/non-residential		12,416		50,173		62,589		202,407		264,996
Construction/land development		7,404		38,357		45,761		46,528		92,289
Agricultural		1,614		3,441		5,055		13,108		18,163
Multifamily residential		1,557		2,670		4,227		5,670		9,897
Commercial and industrial		676		3,772		4,448		8,869		13,317
Consumer		178		8		186		209		395
Other		0		0		0		912		912

Total	$	34,108	$	117,948	$	152,056	$	392,212	$	544,268

At March 31, 2014 and 2013 and December 31, 2013, 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 or better than management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

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)
March 31, 2014:
Real estate:
Residential 1-4 Family	$	27,899	$	37,442	$	21,933	$	34,004	$	0	$	17,374	$	0	$	138,652
Non-farm/non-residential		59,720		102,836		32,160		2,701		0		18,911		0		216,328
Construction/land development		9,880		18,384		10,605		4,550		0		11,094		0		54,513
Agricultural		1,260		7,490		842		146		0		360		0		10,098
Multifamily residential		3,216		5,903		5,002		1,046		0		3,098		0		18,265

Total real estate		101,975		172,055		70,542		42,447		0		50,837		0		437,856
Commercial and industrial		10,766		14,526		5,138		2,648		0		5,303		0		38,381
Consumer		1,448		204		332		4,065		0		560		0		6,609
Other		1,204		2,835		529		200		0		919		0		5,687

Total	$	115,393	$	189,620	$	76,541	$	49,360	$	0	$	57,619	$	0	$	488,533

December 31, 2013:
Real estate:
Residential 1-4 Family	$	27,111	$	32,259	$	21,035	$	35,733	$	0	$	14,947	$	0	$	131,085
Non-farm/non-residential		42,193		72,621		20,685		1,191		0		16,258		0		152,948
Construction/land development		5,930		8,106		2,137		4,553		0		4,907		0		25,633
Agricultural		1,547		6,619		823		164		0		365		0		9,518
Multifamily residential		3,531		5,565		5,268		959		0		1,887		0		17,210

Total real estate		80,312		125,170		49,948		42,600		0		38,364		0		336,394
Commercial and industrial		9,592		9,730		2,250		1,879		0		1,483		0		24,934
Consumer		1,013		141		171		4,794		0		736		0		6,855
Other		1,202		2,897		157		237		0		47		0		4,540

Total	$	92,119	$	137,938	$	52,526	$	49,510	$	0	$	40,630	$	0	$	372,723

March 31, 2013:
Real estate:
Residential 1-4 Family	$	3,290	$	6,883	$	5,164	$	864	$	0	$	2,533	$	0	$	18,734
Non-farm/non-residential		395		920		2,663		54		0		359		0		4,391
Construction/land development		389		670		129		161		0		576		0		1,925
Agricultural		767		819		700		139		0		543		0		2,968

Total real estate		4,841		9,292		8,656		1,218		0		4,011		0		28,018
Commercial and industrial		325		1,485		1,166		375		0		640		0		3,991
Consumer		728		140		67		1,246		0		1,310		0		3,491
Other		159		114		88		2,020		0		190		0		2,571

Total	$	6,053	$	11,031	$	9,977	$	4,859	$	0	$	6,151	$	0	$	38,071

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

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.

The following grades are used for purchased non-covered loans with evidence of credit deterioration at the date of acquisition.

FV 66 – Loans in this category are performing in accordance with or exceeding management’s performance expectations established in conjunction with the determination of Day 1 Fair Values.

FV 88 – Loans in this category have deteriorated from management’s performance expectations established in conjunction with the determination of Day 1 Fair Values.

The Company had no loans rated FV 77 or FV 88 at March 31, 2014 and 2013 or December 31, 2013. Additionally, the Company had no allowance for its purchased non-covered loans at March 31, 2014 and 2013 or December 31, 2013 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)
March 31, 2014:
Real estate:
Residential 1-4 family	$	5,902	$	5,985	$	11,887	$	126,765	$	138,652
Non-farm/non-residential		3,842		7,126		10,968		205,360		216,328
Construction/land development		363		3,363		3,726		50,787		54,513
Agriculture		155		26		181		9,917		10,098
Multifamily residential		0		1,994		1,994		16,271		18,265
Commercial and industrial		400		304		704		37,677		38,381
Consumer		170		179		349		6,260		6,609
Other		8		19		27		5,660		5,687

Total	$	10,840	$	18,996	$	29,836	$	458,697	$	488,533

December 31, 2013:
Real estate:
Residential 1-4 family	$	6,615	$	4,703	$	11,318	$	119,767	$	131,085
Non-farm/non-residential		4,886		5,779		10,665		142,283		152,948
Construction/land development		265		4,045		4,310		21,323		25,633
Agriculture		134		25		159		9,359		9,518
Multifamily residential		421		1,225		1,646		15,564		17,210
Commercial and industrial		614		388		1,002		23,932		24,934
Consumer		411		237		648		6,207		6,855
Other		0		33		33		4,507		4,540

Total	$	13,346	$	16,435	$	29,781	$	342,942	$	372,723

March 31, 2013:
Real estate:
Residential 1-4 family	$	1,277	$	540	$	1,817	$	18,570	$	20,387
Construction/land development		442		112		554		4,108		4,662
Agriculture		79		442		521		2,448		2,969
Multifamily residential		0		0		0		0		0
Commercial and industrial		346		84		430		3,561		3,991
Consumer		197		136		333		3,158		3,491
Other		220		81		301		2,270		2,571

Total	$	2,561	$	1,395	$	3,956	$	34,115	$	38,071

7. Income Taxes

The following table is a summary of the types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities and their approximate tax effects as of the dates indicated.


	March 31,						December 31,
	2014			2013			2013
	(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses	$	16,842		$	14,830		$	16,576
Differences in amounts reflected in financial statements and income tax basis of purchased non-covered loans		18,453			1,288			17,167
Stock-based compensation		1,415			1,358			2,400
Deferred compensation		1,888			1,818			1,775
Foreclosed assets		4,831			3,047			3,165
Investment securities AFS		600			0			5,056
Differences in amounts reflected in financial statements and income tax basis of assets acquired and liabilities assumed in FDIC-assisted acquisitions		5,393			0			3,424
Acquired net operating losses		13,180			0			7,509
Other, net		4,891			0			3,858

Total gross deferred tax assets		67,493			22,341			60,930
Less valuation allowance		(4,529	)		0			(4,102	)

Net deferred tax asset		62,964			22,341			56,828

Deferred tax liabilities:
Accelerated depreciation on premises and equipment		17,954			14,851			17,459
Investment securities AFS		0			6,952			0
Differences in amounts reflected in financial statements and income tax basis of assets acquired and liabilities assumed in FDIC-assisted acquisitions		0			6,103			0
Acquired intangible assets		5,066			616			4,227
Other, net		0			1,600			0

Total gross deferred tax liabilities		23,020			30,122			21,686

Net deferred tax assets (liabilities)	$	39,944		$	(7,781	)	$	35,142

Net operating losses were acquired from the First National Bank and Bancshares transactions. The net operating losses acquired from the First National Bank transaction totaled $19.0 million, of which $11.5 million expires in 2032 and $7.5 million expires in 2033. The net operating losses acquired from the Bancshares transaction totaled $16.3 million, which will expire at various dates from 2030 through 2034.

As a result of recording, at fair value, acquired assets and assumed liabilities pursuant to business combinations, differences in amounts reported for financial statement purposes and their related basis for federal and state income tax purposes are created. Such differences are recorded as deferred tax assets and liabilities using enacted tax rates in effect for the year or years in which the differences are expected to be recovered or settled. Business combination transactions may result in the acquisition of net operating loss carryforwards and other assets with built-in losses, the realization of which are subject to section 382 limitations. In determining the section 382 limitation associated with a business combination, management must make a number of estimates and assumptions regarding the ability to utilize acquired net operating loss carryforwards and the expected timing of future recoveries or settlements of acquired assets with built-in losses. To the extent that information available as of the date of acquisition results in a determination by management that some portion of net operating loss carryforwards cannot be utilized or assets with built-in losses is expected to be settled or recovered in future periods in which the ability to realize the benefits will be subject to section 382 limitations, a deferred tax valuation allowance is established for the estimated amount of the deferred tax assets subject to the section 382 limitation. To the extent that information becomes available, during the first 12 months following the consummation of a business combination transaction, that results in changes in management’s initial estimates and assumptions regarding the expected utilization of net operating loss carryforwards or the expected settlement or recovery of acquired assets with built-in losses subject to section 382 limitations, an increase or decrease of the deferred tax valuation allowance will be recorded as an adjustment to bargain purchase gain or goodwill. To the extent that such information becomes available 12 months or more after the consummation of a business combination transaction, or additional information becomes available during the first 12 months as a result of changes in circumstances since the date of the consummation of a business combination transaction, an increase or decrease of the deferred tax valuation allowance will be recorded as an adjustment to deferred income tax expense (benefit).

In connection with the acquisitions of First National Bank and Bancshares, management determined that net operating loss carryforwards and other assets with built-in losses are expected to be settled or otherwise recovered in future periods where the realization of such benefits would be subject to section 382 limitations. Accordingly, at March 31, 2014, the Company had established a deferred tax valuation allowance of approximately $4.5 million, of which $4.1 million relates to the First National Bank acquisition and $0.4 million relates to the Bancshares acquisition, to reflect its assessment that the realization of the benefits from the settlement or recovery of certain of these acquired assets and net operating losses is expected to be subject to section 382 limitations. To the extent that additional information becomes available, management may be required to adjust its estimates and assumptions regarding the realization of the benefits associated with these acquired assets by adjusting the deferred tax valuation allowance.

8. Supplemental Data for Cash Flows

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


	Three Months Ended
	March 31,
	2014		2013
	(Dollars in thousands)
Cash paid during the period for:
Interest	$	4,782	$	4,606
Taxes		772		4,552
Supplemental schedule of non-cash investing and financing activities:
Net change in unrealized gains/losses on investment securities AFS		11,325		(2,885	)
Loans and other assets transferred to foreclosed assets not covered by FDIC loss share agreements		2,205		915
Loans advanced for sales of foreclosed assets not covered by FDIC loss share agreements		0		41
Covered loans transferred to covered foreclosed assets		15,229		8,036
Unsettled AFS investment security purchases		2,267		4,006

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 March 31, 2014 was $4.8 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at March 31, 2014 totaled $4.3 million.

At March 31, 2014 the Company had outstanding commitments to extend credit, excluding mortgage interest rate lock commitments, totaling $1.42 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 as of the date indicated.


Contractual Maturities at March 31, 2014
Maturity	Amount
(Dollars in thousands)
2014	$	122,993
2015		150,413
2016		484,602
2017		430,883
2018		200,667
Thereafter		25,641

Total	$	1,415,199

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 March 31, 2014 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 period indicated.


Three Months Ended March 31, 2014:	Options			Weighted- Average Exercise Price/Share		Weighted-Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding – January 1, 2014		883,300		$	31.67
Granted		0			0.00
Exercised		(88,300	)		17.05
Forfeited		(8,150	)		34.90

Outstanding – March 31, 2014		786,850			33.28		5.4	$	27,368	⁽¹⁾

Fully vested and exercisable – March 31, 2014		152,800		$	21.11		4.5	$	7,174	⁽¹⁾

Expected to vest in future periods		507,640

Fully vested and expected to vest – March 31, 2014⁽²⁾		660,440		$	32.73		5.4	$	23,336	⁽¹⁾

(1)	Based on closing price of $68.06 per share on March 31, 2014.

(2)	At March 31, 2014 the Company estimated that outstanding options to purchase 126,410 shares of its common stock would not vest and would 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 three months ended March 31, 2014 and 2013 was $3.9 million and $2.2 million, respectively.

No options to purchase shares of the Company’s stock were issued during the three months ended March 31, 2014 or 2013. Stock-based compensation expense for stock options included in non-interest expense was $0.4 million for each of the quarters ended March 31, 2014 and 2013. Total unrecognized compensation cost related to non-vested stock option grants was $3.1 million at March 31, 2014 and is expected to be recognized over a weighted-average period of 2.1 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 March 31, 2014 were issued with a vesting date of three years after issuance.

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


	Three Months Ended
	March 31, 2014
Outstanding – January 1, 2014		308,050
Granted		0
Forfeited		0
Vested		0

Outstanding – March 31, 2014		308,050

Weighted-average grant date fair value	$	35.97

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 $0.9 million and $0.6 million for the three months ended March 31, 2014 and 2013, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $7.0 million at March 31, 2014 and is expected to be recognized over a weighted-average period of 2.2 years.

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 for the dates indicated that are accounted for at fair value.


