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HOME BANCSHARES INC - Quarter Report: 2010 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
     
þ    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2010
or
     
o   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: 000-51904
HOME BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
     
Arkansas   71-0682831
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
719 Harkrider, Suite 100, Conway, Arkansas   72032
     
(Address of principal executive offices)   (Zip Code)
(501) 328-4770
 
(Registrant’s telephone number, including area code)
Not Applicable
 
Former name, former address and former fiscal year, if changed since last report
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 þ No o
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
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.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date.
Common Stock Issued and Outstanding: 28,441,918 shares as of November 4, 2010.
 
 

 


 

HOME BANCSHARES, INC.
FORM 10-Q
September 30, 2010
INDEX
         
    Page No.  
       
 
       
       
 
       
    4  
 
       
    5  
 
       
    6-7  
 
       
    8  
 
       
    9-38  
 
    39  
 
       
    40-74  
 
       
    75-77  
 
       
    78  
 
       
       
 
       
    78  
 
       
    78  
 
       
    79  
 
       
    79  
 
       
    79  
 
       
    79  
 
       
    79  
 
       
    80  
 
       
       
 12.1 Computation of Ratios of Earnings to Fixed Charges
 15 Awareness of Independent Registered Public Accounting Firm
 31.1 CEO Certification Pursuant to 13a-14(a)/15d-14(a)
 31.2 CFO Certification Pursuant to 13a-14(a)/15d-14(a)
 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350
 32.2 CFO Certification Pursuant to 18 U.S.C. Section 1350

 


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
     Some of our statements contained in this document, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation” are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to future events or our future financial performance and include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, our other business strategies and other statements that are not historical facts. Forward-looking statements are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, but not limited to, the following:
    the effects of future economic conditions, including inflation, deflation or a continued decrease in residential housing values;
 
    governmental monetary and fiscal policies, as well as legislative and regulatory changes;
 
    the risks of changes in interest rates or the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;
 
    the effects of terrorism and efforts to combat it;
 
    credit risks;
 
    the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with competitors offering banking products and services by mail, telephone and the Internet;
 
    the effect of any mergers, acquisitions or other transactions to which we or our subsidiaries may from time to time be a party, including our ability to successfully integrate any businesses that we acquire;
 
    the failure of assumptions underlying the establishment of our allowance for loan losses; and
 
    the failure of assumptions underlying the estimates of the fair values for our covered assets and FDIC indemnification receivable.
     All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, see the “Risk Factors” section of our Form 10-K filed with the Securities and Exchange Commission on March 5, 2010.

 


Table of Contents

PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Home BancShares, Inc.
Consolidated Balance Sheets
                 
    September 30,     December 31,  
(In thousands, except share data)   2010     2009  
    (Unaudited)          
Assets
               
Cash and due from banks
  $ 39,894     $ 39,970  
Interest-bearing deposits with other banks
    168,173       133,520  
 
           
Cash and cash equivalents
    208,067       173,490  
Federal funds sold
    800       11,760  
Investment securities — available for sale
    380,717       322,115  
Loans receivable not covered by loss share
    1,955,263       1,950,285  
Loans receivable covered by FDIC loss share
    408,239        
Allowance for loan losses
    (43,784 )     (42,968 )
 
           
Loans receivable, net
    2,319,718       1,907,317  
Bank premises and equipment, net
    74,860       70,810  
Foreclosed assets held for sale not covered by loss share
    12,695       16,484  
Foreclosed assets held for sale covered by FDIC loss share
    18,563        
FDIC indemnification asset
    176,844        
Cash value of life insurance
    51,694       52,176  
Accrued interest receivable
    15,269       13,137  
Deferred tax asset, net
    13,080       14,777  
Goodwill
    59,663       53,039  
Core deposit and other intangibles
    8,402       4,698  
Mortgage servicing rights
          1,090  
Other assets
    51,765       43,972  
 
           
Total assets
  $ 3,392,137     $ 2,684,865  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Deposits:
               
Demand and non-interest-bearing
  $ 368,822     $ 302,228  
Savings and interest-bearing transaction accounts
    926,746       714,744  
Time deposits
    1,268,868       818,451  
 
           
Total deposits
    2,564,436       1,835,423  
Federal funds purchased
           
Securities sold under agreements to repurchase
    73,015       62,000  
FHLB borrowed funds
    187,393       264,360  
Accrued interest payable and other liabilities
    24,494       10,625  
Subordinated debentures
    44,331       47,484  
 
           
Total liabilities
    2,893,669       2,219,892  
 
           
Stockholders’ equity:
               
Preferred stock; $0.01 par value; 5,500,000 shares authorized: Series A fixed rate cumulative perpetual; liquidation preference of $1,000 per share; 50,000 shares issued and outstanding at September 30, 2010 and December 31, 2009
    49,411       49,275  
Common stock, par value $0.01; shares authorized 50,000,000; shares issued and outstanding 28,433,588 in 2010 and 28,259,150 (stock dividend adjusted) in 2009
    284       257  
Capital surplus
    432,668       363,519  
Retained earnings
    9,934       51,746  
Accumulated other comprehensive income
    6,171       176  
 
           
Total stockholders’ equity
    498,468       464,973  
 
           
Total liabilities and stockholders’ equity
  $ 3,392,137     $ 2,684,865  
 
           
See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.
Consolidated Statements of Income
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands, except per share data(1))   2010     2009     2010     2009  
    (Unaudited)  
Interest income:
                               
Loans
  $ 35,673     $ 30,056     $ 98,675     $ 88,583  
Investment securities
                               
Taxable
    1,802       1,768       5,364       6,673  
Tax-exempt
    1,492       1,463       4,471       4,104  
Deposits — other banks
    92       7       258       27  
Federal funds sold
    3       1       13       12  
 
                       
Total interest income
    39,062       33,295       108,781       99,399  
 
                       
Interest expense:
                               
Interest on deposits
    6,319       6,489       17,486       21,738  
Federal funds purchased
          2             6  
FHLB borrowed funds
    1,854       2,379       6,113       7,128  
Securities sold under agreements to repurchase
    137       126       349       361  
Subordinated debentures
    599       623       1,796       1,958  
 
                       
Total interest expense
    8,909       9,619       25,744       31,191  
 
                       
Net interest income
    30,153       23,676       83,037       68,208  
Provision for loan losses
    3,000       3,550       9,850       7,300  
 
                       
Net interest income after provision for loan losses
    27,153       20,126       73,187       60,908  
 
                       
Non-interest income:
                               
Service charges on deposit accounts
    3,551       3,785       10,275       10,792  
Other service charges and fees
    1,816       1,705       5,353       5,330  
Mortgage lending income
    760       488       1,822       2,183  
Mortgage servicing income
          171       314       562  
Insurance commissions
    248       173       904       628  
Income from title services
    98       150       353       441  
Increase in cash value of life insurance
    330       495       1,106       1,546  
Dividends from FHLB, FRB & bankers’ bank
    151       114       419       320  
Gain on acquisitions
                9,334        
Gain on sale of SBA loans
                18        
Gain (loss) on sale of premises and equipment, net
    2       (21 )     221       (33 )
Gain (loss) on OREO, net
    (1,063 )     4       (1,308 )     (141 )
Gain (loss) on securities, net
    (37 )           (37 )     (3 )
FDIC indemnification asset
    1,895             2,631        
Other income
    556       500       1,767       1,483  
 
                       
Total non-interest income
    8,307       7,564       33,172       23,108  
 
                       
Non-interest expense:
                               
Salaries and employee benefits
    9,637       7,987       27,251       25,363  
Occupancy and equipment
    3,264       2,706       9,036       8,050  
Data processing expense
    848       790       2,664       2,380  
Other operating expenses
    7,545       5,556       19,888       20,775  
 
                       
Total non-interest expense
    21,294       17,039       58,839       56,568  
 
                       
Income before income taxes
    14,166       10,651       47,520       27,448  
Income tax expense
    4,606       3,412       16,122       8,523  
 
                       
Net income available to all stockholders
    9,560       7,239       31,398       18,925  
Preferred stock dividends and accretion of discount on preferred stock
    670       670       2,010       1,906  
 
                       
Net income available to common stockholders
  $ 8,890     $ 6,569     $ 29,388     $ 17,019  
 
                       
Basic earnings per common share
  $ 0.32     $ 0.29     $ 1.04     $ 0.77  
 
                       
Diluted earnings per common share
  $ 0.31     $ 0.29     $ 1.03     $ 0.76  
 
                       
 
(1)   All per share amounts have been restated to reflect the effect of the 10% stock dividend.
See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.
Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2010 and 2009
                                                 
                                    Accumulated        
                                    Other        
    Preferred     Common     Capital     Retained     Comprehensive        
(In thousands, except share data(1))   Stock     Stock     Surplus     Earnings     Income (Loss)     Total  
 
Balance at January 1, 2009
  $     $ 199     $ 253,581     $ 32,639     $ (3,375 )   $ 283,044  
Comprehensive income:
                                               
Net income
                      18,925             18,925  
Other comprehensive income:
                                               
Unrealized gain on investment securities available for sale, net of tax effect of $3,181
                            4,929       4,929  
 
                                             
Comprehensive income
                                            23,854  
Issuance of 5,445,000 shares of common stock from public stock offering, net of offering costs of $4,933
          49       93,275                   93,324  
Issuance of 50,000 shares of preferred stock and common stock warrant
    49,094             906                   50,000  
Accretion of discount on preferred stock
    136                   (136 )            
Net issuance of 126,814 shares of common stock from exercise of stock options
          1       1,295                   1,296  
Tax benefit from stock options exercised
                367                   367  
Share-based compensation
                5                   5  
Cash dividends — Preferred Stock - 5%
                      (1,770 )           (1,770 )
Cash dividends — Common Stock, $0.1635 per share
                      (3,584 )           (3,584 )
     
Balances at September 30, 2009 (unaudited)
    49,230       249       349,429       46,074       1,554       446,536  
Comprehensive income:
                                               
Net income
                      7,881             7,881  
Other comprehensive income:
                                               
Unrealized loss on investment securities available for sale, net of tax effect of $889
                            (1,378 )     (1,378 )
 
                                             
Comprehensive income
                                            6,503  
Issuance of 816,750 shares of common stock from public stock offering, net of offering costs of $701
          8       14,009                   14,017  
Accretion of discount on preferred stock
    45                   (45 )            
Net issuance of 13,007 shares of common stock from exercise of stock options
                95                   95  
Tax benefit from stock options exercised
                72                   72  
Share-based compensation
                (86 )                 (86 )
Cash dividends — Preferred stock - 5%
                      (625 )           (625 )
Cash dividends — Common Stock, $0.0545 per share
                      (1,539 )           (1,539 )
     
Balances at December 31, 2009
    49,275       257       363,519       51,746       176       464,973  
See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.
Consolidated Statements of Stockholders’ Equity — Continued
Nine Months Ended September 30, 2010 and 2009
                                                 
                                    Accumulated        
                                    Other        
    Preferred     Common     Capital     Retained     Comprehensive        
(In thousands, except share data(1))   Stock     Stock     Surplus     Earnings     Income (Loss)     Total  
 
Comprehensive income:
                                               
Net income
                      31,398             31,398  
Other comprehensive income:
                                               
Unrealized gain on investment securities available for sale, net of tax effect of $3,872
                            5,995       5,995  
 
                                             
Comprehensive income
                                            37,393  
Accretion of discount on preferred stock
    136                   (136 )            
Net issuance of 156,069 shares of common stock from exercise of stock options
          2       1,411                   1,413  
Disgorgement of profits
                11                   11  
Tax benefit from stock options exercised
                863                   863  
Share-based compensation
                324                   324  
Cash dividend — Preferred Stock — 5%
                      (1,875 )           (1,875 )
Cash dividends — Common Stock, $0.1625 per share
                      (4,623 )           (4,623 )
Stock dividend — Common Stock — 10%
          25       66,540       (66,576 )           (11 )
     
Balances at September 30, 2010 (unaudited)
  $ 49,411     $ 284     $ 432,668     $ 9,934     $ 6,171     $ 498,468  
               
 
(1)   All per share amounts have been restated to reflect the effect of the 10% stock dividend.
See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.
Consolidated Statements of Cash Flows
                 
    Period Ended September 30,  
(In thousands)   2010     2009  
    (Unaudited)  
Operating Activities
               
Net income
  $ 31,398     $ 18,925  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation
    3,945       3,926  
Amortization/(accretion)
    52       2,242  
Share-based compensation
    324       5  
Tax benefits from stock options exercised
    (863 )     (367 )
(Gain) loss on assets
    969       177  
Gain on acquisitions
    (9,334 )      
Provision for loan losses
    9,850       7,300  
Deferred income tax effect
    2,100       (337 )
Increase in cash value of life insurance
    (1,106 )     (1,546 )
Originations of mortgage loans held for sale
    (94,415 )     (149,501 )
Proceeds from sales of mortgage loans held for sale
    79,856       149,590  
Changes in assets and liabilities:
               