	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
March 31, 2014:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	434,201	$	18,547	$	452,748
U.S. Government agency securities		0		219,740		0		219,740
Corporate obligations		0		686		0		686

Total investment securities AFS		0		654,627		18,547		673,174
Impaired non-covered loans and leases		0		0		5,978		5,978
Impaired covered loans		0		0		29,332		29,332
Foreclosed assets not covered by FDIC loss share agreements		0		0		17,076		17,076
Foreclosed assets covered by FDIC loss share agreements		0		0		43,793		43,793

Total assets at fair value	$	0	$	654,627	$	114,726	$	769,353

December 31, 2013:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	417,307	$	18,682	$	435,989
U.S. Government agency securities		0		218,869		0		218,869
Corporate obligations		0		716		0		716

Total investment securities AFS		0		636,892		18,682		655,574
Impaired non-covered loans and leases		0		0		8,087		8,087
Impaired covered loans		0		0		46,179		46,179
Foreclosed assets not covered by FDIC loss share agreements		0		0		11,851		11,851
Foreclosed assets covered by FDIC loss share agreements		0		0		37,960		37,960

Total assets at fair value	$	0	$	636,892	$	122,759	$	759,651

March 31, 2013:
Investment securities AFS⁽¹⁾:
Obligations of state and political subdivisions	$	0	$	359,009	$	21,227	$	380,236
U.S. Government agency securities		0		66,089		26,874		92,963
Corporate obligations		0		748		0		748

Total investment securities AFS		0		425,846		48,101		473,947
Impaired non-covered loans and leases		0		0		6,716		6,716
Impaired covered loans		0		0		51,243		51,243
Foreclosed assets not covered by FDIC loss share agreements		0		0		11,290		11,290
Foreclosed assets covered by FDIC loss share agreements		0		0		51,040		51,040

Total assets at fair value	$	0	$	425,846	$	168,390	$	594,236

(1)	Does not include $14.5 million at March 31, 2014; $13.8 million at December 31, 2013 and $13.7 million at March 31, 2013 of FHLB – Dallas and FNBB stock that do not have readily determinable fair values and are carried at cost.

The following table presents information related to Level 3 non-recurring fair value measurements as of the date indicated.


Description	Fair Value at March 31, 2014		Technique	Unobservable Inputs
(Dollars in thousands)
Impaired non-covered loans and leases	$	5,978	Third party appraisal⁽¹⁾ or discounted cash flows	1. Management discount based on underlying collateral characteristics and market conditions 2. Life of loan
Impaired covered loans	$	29,332	Third party appraisal⁽¹⁾ and/or discounted cash flows	1. Life of loan 2. Discount rate
Foreclosed assets not covered by FDIC loss share agreements	$	17,076	Third party appraisal,⁽¹⁾ 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	$	43,793	Third party appraisal,⁽¹⁾ broker price opinions and/or discounted cash flows	1. Management discount based on asset characteristics and market conditions 2. Discount rate 3. Holding period

(1)	The Company utilizes valuation techniques consistent with the market, cost, and income approaches, or a combination thereof in determining fair value.

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 March 31, 2014. 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 $18.5 million at March 31, 2014 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 March 31, 2014, the third parties’ pricing matrices valued the Company’s portfolio of private placement bonds at $18.6 million which exceeded the aggregate of the lower of the matrix pricing or par value of the private placement bonds by $0.1 million. Accordingly, at March 31, 2014, the Company reported the private placement bonds at $18.5 million, which was the lower of the matrix pricing or par value.

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 March 31, 2014 the Company had reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $6.1 million to the estimated fair value of $6.0 million. The $6.1 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $4.8 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 March 31, 2014, 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 $0.2 million for such loans during the first quarter of 2014. The Company also recorded provision for loan and lease losses of $0.2 million during the first quarter of 2014 to cover such charge-offs. At March 31, 2014, the Company had $29.3 million of impaired covered loans.

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 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 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 foreclosed assets held for sale are generally based on third party appraisals, broker price opinions or other valuations of property, resulting in a Level 3 classification.

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, 2014	$	18,682
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		248
Paydowns and maturities		(383	)
Sales		0
Transfers in and/or out of Level 3		0

Balance – March 31, 2014	$	18,547

Balance – January 1, 2013	$	104,172
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		(108	)
Paydowns and maturities		(27,570	)
Sales		0
Transfers in and/or out of Level 3		(28,393	)

Balance – March 31, 2013	$	48,101

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 $14.5 million at March 31, 2014, $13.8 million at December 31, 2013 and $13.7 million at March 31, 2013, do not have readily determinable fair values and are carried at cost.

Loans and leases – The fair value of loans and leases, including covered loans and purchased non-covered loans, 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 March 31, 2014 and 2013 or at December 31, 2013.

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.

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.


			March 31,
			2014				2013				December 31, 2013
	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	$	188,351	$	188,351	$	162,575	$	162,575	$	195,975	$	195,975
Investment securities AFS		Levels 2 and 3		687,661		687,661		487,648		487,648		669,384		669,384
Loans and leases, net of ALLL		Level 3		3,528,130		3,496,946		2,701,688		2,688,826		3,314,134		3,286,600
FDIC loss share receivable		Level 3		57,782		57,722		132,699		132,470		71,854		71,770
Financial liabilities:
Demand, savings and interest bearing transaction deposits		Level 1	$	3,085,886	$	3,085,886	$	2,242,727	$	2,242,727	$	2,819,817	$	2,819,817
Time deposits		Level 2		830,318		830,583		748,345		748,918		897,210		897,708
Repurchase agreements with customers		Level 1		51,140		51,140		30,714		30,714		53,103		53,103
Other borrowings		Level 2		280,885		317,186		280,756		326,367		280,895		319,650
FDIC clawback payable		Level 3		26,202		26,202		25,384		25,384		25,897		25,897
Subordinated debentures		Level 2		64,950		32,767		64,950		30,603		64,950		30,974

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
	March 31,
	2014			2013
	(Dollars in thousands)
Beginning balance of AOCI – unrealized gains and losses on investment securities AFS	$	(3,672	)	$	10,783
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications		6,886			(1,660	)
Amounts reclassified from AOCI		(3	)		(94	)

Total other comprehensive income (loss)		6,883			(1,754	)

Ending balance of AOCI – unrealized gains and losses on investment securities AFS	$	3,211		$	9,029

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 March 31, 2014 and 2013, respectively, amounts reclassified for net gains on investment securities were $5,000 and $156,000, with related tax effects of $2,000 and $62,000, respectively.

14. Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-04 “Receivables – Troubled Debt Restructurings by Creditors (Sub topic 310-04) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.” The provisions of this ASU clarify when an in substance foreclosure occurs and require a creditor to reclassify a collateralized consumer mortgage loan to real estate owned upon obtaining legal title to the real estate collateral, or a deed in lieu of foreclosure, or similar legal agreement that is voluntarily provided by the borrower to satisfy the loan. ASU 2014-04 is effective for reporting periods beginning January 1, 2014. The proposed provisions of ASU 2014-04 did not have a material impact on the Company’s financial position, results of operations, or liquidity.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion explains the financial condition and results of operations of Bank of the Ozarks, Inc. (“the Company”) as of and for the three months ended March 31, 2014. The purpose of this discussion is to focus on information about the Company’s financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 previously filed with the Securities and Exchange Commission (“SEC”). Annualized results for these interim periods may not be indicative of results for the full year or future periods.

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, gains on investment securities and from sales of other assets, and gains on merger and acquisition transactions.

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.

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 provisions 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) provisions 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.

Provisions to and adequacy of the ALLL. The ALLL is established through a provision for such losses charged against income. All or portions of loans or leases, excluding purchased non-covered loans and covered loans, 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. Provisions 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 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 an 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. These risk elements include, among others, the following: (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.

Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition 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 grade 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 probable 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 March 31, 2014 and 2013, 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 will be charged against the ALLL. Loans 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 are considered troubled debt restructurings (“TDRs”) and are 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. For the three months ended March 31, 2014, there were no defaults during the preceding 12 months on any loans that were considered TDRs.

All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan or lease, excluding purchased non-covered loans with evidence of credit deterioration at the date of purchase 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. 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 allowance 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 is also 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 evaluates such loans and leases to determine if an allowance is needed for these loans and leases. For the purpose of calculating the amount of such allowance, management 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 the need for such an allowance exceeds its net collateral value or its estimated discounted cash flows, such excess is considered allocated allowance for purposes of the determination of the ALLL.

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 allowance 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 judgments and estimates.

Fair value of the investment securities portfolio. Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At March 31, 2014 and 2013 and December 31, 2013, the Company has classified all of its investment securities as available for sale (“AFS”).

AFS investment securities are stated at estimated fair value, with the unrealized gains and losses determined on a specific identification basis. Such unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity and included in other comprehensive income (loss). 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 or 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 may include certain unobservable inputs. All fair value estimates received by the Company for its investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

Declines in the fair value of investment securities below their amortized cost are reviewed at least quarterly by the Company for other-than-temporary impairment. Factors considered during such review include, among other things, the length of time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer. The Company also assesses whether it has the intent to sell the investment security or more likely than not would be required to sell the investment security before any anticipated recovery in fair value. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through the income statement. For securities that do not meet the aforementioned criteria, the amount of impairment is split into (i) other-than-temporary impairment related to credit loss, which must be recognized in the income statement, and (ii) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

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 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. 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 Institute of Certified Public Accountants’ (“AICPA”) December 18, 2009 letter in which the AICPA summarized the SEC’s 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 decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in expected 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. Any such increase or decrease in expected cash flows will result in a corresponding adjustment of the FDIC loss share receivable and accretion or amortization thereof and the FDIC clawback payable or the amortization 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 March 31, 2014, 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 2.5 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 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 ALLL. 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. 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 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.

Purchased non-covered loans include a small volume of non-covered loans acquired in FDIC-assisted acquisitions and loans acquired in the Genala Banc, Inc. (“Genala”), The First National Bank of Shelby (“First National Bank”) and Bancshares Inc. (“Bancshares”) acquisitions and are initially recorded at fair value on the date of purchase. Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are carried at the net present value of expected future proceeds. All other purchased non-covered loans are recorded at their initial fair value, adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on purchase, charge-offs and any other adjustment to carrying value.

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 current information indicates it is probable that the Company will collect all amounts according to the contractual terms thereof, 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 probable 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 increases in expected cash flows will 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 expected 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.

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 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 ALLL. 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. 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 FV88, 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.

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 initially measured at Day 1 Fair Values, the FDIC loss share receivable is also initially measured and recorded at Day 1 Fair Values, and is calculated by discounting the cash flows expected to be received from the FDIC. A discount rate of 5.0% per annum was used to determine the Day 1 Fair Values of the FDIC loss share receivable. 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 or amortization thereof is 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 or amortizing 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 agreements, 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 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 or pricing matrices, or a combination thereof. Additionally, these valuations may include certain unobservable inputs. The Day 1 Fair Values of assumed liabilities in business combinations are generally the amounts payable by the Company necessary to completely satisfy the assumed obligations.

As a result of recording, at fair value, acquired assets and assumed liabilities pursuant to business combinations, differences in amounts reported for financial statement purposes and their related basis for federal and state income tax purposes are created. Such differences are recorded as deferred tax assets and liabilities using enacted tax rates in effect for the year or years in which the differences are expected to be recovered or settled. Business combination transactions may result in the acquisition of net operating loss carryforwards and other assets with built-in losses, the realization of which is subject to limitations pursuant to section 382 (“section 382 limitations”) of the Internal Revenue Code (“IRC”). In determining the section 382 limitation associated with a business combination, management must make a number of estimates and assumptions regarding the ability to utilize acquired net operating loss carryforwards and the expected timing of future recoveries or settlements of acquired assets with built-in losses. To the extent that information available as of the date of acquisition results in a determination by management that some portion of net operating loss carryforwards cannot be utilized or assets with built-in losses are expected to be settled or recovered in future periods in which the ability to realize the benefits will be subject to section 382 limitations, a deferred tax valuation allowance is established for the estimated amount of the deferred tax assets subject to the section 382 limitation. To the extent that information becomes available, during the first 12 months following the consummation of a business combination transaction, that results in changes in management’s initial estimates and assumptions regarding the expected utilization of net operating loss carryforwards or the expected settlement or recovery of acquired assets with built-in losses subject to section 382 limitations, an increase or decrease of the deferred tax valuation allowance will be recorded as an adjustment to bargain purchase gain or goodwill. To the extent that such information becomes available 12 months or more after the consummation of a business combination transaction, or additional information becomes available during the first 12 months as a result of changes in circumstances since the date of the consummation of a business combination transaction, an increase or decrease of the deferred tax valuation allowance will be recorded as an adjustment to deferred income tax expense (benefit).

ANALYSIS OF RESULTS OF OPERATIONS

General

Net income available to common stockholders for the Company was $25.3 million for the first quarter of 2014, a 26.4% increase from $20.0 million for the first quarter of 2013. Diluted earnings per common share were $0.68 for the first quarter of 2014, a 21.4% increase from $0.56 for the first quarter of 2013.

The Company’s annualized return on average assets was 2.12% for the first quarter of 2014 compared to 2.06% for the first quarter of 2013. Its annualized return on average common stockholders’ equity was 16.06% for the first quarter of 2014 compared to 15.77% for the first quarter of 2013.

Total assets were $5.03 billion at March 31, 2014 compared to $4.79 billion at December 31, 2013. Loans and leases, excluding purchased non-covered loans and covered loans, were $2.78 billion at March 31, 2014 compared to $2.63 billion at December 31, 2013. Total loans and leases, including purchased non-covered loans and covered loans, were $3.57 billion at March 31, 2014 compared to $3.36 billion at December 31, 2013. Deposits were $3.92 billion at March 31, 2014 compared to $3.72 billion at December 31, 2013.

Common stockholders’ equity was $653 million at March 31, 2014 compared to $625 million at December 31, 2013. Book value per common share was $17.68 at March 31, 2014 compared to $16.96 at December 31, 2013. Tangible book value per common share was $17.11 at March 31, 2014 compared to $16.44 at December 31, 2013. 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.

During 2013, the Company completed its acquisition of First National Bank effective July 31, 2013. 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 for the three months ended March 31, 2013 do not include the acquired operations of First National Bank.

During 2014, the Company completed its acquisition of Bancshares effective March 5, 2014. 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 March 5, 2014, the Company’s consolidated results of operations for the three months ended March 31, 2013 do not include the acquired operations of Bancshares, and the Company’s consolidated results for the three months ended March 31, 2014 include twenty-six days of the acquired operations of Bancshares.

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 $2.4 million and $2.0 million for the quarters ended March 31, 2014 and 2013, 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 IRC as a result of investment in certain tax-exempt securities.

Net interest income for the first quarter of 2014 increased 18.8% to $54.8 million compared to $46.2 million for the first quarter of 2013. Net interest margin was 5.46% for the first quarter of 2014 compared to 5.83% for the first quarter of 2013. The increase in net interest income for the first quarter of 2014 was primarily due to the increase in average earning assets, which increased 26.6% to $4.07 billion for the first quarter of 2014 compared to $3.21 billion for the first quarter of 2013, partially offset by the decline in net interest margin.

The Company’s net interest margin decreased 37 basis points (“bps”) to 5.46 % for the first quarter of 2014 compared to 5.83% for the first quarter in 2013. This decrease was primarily due to a 48 bps decrease in yields on average earning assets, partially offset by a nine bps reduction in rates paid on interest bearing liabilities.

Yields on earning assets decreased 48 bps to 5.93% for the first quarter of 2014 compared to 6.41% for the first quarter of 2013. The yield on the Company’s portfolio of loans and leases, excluding purchased non-covered loans and covered loans, decreased 59 bps for the first quarter of 2014 compared to the first quarter of 2013. 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. The yield on the Company’s aggregate investment securities portfolio decreased 58 bps for the first quarter compared to the same period in 2013 primarily due to changes in the composition of the Company’s investment securities portfolio between taxable and tax-exempt investment securities as a result of the investment securities acquired in the First National Bank transaction. During the first quarter of 2014, taxable investment securities comprised 40.7% and tax-exempt investment securities comprised 59.3% of average investment securities. During the first quarter of 2013, taxable investment securities comprised 29.6% and tax-exempt investment securities comprised 70.4% of average investment securities. Additionally, the yield on the Company’s purchased non-covered loan portfolio decreased 247 bps for the first quarter of 2014 compared to the first quarter of 2013. This decrease was primarily attributable to the loans acquired in the First National Bank and Bancshares transactions, many of which did not contain evidence of credit deterioration on the date of purchase and were priced at a lower yield compared to the Company’s then existing yield on its purchased non-covered loan portfolio. These decreases were partially offset by the 243 bps increase in the yield on covered loans for the first quarter of 2014 compared to the first quarter in 2013. The increase in yields on covered loans was primarily due to upward revisions of estimated cash flows of certain covered loans as a result of recent evaluations of expected performance of such loans.

The decrease 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 four bps for the first quarter of 2014 compared to the first quarter of 2013. This decrease in the rate on interest bearing deposits was principally due to (i) 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; and (ii) a change in the mix of savings and interest bearing deposit accounts to 71.3% of total average interest bearing deposits for the first quarter of 2014 compared to 68.6% for the first quarter of 2013. During recent quarters, the Company has 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 earning 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 Home Loan Bank of Dallas (“FHLB – Dallas”) advances, and, to a lesser extent, Federal Reserve borrowings and federal funds purchased and (iii) subordinated debentures. The rates on repos decreased one bps for the first quarter of 2014 compared to the first quarter of 2013. The rate on the Company’s other borrowings, which consist primarily of fixed rate callable FHLB – Dallas advances, was unchanged in the first quarter of 2014 compared to the first quarter of 2013. 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 nine bps in the first quarter of 2014 compared to the first quarter of 2013.

The increase in average earning assets for the first quarter of 2014 compared to the first quarter of 2013 was due to increases in the average balances of loans and leases of $531 million, an increase in average balances of purchased non-covered loans of $362 million, primarily as a result of the First National Bank and Bancshares acquisitions, and an increase in average balances of investment securities of $205 million, primarily as a result of the First National Bank acquisition. These increases were partially offset by a decrease in the average balance of covered loans of $241 million.

The following table sets forth certain information relating to the Company’s net interest income for the periods indicated. The yields and rates are derived by dividing interest income or interest expense by the average balance of the related assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances for such assets and liabilities. The average balance of loans and leases includes loans and leases on which the Company has discontinued accruing interest. The average balances of investment securities are computed based on amortized cost adjusted for unrealized gains and losses on investment securities AFS and other-than-temporary impairment writedowns. The yields on loans and leases include late fees and amortization of certain deferred fees and origination costs, which are considered adjustments to yields. The yields on investment securities include amortization of premiums and accretion of discounts. The yields on covered loans and purchased non-covered loans consist of accretion of the net present value of expected future cash flows using the effective yield method over the term of the loans and include late fees. Interest expense and rates on other borrowings are presented net of interest capitalized on construction projects.

Average Consolidated Balance Sheets and Net Interest Analysis – FTE


	Three Months Ended March 31,
	2014							2013
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate
	(Dollars in thousands)
ASSETS
Earning assets:
Interest earning deposits and federal funds sold	$	1,079	$	3		1.19	%	$	2,850	$	7		1.00	%
Investment securities:
Taxable		276,563		2,360		3.46			140,395		1,285		3.71
Tax-exempt – FTE		403,352		6,764		6.80			334,424		5,760		6.99
Loans and leases – FTE		2,656,050		33,469		5.11			2,124,721		29,884		5.70
Purchased non-covered loans		402,199		7,480		7.54			40,046		989		10.01
Covered loans		329,302		9,405		11.58			570,105		12,864		9.15

Total earning assets – FTE		4,068,545		59,481		5.93			3,212,541		50,789		6.41
Non-interest earning assets		756,325							717,097

Total assets	$	4,824,870						$	3,929,638

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest bearing transaction	$	2,096,018	$	1,067		0.21	%	$	1,665,324	$	864		0.21	%
Time deposits of $100,000 or more		382,852		235		0.25			334,805		289		0.35
Other time deposits		458,254		279		0.25			426,712		393		0.37

Total interest bearing deposits		2,937,124		1,581		0.22			2,426,841		1,546		0.26
Repurchase agreements with customers		65,045		12		0.08			33,953		7		0.09
Other borrowings		280,926		2,655		3.83			280,758		2,649		3.83
Subordinated debentures		64,950		413		2.58			64,950		428		2.67

Total interest bearing liabilities		3,348,045		4,661		0.56			2,806,502		4,630		0.67
Non-interest bearing liabilities:
Non-interest bearing deposits		790,861							551,348
Other non-interest bearing liabilities		44,164							53,966

Total liabilities		4,183,070							3,411,816
Common stockholders’ equity		638,334							514,378
Noncontrolling interest		3,466							3,444

Total liabilities and stockholders’ equity	$	4,824,870						$	3,929,638

Net interest income – FTE			$	54,820						$	46,159

Net interest margin – FTE						5.46	%						5.83	%

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—FTE, interest expense and net interest income—FTE 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 March 31, 2014 Over Three Months Ended March 31, 2013
				Yield/			Net
	Volume			Rate			Change
	(Dollars in thousands)
Increase (decrease) in:
Interest income – FTE:
Interest earning deposits and federal funds sold	$	(5	)	$	1		$	(4	)
Investment securities:
Taxable		1,163			(88	)		1,075
Tax-exempt – FTE		1,156			(152	)		1,004
Loans and leases – FTE		6,694			(3,109	)		3,585
Purchased non-covered loans		6,735			(244	)		6,491
Covered loans		(6,878	)		3,419			(3,459	)

Total interest income – FTE		8,865			(173	)		8,692

Interest expense:
Savings and interest bearing transaction		219			(16	)		203
Time deposits of $100,000 or more		30			(84	)		(54	)
Other time deposits		19			(133	)		(114	)
Repurchase agreements with customers		6			(1	)		5
Other borrowings		1			5			6
Subordinated debentures		—			(15	)		(15	)

Total interest expense		275			(244	)		31

Increase in net interest income – FTE	$	8,590		$	71		$	8,661

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, gains on investment securities and on sales of other assets and gains on merger and acquisition transactions.

Non-interest income for the first quarter of 2014 increased 24.5% to $20.4 million compared to $16.4 million for the first quarter of 2013. The Company’s results for the first quarter of 2014 included $4.7 million of tax-exempt bargain purchase gain from the acquisition of Bancshares. The Company’s results for the first quarter of 2013 included no bargain purchase gain.

Service charges on deposit accounts increased 19.4% to $5.6 million for the first quarter of 2014 compared to $4.7 million for the first quarter of 2013. The increase in service charges on deposit accounts was primarily a result of growth in the number of transaction accounts and the addition of deposit customers from the Company’s First National Bank and Bancshares acquisitions.

Mortgage lending income decreased 45.2% to $1.0 million for the first quarter of 2014 compared to $1.7 million for the first quarter of 2013. The volume of originations of mortgage loans available for sale decreased 35.3% for the first quarter of 2014 compared to the first quarter in 2013. During the first quarter of 2014, approximately 27% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 73% were related to new home purchases, compared to approximately 64% for refinancings and approximately 36% for new home purchases in the first quarter of 2013.

Trust income was $1.3 million in the first quarter of 2014, an increase of 49.0% from $0.9 million for the first quarter of 2013. The increase in trust income was primarily due to new trust customers added as a result of the First National Bank acquisition.

The Company recognized $0.7 million of income from the accretion of the FDIC loss share receivable, net of amortization of the FDIC clawback payable, during the first quarter of 2014 compared to $2.4 million during the first quarter of 2013. The decrease in income from the accretion of the FDIC loss share receivable for the first quarter of 2014 compared to the first quarter of 2013 was due to both a decrease in the balance of the FDIC loss share receivable and upward revisions of projected cash flows of certain loans whose performance is exceeding management’s expectations established in conjunction with the determination of the Day 1 Fair Values, resulting in reduced accretion and/or increased amortization of the related FDIC loss share receivable over the remaining term of the loan or the loss share agreement, whichever is shorter.

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 or otherwise has further upward revisions of projected cash flows of certain loans, 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, or increase in the amortization 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 $3.3 million in the first quarter of 2014 compared to $2.2 million in the first quarter of 2013.

Net gains on sales of other assets were $1.0 million in the first quarter of 2014 compared to $2.0 million in the first quarter of 2013.

On March 5, 2014, the Company completed its acquisition of Bancshares for an aggregate of $21.5 million in cash. This acquisition resulted in the Company recognizing a tax-exempt bargain purchase gain of $4.7 million during the first quarter of 2014.

The following table presents non-interest income for the periods indicated.

Non-Interest Income


	Three Months Ended March 31,
	2014		2013
	(Dollars in thousands)
Service charges on deposit accounts	$	5,639	$	4,722
Mortgage lending income		954		1,741
Trust income		1,316		883
BOLI income		1,130		1,083
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		692		2,392
Other income from loss share and purchased non-covered loans, net		3,311		2,155
Gains on investment securities		5		156
Gains on sales of other assets		974		1,974
Gain on merger and acquisition transaction		4,667		—
Other		1,672		1,251

Total non-interest income	$	20,360	$	16,357

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 28.1% to $37.5 million for the first quarter of 2014 compared to $29.2 million for the first quarter of 2013. During the first quarter of 2014, the Company incurred pre-tax non-interest expense of $5.0 million due to the termination of existing core banking software contracts and approximately $0.7 million of acquisition-related costs in connection with the Company’s acquisition of Bancshares and its pending acquisition of Summit Bancorp, Inc. (“Summit”). There were no software termination charges or acquisition-related costs in the first quarter of 2013.