Accrued interest receivable
    (2,132 )     300  
Other assets
    9,913       (5,791 )
Accrued interest payable and other liabilities
    5,397       6,759  
 
           
Net cash provided by (used in) operating activities
    35,954       31,682  
 
           
Investing Activities
               
Net (increase) decrease in federal funds sold
    14,039       7,205  
Net (increase) decrease in loans net, excluding loans acquired
    10,019       (38,549 )
Purchases of investment securities — available for sale
    (113,721 )     (59,293 )
Proceeds from maturities of investment securities — available for sale
    107,855       84,063  
Proceeds from sale of investment securities — available for sale
    5,539       22,972  
Proceeds from foreclosed assets held for sale
    14,879       4,689  
Proceeds from sale of SBA loans
    268        
Sale of mortgage servicing portfolio
    225        
Purchases of premises and equipment, net
    (7,722 )     (1,340 )
Death benefits received
    1,585        
Acquisition of Centennial Bancshares, Inc., net funds received
          (3,100 )
Net cash proceeds received in FDIC-assisted acquisitions
    160,587        
 
           
Net cash provided by (used in) investing activities
    193,553       16,647  
 
           
Financing Activities
               
Net increase (decrease) in deposits, net of deposits acquired
    (90,829 )     (67,623 )
Net increase (decrease) in securities sold under agreements to repurchase
    11,015       (50,125 )
Net increase (decrease) in federal funds purchased
           
Net increase (decrease) in FHLB and other borrowed funds, net of acquired
    (107,642 )     (425 )
Retirement of subordinated debentures
    (3,252 )      
Proceeds from exercise of stock options
    1,413       1,296  
Proceeds from issuance of preferred stock and common stock warrant
          50,000  
Proceeds from issuance of common stock
          93,324  
Disgorgement of profits
    11        
Tax benefits from stock options exercised
    863       367  
Dividends paid on preferred stock
    (1,875 )     (1,770 )
Dividends paid on common stock
    (4,634 )     (3,584 )
 
           
Net cash provided by (used in) financing activities
    (194,930 )     21,460  
 
           
Net change in cash and cash equivalents
    34,577       69,789  
Cash and cash equivalents — beginning of year
    173,490       54,168  
 
           
Cash and cash equivalents — end of period
  $ 208,067     $ 123,957  
 
           
See Condensed Notes to Consolidated Financial Statements.

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Home BancShares, Inc.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
     Home BancShares, Inc. (the Company or HBI) is a bank holding company headquartered in Conway, Arkansas. The Company is primarily engaged in providing a full range of banking services to individual and corporate customers through its wholly owned community bank subsidiary — Centennial Bank (the Bank). During 2009, the Company completed the combination of its former bank charters into a single charter, adopting Centennial Bank as the common name. The Bank has locations in central Arkansas, north central Arkansas, southern Arkansas, the Florida Keys, central Florida, southwestern Florida and the Florida Panhandle. The Company is subject to competition from other financial institutions. The Company also is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
     A summary of the significant accounting policies of the Company follows:
Operating Segments
     Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Bank is the only significant subsidiary upon which management makes decisions regarding how to allocate resources and assess performance. Each of the branches of the Bank provide a group of similar community banking services, including such products and services as commercial, real estate and consumer loans, time deposits, checking and savings accounts. The individual bank branches have similar operating and economic characteristics. While the chief decision maker monitors the revenue streams of the various products, services and branch locations, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the community banking services and branch locations are considered by management to be aggregated into one reportable operating segment, community banking.
Use of Estimates
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
     Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of foreclosed assets. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets, management obtains independent appraisals for significant properties.
Principles of Consolidation
     The consolidated financial statements include the accounts of HBI and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
     Various items within the accompanying consolidated financial statements for previous years have been reclassified to provide more comparative information. These reclassifications had no effect on net earnings or stockholders’ equity.

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     Acquisition Accounting, Covered Loans and Related Indemnification Asset
     Beginning in 2009, the Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the Federal Deposit Insurance Corporation (FDIC). The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
     Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics and were treated in the aggregate when applying various valuation techniques. The Company evaluates at each balance sheet date whether the present value of its loans determined using the effective interest rates has significantly decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any significant increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.
     Because the FDIC will reimburse the Company for certain acquired loans should the Company experience a loss, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The shared-loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.
     The shared-loss agreements continue to be measured on the same basis as the related indemnified loans. Because the acquired loans are subject to the accounting prescribed by ASC Topic 310, subsequent changes to the basis of the shared-loss agreements also follow that model. Deterioration in the credit quality of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the basis of the shared-loss agreements, with the offset recorded through the consolidated statement of income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the shared-loss agreements, with such decrease being accreted into income over 1) the same period or 2) the life of the shared-loss agreements, whichever is shorter. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset. Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared-loss agreements.
     Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding claim receivable is recorded until cash is received from the FDIC.
     For further discussion of the Company’s acquisitions and loan accounting, see Note 2 and Note 5 to the consolidated financial statements.
     Interim financial information
     The accompanying unaudited consolidated financial statements as of September 30, 2010 and 2009 have been prepared in condensed format, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
     The information furnished in these interim statements reflects all adjustments, which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2009 Form 10-K, filed with the Securities and Exchange Commission.

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Earnings per Share
     Basic earnings per share are computed based on the weighted average number of shares outstanding during each year. Diluted earnings per share are computed using the weighted average common shares and all potential dilutive common shares outstanding during the period. Prior year and end of period per share amounts have been adjusted for the stock dividend which occurred in June of 2010. The following table sets forth the computation of basic and diluted earnings per common share (EPS) for the three-month and nine-month periods ended September 30:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
            (In thousands)          
Net income available to common stockholders
  $ 8,890     $ 6,569     $ 29,388     $ 17,019  
 
                               
Average shares outstanding
    28,403       22,528       28,334       22,087  
Effect of common stock options
    241       245       246       264  
 
                       
Diluted shares outstanding
    28,644       22,773       28,580       22,351  
 
                       
 
                               
Basic earnings per common share
  $ 0.32     $ 0.29     $ 1.04     $ 0.77  
Diluted earnings per common share
  $ 0.31     $ 0.29     $ 1.03     $ 0.76  
     Warrant to purchase 158,471.50 shares of common stock at $23.664 (stock dividend adjusted) were outstanding at September 30, 2010. At September 30, 2009, 316,943 shares of common stock at $23.664 (stock dividend adjusted) were outstanding. These shares of common stock were not included in the computation of diluted EPS because the exercise prices were greater than the average market price of the common shares.
2. Business Combinations
     Acquisition Old Southern Bank
     On March 12, 2010, Centennial Bank entered into a purchase and assumption agreement (Old Southern Agreement) with the FDIC, as receiver, pursuant to which the Bank acquired certain assets and assumed substantially all of the deposits and certain liabilities of Old Southern Bank (Old Southern).
     Prior to the acquisition, Old Southern operated 7 banking centers in the Orlando, Florida metropolitan area. The Company plans to keep all of the branches except for one location in downtown Orlando. The downtown Orlando location was closed during the third quarter of 2010. Excluding the effects of purchase accounting adjustments, Centennial Bank acquired $335.3 million in assets and assumed approximately $328.5 million of the deposits of Old Southern. Additionally, Centennial Bank purchased loans with an estimated fair value of $179.1 million, $3.0 million of foreclosed assets and $30.4 million of investment securities.
     Centennial Bank did not acquire the real estate, banking facilities, furniture and equipment of Old Southern as part of the purchase and assumption agreement but exercised its option late in the second quarter of 2010 to purchase these assets at fair market value from the FDIC. Fair market values for the real estate, facilities, furniture and equipment were based on current appraisals. Centennial Bank leased these facilities and equipment from the FDIC until it exercised its option. Late in the second quarter, Centennial Bank purchased $5.3 million of bank premises and equipment from the FDIC.

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     In connection with the Old Southern acquisition, Centennial Bank entered into loss sharing agreements with the FDIC that cover $282.0 million of assets, based upon the seller’s records, including single family residential mortgage loans, commercial real estate, commercial and industrial loans, and foreclosed assets (collectively, “covered assets”). Centennial Bank acquired other Old Southern assets that are not covered by the loss sharing agreements with the FDIC including interest-bearing deposits with other banks, investment securities purchased at fair market value and other tangible assets. Pursuant to the terms of the loss sharing agreements, the covered assets are subject to a stated loss threshold of $110.0 million whereby the FDIC will reimburse Centennial Bank for 80% of losses of up to $110.0 million, and 95% of losses in excess of this amount. Centennial Bank will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid Centennial Bank a reimbursement under the loss sharing agreements. The FDIC’s obligation to reimburse Centennial Bank for losses with respect to covered assets begins with the first dollar of loss incurred.
     The amounts covered by the loss sharing agreements are the pre-acquisition book values of the underlying covered assets, the contractual balance of unfunded commitments that were acquired, and certain future net direct costs. The loss sharing agreement applicable to single family residential mortgage loans provide for FDIC loss sharing and Centennial Bank reimbursement to the FDIC, in each case as described above, for ten years. The loss sharing agreement applicable to all other covered assets provide for FDIC loss sharing for five years and Centennial Bank reimbursement of recoveries to the FDIC for eight years, in each case as described above.
     The loss sharing agreements are subject to certain servicing procedures as specified in agreements with the FDIC. The expected reimbursements under the loss sharing agreements were recorded as indemnification assets at their estimated fair values of $73.5 million for the Old Southern Agreement, on the acquisition date. The indemnification assets reflect the present value of the expected net cash reimbursement related to the loss sharing agreements described above. The loss sharing agreements were the standard format utilized by the FDIC during this period for such transactions. The FDIC has and continues to make changes and modifications to their standard agreements.
     Centennial Bank has determined that the acquisition of the net assets of Old Southern constitute a business combination as defined by the FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. In addition, the tax treatment of the FDIC-assisted acquisition is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date.

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     The following schedule is a breakdown of the revised assets and liabilities acquired as of the acquisition date.
                         
    Old Southern  
    Acquired from     Fair Value     As Recorded  
    the FDIC     Adjustments     by HBI  
    (Dollars in thousands)  
Assets
                       
Cash and due from banks
  $ 1,759     $ 30,675     $ 32,434  
Interest-bearing deposits with other banks
    16,563             16,563  
Investment securities
    30,401             30,401  
Federal funds sold
    3,079             3,079  
Loans receivable covered by loss share
    273,166       (94,101 )     179,065  
 
                 
Total loans receivable
    273,166       (94,101 )     179,065  
Bank premises and equipment, net
    44             44  
Foreclosed assets held for sale covered by loss share
    8,781       (5,821 )     2,960  
FDIC indemnification asset
          73,544       73,544  
Core deposit intangibles
          2,400       2,400  
Other assets
    1,505       633       2,138  
 
                 
Total assets acquired
  $ 335,298     $ 7,330     $ 342,628  
 
                 
 
                       
Liabilities
                       
Deposits
                       
Demand and non-interest-bearing
  $ 25,178     $     $ 25,178  
Savings and interest-bearing transaction accounts
    124,071             124,071  
Time deposits
    179,208             179,208  
 
                 
Total deposits
    328,457             328,457  
Accrued interest payable and other liabilities
    375       6,535       6,910  
 
                 
Total liabilities assumed
  $ 328,832     $ 6,535     $ 335,367  
 
                 
Gain on acquisition
                  $ 7,261  
 
                     
     The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.
     Cash and due from banks, interest-bearing deposits with other banks and federal funds sold — The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets. The $30.7 million adjustment is the first pro-forma cash settlement received from the FDIC on Monday following the closing weekend.
     Investment Securities — Investment securities were acquired from the FDIC at fair market value.
     Loans — Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.
     Core deposit intangible — This intangible asset represents the value of the relationships that Old Southern had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits.

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     Foreclosed assets held for sale — These assets are presented at the estimated present values that management expects to receive when the properties are sold, net of related costs of disposal.
     FDIC indemnification asset — This loss sharing asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should Centennial Bank choose to dispose of them. Fair value was estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss-sharing reimbursement from the FDIC.
     Deposits — The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. No fair value adjustment was applied for time deposits as the Bank was able to reset deposit rates to market rates currently offered.
     The Company’s operating results for the period ended September 30, 2010, include the operating results of the acquired assets and assumed liabilities subsequent to the March 12, 2010 acquisition date. Due to the significant fair value adjustments recorded, as well as the nature of the FDIC loss sharing agreements in place, Old Southern’s historical results are not believed to be relevant to the Company’s results, and thus no pro forma information is presented.
     Acquisition Key West Bank
     On March 26, 2010, Centennial Bank, entered into a purchase and assumption agreement (Key West Bank Agreement) with the FDIC, as receiver, pursuant to which Centennial Bank acquired certain assets and assumed substantially all of the deposits and certain liabilities of Key West Bank (Key West).
     Prior to the acquisition, Key West operated one banking center located in Key West, Florida. Excluding the effects of purchase accounting adjustments, Centennial Bank acquired $96.8 million in assets and assumed approximately $66.7 million of the deposits of Key West. Additionally, Centennial Bank purchased loans with an estimated fair value of $46.9 million, $5.7 million of foreclosed assets and assumed $20.0 million of FHLB advances.
     Centennial Bank did not acquire the real estate, banking facilities, furniture and equipment of Key West as part of the purchase and assumption agreement but exercised its option late in the second quarter of 2010 to purchase these assets at fair market value from the FDIC. Fair market values for the real estate, facilities, furniture and equipment were based on current appraisals. Centennial Bank leased these facilities and equipment from the FDIC until it exercised its option. Late in the second quarter, Centennial Bank purchased $1.0 million of bank premises and equipment from the FDIC.
     In connection with the Key West acquisition, Centennial Bank entered into loss-sharing agreements with the FDIC that collectively cover approximately $72.7 million of assets, based upon the seller’s records, which include single family residential mortgage loans, commercial real estate, commercial and industrial loans and foreclosed assets (covered assets). Centennial Bank acquired other Key West assets that are not covered by loss sharing agreements with the FDIC including interest-bearing deposits with other banks and other tangible assets. Pursuant to the terms of the loss sharing agreements, the covered assets of Key West are subject to a stated loss threshold of $23.0 million whereby the FDIC will reimburse Centennial Bank for 80% of losses of up to $23.0 million, and 95% of losses in excess of this amount. Centennial Bank will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid Centennial Bank a reimbursement under the loss sharing agreements. The FDIC’s obligation to reimburse Centennial Bank for losses with respect to covered assets begins with the first dollar of loss incurred.

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     The amounts covered by the loss sharing agreements are the pre-acquisition book values of the underlying covered assets, the contractual balance of unfunded commitments that were acquired, and certain future net direct costs. The loss sharing agreement applicable to single family residential mortgage loans provide for FDIC loss sharing and Centennial Bank reimbursement to the FDIC, in each case as described above, for ten years. The loss sharing agreement applicable to all other covered assets provide for FDIC loss sharing for five years and Centennial Bank reimbursement of recoveries to the FDIC for eight years, in each case as described above.
     The loss sharing agreements are subject to certain servicing procedures as specified in agreements with the FDIC. The expected reimbursements under the loss sharing agreements were recorded as indemnification assets at their estimated fair values of $12.2 million for the Key West Agreement, on the acquisition date. The indemnification assets reflect the present value of the expected net cash reimbursement related to the loss sharing agreements described above. The loss sharing agreements were the standard format utilized by the FDIC during this period for such transactions. The FDIC has and continues to make changes and modifications to their standard agreements.
     Centennial Bank has determined that the acquisition of the net assets of Key West constitute a business combination as defined by the FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. In addition, the tax treatment of the FDIC-assisted acquisition is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date.
                         
    Key West  
    Acquired from     Fair Value     As Recorded  
    the FDIC     Adjustments     by HBI  
    (Dollars in thousands)  
Assets
                       
Cash and due from banks
  $ 1,592     $     $ 1,592  
Interest-bearing deposits with other banks
    21,063             21,063  
Loans receivable covered by loss share
    65,256       (18,315 )     46,941  
 
                 
Total loans receivable
    65,256       (18,315 )     46,941  
Foreclosed assets held for sale covered by loss share
    7,412       (1,700 )     5,712  
FDIC indemnification asset
          12,200       12,200  
Core deposit intangible
          370       370  
Other assets
    1,438       276       1,714  
 
                 
Total assets acquired
  $ 96,761     $ (7,169 )   $ 89,592  
 
                 
 
                       
Liabilities
                       
Deposits
                       
Demand and non-interest-bearing
  $ 4,357     $     $ 4,357  
Savings and interest-bearing transaction accounts
    5,543             5,543  
Time deposits
    56,846             56,846  
 
                 
Total deposits
    66,746             66,746  
FHLB borrowed funds
    20,010             20,010  
Accrued interest payable and other liabilities
    593       170       763  
 
                 
Total liabilities assumed
  $ 87,349     $ 170     $ 87,519  
 
                 
Gain on acquisition
                  $ 2,073  
 
                     

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     The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.
     Cash and due from banks and interest-bearing deposits with other banks — The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
     Loans — Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.
     Core deposit intangible — This intangible asset represents the value of the relationships that Key West had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits.
     Foreclosed assets held for sale — These assets are presented at the estimated present values that management expects to receive when the properties are sold, net of related costs of disposal.
     FDIC indemnification asset — This loss sharing asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should Centennial Bank choose to dispose of them. Fair value was estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.
     Deposits — The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. No fair value adjustment was applied for time deposits because the weighted average interest rate of Key West’s CD’s were at the market rates of similar funding at the time of acquisition.
     FHLB borrowed funds — FHLB borrowed funds included four short-term rate advances. As a result of the short-term nature of these borrowings, the carrying amount of the borrowings is a reasonable estimate of fair value.
     The Company’s operating results for the period ended September 30, 2010, include the operating results of the acquired assets and assumed liabilities subsequent to the March 26, 2010 acquisition date. Due to the significant fair value adjustments recorded, as well as the nature of the FDIC loss sharing agreements in place, Key West’s historical results are not believed to be relevant to the Company’s results, and thus no pro forma information is presented.
     Acquisition Coastal Community Bank and Bayside Savings Bank
     On July 30, 2010, Centennial Bank entered into separate purchase and assumption agreements with the FDIC (collectively, the “Coastal-Bayside Agreements”), as receiver for each bank, pursuant to which Centennial Bank acquired the loans and certain assets and assumed the deposits and certain liabilities of Coastal Community Bank (Coastal) and Bayside Savings Bank (Bayside), respectively. These two institutions had been under common ownership of Coastal Community Investments, Inc.
     Prior to the acquisition, Coastal and Bayside operated 12 banking centers in the Florida Panhandle area. Excluding the effects of purchase accounting adjustments, Centennial Bank acquired $425.4 million in assets and assumed approximately $422.3 million of the deposits of Coastal and Bayside. Additionally, Centennial Bank purchased loans with an estimated fair value of $204.6 million, $9.6 million of foreclosed assets and $18.5 million of investment securities.

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     Centennial Bank did not acquire a material amount of the real estate, banking facilities, furniture and equipment of Coastal and Bayside as part of the purchase and assumption agreements but has the option to purchase these assets at fair market value from the FDIC. This purchase option expires 90 days after acquisition date. Fair market values for the real estate, facilities, furniture and equipment will be based on current appraisals and determined at a later date. Centennial Bank is leasing these facilities and equipment from the FDIC until current appraisals are received and a final decision is made.
     In connection with the Coastal-Bayside acquisition, Centennial Bank entered into loss sharing agreements with the FDIC. Pursuant to the terms of the loss sharing agreements, the FDIC is obligated to reimburse Centennial Bank for 80% of all losses with respect to covered assets. Centennial Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid Centennial Bank 80% reimbursement under the loss sharing agreements.
     The amounts covered by the loss sharing agreements are the pre-acquisition book values of the underlying covered assets, the contractual balance of unfunded commitments that were acquired, and certain future net direct costs. The loss sharing agreements applicable to single family residential mortgage loans provide for FDIC loss sharing and Centennial Bank reimbursement to the FDIC for ten years. The loss sharing agreements applicable to all other covered assets provide for FDIC loss sharing for five years and Centennial Bank reimbursement of recoveries to the FDIC for eight years.
     The loss sharing agreements are subject to certain servicing procedures as specified in the agreements with the FDIC. The fair value of the loss sharing agreements was recorded as an indemnification asset at their estimated fair value of $98.0 million on the acquisition date. The indemnification asset reflects the present value of the expected net cash reimbursement related to the loss sharing agreements described above. Based upon the acquisition date fair values of the net assets acquired, $6.6 million of goodwill was recorded. Due to the difference in tax bases of the assets acquired and liabilities assumed, the Company recorded a deferred tax asset of $4.3 million. The loss sharing agreements were the standard format utilized by the FDIC during this period for such transactions. The FDIC has and continues to make changes and modifications to their standard agreements.
     Centennial Bank has determined that the acquisition of the net assets of Coastal and Bayside constitute a business combination as defined by the FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Centennial Bank and the FDIC are engaged in on-going discussions that may impact which assets and liabilities are ultimately acquired or assumed by Centennial Bank and/or the purchase prices. In addition, the tax treatment of the FDIC-assisted acquisition is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date.

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    Coastal-Bayside  
    Acquired from     Fair Value     As Recorded  
    the FDIC     Adjustments     by HBI  
    (Dollars in thousands)  
Assets
                       
Cash and due from banks
  $ 6,652     $ 32,797     $ 39,449  
Interest-bearing deposits with other banks
    49,486             49,486  
Investment securities
    18,541             18,541  
Loans receivable not covered by FDIC loss share
    7,077       (3,022 )     4,055  
Loans receivable covered by FDIC loss share
    317,208       (116,639 )     200,569  
 
                 
Total loans receivable
    324,285       (119,661 )     204,624  
Foreclosed assets held for sale covered by loss share
    22,954       (13,317 )     9,637  
FDIC indemnification asset
          98,000       98,000  
Deferred tax asset
          4,275       4,275  
Goodwill
          6,624       6,624  
Core deposit intangible
          2,670       2,670  
Other assets
    3,510             3,510  
 
                 
Total assets acquired
  $ 425,428     $ 11,388     $ 436,816  
 
                 
 
                       
Liabilities
                       
Deposits
                       
Demand and non-interest-bearing
  $ 14,288     $     $ 14,288  
Savings and interest-bearing transaction accounts
    95,975             95,975  
Time deposits
    312,008       2,368       314,376  
 
                 
Total deposits
    422,271       2,368       424,639  
FHLB borrowed funds
    10,046       619       10,665  
Accrued interest payable and other liabilities
    327       1,185       1,512  
 
                 
Total liabilities assumed
  $ 432,644     $ 4,172     $ 436,816  
 
                 
     The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.
     Cash and due from banks and interest-bearing deposits with other banks — The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets. The $32.8 million adjustment is the first pro-forma cash settlement received from the FDIC on Monday following the closing weekend.
     Investment Securities — Investment securities were acquired from the FDIC at fair market value.
     Loans — Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.
     Core deposit intangible — This intangible asset represents the value of the relationships that Coastal and Bayside had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits.
     Foreclosed assets held for sale — These assets are presented at the estimated present values that management expects to receive when the properties are sold, net of related costs of disposal.