Salaries and employee benefits, the Company’s largest components of non-interest expense, increased 12.7% to $17.7 million in the first quarter of 2014 compared to $15.7 million in the first quarter of 2013. The Company had 1,306 full-time equivalent employees at March 31, 2014, a 17.7% increase compared to 1,110 full-time equivalent employees at March 31, 2013.

Net occupancy and equipment expense for the first quarter of 2014 increased 11.7% to $5.0 million compared to $4.5 million for the first quarter of 2013. At March 31, 2014 the Company had 141 offices, a 20.5% increase compared to 117 offices at March 31, 2013.

The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 49.8% for the first quarter of 2014 compared to 46.8% for the first quarter of 2013.

The following table presents non-interest expense for the periods indicated.

Non-Interest Expense


	Three Months Ended
	March 31,
	2014		2013
	(Dollars in thousands)
Salaries and employee benefits	$	17,689	$	15,694
Net occupancy and equipment		5,044		4,514
Other operating expenses:
Postage and supplies		770		809
Advertising and public relations		400		354
Telephone and data lines		1,001		823
Professional and outside services		2,128		1,186
Software expense		6,024		1,396
Travel and meals		556		645
FDIC insurance		503		420
FDIC and state assessments		260		172
ATM expense		210		218
Loan collection and repossession expense		460		766
Writedowns of foreclosed and other assets		64		121
Amortization of intangibles		813		568
Other		1,532		1,545

Total non-interest expense	$	37,454	$	29,231

Income Taxes

The provision for income taxes was $8.7 million for the first quarter of 2014 compared to $8.5 million for the first quarter of 2013. The effective income tax rate was 25.7% for the first quarter of 2014 compared to 29.9% for the first quarter of 2013. The decrease in the effective tax rate for the first quarter of 2014 compared to the first quarter of 2013 was due primarily to the tax-exempt bargain purchase gain of $4.7 million as a result of the Bancshares acquisition. The effective tax rates were also affected by various other factors including non-taxable income and non-deductible expenses.

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Portfolio

At March 31, 2014 the Company’s loan and lease portfolio, excluding purchased non-covered loans and covered loans, was $2.78 billion, compared to $2.63 billion at December 31, 2013 and $2.16 billion at March 31, 2013. 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 $2.43 billion at March 31, 2014, compared to $2.33 billion at December 31, 2013 and $1.90 billion at March 31, 2013. The amount and type of loans and leases outstanding, excluding purchased non-covered loans and covered loans, as of the dates indicated, and their respective percentage of the total loan and lease portfolio are reflected in the following table.

Loan and Lease Portfolio


	March 31,								December 31,
	2014				2013				2013
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	252,788	9.1	%	$	256,628	11.9	%	$	249,556	9.5	%
Non-farm/non-residential		1,144,483	41.2			823,691	38.2			1,104,114	41.9
Construction/land development		796,126	28.7			623,302	28.9			722,557	27.4
Agricultural		43,908	1.6			49,460	2.3			45,196	1.7
Multifamily residential		195,332	7.0			142,714	6.6			208,337	8.0

Total real estate		2,432,637	87.6			1,895,795	87.9			2,329,760	88.5
Commercial and industrial		137,664	5.0			127,742	5.9			124,068	4.7
Consumer		23,769	0.9			28,551	1.3			26,182	1.0
Direct financing leases		92,856	3.3			71,420	3.3			86,321	3.3
Other		91,577	3.2			34,263	1.6			66,234	2.5

Total loans and leases	$	2,778,503	100.0	%	$	2,157,771	100.0	%	$	2,632,565	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, as of the dates indicated, are reflected in the following table.

Loan and Lease Portfolio by State of Originating Office


Loans and Leases	March 31,								December 31,
Attributable to Offices In	2014				2013				2013
	(Dollars in thousands)
Texas	$	1,319,150	47.5	%	$	1,039,871	48.2	%	$	1,302,061	49.5	%
Arkansas		1,072,391	38.6			970,145	44.9			1,069,200	40.6
North Carolina		178,365	6.4			101,038	4.7			157,938	6.0
Georgia		102,126	3.7			40,146	1.9			57,570	2.1
New York		90,812	3.3			—	—			30,837	1.2
Alabama		13,624	0.4			5,959	0.3			13,073	0.5
South Carolina		1,816	0.1			393	—			1,703	0.1
Florida		219	—			219	—			183	—

Total	$	2,778,503	100.0	%	$	2,157,771	100.0	%	$	2,632,565	100.0	%

The amount and type of the Company’s real estate loans, excluding covered loans and purchased non-covered loans, at March 31, 2014, 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	$	95,841	$	201,746	$	114,852	$	7,804	$	13,151	$	433,394
Northern Arkansas ⁽¹⁾		41,840		15,767		5,388		15,041		893		78,929
Fort Smith, AR–OK MSA		28,090		25,842		6,091		3,350		8,015		71,388
Western Arkansas ⁽²⁾		21,745		29,731		4,834		6,427		1,127		63,864
Fayetteville–Springdale–Rogers, AR–MO MSA		9,132		21,703		16,269		5,044		3,366		55,514
Hot Springs, AR MSA		4,658		22,126		6,938		—		907		34,629
All other Arkansas ⁽³⁾		5,636		12,125		8,296		2,973		1,646		30,676

Total Arkansas		206,942		329,040		162,668		40,639		29,105		768,394

Texas:
Dallas–Fort Worth–Arlington, TX MSA		16,456		139,662		167,171		—		13,447		336,736
Houston–The Woodlands–Sugarland, TX MSA		125		29,500		79,359		—		8,345		117,329
San Antonio–New Braunfels, TX MSA		—		2,663		13,789		—		—		16,452
Austin–Round Rock, TX MSA		—		—		41,371		—		—		41,371
Texarkana, TX–AR MSA		7,880		8,713		1,004		597		984		19,178
College Station–Bryan, TX MSA		—		—		—		—		17,893		17,893
Midland, TX MSA		—		7,924		9,553		—		—		17,477
Beaumont–Port Arthur, TX MSA		—		—		—		—		15,730		15,730
All other Texas ⁽³⁾		1,068		17,823		152		132		4,156		23,331

Total Texas		25,529		206,285		312,399		729		60,555		605,497

North Carolina/South Carolina:
Charlotte–Gastonia–Concord, NC–SC MSA		4,532		55,785		30,395		—		1,534		92,246
Wilmington, NC MSA		659		15,769		2,218		—		—		18,646
Raleigh-Cary, NC MSA		—		—		12,240		—		—		12,240
Charleston-North Charleston, SC MSA		—		3,743		724		—		5,863		10,330
All other No. Carolina ⁽³⁾		4,410		14,885		39,858		492		—		59,645
All other So. Carolina⁽³⁾		1,392		2,755		14,808		—		—		18,955

Total N. Carolina/S. Carolina		10,993		92,937		100,243		492		7,397		212,062

California:
Los Angeles–Long Beach–Santa Ana, CA MSA		—		100,706		1		—		—		100,707
San Francisco–Oakland–Fremont, CA MSA		—		59,010		—		—		—		59,010
Sacramento–Roseville–Arden–Arcade, CA MSA		—		—		42,113		—		—		42,113
All other California⁽³⁾		—		8,976		472		—		—		9,448

Total California		—		168,692		42,586		—		—		211,278

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)
New York–Northern New Jersey– Long Island, NY–NJ–PA MSA		—		34,906		57,603		—		—		92,509
Georgia:
Atlanta–Sandy Springs–Roswell, GA MSA		2,625		41,538		26,298		186		—		70,647
All other Georgia ⁽³⁾		2,040		16,579		1,781		790		217		21,407

Total Georgia		4,665		58,117		28,079		976		217		92,054

Virginia/West Virginia:
Virginia Beach-Norfolk-Newport News, VA-NC MSA		—		41,507		—		—		—		41,507
Washington–Arlington– Alexandria, DC–VA–MD–WV MSA		—		—		30,058		—		—		30,058
All other West Virginia⁽³⁾		—		10,221		—		—		—		10,221

Total Virginia/West Virginia		—		51,728		30,058		—		—		81,786

Florida:
Miami–Fort Lauderdale– Pompano Beach, FL MSA		—		—		5,767		—		41,375		47,142
All other Florida⁽³⁾		1,250		7,595		6,663		691		—		16,199

Total Florida		1,250		7,595		12,430		691		41,375		63,341

Phoenix–Mesa–Glendale, AZ MSA		—		60,477		—		—		—		60,477
Missouri:
St. Louis, MO MSA		—		—		—		—		22,974		22,974
Kansas City, MO–KS MSA		118		147		18,762		42		—		19,069
All other Missouri ⁽³⁾		623		2,782		174		266		—		3,845

Total Missouri		741		2,929		18,936		308		22,974		45,888

Tennessee:
Nashville-Davidson-Murfreesboro-Franklin, TN MSA		—		14,301		—		—		—		14,301
Memphis, TN–MS–AR MSA		101		19,203		—		—		—		19,304
All other Tennessee ⁽³⁾		—		—		—		—		—		—

Total Tennessee		101		33,504		—		—		—		33,605

Seattle–Tacoma–Bellevue, WA MSA		—		—		—		—		29,935		29,935
Oklahoma:
Lawton, OK MSA		—		—		22,573		—		—		22,573
All other Oklahoma ⁽³⁾		128		5,389		796		—		—		6,313

Total Oklahoma		128		5,389		23,369		—		—		28,886

Boston–Cambridge–Quincy, MA MSA		—		21,441		—		—		—		21,441
Baltimore–Columbia–Towson, MD MSA		—		17,184		—		—		—		17,184

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)
Alabama		1,826		7,209		1,546		73		3,774		14,428
Mississippi:
Gulfport–Biloxi–Pascagoula, MS MSA		—		12,835		—		—		—		12,835
All other Mississippi⁽³⁾		423		—		—		—		—		423

Total Mississippi		423		12,835		—		—		—		13,258

All other states ⁽⁴⁾		190		34,215		6,209		—		—		40,614

Total real estate loans	$	252,788	$	1,144,483	$	796,126	$	43,908	$	195,332	$	2,432,637

(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, as of the dates indicated, and their respective percentage of the total non-farm/non-residential loan portfolio are reflected in the following table.

Non-Farm/Non-Residential Loans


	March 31,								December 31,
	2014				2013				2013
	(Dollars in thousands)
Retail, including shopping centers and strip centers	$	264,651	23.1	%	$	327,912	39.8	%	$	290,092	26.3	%
Churches and schools		47,546	4.1			41,271	5.0			44,740	4.1
Office, including medical offices		278,058	24.3			128,670	15.6			263,986	23.9
Office warehouse, warehouse and mini-storage		110,757	9.7			37,338	4.5			113,317	10.3
Gasoline stations and convenience stores		10,660	0.9			8,653	1.1			8,150	0.7
Hotels and motels		234,793	20.5			96,539	11.7			192,527	17.4
Restaurants and bars		31,932	2.8			35,766	4.3			33,178	3.0
Manufacturing and industrial facilities		41,948	3.7			38,043	4.6			37,288	3.4
Nursing homes and assisted living centers		42,120	3.7			24,468	3.0			41,317	3.7
Hospitals, surgery centers and other medical		48,303	4.2			49,304	6.0			49,112	4.4
Golf courses, entertainment and recreational facilities		6,503	0.6			9,842	1.2			5,261	0.5
Other non-farm/non residential		27,212	2.4			25,885	3.2			25,146	2.3

Total	$	1,144,483	100.0	%	$	823,691	100.0	%	$	1,104,114	100.0	%

The amount and type of construction/land development loans, excluding purchased non-covered loans and covered loans, as of the dates indicated, and their respective percentage of the total construction/land development loan portfolio are reflected in the following table.

Construction/Land Development Loans


	March 31,								December 31,
	2014				2013				2013
	(Dollars in thousands)
Unimproved land	$	134,733	16.9	%	$	89,716	14.4	%	$	105,739	14.6	%
Land development and lots:
1-4 family residential and multifamily		174,008	21.9			184,733	29.6			176,893	24.5
Non-residential		72,877	9.1			70,803	11.4			68,376	9.5
Construction:
1-4 family residential:
Owner occupied		13,340	1.7			14,585	2.4			12,870	1.8
Non-owner occupied:
Pre-sold		7,947	1.0			6,880	1.1			8,206	1.1
Speculative		53,068	6.7			33,722	5.4			50,030	6.9
Multifamily		201,571	25.3			109,884	17.6			187,409	26.0
Industrial, commercial and other		138,582	17.4			112,979	18.1			113,034	15.6

Total	$	796,126	100.0	%	$	623,302	100.0	%	$	722,557	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 $2.5 million in the first quarter of 2014. 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 March 31, 2014 was approximately $1.57 billion, of which $579 million was outstanding at March 31, 2014 and $988 million remained to be advanced. The weighted average loan-to-cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 56%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 44%. 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 47%.