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     FDIC indemnification asset — This loss sharing asset is measured separately from the related covered assets as it is not contractually embedded in the covered assets and is not transferable with the covered assets should Centennial Bank choose to dispose of them. Fair value was estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.
     Deferred tax asset — The deferred tax asset of $4.3 million as of acquisition date is solely related to the differences between the financial statement and tax bases of assets acquired and liabilities assumed in this transaction.
     Goodwill — The consideration paid as a result of the acquisition exceeded the fair value of the assets received; therefore the Company recorded $6.6 million of goodwill.
     Deposits — The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. The Bank did not reset deposit rates to current market rates even though the rates were above market; therefore, a $2.4 million fair value adjustment was recorded for time deposits.
     FHLB borrowed funds — The fair value of FHLB borrowed funds is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.
     The Company’s operating results for the period ended September 30, 2010, include the operating results of the acquired assets and assumed liabilities subsequent to the July 30, 2010 acquisition date. Due to the significant fair value adjustments recorded, as well as the nature of the FDIC loss sharing agreements in place, Coastal and Bayside’s historical results are not believed to be relevant to the Company’s results, and thus no pro forma information is presented.
3. Investment Securities
     The amortized cost and estimated market value of investment securities were as follows:
                                 
    September 30, 2010  
    Available for Sale  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     (Losses)     Fair Value  
    (In thousands)  
U.S. government-sponsored enterprises
  $ 122,635     $ 3,015     $     $ 125,650  
Mortgage-backed securities
    96,279       3,363       (1,022 )     98,620  
State and political subdivisions
    148,754       4,958       (88 )     153,624  
Other securities
    2,892             (69 )     2,823  
 
                       
Total
  $ 370,560     $ 11,336     $ (1,179 )   $ 380,717  
 
                       

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    December 31, 2009  
    Available for Sale  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     (Losses)     Fair Value  
    (In thousands)  
U.S. government-sponsored enterprises
  $ 56,439     $ 130     $ (463 )   $ 56,106  
Mortgage-backed securities
    114,464       2,813       (1,690 )     115,587  
State and political subdivisions
    145,086       2,224       (1,375 )     145,935  
Other securities
    5,837             (1,350 )     4,487  
 
                       
Total
  $ 321,826     $ 5,167     $ (4,878 )   $ 322,115  
 
                       
     Assets, principally investment securities, having a carrying value of approximately $320.3 million and $231.3 million at September 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Also, investment securities pledged as collateral for repurchase agreements totaled approximately $73.0 million and $62.0 million at September 30, 2010 and December 31, 2009, respectively.
     During the three-month and nine-month periods ended September 30, 2010, $5.6 million available for sale securities were sold. The gross realized gains and losses on these sales totaled approximately $34,000 and $1,000, respectively. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.
     During the three-month period ended September 30, 2009, no available for sale securities were sold. During the nine-month period ended September 30, 2009, $23.0 million in available for sale securities were sold. The gross realized gains and losses on these sales totaled $890,000 and $893,000, respectively. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.
     The amortized cost and estimated fair value of securities at September 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                 
    Available-for-Sale  
    Amortized     Estimated  
    Cost     Fair Value  
    (In thousands)  
Due in one year or less
  $ 135,219     $ 136,429  
Due after one year through five years
    160,613       166,389  
Due after five years through ten years
    45,809       48,375  
Due after ten years
    28,919       29,524  
 
           
Total
  $ 370,560     $ 380,717  
 
           
     For purposes of the maturity tables, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on anticipated maturities. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

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     The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. In completing these evaluations the Company follows the requirements of FASB ASC 320, Investments — Debt and Equity Securities. Certain investment securities are valued less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. The Company does not intend to sell or believe it will be required to sell these investments before recovery of their amortized cost bases, which may be maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
     One security was deemed by management to have other-than-temporary impairment of approximately $70,000 for the three and nine month periods ended September 30, 2010. No other securities were deemed to have other-than-temporary impairment besides securities for which impairment was taken in prior periods.
     For the period ended September 30, 2010, the Company had $1.2 million in unrealized losses, which have been in continuous loss positions for more than twelve months. Included in the $1.2 million in unrealized losses are $1.0 million in unrealized losses, which were associated with government-sponsored mortgage-back securities. Excluding impairment write downs taken in prior periods, the Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates and not the issuer’s financial condition, or downgrades by rating agencies. In addition, approximately 79.8% of the Company’s investment portfolio matures in five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.
     The following shows gross unrealized losses and estimated fair value of investment securities available for sale aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of the periods ended September 30, 2010 and December 31, 2009:
                                                 
    September 30, 2010  
    Less Than 12 Months     12 Months or More     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
    (In thousands)  
U.S. Government-sponsored enterprises
  $     $     $     $     $     $  
Mortgage-backed securities
    2,073       (12 )     4,101       (1,010 )     6,174       (1,022 )
State and political subdivisions
    1,505       (7 )     4,834       (81 )     6,339       (88 )
Other securities
                2,670       (69 )     2,670       (69 )
 
                                   
Total
  $ 3,578     $ (19 )   $ 11,605     $ (1,160 )   $ 15,183     $ (1,179 )
 
                                   
                                                 
    December 31, 2009  
    Less Than 12 Months     12 Months or More     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
    (In thousands)  
U.S. Government-sponsored enterprises
  $ 41,078     $ (463 )   $     $     $ 41,078     $ (463 )
Mortgage-backed securities
    10,837       (205 )     4,411       (1,485 )     15,248       (1,690 )
State and political subdivisions
    10,647       (146 )     17,957       (1,229 )     28,604       (1,375 )
Other securities
                1,562       (1,350 )     1,562       (1,350 )
 
                                   
Total
  $ 62,562     $ (814 )   $ 23,930     $ (4,064 )   $ 86,492     $ (4,878 )
 
                                   

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4: Loans Receivable Not Covered by Loss Share and Allowance for Loan Losses
     The various categories of loans not covered by loss share are summarized as follows:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Real estate:
               
Commercial real estate loans
               
Non-farm/non-residential
  $ 824,041     $ 808,983  
Construction/land development
    366,302       368,723  
Agricultural
    27,019       33,699  
Residential real estate loans
               
Residential 1-4 family
    377,843       382,504  
Multifamily residential
    59,032       62,609  
 
           
Total real estate
    1,654,237       1,656,518  
Consumer
    35,729       39,084  
Commercial and industrial
    215,245       219,847  
Agricultural
    23,177       10,280  
Other
    26,875       24,556  
 
           
Loans receivable not covered by loss share
  $ 1,955,263     $ 1,950,285  
 
           
     The following is a summary of activity within the allowance for loan losses:
                 
    2010     2009  
    (In thousands)  
Balance, beginning of year
  $ 42,968     $ 40,385  
Additions
               
Provision charged to expense
    9,850       7,300  
 
               
Net loans charged off
               
Losses charged to allowance, net of recoveries of $1,785 and $1,355 for the first nine months of 2010 and 2009, respectively
    9,034       6,475  
 
           
 
               
Balance, September 30
  $ 43,784       41,210  
 
             
 
               
Additions
               
Provision charged to expense
            3,850  
 
               
Net loans charged off
               
Losses charged to allowance, net of recoveries of $547 for the last three months of 2009
            2,092  
 
             
 
               
Balance, end of year
          $ 42,968  
 
             
     At September 30, 2010 and December 31, 2009, accruing loans not covered by loss share delinquent 90 days or more totaled $162,000 and $2.9 million, respectively. Non-accruing loans not covered by loss share at September 30, 2010 and December 31, 2009 were $41.4 million and $37.1 million, respectively.
     During the three-month period ended September 30, 2010, the Company did not sell any of the guaranteed portions of SBA loans. During the nine-month period ended September 30, 2010, the Company sold $247,500 of the guaranteed portion of certain SBA loans, which resulted in a gain of $18,000. The Company did not sell any of the guaranteed portions of SBA loans during 2009.

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     Mortgage loans held for sale of approximately $19.3 million and $4.8 million at September 30, 2010 and December 31, 2009, respectively, are included in residential 1-4 family loans. Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid. The Company obtains forward commitments to sell mortgage loans to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. The forward commitments acquired by the Company for mortgage loans in process of origination are not mandatory forward commitments. These commitments are structured on a best efforts basis; therefore the Company is not required to substitute another loan or to buy back the commitment if the original loan does not fund. Typically, the Company delivers the mortgage loans within a few days after the loans are funded. These commitments are derivative instruments and their fair values at September 30, 2010 and December 31, 2009 were not material.
     At September 30, 2010 and December 31, 2009, non-covered impaired loans totaled $63.6 million and $44.4 million, respectively. As of September 30, 2010 and 2009, average non-covered impaired loans were $54.5 million and $40.1 million, respectively. All non-covered impaired loans had designated reserves for possible loan losses. Reserves relative to non-covered impaired loans were $22.1 million and $16.6 million at September 30, 2010 and December 31, 2009, respectively. Interest recognized on non-covered impaired loans during the nine months ended September 30, 2010 and 2009 was approximately $1.9 million and $2.0 million, respectively.
5: Loans Receivable Covered by FDIC Loss Share
     The Company evaluated loans purchased in conjunction with the acquisitions of Old Southern, Key West and Coastal-Bayside described in Note 2, Business Combinations, for impairment in accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased covered loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected. The following table reflects the carrying value of all purchased covered impaired loans as of September 30, 2010 for the Old Southern, Key West, and Coastal-Bayside FDIC-assisted transactions:
         
    Loans  
    Receivable  
    Covered  
    by FDIC  
    Loss Share  
    (In thousands)  
Real estate:
       
Commercial real estate loans
       
Non-farm/non-residential
  $ 142,571  
Construction/land development
    111,850  
Agricultural
    1,805  
Residential real estate loans
       
Residential 1-4 family
    110,271  
Multifamily residential
    12,014  
 
     
Total real estate
    378,511  
Consumer
    215  
Commercial and industrial
    29,136  
Agricultural
    1  
Other
    376  
 
     
Total loans receivable covered by FDIC loss share (1)
  $ 408,239  
 
     
 
(1)   These loans were not classified as nonperforming assets at September 30, 2010, as the loans are accounted for on a pooled basis and the pools are considered to be performing. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased impaired loans.

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     The acquired loans were grouped into pools based on common risk characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition dates. These loan pools are systematically reviewed by the Company to determine material changes in cash flow estimates than those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to the Centennial Bank non-covered loan portfolio, with most focus being placed on those loan pools which include the larger loan relationships and those loan pools which exhibit higher risk characteristics.
     The following is a summary of the covered impaired loans acquired in the acquisitions during 2010 as of the dates of acquisition.
                         
    Old Southern     Key West     Coastal-Bayside  
Contractually required principal and interest at acquisitions
  $ 301,797     $ 100,146     $ 334,091  
Non-accretable difference (expected losses and foregone interest)
    (93,930 )     (32,699 )     (116,252 )
 
                 
Cash flows expected to be collected at acquisition
    207,867       67,447       217,839  
Accretable yield
    (28,802 )     (20,506 )     (17,270 )
 
                 
Basis in acquired loans at acquisition
  $ 179,065     $ 46,941     $ 200,569  
 
                 
     As of the respective acquisition dates, the estimates of contractually required payments receivable, including interest, for all covered impaired loans acquired in the Old Southern, Key West, and Coastal-Bayside transactions were $736.0 million. The cash flows expected to be collected as of the acquisition dates for these loans were $493.2 million, including interest. These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments.
     Changes in the carrying amount of the accretable yield for purchased impaired and non-impaired loans were as follows for the nine months ended September 30, 2010 for Old Southern, Key West and Coastal-Bayside.
                 
            Carrying  
    Accretable     Amount of  
    Yield     Loans  
    (In thousands)  
Balance at beginning of period
  $     $  
Additions
    66,578       426,575  
Accretion
    (10,557 )     10,557  
Payments received, net
          (28,893 )
 
           
Balance at end of period
  $ 56,021     $ 408,239  
 
           
     There were no allowances for loan losses related to the purchased impaired loans at September 30, 2010.
     Due to the short time period between the execution of the Coastal-Bayside purchase and assumption agreements and September 30, 2010, certain amounts related to the purchased Coastal-Bayside impaired loans are preliminary estimates. Additionally, Centennial Bank and the FDIC are engaged in on-going discussions that may impact which assets and liabilities are ultimately acquired or assumed by Centennial Bank and/or the purchase prices.

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6: Goodwill and Core Deposits and Other Intangibles
     Changes in the carrying amount and accumulated amortization of the Company’s goodwill and core deposits and other intangibles for the nine-month period ended September 30, 2010 and for the year ended December 31, 2009, were as follows:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Goodwill
               
Balance, beginning of period
  $ 53,039     $ 50,038  
Acquisition of Centennial Bancshares, Inc.
          3,100  
FDIC-assisted acquisitions
    6,624        
Charter consolidation
          (99 )
 
           
Balance, end of period
  $ 59,663     $ 53,039  
 
           
                 
    2010     2009  
    (In thousands)  
Core Deposit and Other Intangibles
               
Balance, beginning of period
  $ 4,698     $ 6,547  
FDIC-assisted acquisitions
    5,440        
Amortization expense
    (1,736 )     (1,387 )
 
           
Balance, September 30
  $ 8,402       5,160  
 
             
Amortization expense
            (462 )
 
             
Balance, end of year
          $ 4,698  
 
             
     The carrying basis and accumulated amortization of core deposits and other intangibles at September 30, 2010 and December 31, 2009 were:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Gross carrying amount
  $ 19,591     $ 14,151  
Accumulated amortization
    11,189       9,453  
 
           
Net carrying amount
  $ 8,402     $ 4,698  
 
           
     Core deposit and other intangible amortization was approximately $674,000 and $462,000 for each of the three-months ended September 30, 2010 and 2009, respectively. Core deposit and other intangible amortization was approximately $1.7 million and $1.4 million for each of the nine-months ended September 30, 2010 and 2009, respectively. Including all of the mergers completed, HBI’s estimated amortization expense of core deposits and other intangibles for each of the years 2010 through 2014 is: 2010 — $2.4 million; 2011 — $2.1 million; 2012 — $1.6 million; 2013 — $1.6 million; and 2014 — $1.5 million.
     Goodwill is tested annually for impairment during the fourth quarter. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
7: Deposits
     The aggregate amount of time deposits with a minimum denomination of $100,000 was $798.0 million and $482.6 million at September 30, 2010 and December 31, 2009, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $7.9 million and $3.2 million for the three months ended September 30, 2010 and 2009, respectively. As of September 30, 2010 and December 31, 2009, brokered deposits were $87.7 million and $71.0 million, respectively.

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     Deposits totaling approximately $233.0 million and $206.6 million at September 30, 2010 and December 31, 2009, respectively, were public funds obtained primarily from state and political subdivisions in the United States.
8: Securities Sold Under Agreements to Repurchase
     Securities sold under agreements to repurchase consist of obligations of the Company to other parties. At the point funds deposited by customers become investable, those funds are used to purchase securities owned by the Company and held in its general account with the designation of Customers’ Securities. A third party maintains control over the securities underlying overnight repurchase agreements. The securities involved in these transactions are generally U.S. Treasury or Federal Agency issues. Securities sold under agreements to repurchase generally mature on the banking day following that on which the investment was initially purchased and are treated as collateralized financing transactions which are recorded at the amounts at which the securities were sold plus accrued interest. Interest rates and maturity dates of the securities involved vary and are not intended to be matched with funds from customers. At September 30, 2010 and December 31, 2009, securities sold under agreements to repurchase totaled $73.0 million and $62.0 million, respectively. For the three month periods ended September 30, 2010 and December 31, 2009, securities sold under agreements to repurchase daily weighted average totaled $68.6 million and $62.8 million, respectively. For the nine-month period ended September 30, 2010 and the year ended December 31, 2009, securities sold under agreements to repurchase daily weighted average totaled $61.4 million and $70.8 million, respectively.
9: FHLB Borrowed Funds
     The Company’s FHLB borrowed funds were $187.4 million and $264.4 million at September 30, 2010 and December 31, 2009, respectively. The outstanding balance for September 30, 2010 includes $5.0 million of short-term advances and $182.4 million of long-term advances. All of the outstanding balance for December 31, 2009 was long-term advances. The FHLB advances mature from the current year to 2025 with fixed interest rates ranging from 2.020% to 5.076% and are secured by loans and investments securities. As of September 30, 2010, the Company has one short-term rate advance associated with the Key West Acquisition with a rate of 0.65%. Expected maturities will differ from contractual maturities, because FHLB may have the right to call or prepay certain obligations.

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10: Subordinated Debentures
     Subordinated debentures at September 30, 2010 and December 31, 2009 consisted of guaranteed payments on trust preferred securities with the following components:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Subordinated debentures, issued in 2003, due 2033, fixed at 6.40%, during the first five years and at a floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty
  $ 20,618     $ 20,618  
Subordinated debentures, issued in 2000, due 2030, fixed at 10.60%, called in the third quarter of 2010 with a penalty of 5.30%
          3,153  
Subordinated debentures, issued in 2003, due 2033, floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, currently callable without penalty
    5,155       5,155  
Subordinated debentures, issued in 2005, due 2035, fixed rate of 6.81% during the first ten years and at a floating rate of 1.38% above the three-month LIBOR rate, reset quarterly, thereafter, callable in the fourth quarter of 2010 without penalty
    15,465       15,465  
Subordinated debentures, issued in 2006, due 2036, fixed rate of 6.75% during the first five years and at a floating rate of 1.85% above the three-month LIBOR rate, reset quarterly, thereafter, callable in the fourth quarter of 2011 without penalty
    3,093       3,093  
 
           
Total subordinated debt
  $ 44,331     $ 47,484  
 
           
     The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Company, the sole asset of each trust. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The Company wholly owns the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The Company’s obligations under the junior subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.
     Presently, the funds raised from the trust preferred offerings qualify as Tier 1 capital for regulatory purposes, subject to the applicable limit, with the balance qualifying as Tier 2 capital.
     The Company holds two trust preferred securities which are currently callable without penalty based on the terms of the specific agreements. The 2009 agreement between the Company and the Treasury limits our ability to retire any of our qualifying capital. As a result, the notes previously mentioned are not currently eligible to be paid off.
     During the third quarter of 2010, one trust preferred security became callable with a penalty of 5.30% based on the terms of the particular agreement. The Company requested permission from the Treasury to retire this source of capital. The Treasury subsequently granted the request to pay off this trust preferred security during the third quarter. Upon approval from the Treasury, the Company made the election to pay off this $3.2 million trust preferred security during the third quarter of 2010.

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11: Income Taxes
     The following is a summary of the components of the provision for income taxes for the three-month and nine-month periods ended September 30:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
            (In thousands)          
Current:
                               
Federal
  $ 4,262     $ 3,619     $ 11,449     $ 7,495  
State
    1,196       675       2,573       1,365  
 
                       
Total current
    5,458       4,294       14,022       8,860  
 
                       
 
                               
Deferred:
                               
Federal
    (373 )     (736 )     2,087       (282 )
State
    (479 )     (146 )     13       (55 )
 
                       
Total deferred
    (852 )     (882 )     2,100       (337 )
 
                       
Provision for income taxes
  $ 4,606     $ 3,412     $ 16,122     $ 8,523  
 
                       
     The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three-month and nine-month periods ended September 30:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Statutory federal income tax rate
    35.00 %     35.00 %     35.00 %     35.00 %
Effect of nontaxable interest income
    (4.14 )     (5.20 )     (3.65 )     (5.55 )
Cash value of life insurance
    (0.82 )     (1.63 )     (0.81 )     (1.97 )
State income taxes, net of federal benefit
    2.56       3.23       3.54       3.10  
Other
    (0.08 )     0.63       (0.15 )     0.47  
 
                       
Effective income tax rate
    32.52 %     32.03 %     33.93 %     31.05 %
 
                       

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     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, are as follows:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Deferred tax assets:
               
Allowance for loan losses
  $ 17,131     $ 16,760  
Deferred compensation
    1,477       937  
Stock options
    324       389  
Non-accrual interest income
    1,328       1,115  
Impairment of investment securities
    39       39  
Real estate owned
    504       504  
FDIC-assisted acquisitions
    614        
Other
    151       633  
 
           
Gross deferred tax assets
    21,568       20,377  
 
           
Deferred tax liabilities:
               
Accelerated depreciation on premises and equipment
    2,075       2,501  
Unrealized gain on securities
    3,986       114  
Core deposit intangibles
    1,275       1,823  
FHLB dividends
    859       850  
Other
    293       312  
 
           
Gross deferred tax liabilities
    8,488       5,600  
 
           
Net deferred tax assets
  $ 13,080     $ 14,777  
 
           
12: Common Stock and Stock Compensation Plans
     On April 22, 2010, our Board of Directors declared a 10% stock dividend which was paid June 4, 2010 to shareholders of record as of May 14, 2010. Except for fractional shares, the holders of our common stock received 10% additional common stock on June 4, 2010. The common shareholders did not receive fractional shares; instead they received cash at a rate equal to the closing price of a share on June 4, 2010 times the fraction of a share they otherwise would have been entitled to.
     All share and per share amounts have been restated to reflect the retroactive effect of the stock dividend. After issuance, this stock dividend lowered our total capital position by approximately $11,000 as a result of the cash paid in lieu of fractional shares. Our financial statements reflect an increase in the number of outstanding shares of common stock, an increase in surplus and reduction of retained earnings.
     In September 2009, the Company raised common equity through an underwritten public offering by issuing 5,445,000 shares of common stock at $18.05. The net proceeds of the offering after deducting underwriting discounts and commissions and offering expenses were $93.3 million. In October 2009, the underwriters of our stock offering exercised and completed their option to purchase an additional 816,750 shares of common stock at $18.05 to cover over-allotments. The net proceeds of the exercise of the over-allotment option after deducting underwriting discounts and commissions were $14.0 million. The total net proceeds of the offering after deducting underwriting discounts and commissions and offering expenses were $107.3 million.
     On January 16, 2009, we issued and sold, and the United States Department of the Treasury purchased, (1) 50,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock Series A, liquidation preference of $1,000 per share, and (2) a ten-year warrant to purchase up to 316,943 shares of the Company’s common stock, par value $0.01 per share, at an exercise price of $23.664 per share, for an aggregate purchase price of $50.0 million in cash. Cumulative dividends on the Preferred Shares will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. As a result of the recent public stock offering, the number of shares of common stock underlying the ten-year warrant held by the Treasury, has been reduced by half to 158,471.50 shares of our common stock at an exercise price of $23.664 per share.

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     These preferred shares qualify as Tier 1 capital. Due to the Company’s public common stock offering during 2009, the preferred shares are currently callable at par. The preferred shares may be redeemed with the proceeds from this common stock offering. The Treasury must approve any quarterly cash dividend on our common stock above $0.0545 per share (stock dividend adjusted) or share repurchases until three years from the date of the investment unless the shares are paid off in whole or transferred to a third party.
     Stock Compensation Plans
     The Company has a stock option and performance incentive plan. The purpose of the plan is to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate those persons to improve our business results. This plan provides for the granting of incentive nonqualified options to purchase up to 1,782,000 of common stock in the Company.
     Total unrecognized compensation cost, net of income tax benefit, related to non-vested awards, which are expected to be recognized over the vesting periods, is approximately $76,000 as of September 30, 2010. The intrinsic value of the stock options outstanding and stock options vested at September 30, 2010 was $6.5 million and $6.4 million, respectively. The intrinsic value of the stock options exercised during the three-month and nine-month periods ended September 30, 2010 was approximately $1.4 million and $2.4 million, respectively.
     The table below summarized the transactions under the Company’s stock option plans at September 30, 2010 and December 31, 2009 and changes during the nine-month period and year then ended, respectively:
                                 
    For the Nine Months Ended     For the Year Ended  
    September 30, 2010     December 31, 2009  
            Weighted             Weighted  
            Average             Average  
          Exercisable           Exercisable  
    Shares (000)     Price     Shares (000)     Price  
Outstanding, beginning of year
    835     $ 10.46       1,176     $ 10.65  
Granted
                       
Forfeited/Expired
                (201 )     11.93  
Exercised
    156       9.05       140       9.95  
 
                           
Outstanding, end of period
    679       10.79       835       10.46  
 
                           
Exercisable, end of period
    640     $ 10.34       779     $ 9.93  
 
                           
     Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006, is based on the grant date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options. There were no options granted during the nine-months ended September 30, 2010. There were no options granted during the year-ended December 31, 2009.

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     The following is a summary of currently outstanding and exercisable options at September 30, 2010:
                                                 
    Options Outstanding     Options Exercisable  
                    Weighted- Average                    
                    Remaining                    
            Options Outstanding     Contractual Life     Weighted- Average     Options Exercisable     Weighted- Average  
    Exercise Prices     Shares (000)     (in years)     Exercise Price     Shares (000)     Exercise Price  
 
  $ 5.17 to $5.63       3       1.34     $ 5.28       3     $ 5.28  
 
  $ 6.17 to $7.01       130       2.52       6.25       130       6.25  
 
  $ 7.85 to $8.68       92       3.02       8.55       92       8.55  
 
  $ 9.55 to $9.83       52       4.81       9.63       52       9.63  
 
  $ 10.66 to $10.66       105       5.19       10.66       105       10.66  
 
  $ 11.09 to $11.09       189       5.45       11.09       189       11.09  
 
  $ 16.65 to $17.82       60       6.94       17.30       33       17.38  
 
  $ 18.50 to $18.62       19       6.60       18.57       11       18.57  
 
  $ 20.33 to $22.74       29       6.63       20.78       25       20.44  
 
                                           
 
            679                       640          
 
                                           
     During the third quarter of 2009, the Company granted 7,040 shares of restricted common stock to its President and Chief Operating Officer. Due to the death of this officer, these shares of restricted shares became fully vested. The amount of expense during the first quarter of 2010 associated with the vesting of the 7,040 shares was approximately $144,000. These restricted shares are also limited by the 2009 agreement between the Company and the Treasury. This Treasury agreement has additional provisions concerning the transferability of the shares.
     During the fourth quarter of 2009, the Company granted 4,999 shares of restricted common stock. The restricted shares will vest equally each year over three years beginning on the third anniversary of the grant.
     During the first quarter of 2010, the Company granted 18,810 shares of restricted common stock. The restricted shares will vest equally each year over three years beginning on the first anniversary of the grant. Of the 18,810 shares of restricted stock granted, 14,960 shares are also limited by the 2009 agreement between the Company and the Treasury. This Treasury agreement has additional provisions concerning the transferability of the shares and the continuation of performing substantial services for the Company. Due to the death of the Company’s President, 1,760 of the restricted shares became fully vested. The amount of expense during the first quarter of 2010 associated with the vesting of the 1,760 shares was approximately $39,000.