The following table reflects loans and leases, excluding purchased non-covered loans and covered loans, as of March 31, 2014 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	$	290,462		$	167,662		$	162,591		$	365,547		$	986,262
Floating rate (not at a floor or ceiling rate)		100,646			96			122			—			100,864
Floating rate (at floor rate)⁽¹⁾		1,681,831			422			3,220			5,904			1,691,377
Floating rate (at ceiling rate)		—			—			—			—			—

Total	$	2,072,939		$	168,180		$	165,933		$	371,451		$	2,778,503

Percentage of total		74.6	%		6.0	%		6.0	%		13.4	%		100.0	%
Cumulative percentage of total		74.6			80.6			86.6			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 quarterly report on Form 10-Q 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, as of the dates indicated, are reflected in the following table.

Purchased Non-Covered Loan Portfolio


	March 31,				December 31,
	2014		2013		2013
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	138,652	$	18,734	$	131,085
Non-farm/non-residential		216,328		4,391		152,948
Construction/land development		54,513		1,925		25,633
Agricultural		10,098		2,968		9,518
Multifamily residential		18,265		—		17,210

Total real estate		437,856		28,018		336,394
Commercial and industrial		38,381		3,991		24,934
Consumer		6,609		3,491		6,855
Other		5,687		2,571		4,540

Total	$	488,533	$	38,071	$	372,723

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

Purchased Non-Covered Loans by State


	March 31,										December 31,
Purchased Non-Covered Loans	2014					2013					2013
Attributable to Offices In	Amount		%			Amount		%			Amount		%
	(Dollars in thousands)
North Carolina	$	321,617		65.8	%	$	103		0.3	%	$	348,651		93.5	%
Texas		146,094		29.9			—		—			—		—
Alabama		20,291		4.2			36,762		96.6			23,431		6.3
Georgia		434		0.1			1,032		2.7			537		0.1
Florida		97		—			159		0.4			104		0.1
South Carolina		—		—			15		—			—		—

Total	$	488,533		100.0	%	$	38,071		100.0	%	$	372,723		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


	March 31,						December 31,
	2014			2013			2013
	(Dollars in thousands)
Loans without evidence of credit deterioration at date of purchase:
Unpaid principal balance	$	442,955		$	32,659		$	344,065
Valuation discount		(12,041	)		(701	)		(11,972	)

Carrying value		430,914			31,958			332,093

Loans with evidence of credit deterioration at date of purchase:
Unpaid principal balance		94,645			11,211			70,857
Valuation discount		(37,026	)		(5,098	)		(30,227	)

Carrying value		57,619			6,113			40,630

Total carrying value	$	488,533		$	38,071		$	372,723

The Company completed its acquisition of Bancshares on March 5, 2014. On the date of the acquisition, Bancshares’ outstanding loans were categorized into loans without evidence of credit deterioration and loans with evidence of credit deterioration. The following table presents, by risk rating, the unpaid principal balance, fair value adjustment, Day 1 Fair Value and the weighted-average fair value adjustment applied to the purchased non-covered loans without evidence of credit deterioration in the Bancshares acquisition.

Fair Value Adjustments for Purchased Non-Covered

Loans Without Evidence of Credit Deterioration

At Date of Acquisition of Bancshares


	Unpaid Principal Balance		Fair Value Adjustment			Day 1 Fair Value		Weighted Average Fair Value Adjustment (in bps)
	(Dollars in thousands)
FV 33	$	35,541	$	(375	)	$	35,166		106
FV 44		72,376		(852	)		71,524		118
FV 55		29,210		(584	)		28,626		200
FV 36		908		(222	)		686		2,445

Total	$	138,035	$	(2,033	)	$	136,002		147

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.

The following table is a summary of the loans acquired in the Bancshares acquisition with evidence of credit deterioration at the date of acquisition.

Fair Value Adjustments for

Purchased Non-Covered Loans With Evidence of

Credit Deterioration at Date of Acquisition of Bancshares


	March 5, 2014
	(Dollars in thousands)
Contractually required principal and interest	$	30,453
Nonaccretable difference		(8,054	)

Cash flows expected to be collected		22,399
Accretable difference		(3,226	)

Day 1 Fair Value	$	19,173

A summary of changes in the accretable difference on purchased non-covered loans with evidence of credit deterioration at the date of acquisition is shown below for the periods indicated.

Accretable Difference on Non-Covered Loans With Evidence

of Credit Deterioration at Date of Acquisition


	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Accretable difference at January 1	$	5,983		$	969
Accretable difference acquired		3,226			—
Accretion		(847	)		(131	)
Other, net		(33	)		8

Accretable difference at March 31	$	8,329		$	846

The following table presents purchased non-covered loans grouped by remaining maturities at March 31, 2014 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 acquisition 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	$	20,641	$	49,587	$	68,424	$	138,652
Non-farm/non-residential		42,001		119,476		54,851		216,328
Construction/land development		21,819		27,349		5,345		54,513
Agricultural		1,414		6,982		1,702		10,098
Multifamily residential		5,896		11,233		1,136		18,265

Total real estate		91,771		214,627		131,458		437,856
Commercial and industrial		16,533		18,192		3,656		38,381
Consumer		2,901		3,526		182		6,609
Other		1,499		2,025		2,163		5,687

Total	$	112,704	$	238,370	$	137,459	$	488,533

Fixed rate	$	60,603	$	162,466	$	87,829	$	310,898
Floating rate		52,101		75,904		49,630		177,635

Total	$	112,704	$	238,370	$	137,459	$	488,533

Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable

FDIC-Assisted Acquisitions

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.

Loss Share Agreements and Other FDIC-Assisted Acquisition Matters

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 as of the dates indicated.

Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable


	March 31,				December 31,
	2014		2013		2013
	(Dollars in thousands)
Covered loans	$	304,955	$	544,268	$	351,791
FDIC loss share receivable		57,782		132,699		71,854
Covered foreclosed assets		43,793		51,040		37,960

Total	$	406,530	$	728,007	$	461,605

FDIC clawback payable	$	26,202	$	25,384	$	25,897

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, 2013	$	72,849		$	99,734		$	63,193		$	56,668		$	48,093		$	91,081		$	164,621		$	596,239
Accretion		1,526			1,980			1,237			1,183			1,205			2,025			3,708			12,864
Transfers to covered foreclosed assets		(1,317	)		(1,711	)		(1,320	)		(412	)		(950	)		(82	)		(2,244	)		(8,036	)
Payments received		(3,502	)		(7,354	)		(2,790	)		(6,451	)		(4,303	)		(6,684	)		(17,549	)		(48,633	)
Charge-offs		(2,042	)		(954	)		(502	)		(648	)		(206	)		(1,047	)		(2,864	)		(8,263	)
Other activity, net		58			(27	)		15			(10	)		60			63			(62	)		97

Carrying value at March 31, 2013	$	67,572		$	91,668		$	59,833		$	50,330		$	43,899		$	85,356		$	145,610		$	544,268

Carrying value at January 1, 2014	$	48,968		$	62,039		$	41,466		$	26,076		$	27,592		$	61,966		$	83,684		$	351,791
Accretion		1,825			1,548			1,013			750			877			1,549			1,843			9,405
Transfers to covered foreclosed assets		(1,024	)		(1,578	)		(532	)		(14	)		—			(3,249	)		(8,832	)		(15,229	)
Payments received		(3,272	)		(6,083	)		(8,468	)		(4,956	)		(3,296	)		(3,609	)		(10,159	)		(39,843	)
Charge-offs		(603	)		(64	)		(24	)		—			—			(522	)		(94	)		(1,307	)
Other activity, net		(35	)		132			42			(71	)		34			(17	)		53			138

Carrying value at March 31, 2014	$	45,859		$	55,994		$	33,497		$	21,785		$	25,207		$	56,118		$	66,495		$	304,955

The following table presents a summary of the carrying value and type of covered loans as of the dates indicated.

Covered Loan Portfolio


	March 31,				December 31,
	2014		2013		2013
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	101,954	$	144,299	$	111,053
Non-farm/non-residential		136,556		264,996		163,707
Construction/land development		39,375		92,289		47,743
Agricultural		11,029		18,163		11,150
Multifamily residential		8,011		9,897		9,166

Total real estate		296,925		529,644		342,819
Commercial and industrial		7,802		13,317		8,719
Consumer		91		395		111
Other		137		912		142

Total covered loans	$	304,955	$	544,268	$	351,791

The following table presents covered loans grouped by remaining maturities and by type at March 31, 2014. 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	$	30,652	$	45,629	$	25,673	$	101,954
Non-farm/non-residential		63,742		57,719		15,095		136,556
Construction/land development		30,296		8,069		1,010		39,375
Agricultural		6,865		2,686		1,478		11,029
Multifamily residential		6,326		1,463		222		8,011

Total real estate		137,881		115,566		43,478		296,925
Commercial and industrial		3,592		969		3,241		7,802
Consumer		76		15		—		91
Other		1		136		—		137

Total covered loans	$	141,550	$	116,686	$	46,719	$	304,955

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, 2013	$	8,574		$	17,452		$	16,524		$	5,712		$	11,372		$	9,919		$	27,942		$	97,495
Accretion		(1,526	)		(1,980	)		(1,237	)		(1,183	)		(1,205	)		(2,025	)		(3,708	)		(12,864	)
Transfers to covered foreclosed assets		(98	)		(138	)		(24	)		(44	)		(25	)		(6	)		(374	)		(709	)
Covered loans paid off		(226	)		(95	)		(299	)		(269	)		(188	)		(508	)		(1,106	)		(2,691	)
Cash flow revisions as a result of renewals and/or modifications		2,563			1,550			(294	)		655			419			2,412			671			7,976
Other, net		16			175			25			95			24			106			230			671

Accretable difference at March 31, 2013	$	9,303		$	16,964		$	14,695		$	4,966		$	10,397		$	9,898		$	23,655		$	89,878

Accretable difference at January 1, 2014	$	8,037		$	16,216		$	14,428		$	4,195		$	11,311		$	9,621		$	13,664		$	77,472
Accretion		(1,825	)		(1,548	)		(1,013	)		(750	)		(877	)		(1,549	)		(1,843	)		(9,405	)
Transfers to covered foreclosed assets		(42	)		(89	)		(12	)		—			—			(97	)		(357	)		(597	)
Covered loans paid off		(235	)		(1,293	)		(2,734	)		(399	)		(985	)		(195	)		(377	)		(6,218	)
Cash flow revisions as a result of renewals and/or modifications		2,674			795			53			467			837			941			758			6,525
Other, net		(26	)		10			48			42			53			61			28			216

Accretable difference at March 31, 2014	$	8,583		$	14,091		$	10,770		$	3,555		$	10,339		$	8,782		$	11,873		$	67,993

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, 2013	$	19,818		$	22,373		$	16,859		$	11,162		$	23,996		$	17,918		$	40,072		$	152,198
Accretion income		119			238			77			114			234			713			1,204			2,699
Cash received from FDIC		(2,013	)		(2,524	)		(3,418	)		(2,828	)		(2,325	)		(4,226	)		(5,231	)		(22,565	)
Reductions of FDIC loss share receivable for payments on covered loans in excess of carrying value		(614	)		(1,201	)		(503	)		(2,024	)		(615	)		(1,067	)		(2,344	)		(8,368	)
Increases in FDIC loss share receivable for:
Charge-offs of covered loans		954			751			401			519			165			838			2,291			5,919
Writedowns of covered foreclosed assets		74			98			83			234			9			133			75			706
Expenses on covered assets reimbursable by FDIC		209			441			347			115			381			239			650			2,382
Other activity, net		29			(284	)		(81	)		(177	)		(226	)		(76	)		543			(272	)

Carrying value at March 31, 2013	$	18,576		$	19,892		$	13,765		$	7,115		$	21,619		$	14,472		$	37,260		$	132,699