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13. Non-Interest Expense
     The table below shows the components of non-interest expense for three and nine months ended September 30, 2010 and 2009:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
            (In thousands)          
Salaries and employee benefits
  $ 9,637     $ 7,987     $ 27,251     $ 25,363  
Occupancy and equipment
    3,264       2,706       9,036       8,050  
Data processing expense
    848       790       2,664       2,380  
Other operating expenses:
                               
Advertising
    532       567       1,351       2,023  
Merger expenses
    1,653       2       2,970       1,640  
Amortization of intangibles
    674       462       1,736       1,387  
Amortization of mortgage servicing rights
          218       436       583  
Electronic banking expense
    495       686       1,468       2,438  
Directors’ fees
    176       239       502       760  
Due from bank service charges
    142       104       335       311  
FDIC and state assessment
    908       913       2,792       3,827  
Insurance
    309       278       905       846  
Legal and accounting
    426       74       1,170       877  
Mortgage servicing expense
    4       75       164       225  
Other professional fees
    385       278       1,066       787  
Operating supplies
    226       217       619       622  
Postage
    167       163       481       512  
Telephone
    240       164       530       523  
Other expense
    1,208       1,116       3,363       3,414  
 
                       
Total other operating expenses
    7,545       5,556       19,888       20,775  
 
                       
Total non-interest expense
  $ 21,294     $ 17,039     $ 58,839     $ 56,568  
 
                       
14: Concentration of Credit Risks
     The Company’s primary market areas are in central Arkansas, north central Arkansas, northwest Arkansas, southern Arkansas, central Florida, southwest Florida, the Florida Panhandle and the Florida Keys (Monroe County). The Company primarily grants loans to customers located within these geographical areas unless the borrower has an established relationship with the Company.
     The diversity of the Company’s economic base tends to provide a stable lending environment. Although the Company has a loan portfolio that is diversified in both industry and geographic area, a substantial portion of its debtors’ ability to honor their contracts is dependent upon real estate values, tourism demand and the economic conditions prevailing in its market areas.
15: Significant Estimates and Concentrations
     Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses and certain concentrations of credit risk are reflected in Note 4, while deposit concentrations are reflected in Note 7.

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     Although the Company has a diversified loan portfolio, at September 30, 2010 and December 31, 2009, non-covered commercial real estate loans represented 62.3% and 62.1% of gross non-covered loans and 244.2% and 260.5% of total stockholders’ equity, respectively. Non-covered residential real estate loans represented 22.3% and 22.8% of gross non-covered loans and 87.6% and 95.7% of total stockholders’ equity at September 30, 2010 and December 31, 2009, respectively.
     The current economic environment presents financial institutions with unprecedented circumstances and challenges which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.
     Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
16: Commitments and Contingencies
     In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of their customers. These commitments and contingent liabilities include lines of credit and commitments to extend credit and issue standby letters of credit. The Company applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based on the assessed creditworthiness of the borrower.
     At September 30, 2010 and December 31, 2009, commitments to extend credit of $269.3 million and $299.4 million, respectively, were outstanding. A percentage of these balances are participated out to other banks; therefore, the Company can call on the participating banks to fund future draws. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
     Outstanding standby letters of credit are contingent commitments issued by the Company, generally to guarantee the performance of a customer in third-party borrowing arrangements. The term of the guarantee is dependent upon the credit worthiness of the borrower, some of which are long-term. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2010 and December 31, 2009, is $16.8 million and $15.6 million, respectively.
     The Company and/or its subsidiary bank have various unrelated legal proceedings, most of which involve loan foreclosure activity pending, which, in the aggregate, are not expected to have a material adverse effect on the financial position and results of operations of the Company.

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17: Regulatory Matters
     The Bank is subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since the Bank is also under supervision of the Federal Reserve, it is further limited if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. In 2009, the Company received a dividend for $2.1 million from its banking subsidiary. During the first nine months of 2010, the Company did not request any dividends from its banking subsidiary. As a result of the 2010 FDIC-assisted acquisition transactions, the Company could deem appropriate to apply the option to request dividends from its banking subsidiary during the fourth quarter of 2010.
     The Federal Reserve Board’s risk-based capital guidelines include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) and undercapitalized institution. The criteria for a well-capitalized institution are: a 5% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio, and a 10% “total risk-based capital” ratio. As of September 30, 2010, the Bank met the capital standards for a well-capitalized institution. The Company’s “Tier 1 leverage capital” ratio, “Tier 1 risk-based capital” ratio, and “total risk-based capital” ratio were 14.49%, 18.48%, and 19.74%, respectively, as of September 30, 2010.
18: Additional Cash Flow Information
     The following is summary of the Company’s additional cash flow information during the three and nine months ended:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
            (In thousands)          
Interest paid
  $ 9,281     $ 10,804     $ 17,728     $ 32,614  
Income taxes paid
    1,700       4,600       9,050       10,000  
Assets acquired by foreclosure
    1,797       4,784       8,670       17,178  
19: Financial Instruments
     FASB ASC 820 Fair Value Measurements and Disclosures defines fair value 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. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
  Level 1   Quoted prices in active markets for identical assets or liabilities
 
  Level 2   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
 
  Level 3   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
     Available-for-sale securities are the only material instruments valued on a recurring basis which are held by the Company at fair value. The Company does not have any Level 1 securities. Primarily all of the Company’s securities are considered to be Level 2 securities. These Level 2 securities consist of U.S. government-sponsored enterprises, mortgage-backed securities plus state and political subdivisions. As of September 30, 2010, Level 3 securities were immaterial.

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     Impaired loans that are collateral dependent are the only material financial assets valued on a non-recurring basis which are held by the Company at fair value. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan is confirmed. Non-covered impaired loans, net of specific allowance, were $41.5 million and $27.8 million as of September 30, 2010 and December 31, 2009, respectively. This valuation is considered Level 3, consisting of appraisals of underlying collateral.
     Foreclosed assets held for sale are the only material non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held for sale is estimated using Level 2 inputs based on observable market data. As of September 30, 2010 and December 31, 2009, the fair value of foreclosed assets held for sale not covered by loss share, less estimated costs to sell was $12.7 million and $16.5 million, respectively.
Fair Values of Financial Instruments
     The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed in these notes:
     Cash and cash equivalents and federal funds sold — For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
     Net loans receivable not covered by loss share, net of non-covered impaired loans — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are assumed to approximate the carrying amounts. The fair values for fixed-rate loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.
     Net loans receivable covered by FDIC loss share — Fair values for loans are based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows.
     FDIC indemnification asset — Although this asset is a contractual receivable from the FDIC, there is no effective interest rate. The Bank will collect this asset over the next several years. The amount ultimately collected will depend on the timing and amount of collections and charge-offs on the acquired assets covered by the loss sharing agreement. While this asset was recorded at its estimated fair value at acquisition date, it is not practicable to complete a fair value analysis on a quarterly or annual basis. This would involve preparing a fair value analysis of the entire portfolio of loans and foreclosed assets covered by the loss sharing agreement on a quarterly or annual basis in order to estimate the fair value of the FDIC indemnification asset.
     Accrued interest receivable — The carrying amount of accrued interest receivable approximates its fair value.

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     Deposits and securities sold under agreements to repurchase — The fair values of demand, savings deposits and securities sold under agreements to repurchase are, by definition, equal to the amount payable on demand and therefore approximate their carrying amounts. The fair values for time deposits are estimated using a discounted cash flow calculation that utilizes interest rates currently being offered on time deposits with similar contractual maturities.
     Federal funds purchased — The carrying amount of federal funds purchased approximates its fair value.
     FHLB and other borrowed funds — For short-term instruments, the carrying amount is a reasonable estimate of fair value. The fair value of long-term debt is estimated based on the current rates available to the Company for debt with similar terms and remaining maturities.
     Accrued interest payable — The carrying amount of accrued interest payable approximates its fair value.
     Subordinated debentures — The fair value of subordinated debentures is estimated using the rates that would be charged for subordinated debentures of similar remaining maturities.
     Commitments to extend credit, letters of credit and lines of credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
     The following table presents the estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

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    September 30, 2010  
    Carrying        
    Amount     Fair Value  
    (In thousands)  
Financial assets:
               
Cash and cash equivalents
  $ 208,067     $ 208,067  
Federal funds sold
    800       800  
Loans receivable not covered by loss share, net of non-covered impaired loans and allowance
    1,870,026       1,857,754  
Loans receivable covered by FDIC loss share
    408,239       408,239  
FDIC indemnification asset
    176,844       176,844  
Accrued interest receivable
    15,269       15,269  
 
               
Financial liabilities:
               
Deposits:
               
Demand and non-interest bearing
  $ 368,822     $ 368,822  
Savings and interest-bearing transaction accounts
    926,746       926,746  
Time deposits
    1,268,868       1,277,253  
Federal funds purchased
           
Securities sold under agreements to repurchase
    73,015       73,015  
FHLB and other borrowed funds
    187,393       194,406  
Accrued interest payable
    2,718       2,718  
Subordinated debentures
    44,331       48,394  
                 
    December 31, 2009  
    Carrying        
    Amount     Fair Value  
    (In thousands)  
Financial assets:
               
Cash and cash equivalents
  $ 173,490     $ 173,490  
Federal funds sold
    11,760       11,760  
Loans receivable not covered by loss share, net of non-covered impaired loans and allowance
    1,879,544       1,876,544  
Accrued interest receivable
    13,137       13,137  
 
               
Financial liabilities:
               
Deposits:
               
Demand and non-interest bearing
  $ 302,228     $ 302,228  
Savings and interest-bearing transaction accounts
    714,744       714,744  
Time deposits
    818,451       823,139  
Federal funds purchased
           
Securities sold under agreements to repurchase
    62,000       62,000  
FHLB and other borrowed funds
    264,360       265,246  
Accrued interest payable
    3,245       3,245  
Subordinated debentures
    47,484       52,325  

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20: Recent Accounting Pronouncements
     In January 2010, FASB issued an amendment to FASB ASC 820, Fair Value Measurements and Disclosures. The objective of this amendment requires new disclosures regarding significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for the transfers. This amendment also requires that a reporting entity should present information separately about purchases, sales, issuances and settlements, on a gross basis rather than a net basis for activity in Level 3 fair value measurements using significant unobservable inputs. This amendment also clarifies existing disclosures on the level of disaggregation, in that the reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and 3. The new disclosures and clarifications of existing disclosures for ASC 820 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC 820 did not have a material effect on the Company’s consolidated financial statements.
21. Subsequent Events
     On October 1, 2010, Centennial Bank entered into a purchase and assumption agreement with the FDIC, as receiver, pursuant to which Centennial Bank acquired the performing loans and certain assets and assumed substantially all of the deposits and certain liabilities of Wakulla Bank (Wakulla).
     Prior to the acquisition, Wakulla operated 12 banking centers in the Florida Panhandle. Excluding the effects of purchase accounting adjustments, Centennial Bank acquired approximately $322.4 million in assets and assumed approximately $354.2 million in deposits of Wakulla. Additionally, excluding the effects of purchase accounting adjustments, Centennial Bank purchased performing loans of approximately $236.7 million, $45.9 million of marketable securities and $27.6 million of federal funds sold. In connection with this acquisition, the FDIC has made an initial payment to Centennial Bank in the amount of approximately $80.9 million, based upon the closing date balance sheet for Wakulla. The cash payment is settlement for the net equity received, assets discount bid, charge-offs since July 28, 2010, and other customary closing adjustments.
     In connection with the Wakulla acquisition, Centennial Bank entered into a loss sharing agreement with the FDIC. Pursuant to the terms of the loss sharing agreement, the FDIC is obligated to reimburse Centennial Bank for 70% of losses on the first loss tranche of up to $15.7 million in single family residential loans and up to $22.7 million in commercial loans. The FDIC will reimburse Centennial Bank for 30% of losses on the second loss tranche including the next $8.6 million in single family residential loans and the next $25.7 million in commercial loans. The FDIC will reimburse Centennial Bank for 80% of losses above these amounts with respect to covered loans. Centennial Bank will reimburse the FDIC for 70%, 30% and 80%, respectively, of recoveries with respect to losses for which the FDIC paid Centennial Bank the respective percentage reimbursement under the loss sharing agreements. The loss sharing agreement does not provide loss sharing for consumer loans, estimated to total approximately $23.2 million, which we acquired from Wakulla.
     The third-party valuations on the acquired assets and assumed liabilities associated with the Wakulla acquisition are not currently available to the Company; therefore no fair value adjustments have been applied. When these reports become available, the Company will report the required financial statements to the Securities and Exchange Commission in an amendment on Form 8-K. In any event, the Company will file these financial statements on Form 8-K no later than December 17, 2010.

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Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Home BancShares, Inc.
Conway, Arkansas
We have reviewed the accompanying condensed consolidated balance sheet of Home BancShares, Inc. as of September 30, 2010 and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2010 and 2009 and condensed consolidated statements of stockholders’ equity and cash flows for the nine-month periods ended September 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 5, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
         
     
  /s/ BKD, LLP    
Little Rock, Arkansas
November 8, 2010

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Item 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on March 5, 2010, which includes the audited financial statements for the year ended December 31, 2009. Unless the context requires otherwise, the terms “Company”, “us”, “we”, and “our” refer to Home BancShares, Inc. on a consolidated basis.
General
     We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly owned bank subsidiary, Centennial Bank. As of September 30, 2010, we had, on a consolidated basis, total assets of $3.39 billion, loans receivable not covered by loss share of $1.96 billion, total deposits of $2.56 billion, and stockholders’ equity of $498.5 million.
     We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income. Deposits and FHLB borrowed funds are our primary sources of funding. Our largest expenses are interest on our funding sources and salaries and related employee benefits. We measure our performance by calculating our return on average common equity, return on average assets, and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. Per share amounts have been adjusted for the 10% stock dividend which occurred in June of 2010.
Key Financial Measures
                                 
    As of or for the Three Months     As of or for the Nine Months  
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
            (Dollars in thousands, except per share data)          
Total assets
  $ 3,392,137     $ 2,631,736     $ 3,392,137     $ 2,631,736  
Loans receivable not covered by loss share
    1,955,263       1,971,039       1,955,263       1,971,039  
Loans receivable covered by FDIC loss share
    408,239             408,239        
Total deposits
    2,564,436       1,780,285       2,564,436       1,780,285  
Total stockholders’ equity
    498,468       446,536       498,468       446,536  
Net income
    9,560       7,239       31,398       18,925  
Net income available to common stockholders
    8,890       6,569       29,388       17,019  
Basic earnings per common share
    0.32       0.29       1.04       0.77  
Diluted earnings per common share
    0.31       0.29       1.03       0.76  
Diluted cash earnings per common share (1)
    0.33       0.30       1.07       0.80  
Annualized net interest margin — FTE
    4.35 %     4.26 %     4.30 %     4.09 %
Efficiency ratio
    52.14       51.38       47.82       58.62  
Annualized return on average assets
    1.15       1.12       1.38       0.98  
Annualized return on average common equity
    7.81       8.46       9.06       7.69  
 
(1)   See Table 20 “Diluted Cash Earnings Per Share” for a reconciliation to GAAP for diluted cash earnings per share.

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Overview
Results of Operations for Three Months Ended September 30, 2010 and 2009
     Our net income increased 32.1% to $9.6 million for the three-month period ended September 30, 2010, from $7.2 million for the same period in 2009. On a diluted earnings per share basis, our earnings were $0.31 and $0.29 for the three-month periods ended September 30, 2010 and 2009, respectively. The $2.3 million increase in net income is primarily associated with $6.5 million of additional net interest income from the additional earning assets from our four FDIC-assisted transactions combined with a 9 basis point increase in net interest margin plus new income from FDIC indemnification accretion offset by the increased OREO losses and increased costs associated with mergers and acquisitions.
     Our annualized return on average assets was 1.15% for the three months ended September 30, 2010, compared to 1.12% for the same period in 2009. Our annualized return on average common equity was 7.81% for the three months ended September 30, 2010, compared to 8.46% for the same period in 2009, respectively. The slight improvement in annualized return on average assets was primarily due to the previously discussed changes in earnings and assets for the three months ended September 30, 2010, compared to the same period in 2009. The decrease in annualized return on average common equity was primarily due to the increased average common equity offset by the improvements in earnings in the third quarter of 2010 when compared to the same quarter in 2009. The primary reason for the lower average common equity in the third quarter of 2009 results from the equity added late in September 2009 from our common stock offering.
     Our annualized net interest margin, on a fully taxable equivalent basis, was 4.35% for the three months ended September 30, 2010, compared to 4.26% for the same period in 2009. Our ability to improve pricing on our deposits and hold down the decline of interest rates on earning assets allowed the Company to expand net interest margin by 9 basis points.
     Our efficiency ratio was 52.14% for the three months ended September 30, 2010, compared to 51.38% for the same period in 2009. While the quarterly efficiency ratio reported for September 30, 2010 compared to September 30, 2009 reflected a slight decline, we are pleased with the reported quarterly efficiency ratio for September 30, 2010 considering the losses on OREO and the merger expenses related to our FDIC acquisitions during the third quarter of 2010. This indicates a continued improvement of our overall operations.
Results of Operations for Nine Months Ended September 30, 2010 and 2009
     Our net income increased 65.9% to $31.4 million for the nine-month period ended September 30, 2010, from $18.9 million for the same period in 2009. On a diluted earnings per share basis, our earnings were $1.03 and $0.76 for the nine-month periods ended September 30, 2010 and 2009, respectively. The $12.5 million increase in net income is primarily associated with an $9.3 million pre-tax gain on the first quarter 2010 FDIC-assisted acquisitions, $14.8 million of additional net interest income from a 21 basis point increase in net interest margin combined with the additional earning assets from our four FDIC-assisted transactions plus new income from FDIC indemnification accretion and reduced FDIC assessment, advertising and electronic banking expenses offset by the higher provision for loan losses, increased OREO losses, increased costs associated with merger and acquisitions, lower income from service charges and lower income from cash value of life insurance.
     In addition to the $9.3 million pre-tax gain on the acquisitions, the Company incurred $3.0 million of acquisition expenses for the transactions during the first nine months of 2010. The combined financial impact of these items to the Company on an after-tax basis is a profit of $3.9 million or $0.14 diluted earnings per common share. If adjusted for these non core items, the announced profit for the first nine months of 2010 would reflect core net income of $27.5 million or $0.89 diluted earnings per share.

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     Our annualized return on average assets was 1.38% for the nine months ended September 30, 2010, compared to 0.98% for the same period in 2009. Our annualized return on average common equity was 9.06% for the nine months ended September 30, 2010, compared to 7.69% for the same period in 2009, respectively. The improvements in annualized return on average assets and annualized return on average common equity were primarily due to the previously discussed changes in earnings and assets for the nine months ended September 30, 2010, compared to the same period in 2009.
     Our annualized net interest margin, on a fully taxable equivalent basis, was 4.30% for the nine months ended September 30, 2010, compared to 4.09% for the same period in 2009. Our ability to improve pricing on our deposits and hold down the decline of interest rates on earning assets allowed the Company to expand net interest margin by 21 basis points.
     Our efficiency ratio was 47.82% for the nine months ended September 30, 2010, compared to 58.62% for the same period in 2009. This positive progress was primarily due to the gains earned on acquisitions, our ability to raise net interest margin and the continued improvement of our overall operations. Excluding the $6.3 million pre-tax combined profit on the FDIC-assisted acquisitions, $1.3 million of losses on OREO and $37,000 of losses on investment securities, our core efficiency ratio for the nine-months ended September 30, 2010 would have been 48.58%.
Financial Condition as of and for the Period Ended September 30, 2010 and December 31, 2009
     Our total assets as of September 30, 2010 increased $707.3 million, an annualized growth of 35.1%, to $3.39 billion from the $2.68 billion reported as of December 31, 2009. Our loan portfolio not covered by loss share increased slightly by $5.0 million, an annualized growth of 0.34%, to $1.96 billion as of September 30, 2010, from $1.95 billion as of December 31, 2009. Stockholders’ equity increased $33.5 million to $498.5 million as of September 30, 2010, compared to $465.0 million as of December 31, 2009. The increase in assets is primarily associated with assets acquired in our recent FDIC-assisted acquisitions. The increase in stockholders’ equity is primarily associated with the $37.4 million of comprehensive income less the $6.5 million of dividends paid for 2010. The annualized growth in stockholders’ equity for the first nine months of 2010 was 9.6%.
     As of September 30, 2010, our non-performing non-covered loans increased to $41.6 million, or 2.13%, of total non-covered loans from $39.9 million, or 2.05%, of total non-covered loans as of December 31, 2009. The allowance for loan losses as a percent of non-performing loans decreased to 105.32% as of September 30, 2010, compared to 107.57% as of December 31, 2009. Non-performing non-covered loans in Florida were $29.3 million at September 30, 2010 compared to $30.2 million as of December 31, 2009.
     As of September 30, 2010, our non-performing non-covered assets slightly improved to $54.4 million, or 1.95%, of total non-covered assets from $56.8 million, or 2.12%, of total non-covered assets as of December 31, 2009. Non-performing non-covered assets in Florida were $36.6 million at September 30, 2010 compared to $40.8 million as of December 31, 2009.
Critical Accounting Policies
     Overview. We prepare our consolidated financial statements based on the selection of certain accounting policies, generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. Our accounting policies are described in detail in the notes to our consolidated financial statements in Note 1 of the audited consolidated financial statements included in our Form 10-K, filed with the Securities and Exchange Commission.
     We consider a policy critical if (i) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate; and (ii) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that the accounting policies most critical to us are those associated with our lending practices, including the accounting for the allowance for loan losses, investments, intangible assets, income taxes and stock options.

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     Investments. Securities available for sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss). Securities that are held as available for sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available for sale.
     Loans Receivable Not Covered by Loss Share and Allowance for Loan Losses. Substantially all of our loans receivable not covered by loss share are reported at their outstanding principal balance adjusted for any charge-offs, as it is management’s intent to hold them for the foreseeable future or until maturity or payoff, except for mortgage loans held for sale. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding.
     The allowance for loan losses is established through a provision for loan losses charged against income. The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable credit losses on identifiable loans that may become uncollectible and probable credit losses inherent in the remainder of the loan portfolio. The amounts of provisions for loan losses are based on management’s analysis and evaluation of the loan portfolio for identification of problem credits, internal and external factors that may affect collectability, relevant credit exposure, particular risks inherent in different kinds of lending, current collateral values and other relevant factors.
     The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risking rating data.
     Loans considered impaired, under FASB ASC 310-10-35 (formerly SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures), are loans for which, 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 of the loan agreement. The Company applies this policy even if delays or shortfalls in payment are expected to be insignificant. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for loan losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for loan losses when in the process of collection it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When accrual of interest is discontinued, all unpaid accrued interest is reversed.
     Groups of loans with similar risk characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements.
     Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for loan losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least nine months, and we reasonably expect to collect all principal and interest.

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     Acquisition Accounting, Covered Loans and Related Indemnification Asset. Beginning in 2009, the Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the Federal Deposit Insurance Corporation (FDIC). The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
     Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques. The Company evaluates at each balance sheet date whether the present value of its pools of loans determined using the effective interest rates has decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the pool’s remaining life.
     Because the FDIC will reimburse the Company for certain acquired loans should the Company experience a loss, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The shared-loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.
     The shared-loss agreements continue to be measured on the same basis as the related indemnified loans. Because the acquired loans are subject to the accounting prescribed by ASC Topic 310, subsequent changes to the basis of the shared-loss agreements also follow that model. Deterioration in the credit quality of the loans (immediately recorded as an adjustment to the allowance for loan losses) would immediately increase the basis of the shared-loss agreements, with the offset recorded through the consolidated statement of income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the shared-loss agreements, with such decrease being accreted into income over 1) the same period or 2) the life of the shared-loss agreements, whichever is shorter. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset. Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared-loss agreements.
     Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding, claim receivable is recorded until cash is received from the FDIC.
     Intangible Assets. Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles are being amortized over 48 to 114 months on a straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual impairment test of goodwill and core deposit intangibles as required by FASB ASC 350, Intangibles - Goodwill and Other in the fourth quarter.
     Income Taxes. The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

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     Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
     The Company and its subsidiary file consolidated tax returns. Its subsidiary provides for income taxes on a separate return basis, and remits to the Company amounts determined to be currently payable.
     Stock Options. In accordance with FASB ASC 718, Compensation — Stock Compensation and FASB ASC 505-50, Equity-Based Payments to Non-Employees, the fair value of each option award is estimated on the date of grant. The Company recognizes compensation expense for the grant-date fair value of the option award over the vesting period of the award.
Acquisitions
     Acquisition Old Southern Bank
     On March 12, 2010, Centennial Bank entered into a purchase and assumption agreement (Old Southern Agreement) with the FDIC, as receiver, pursuant to which Centennial Bank acquired certain assets and assumed substantially all of the deposits and certain liabilities of Old Southern Bank (Old Southern).
     Prior to the acquisition, Old Southern operated 7 banking centers in the Orlando, Florida metropolitan area. Including the effects of purchase accounting adjustments, Centennial Bank acquired $342.6 million in assets and assumed approximately $328.5 million of the deposits of Old Southern. Additionally, Centennial Bank purchased loans with an estimated fair value of $179.1 million, $3.0 million of foreclosed assets and $30.4 million of investment securities.
     See Note 2 “Business Combinations” to the Consolidated Financial Statements for an additional discussion for the acquisition of Old Southern.
     Acquisition Key West Bank
     On March 26, 2010, Centennial Bank, entered into a purchase and assumption agreement (Key West Bank Agreement) with the FDIC, as receiver, pursuant to which Centennial Bank acquired certain assets and assumed substantially all of the deposits and certain liabilities of Key West Bank (Key West).
     Prior to the acquisition, Key West operated one banking center located in Key West, Florida. Including the effects of purchase accounting adjustments, Centennial Bank acquired $89.6 million in assets and assumed approximately $66.7 million of the deposits of Key West. Additionally, Centennial Bank purchased loans with an estimated fair value of $46.9 million, $5.7 million of foreclosed assets and assumed $20.0 million of FHLB advances.
     See Note 2 “Business Combinations” to the Consolidated Financial Statements for an additional discussion for the acquisition of Key West.