Carrying value at January 1, 2014	$	13,892		$	14,331		$	5,731		$	3,688		$	10,119		$	9,336		$	14,757		$	71,854
Accretion income (amortization expense)		(328	)		(11	)		30			(7	)		60			409			844			997
Cash received from FDIC		(2,572	)		(1,992	)		(302	)		(646	)		(59	)		(1,851	)		(3,188	)		(10,610	)
Reductions of FDIC loss share receivable for payments on covered loans in excess of carrying value		(645	)		(989	)		(965	)		(823	)		(1,025	)		(897	)		(1,486	)		(6,830	)
Increases in FDIC loss share receivable for:
Charge-offs of covered loans		466			51			20			—			—			418			75			1,030
Writedowns of covered foreclosed assets		30			383			26			3			39			15			96			592
Expenses on covered assets reimbursable by FDIC		229			306			171			31			151			364			27			1,279
Other activity, net		5			33			(58	)		148			(102	)		(559	)		3			(530	)

Carrying value at March 31, 2014	$	11,077		$	12,112		$	4,653		$	2,394		$	9,183		$	7,235		$	11,128		$	57,782

Covered Foreclosed Assets

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

Covered Foreclosed Assets


	Unity			Woodlands			Horizon			Chestatee			Oglethorpe			First Choice			Park Avenue			Total
	(Dollars in thousands)
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		1,317			1,711			1,320			412			950			82			2,244			8,036
Sales of covered foreclosed assets		(707	)		(1,096	)		(848	)		(410	)		(2,085	)		(567	)		(3,518	)		(9,231	)
Writedowns of covered foreclosed assets		(105	)		(130	)		(92	)		(270	)		(10	)		(58	)		(51	)		(716	)

Carrying value at March 31, 2013	$	8,692		$	8,535		$	2,918		$	3,943		$	5,652		$	3,041		$	18,259		$	51,040

Carrying value at January 1, 2014	$	3,980		$	6,891		$	3,802		$	2,004		$	4,130		$	2,629		$	14,524		$	37,960
Transfers from covered loans		1,024			1,578			532			14			—			3,249			8,832			15,229
Sales of covered foreclosed assets		(469	)		(1,055	)		(376	)		(1,080	)		(704	)		(2,714	)		(2,373	)		(8,771	)
Writedowns of covered foreclosed assets		(68	)		(388	)		(22	)		—			(44	)		(46	)		(57	)		(625	)

Carrying value at March 31, 2014	$	4,467		$	7,026		$	3,936		$	938		$	3,382		$	3,118		$	20,926		$	43,793

The following table presents a summary of the carrying value and type of covered foreclosed assets as of the dates indicated.

Covered Foreclosed Assets


	March 31,				December 31,
	2014		2013		2013
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	5,393	$	8,849	$	5,004
Non-farm/non-residential		19,830		11,262		14,301
Construction/land development		17,980		30,419		17,202
Agricultural		517		71		1,054
Multifamily residential		73		439		399

Total real estate		43,793		51,040		37,960
Repossessions		—		—		—

Total covered foreclosed assets	$	43,793	$	51,040	$	37,960

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, 2013	$	1,644		$	2,986	$	1,468	$	794	$	1,083	$	968	$	16,226	$	25,169
Amortization expense		20			33		18		9		13		11		203		307
Changes in FDIC clawback payable related to changes in expected losses on covered assets		(92	)		—		—		—		—		—		—		(92	)

Carrying value at March 31, 2013	$	1,572		$	3,019	$	1,486	$	803	$	1,096	$	979	$	16,429	$	25,384

Carrying value at January 1, 2014	$	1,630		$	3,036	$	1,420	$	751	$	1,091	$	1,013	$	16,956	$	25,897
Amortization (accretion) expense		(25	)		35		22		16		34		11		212		305
Changes in FDIC clawback payable related to changes in expected losses on covered assets		—			—		—		—		—		—		—		—

Carrying value at March 31, 2014	$	1,605		$	3,071	$	1,442	$	767	$	1,125	$	1,024	$	17,168	$	26,202

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. Covered loans and covered foreclosed 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 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.

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


	March 31,						December 31,
	2014			2013			2013
	(Dollars in thousands)
Nonaccrual loans and leases	$	11,783		$	8,564		$	8,737
Accruing loans and leases 90 days or more past due		—			—			—
TDRs		—			—			—

Total nonperforming loans and leases		11,783			8,564			8,737
Foreclosed assets not covered by FDIC loss share agreements⁽¹⁾		17,076			11,290			11,851

Total nonperforming assets	$	28,859		$	19,854		$	20,588

Nonperforming loans and leases to total loans and leases⁽²⁾		0.42	%		0.40	%		0.33	%
Nonperforming assets to total assets⁽²⁾		0.57			0.50			0.43

(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.

The following table presents information concerning nonperforming purchased non-covered loans as of the dates indicated.

Nonperforming Purchased

Non-Covered Loans


	March 31,						December 31,
	2014			2013			2013
	(Dollars in thousands)
Nonaccrual purchased non-covered loans	$	2,956		$	71		$	1,696
Accruing purchased non-covered loans 90 days or more past due		—			—			—

Total nonperforming purchased non-covered loans	$	2,956		$	71		$	1,696

Nonperforming purchased non-covered loans to total purchased non-covered loans		0.61	%		0.19	%		0.46	%

The Company’s ratio of nonperforming loans and leases, including nonperforming purchased non-covered loans but excluding covered loans, to total loans and leases, including purchased non-covered loans but excluding covered loans, was 0.45% and 0.39% at March 31, 2014 and 2013, respectively, and 0.35% at December 31, 2013.

As of March 31, 2014, 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 $0.2 million for such loans during the first quarter of 2014 compared to $2.0 million during the first quarter of 2013. The Company also recorded provision for loan and lease losses of $0.2 million during the first quarter of 2014 compared to $2.0 million during the first quarter of 2013 to cover such charge-offs. The Company had $29.3 million of impaired covered loans at March 31, 2014 compared to $51.2 million of impaired covered loans at March 31, 2013 and $46.2 million at December 31, 2013.

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 March 31, 2014, the Company had reduced the carrying value of its loans and leases deemed impaired, excluding covered loans and purchased non-covered loans, (all of which were included in nonaccrual loans and leases) by $4.1 million to the estimated fair value of such loans and leases of $6.0 million. The adjustment to reduce the carrying value of such impaired loans and leases to estimated fair value consisted of $2.8 million of partial charge-offs and $1.3 million of specific loan and lease loss allocations. These amounts do not include the Company’s $29.3 million of impaired covered loans at March 31, 2014.

The following table presents information concerning the geographic location of nonperforming assets, excluding purchased non-covered loans and covered assets, at March 31, 2014. 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	$	6,624	$	5,992	$	12,616
Texas		263		5,374		5,637
North Carolina		3,912		4,022		7,934
South Carolina		968		1,219		2,187
Georgia		10		90		100
Alabama		5		340		345
Florida		1		—		1
All other		—		39		39

Total	$	11,783	$	17,076	$	28,859

Allowance and Provision for Loan and Lease Losses

The Company’s ALLL was $43.9 million, or 1.58% of total loans and leases, excluding purchased non-covered loans and covered loans, at March 31, 2014, compared to $42.9 million, or 1.63% of total loans and leases, excluding purchased non-covered loans and covered loans, at December 31, 2013 and $38.4 million, or 1.78% of total loans and leases, excluding purchased non-covered loans and covered loans, at March 31, 2013. The Company had no ALLL for purchased non-covered loans or for covered loans at March 31, 2014, December 31, 2013 or March 31, 2013, 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 372% of its total nonperforming loans and leases at March 31, 2014 compared to 492% at December 31, 2013 and 449% at March 31, 2013. 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 first quarter of 2014 was $1.3 million, including $1.1 million for non-covered loans and leases and $0.2 million for covered loans, compared to $2.7 million for the first quarter of 2013, including $0.7 million for non-covered loans and leases and $2.0 million for covered loans.

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


	Three Months Ended March 31,						Year Ended December 31,
	2014			2013			2013
	(Dollars in thousands)
Balance, beginning of period	$	42,945		$	38,738		$	38,738
Non-covered loans and leases charged off:
Real estate:
Residential 1-4 family		(199	)		(280	)		(837	)
Non-farm/non-residential		(73	)		(41	)		(1,111	)
Construction/land development		—			(58	)		(137	)
Agricultural		(15	)		—			(261	)
Multifamily residential		—			—			(4	)

Total real estate		(287	)		(379	)		(2,350	)
Commercial and industrial		(374	)		(716	)		(922	)
Consumer		(41	)		(61	)		(214	)
Direct financing leases		(146	)		(80	)		(482	)
Other		(72	)		(111	)		(359	)

Total non-covered loans and leases charged off		(920	)		(1,347	)		(4,327	)

Recoveries of non-covered loans and leases previously charged off:
Real estate:
Residential 1-4 family		22			95			106
Non-farm/non-residential		3			102			122
Construction/land development		8			5			174
Agricultural		5			2			14
Multifamily residential		—			—			4

Total real estate		38			204			420
Commercial and industrial		628			9			433
Consumer		18			58			104
Direct financing leases		6			9			33
Other		46			51			144

Total recoveries of non-covered loans and leases previously charged off		736			331			1,134

Net non-covered loans and leases charged off		(184	)		1,016			(3,193	)
Covered loans charged off		(204	)		2,028			(4,675	)

Net charge-offs – total loans and leases		(388	)		3,044			(7,868	)
Provision for loan and lease losses:
Non-covered loans and leases		1,100			700			7,400
Covered loans		204			2,028			4,675

Total provision		1,304			2,728			12,075

Balance, end of period	$	43,861		$	38,422		$	42,945

Net charge-offs of non-covered loans and leases to average non-covered loans and leases ⁽¹⁾		0.02	%⁽²⁾		0.19	%⁽²⁾		0.13	%
Net charge-offs of total loans and leases, including covered loans and purchased non-covered loans, to total average loans and leases		0.05	%⁽²⁾		0.45	%⁽²⁾		0.26	%
ALLL to total loans and leases ⁽³⁾		1.58	%		1.78	%		1.63	%
ALLL to nonperforming loans and leases ⁽³⁾		372	%		449	%		492	%

(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 three months ended March 31, 2014 and 2013 and as of and for the year ended December 31, 2013, 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 March 31, 2014 and 2013 and at December 31, 2013, 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 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.

The following table presents the amortized cost and estimated fair value of investment securities AFS as of the dates indicated. 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


	March 31,								December 31,
	2014				2013				2013
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
	(Dollars in thousands)
Obligations of state and political subdivisions	$	447,368	$	452,748	$	366,753	$	380,236	$	438,390	$	435,989
U.S. Government agency securities		219,836		219,740		91,589		92,963		222,510		218,869
Corporate obligations		686		686		748		748		716		716
Other equity securities		14,487		14,487		13,701		13,701		13,810		13,810

Total	$	682,377	$	687,661	$	472,791	$	487,648	$	675,426	$	669,384

The Company’s investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $13.5 million and gross unrealized losses of $8.3 million at March 31, 2014; gross unrealized gains of $8.6 million and gross unrealized losses of $14.6 million at December 31, 2013; and gross unrealized gains of $15.9 million and gross unrealized losses of $1.0 million at March 31, 2013. Management believes that all of its unrealized losses on individual investment securities at March 31, 2014 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 as of the dates indicated.

Unaccreted Discounts and Unamortized Premiums


	Amortized Cost		Unaccreted Discount		Unamortized Premium			Par Value
	(Dollars in thousands)
March 31, 2014:
Obligations of states and political subdivisions	$	447,368	$	8,194	$	(3,806	)	$	451,756
U.S. Government agency securities		219,836		4,451		(4,274	)		220,013
Corporate obligations		686		—		(16	)		670
Other equity securities		14,487		—		—			14,487

Total	$	682,377	$	12,645	$	(8,096	)	$	686,926

December 31, 2013:
Obligations of states and political subdivisions	$	438,390	$	8,298	$	(3,447	)	$	443,241
U.S. Government agency securities		222,510		4,694		(4,436	)		222,768
Corporate obligations		716		—		(18	)		698
Other equity securities		13,810		—		—			13,810

Total	$	675,426	$	12,992	$	(7,901	)	$	680,517

March 31, 2013:
Obligations of states and political subdivisions	$	366,753	$	7,949	$	(1,622	)	$	373,080
U.S. Government agency securities		91,589		201		(4,846	)		86,944
Corporate obligations		748		—		(21	)		727
Other equity securities		13,701		—		—			13,701

Total	$	472,791	$	8,150	$	(6,489	)	$	474,452

The Company had net gains of $5,000 from the sale of $1.2 million of investment securities in the first quarter of 2014 compared with net gains of $156,000 from the sale of $0.8 million of investment securities in the first quarter of 2013. During the quarters ended March 31, 2014 and 2013, respectively, investment securities totaling $13.3 million and $39.5 million matured, were called or were paid down by the issuer. The Company purchased $18.3 million and $38.2 million of investment securities during the first quarter of 2014 and 2013, respectively. On March 5, 2014, the Company acquired $1.9 million of investment securities as a result of its acquisition of Bancshares.

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 at March 31, 2014 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	$	6,352		$	151,380		$	61,295		$	53,624		$	180,098		$	452,749
U.S. Government agency securities		—			218,568			—			—			1,171			219,739
Corporate obligations		—			—			686			—			—			686
Other equity securities		—			—			—			—			14,487			14,487

Total	$	6,352		$	369,948		$	61,981		$	53,624		$	195,756		$	687,661

Percentage of total		0.9	%		53.8	%		9.0	%		7.8	%		28.5	%		100.0	%
Cumulative percentage of total		0.9	%		54.7	%		63.7	%		71.5	%		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 as of the dates indicated and their respective percentage of the total deposits are reflected in the following table. On March 5, 2014, the Company assumed $256 million of deposits as a result of its acquisition of Bancshares, and on July 31, 2013, the Company assumed $601 million of deposits as a result of its acquisition of First National Bank.

Deposits


	March 31,								December 31,
	2014				2013				2013
	(Dollars in thousands)
Non-interest bearing	$	886,341	22.6	%	$	588,841	19.7	%	$	746,320	20.0	%
Interest bearing:
Transaction (NOW)		843,767	21.5			720,566	24.1			839,632	22.6
Savings and money market		1,355,779	34.6			933,320	31.2			1,233,865	33.2
Time deposits less than $100,000		457,349	11.7			415,346	13.9			471,052	12.7
Time deposits of $100,000 or more		372,968	9.6			332,999	11.1			426,158	11.5

Total deposits	$	3,916,204	100.0	%	$	2,991,072	100.0	%	$	3,717,027	100.0	%

The amount and percentage of the Company’s deposits attributable to offices, by state, as of the dates indicated, are reflected in the following table.

Deposits by State


Deposits Attributable	March 31,								December 31,
to Offices In	2014				2013				2013
	(Dollars in thousands)
Arkansas	$	1,640,141	41.9	%	$	1,627,352	54.4	%	$	1,671,498	45.0	%
Texas		749,851	19.2			385,939	12.9			629,241	16.9
Georgia		630,979	16.1			668,697	22.4			634,060	17.1
North Carolina		608,491	15.5			16,007	0.5			124,894	3.4
Alabama		133,641	3.4			149,968	5.0			492,069	13.2
Florida		125,526	3.2			130,688	4.4			137,345	3.7
South Carolina		27,575	0.7			12,421	0.4			27,920	0.7

Total	$	3,916,204	100.0	%	$	2,991,072	100.0	%	$	3,717,027	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 (FHLB – Dallas advances and, to a lesser extent, FRB borrowings and federal funds purchased) and subordinated debentures.

The following table reflects the average balance and rate paid for each category of other interest bearing liabilities for the periods indicated.

Average Balances and Rates of Other Interest Bearing Liabilities


	Three Months Ended March 31,
	2014					2013
	Average Balance		Rate Paid			Average Balance		Rate Paid
	(Dollars in thousands)
Repurchase agreements with customers	$	65,045		0.08	%	$	33,953		0.09	%
Other borrowings ⁽¹⁾		280,993		3.83			280,758		3.83
Subordinated debentures		64,950		2.58			64,950		2.67

Total other interest bearing liabilities	$	410,988		3.04	%	$	379,661		3.29	%

(1)	Included in other borrowings at March 31, 2014 and 2013 are FHLB – Dallas advances that contain quarterly call features and mature as follows: 2017, $260.0 million at 3.90% weighted-average interest rate and 2018, $20.0 million at 2.53% weighted-average interest rate.

CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Subordinated Debentures. At March 31, 2014, 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, its tangible common stockholders’ equity ratio and its tangible book value per share as the principal measures of the strength of its capital. The following table reconciles the tangible common stockholders’ equity to total tangible assets ratio to GAAP financial measures as reflected in the Company’s consolidated financial statements as of the dates indicated.

Calculation of the Ratio of Total Tangible Common

Stockholders’ Equity to Total Tangible Assets


	March 31,
	2014			2013
	(Dollars in thousands)
Total common stockholders’ equity before noncontrolling interest	$	653,208		$	523,679
Less intangible assets:
Goodwill		(5,243	)		(5,243	)
Core deposit and bank charter intangibles, net of accumulated amortization		(15,750	)		(6,015	)

Total intangibles		(20,993	)		(11,258	)

Total tangible common stockholders’ equity	$	632,215		$	512,421

Total assets	$	5,028,893		$	3,951,818
Less intangible assets:
Goodwill		(5,243	)		(5,243	)
Core deposit and bank charter intangibles, net of accumulated amortization		(15,750	)		(6,015	)

Total intangibles		(20,993	)		(11,258	)

Total tangible assets	$	5,007,900		$	3,940,560

Ratio of total tangible common stockholders’ equity to total tangible assets		12.62	%		13.00	%

The following table reconciles the tangible book value per share to GAAP financial measures as reflected in the Company’s consolidated financial statements as of the dates indicated.

Calculation of Tangible Book Value Per Share


	March 31,
	2014			2013
	(In thousands, except per share amounts)
Total common stockholders’ equity before noncontrolling interest	$	653,208		$	523,679
Less intangible assets:
Goodwill		(5,243	)		(5,243	)
Core deposit and bank charter intangibles, net of accumulated amortization		(15,750	)		(6,015	)

Total intangibles		(20,993	)		(11,258	)

Total tangible common stockholders’ equity	$	632,215		$	512,421

Shares of common stock outstanding		36,944			35,367

Tangible book value per share	$	17.11		$	14.49

Common Stock Dividend Policy. During the quarter ended March 31, 2014, the Company paid a dividend of $0.22 per common share compared to $0.15 per common share in the quarter ended March 31, 2013. On April 1, 2014, the Company’s board of directors approved a dividend of $0.23 per common share that was paid on April 18, 2014. The determination of future dividends on the Company’s common stock will depend on conditions existing at that time and approval of the Company’s board of directors.

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.

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 March 31, 2014 and December 31, 2012, and are presented in the following tables.

Consolidated Capital Ratios


	March 31,			December 31,
	2014			2013
	(Dollars in thousands)
Tier 1 capital:
Common stockholders’ equity before noncontrolling interest	$	653,208		$	624,958
Allowed amount of trust preferred securities		63,000			63,000
Net unrealized (gains) losses on investment securities AFS		(3,211	)		3,672
Less goodwill and certain intangible assets		(20,993	)		(19,158	)

Total tier 1 capital		692,004			672,472
Tier 2 capital:
Qualifying allowance for loan and lease losses		43,861			42,945

Total risk-based capital	$	735,865		$	715,417

Risk-weighted assets	$	4,552,401		$	4,185,142

Adjusted quarterly average assets	$	4,803,877		$	4,763,746

Ratios at end of period:
Tier 1 leverage		14.41	%		14.12	%
Tier 1 risk-based capital		15.20			16.07
Total risk-based capital		16.16			17.09
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


	March 31, 2014			December 31, 2013
	(Dollars in thousands)
Stockholders’ equity – Tier 1	$	672,202		$	655,793
Tier 1 leverage ratio		14.03	%		13.78	%
Tier 1 risk-based capital ratio		14.78			15.69
Total risk-based capital ratio		15.75			16.72

Basel III. On July 9, 2013, the FDIC and other federal banking regulators issued a final rule that will substantially revise the risk-based capital requirements applicable to bank holding companies and insured depository institutions, including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies.

The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.

The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, the new rules allow for insured depository institutions to make a one-time election not to include most elements of accumulated other comprehensive income in regulatory capital and instead effectively use the existing treatment under the general risk-based capital rules. Insured depository institutions must make their accumulated other comprehensive income opt-out election in the first Consolidated Reports of Condition and Income, Consolidated Financial Statements for Bank Holding Companies and Parent Company Only Financial Statements for Large Bank Holding Companies reports that are filed for the first quarter of 2015.

The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and the unsecured portion of non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk weights (from 0% to up to 600%) for equity exposures.

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The final rule becomes effective on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019.

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 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 March 31, 2014 the Company had substantial unused borrowing availability. This availability was primarily comprised of the following four options: (1) $761 million of available blanket borrowing capacity with the FHLB-Dallas, (2) $162 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 $102 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 $18.2 million for the first quarter of 2014 and provided $31.3 million for the first quarter of 2013. 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 provided $38.4 million in the quarter ended March 31, 2014 and $35.3 million in the quarter ended March 31, 2013. Net activity in the Company’s investment securities portfolio used $3.8 million and provided $2.3 million in the quarters ended March 31, 2014 and 2013, respectively. Net loans and leases, excluding covered loans and purchased non-covered loans, used $148.1 million and $60.1 million in the quarters ended March 31, 2014 and 2013, respectively. Payments received on purchased non-covered loans provided $46.8 million and $4.5 million for the quarters ended March 31, 2014 and 2013, respectively. Payments received on covered loans provided $39.8 million and $48.6 million for the quarters ended March 31, 2014 and 2013, respectively, and payments received from the FDIC under loss share agreements provided $10.6 million and $22.6 million for the quarters ended March 31, 2014 and 2013, respectively. Other loss share activity provided $5.4 million and $8.3 million in the quarters ended March 31, 2014 and 2013, respectively. The Company had proceeds from sales of other assets of $11.3 million and $13.3 million in the quarters ended March 31, 2014 and 2013, respectively. Purchases of premises and equipment used $3.4 million and $4.1 million in the quarters ended March 31, 2014 and 2013, respectively. Net cash received in merger and acquisition transactions totaled $80.7 million for the quarter ended March 31, 2014 (none in the quarter ended March 31, 2013).

Financing activities used $64.3 million and $112.0 million in the quarters ended March 31, 2014 and 2013, respectively. Net changes in deposit accounts used $56.7 million and $110.0 million in the quarters ended March 31, 2014 and 2013, respectively. Net repayments of other borrowings and repurchase agreements with customers used $2.2 million and provided $1.2 million in the quarters ended March 31, 2014 and 2013, respectively. The Company paid common stock cash dividends of $8.1 million and $5.3 million in the quarters ended March 31, 2014 and 2013, respectively. Proceeds from and excess tax benefits on exercise and forfeiture of stock options provided $2.8 million and $2.1 million during the quarters ended March 31, 2014 and 2013, respectively.

Off-Balance Sheet Commitments. The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit and standby letters of credit. See Note 9 to the Consolidated Financial Statements for more information about the Company’s outstanding guarantees and commitments as of March 31, 2014.

Growth and Expansion

The Company is continuing its growth and de novo branching strategy. On January 2, 2014, the Company opened a loan production office for its Real Estate Specialties Group (“RESG”) in Houston, Texas, and on February 24, 2014, it opened an RESG loan production office in Los Angeles, California. On February 26, 2014, the Company relocated its Savannah, Georgia office from a leased facility to a bank-owned facility and on March 11, 2014, opened a third retail banking office in Bradenton, Florida. In the second quarter of 2014, the Company expects to open a retail banking office in Cornelius, North Carolina.

Opening new offices is subject to local banking market conditions, availability of suitable sites, hiring qualified personnel, 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 office openings 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 quarter of 2014, the Company spent $3.4 million on capital expenditures for premises and equipment. The Company’s capital expenditures for 2014 are expected to be in the range of $12 million to $20 million, including progress payments on construction projects expected to be completed in 2014 and 2015, 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 branch offices acquired or constructed and sites acquired for future development, progress or delays encountered on ongoing and new construction projects, delays in or inability to obtain required approvals, potential premises and equipment expenditures associated with acquisitions, if any, and other factors.

On March 5, 2014, the Company completed its acquisition of Bancshares and its wholly-owned bank subsidiary OMNIBANK, N.A. for an aggregate of $21.5 million in cash. The acquisition of Bancshares expanded the Company’s service area in south Texas by adding offices in Houston (3), San Antonio, Austin, Cedar Park and Lockhart.

On January 30, 2014, the Company entered into a definitive agreement and plan of merger (“Summit Agreement”) with Summit and its wholly-owned bank subsidiary, Summit Bank, in a transaction valued at approximately $216 million. Summit Bank operates 24 banking offices in central, western and southwestern Arkansas. Under the terms of the Summit Agreement, each outstanding share of common stock of Summit will be converted, at the election of each Summit shareholder, into the right to receive shares of the Company’s common stock, plus cash in lieu of any fractional share, or the right to receive cash, all subject to certain conditions and potential adjustments, provided that at least 80% of the merger consideration paid to Summit shareholders will consist of shares of the Company’s common stock. The number of Company shares to be issued will be determined based on Summit shareholder elections and the Company’s 10-day average closing stock price as of the fifth business day prior to the closing date, subject to a minimum price of $43.58 and a maximum price of $72.63 per share. Upon the closing of the transaction, Summit will merge with and into the Company and Summit Bank will merge with and into the Bank. Completion of the transaction is subject to certain closing conditions. The transaction is expected to close on or about May 16, 2014.

The Company expects to continue growing through both its de novo branching strategy and traditional acquisitions. With respect to its de novo branching strategy, future de novo branches are expected to be focused in the seven states in which the Company has retail banking offices, including Arkansas, Georgia, Texas, North Carolina, Florida, Alabama and South Carolina. With respect to traditional acquisitions, the Company is focusing primarily on opportunities in the seven states in which it operates retail banking offices, although the Company may consider opportunities outside this seven state area. The Company is seeking acquisitions that are either immediately accretive to book value, tangible book value, net income and diluted earnings per share, or strategic in location, or both.

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 quarterly report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, other filings made by the Company with the SEC and other oral and written statements or reports by the Company and its management include certain forward-looking statements that are intended to be covered by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at that time. Those statements are subject to certain risks, uncertainties and other factors that may cause actual results to differ materially from those projected in such forward-looking statements. Forward-looking statements include, 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; gains on merger and acquisition transactions; 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 acquisitions; problems with integrating or managing acquisitions; the effect of the announcements or completion of any pending or future mergers or acquisitions on customer relationships and operating results; opportunities to profitably deploy capital; plans for opening new offices or relocating or closing existing offices; opportunities and goals for future market share growth; expected capital expenditures; loan, lease and deposit growth, including growth from unfunded closed loans; changes in covered assets; changes in the volume, yield and value of the Company’s investment securities portfolio; conversion of the Company’s core banking software; 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. 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 future 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 and/or close additional acquisitions, including the pending merger with Summit; problems with integrating or managing acquisitions; opportunities to profitably deploy capital; the ability to attract new or retain existing or acquired deposits, or to

retain or grow loans and leases, including growth from unfunded closed loans; 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, and the effect of any such conditions 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 related assets covered by FDIC loss share agreements; 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; the ability to keep pace with technological changes, including changes regarding cyber security; 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 quarterly report on Form 10-Q 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.

SELECTED AND SUPPLEMENTAL FINANCIAL DATA

The following tables set forth selected consolidated financial data of the Company for the three months ended March 31, 2014 and 2013 and supplemental quarterly financial data of the Company for each of the most recent eight quarters beginning with the second quarter of 2012 through the first quarter of 2014. 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
	March 31,
	2014			2013
	(Dollars in thousands, except per share amounts)
Income statement data:
Interest income	$	57,057		$	48,769
Interest expense		4,661			4,630
Net interest income		52,396			44,139
Provision for loan and lease losses		1,304			2,728
Non-interest income		20,360			16,357
Non-interest expense		37,454			29,231
Net income available to common stockholders		25,276			20,000
Common share and per common share data:
Earnings – diluted	$	0.68		$	0.56
Book value		17.68			14.81
Dividends		0.22			0.15
Weighted-average diluted shares outstanding (thousands)		37,247			35,631
End of period shares outstanding (thousands)		36,944			35,367
Balance sheet data at period end:
Total assets	$	5,028,893		$	3,951,818
Loans and leases		2,778,503			2,157,771
Purchased non-covered loans		488,533			38,071
Covered loans		304,955			544,268
Allowance for loan and lease losses		43,861			38,422
FDIC loss share receivable		57,782			132,699
Investment securities AFS		687,661			487,648
Covered foreclosed assets		43,793			51,040
Total deposits		3,916,204			2,991,072
Repurchase agreements with customers		51,140			30,714
Other borrowings		280,885			280,756
Subordinated debentures		64,950			64,950
Total common stockholders’ equity		653,208			523,679
Loan and lease (including covered loans and purchased non-covered loans) to deposit ratio		91.21	%		91.61	%
Average balance sheet data:
Total average assets	$	4,824,870		$	3,929,638
Total average common stockholders’ equity		638,334			514,378
Average common equity to average assets		13.23	%		13.09	%
Performance ratios:
Return on average assets*		2.12	%		2.06	%
Return on average common stockholders’ equity*		16.06			15.77
Net interest margin – FTE*		5.46			5.83
Efficiency ratio		49.82			46.76
Common stock dividend payout ratio		32.35			26.46
Asset quality ratios:
Net charge-offs to average total loans and leases*⁽¹⁾		0.02	%		0.19	%
Nonperforming loans and leases to total loans and leases⁽²⁾		0.42			0.40
Nonperforming assets to total assets⁽²⁾		0.57			0.50
Allowance for loan and lease losses as a percentage of:
Total loans and leases⁽²⁾		1.58	%		1.78	%
Nonperforming loans and leases⁽²⁾		372	%		449	%
Capital ratios at period end:
Tier 1 leverage		14.41	%		14.45	%
Tier 1 risk-based capital		15.20			18.23
Total risk-based capital		16.16			19.47

*	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)


	6/30/12			9/30/12			12/31/12			3/31/13			6/30/13			9/30/13			12/31/13			3/31/14
Earnings Summary:
Net interest income	$	42,298		$	44,444		$	43,771		$	44,139		$	43,465		$	50,633		$	55,282		$	52,396
Federal tax (FTE) adjustment		2,151			2,087			2,009			2,020			2,076			2,161			2,372			2,424

Net interest income (FTE)		44,449			46,531			45,780			46,159			45,541			52,794			57,654			54,820
Provision for loan and lease losses		(3,055	)		(3,080	)		(2,533	)		(2,728	)		(2,666	)		(3,818	)		(2,863	)		(1,304	)
Non-interest income		15,710			14,491			18,848			16,357			18,987			18,000			18,592			20,360
Non-interest expense		(27,282	)		(28,682	)		(29,891	)		(29,231	)		(29,901	)		(32,208	)		(34,728	)		(37,454	)

Pretax income (FTE)		29,822			29,260			32,204			30,557			31,961			34,768			38,655			36,422
FTE adjustment		(2,151	)		(2,087	)		(2,009	)		(2,020	)		(2,076	)		(2,161	)		(2,372	)		(2,424	)
Provision for income taxes		(8,584	)		(7,883	)		(9,519	)		(8,526	)		(9,506	)		(10,224	)		(11,893	)		(8,730	)
Noncontrolling interest		5			(15	)		(9	)		(11	)		8			(33	)		8			8

Net income available to common stockholders	$	19,092		$	19,275		$	20,667		$	20,000		$	20,387		$	22,350		$	24,398		$	25,276

Earnings per common share – diluted	$	0.55		$	0.55		$	0.59		$	0.56		$	0.57		$	0.61		$	0.66		$	0.68
Non-interest Income:
Service charges on deposit accounts	$	4,908		$	5,000		$	4,799		$	4,722		$	5,074		$	5,817		$	6,031		$	5,639
Mortgage lending income		1,328			1,672			1,483			1,741			1,643			1,276			967			954
Trust income		888			865			928			883			865			1,060			1,289			1,316
BOLI income		567			598			1,027			1,083			1,104			1,179			1,164			1,130
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		2,035			1,699			1,336			2,392			2,481			1,396			901			692
Other income from loss share and purchased non-covered loans, net		3,197			2,270			3,194			2,155			3,689			2,484			4,825			3,311
Gains on investment securities		402			—			55			156			—			—			4			5
Gains on sales of other assets		1,397			1,425			2,431			1,974			3,110			2,501			1,801			974
Gains on merger and acquisition transactions		—			—			2,403			—			—			1,061			—			4,667
Other		988			962			1,192			1,251			1,021			1,226			1,610			1,672

Total non-interest income	$	15,710		$	14,491		$	18,848		$	16,357		$	18,987		$	18,000		$	18,592		$	20,360

Non-interest Expense:
Salaries and employee benefits	$	14,574		$	15,040		$	15,362		$	15,694		$	15,294		$	16,456		$	17,381		$	17,689
Net occupancy expense		3,650			4,105			4,160			4,514			4,370			4,786			5,039			5,044
Other operating expenses		8,549			9,028			9,860			8,455			9,669			10,178			11,427			13,908
Amortization of intangibles		509			509			509			568			568			788			881			813

Total non-interest expense	$	27,282		$	28,682		$	29,891		$	29,231		$	29,901		$	32,208		$	34,728		$	37,454

Allowance for Loan and Lease Losses:
Balance at beginning of period	$	38,632		$	38,862		$	38,672		$	38,738		$	38,422		$	39,373		$	41,660		$	42,945
Net charge-offs		(2,825	)		(3,270	)		(2,467	)		(3,044	)		(1,715	)		(1,531	)		(1,578	)		(388	)
Provision for loan and lease losses		3,055			3,080			2,533			2,728			2,666			3,818			2,863			1,304

Balance at end of period	$	38,862		$	38,672		$	38,738		$	38,422		$	39,373		$	41,660		$	42,945		$	43,861

Selected Ratios:
Net interest margin—FTE*		5.84	%		5.97	%		5.84	%		5.83	%		5.56	%		5.55	%		5.63	%		5.46	%
Efficiency ratio		45.35			47.00			46.25			46.76			46.34			45.49			45.55			49.82
Net charge-offs to average loans and leases*(1)		0.18			0.32			0.28			0.19			0.11			0.09			0.12			0.02
Nonperforming loans and leases to total loans and leases(2)		0.49			0.43			0.43			0.40			0.66			0.41			0.33			0.42
Nonperforming assets to total assets(2)		0.63			0.59			0.57			0.50			0.66			0.47			0.43			0.57
Allowance for loan and lease losses to total loans and leases(2)		1.96			1.90			1.83			1.78			1.61			1.65			1.63			1.58
Loans and leases past due 30 days or more, including past due non-accrual loans and leases, to total loans and leases(2)		0.74			0.61			0.73			0.56			0.74			0.54			0.45			0.75

*	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 April 1, 2014. 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 or the impact of any pending or possible future acquisitions.


Shift in	% Change in
Interest Rates	Projected Baseline
(in bps)	Net Interest Income
+400		6.1	%
+300		4.1
+200		2.2
+100		0.8
-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.

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 or submits 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.

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 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. In January 2014, the Arkansas Supreme Court granted the plaintiff’s petition for review. Oral arguments were presented to the Arkansas Supreme Court on May 1, 2014, and the Company and Bank expect a ruling from the Arkansas Supreme Court in the second or third quarter of 2014. During the pendency of the appeal and review process, the plaintiff in the Muzingo case has agreed to stay the proceedings in that case. The Company and Bank believe the plaintiffs’ claims are unfounded and intend to defend against these claims.

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 Court of Appeals for the Fifth District of Texas at Dallas (“Court of Appeals”). On or about November 28, 2012, plaintiff filed an appellant’s brief with the Court of Appeals. Oral arguments were heard by the Court of Appeals on February 5, 2014. On March 18, 2014, the Court of Appeals affirmed the district court’s order granting the Bank’s motion for summary judgment. The plaintiff did not timely file a motion for rehearing with the Court of Appeals. Similarly, the plaintiff did not timely file a petition for review with the Supreme Court of Texas. Nevertheless, untimely requests for review may be granted by the Supreme Court of Texas for good cause shown. In the absence of an untimely request for review being granted by the Supreme Court of Texas, all matters related to this litigation have been concluded.

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. 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.

Item 1A.

Risk Factors

The discussion of the Company’s business and operations should be read together with the risk below and the risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2013, which describes various risks and uncertainties to which the Company is or may be subject. These risks and uncertainties have the potential to affect the Company’s business, financial condition, results of operations, and prospects in a material adverse manner.

The Company May Be Subject to Claims and Litigation Pertaining to Fiduciary Responsibility.

From time to time as part of the Company’s normal course of business, customers may make claims and take legal action against the Company based on its actions or inactions related to the Bank’s fiduciary responsibilities of its Trust and Wealth Management Division. If such claims and legal actions are not resolved in a manner favorable to the Company, they may result in financial liability and/or adversely affect the market perception of the Company and its products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

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: May 9, 2014						/s/ Greg McKinney
						Greg McKinney
						Chief Financial Officer and
						Chief Accounting Officer

Bank of the Ozarks, Inc.

Exhibit Index


Exhibit Number

2.1		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).

2.2		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).

2.3		Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks, Summit Bancorp, Inc. and Summit Bank, dated as of January 30, 2014 (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 30, 2014, and incorporated herein by this reference). Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules to this agreement have not been filed with this exhibit. The schedules contain various items relating to the business of and the representations and warranties made by Summit Bancorp, Inc. and Summit Bank. The Company agrees to furnish supplementally any omitted schedule to the Commission upon request.

3.1		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).

3.2		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).

3.3		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).

3.4		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).

11.1		Earnings Per Share Computation (included in Note 4 to the Consolidated Financial Statements).

31.1		Certification of Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith.

31.2		Certification of Chief Financial Officer and Chief Accounting Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith.

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, furnished herewith.

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, furnished herewith.

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