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     Acquisition Coastal Community Bank and Bayside Savings Bank
     On July 30, 2010, Centennial Bank entered into separate purchase and assumption agreements with the FDIC (collectively, the “Coastal-Bayside Agreements”), as receiver for each bank, pursuant to which Centennial Bank acquired the loans and certain assets and assumed the deposits and certain liabilities of Coastal Community Bank (Coastal) and Bayside Savings Bank (Bayside), respectively. These two institutions had been under common ownership of Coastal Community Investments, Inc.
     Prior to the acquisition, Coastal and Bayside operated 12 banking centers in the Florida Panhandle area. Including the effects of purchase accounting adjustments, Centennial Bank acquired $436.8 million in assets and assumed approximately $424.6 million of the deposits of Coastal and Bayside. Additionally, Centennial Bank purchased loans with an estimated fair value of $204.6 million, $9.6 million of foreclosed assets and $18.5 million of investment securities.
     See Note 2 “Business Combinations” to the Consolidated Financial Statements for an additional discussion for the acquisition of Coastal and Bayside.
     Acquisition Wakulla Bank
     On October 1, 2010, Centennial Bank entered into a purchase and assumption agreement with the FDIC, as receiver, pursuant to which Centennial Bank acquired the performing loans and certain assets and assumed substantially all of the deposits and certain liabilities of Wakulla Bank (Wakulla).
     Prior to the acquisition, Wakulla operated 12 banking centers in the Florida Panhandle. Excluding the effects of purchase accounting adjustments, Centennial Bank acquired approximately $322.4 million in assets and assumed approximately $354.2 million in deposits of Wakulla. Additionally, excluding the effects of purchase accounting adjustments, Centennial Bank purchased performing loans of approximately $236.7 million, $45.9 million of marketable securities and $27.6 million of federal funds sold.
     FDIC-Assisted Acquisitions
     The acquisitions of Old Southern Bank, Key West Bank, Coastal Community Bank, Bayside Savings Bank and Wakulla Bank are seen as attractive by Home BancShares. The transactions provide the ability to expand into opportunistic markets and increase market share in Florida. The transactions are anticipated to be profitable due to the pricing associated with the acquired loan portfolio and the establishment of the indemnification asset. The ability to add immediate deposit growth helps to supplement organic deposit growth. Also, reduction in the duplication of efforts and centralization of functions within the organizations is expected to lead to increased efficiencies and increased profitability. Should the acquired markets not perform as expected, the losses associated with the covered assets significantly exceed expectations, the operational efforts required to integrate the acquisitions and manage the loss share require significantly more resources than anticipated or the overall financial performance of the acquired institutions may not reach expectations and may adversely affect the overall financial performance of our Company.
     Future Acquisitions
     In our continuing evaluation of our growth plans for the Company, we believe properly priced bank acquisitions can complement our organic growth and de novo branching growth strategies. In the near term, our principal acquisition focus will be to expand our presence in Florida, Arkansas and other nearby markets through pursuing additional FDIC-assisted acquisition opportunities. While we seek to be a successful bidder to the FDIC on one or more additional failed depository institutions within our targeted markets, there is no assurance that we will be the winning bidder on other FDIC-assisted transactions.
     We will continue evaluating all types of potential bank acquisitions to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.

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Branches
     We intend to continue to open new (commonly referred to as de novo) branches in our current markets and in other attractive market areas if opportunities arise. Presently, we are evaluating additional opportunities but have no firm commitments for any additional de novo branch locations.
     During 2010, Centennial Bank has entered into five loss sharing agreements with the FDIC. Through these five transactions, the Company has added a total of thirty-one branch locations in Florida. These branch locations include one in the Florida Keys, six in the Greater Orlando MSA, and twenty-four in the Florida Panhandle, which contains seven locations in the Panama City MSA and nine locations in the Tallahassee MSA. The Company is currently evaluating the branch locations acquired from the FDIC. Although the Company plans to keep most of these branches, presently no final determination for any potential branch closures has been made.
Charter Consolidation
     During 2009, we combined the charters of our subsidiary banks into a single charter and adopted Centennial Bank as the common name. In the fourth quarter of 2008, First State Bank and Marine Bank consolidated and adopted Centennial Bank as its new name. Community Bank and Bank of Mountain View were completed in the first quarter of 2009, and Twin City Bank and the original Centennial Bank finished the process in June of 2009.
     All of our banks now have the same name, logo and charter, allowing for a more customer-friendly banking experience and seamless transactions across our entire banking network. We remain committed, however, to our community banking philosophy and will continue to rely on local community bank boards and management built around experienced bankers with strong local relationships.
Results of Operations
     For Three Months Ended September 30, 2010 and 2009
     Our net income increased 32.1% to $9.6 million for the three-month period ended September 30, 2010, from $7.2 million for the same period in 2009. On a diluted earnings per share basis, our earnings were $0.31 and $0.29 for the three-month periods ended September 30, 2010 and 2009, respectively. The $2.3 million increase in net income is primarily associated with $6.5 million of additional net interest income from the additional earning assets from our four FDIC-assisted transactions combined with a 9 basis point increase in net interest margin plus new income from FDIC indemnification accretion offset by the increased OREO losses and increased costs associated with mergers and acquisitions.
     For Nine Months Ended September 30, 2010 and 2009
     Our net income increased 65.9% to $31.4 million for the nine-month period ended September 30, 2010, from $18.9 million for the same period in 2009. On a diluted earnings per share basis, our earnings were $1.03 and $0.76 for the nine-month periods ended September 30, 2010 and 2009, respectively. The $12.5 million increase in net income is primarily associated with an $9.3 million pre-tax gain on the first quarter 2010 FDIC-assisted acquisitions, $14.8 million of additional net interest income from a 21 basis point increase in net interest margin combined with the additional earning assets from our four FDIC-assisted transactions plus new income from FDIC indemnification accretion and reduced FDIC assessment, advertising and electronic banking expenses offset by the higher provision for loan losses, increased OREO losses, increased costs associated with merger and acquisitions, lower income from service charges and lower income from cash value of life insurance.
     In addition to the $9.3 million pre-tax gain on the acquisitions, the Company incurred $3.0 million of acquisition expenses for the transactions during the first nine months of 2010. The combined financial impact of these items to the Company on an after-tax basis is a profit of $3.9 million or $0.14 diluted earnings per common share. If adjusted for these non core items, the announced profit for the first nine months of 2010 would reflect core net income of $27.5 million or $0.89 diluted earnings per share.

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     Net Interest Income
     Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate.
     The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Funds rate, which is the cost to banks of immediately available overnight funds, began in 2008 at 4.25%. During 2008, the rate decreased by 75 basis points on January 22, 2008, 50 basis points on January 30, 2008, 75 basis points on March 18, 2008, 25 basis points on April 30, 2008 and 50 basis points to a rate of 1.50% as of October 8, 2008. The rate continued to fall 50 basis points on October 29, 2008 and 75 to 100 basis points to a low of 0.25% to 0% on December 16, 2008, where the rate has remained.
     Net interest income on a fully taxable equivalent basis increased $6.5 million, or 26.5%, to $31.2 million for the three-month period ended September 30, 2010, from $24.7 million for the same period in 2009. This increase in net interest income was the result of a $5.8 million increase in interest income combined with a $710,000 decrease in interest expense. The $5.8 million increase in interest income was primarily the result of a higher level of earning assets combine with improved pricing of our earning assets. The higher level of earning assets resulted in an increase in interest income of $5.7 million, while the repricing of our earning assets resulted in a $107,000 increase in interest income for the three-month period ended September 30, 2010. The Company has worked diligently to hold the changes to interest rates on earning assets to a minimum during this lower rate environment. The $710,000 decrease in interest expense for the three-month period ended September 30, 2010, is primarily the result of our interest bearing liabilities repricing in the lower interest rate environment offset by an increase in our interest bearing liabilities. The repricing of our interest bearing liabilities in the lower interest rate environment resulted in a $2.3 million decrease in interest expense. The higher level of our interest bearing liabilities resulted in additional interest expense of $1.6 million.
     Net interest income on a fully taxable equivalent basis increased $15.2 million, or 21.4%, to $86.2 million for the nine-month period ended September 30, 2010, from $71.0 million for the same period in 2009. This increase in net interest income was the result of a $9.8 million increase in interest income combined with a $5.4 million decrease in interest expense. The $9.8 million increase in interest income was primarily the result of a higher level of earning assets offset by the repricing of our earning assets. The higher level of earning assets resulted in an increase in interest income of $9.9 million, while the repricing of our earning assets resulted in a $79,000 decrease in interest income for the nine-month period ended September 30, 2010. The Company has worked diligently to hold the changes to interest rates on earning assets to a minimum during this lower rate environment. The $5.4 million decrease in interest expense for the nine-month period ended September 30, 2010, is primarily the result of our interest bearing liabilities repricing in the lower interest rate environment offset by an increase in our interest bearing liabilities. The repricing of our interest bearing liabilities in the lower interest rate environment resulted in a $7.7 million decrease in interest expense. The higher level of our interest bearing liabilities resulted in additional interest expense of $2.3 million.
     Net interest margin, on a fully taxable equivalent basis, was 4.35% and 4.30 for the three and nine months ended September 30, 2010 compared to 4.26% and 4.09% for the same periods in 2009, respectively. Our ability to improve pricing on our deposits and hold the changes of interest rates on earning assets to a minimum allowed the Company to expand net interest margin.
     Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three-month and nine-month periods ended September 30, 2010 and 2009, as well as changes in fully taxable equivalent net interest margin for the three-month and nine-month periods ended September 30, 2010, compared to the same period in 2009.

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Table 1: Analysis of Net Interest Income
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
            (Dollars in thousands)          
Interest income
  $ 39,062     $ 33,295     $ 108,781     $ 99,399  
Fully taxable equivalent adjustment
    1,084       1,023       3,201       2,811  
 
                       
Interest income — fully taxable equivalent
    40,146       34,318       111,982       102,210  
Interest expense
    8,909       9,619       25,744       31,191  
 
                       
Net interest income — fully taxable equivalent
  $ 31,237     $ 24,699     $ 86,238     $ 71,019  
 
                       
 
                               
Yield on earning assets — fully taxable equivalent
    5.58 %     5.92 %     5.58 %     5.89 %
Cost of interest-bearing liabilities
    1.45       2.00       1.56       2.14  
Net interest spread — fully taxable equivalent
    4.13       3.92       4.02       3.75  
Net interest margin — fully taxable equivalent
    4.35       4.26       4.30       4.09  
Table 2: Changes in Fully Taxable Equivalent Net Interest Margin
                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010 vs. 2009     2010 vs. 2009  
    (In thousands)  
Increase (decrease) in interest income due to change in earning assets
  $ 5,721     $ 9,851  
Increase (decrease) in interest income due to change in earning asset yields
    107       (79 )
(Increase) decrease in interest expense due to change in interest-bearing liabilities
    (1,573 )     (2,251 )
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities
    2,283       7,698  
 
           
Increase (decrease) in net interest income
  $ 6,538     $ 15,219  
 
           

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     Table 3 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three-month and nine-month periods ended September 30, 2010 and 2009. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.
Table 3: Average Balance Sheets and Net Interest Income Analysis
                                                 
    Three Months Ended September 30,  
    2010     2009  
    Average Balance     Income / Expense     Yield / Rate     Average Balance     Income / Expense     Yield / Rate  
                    (Dollars in thousands)                  
ASSETS
                                               
Earnings assets
                                               
Interest-bearing balances due from banks
  $ 177,230     $ 92       0.21 %   $ 5,860     $ 7       0.47 %
Federal funds sold
    4,674       3       0.25       2,056       1       0.19  
Investment securities — taxable
    212,083       1,802       3.37       173,940       1,768       4.03  
Investment securities — non-taxable
    145,355       2,414       6.59       137,653       2,343       6.75  
Gross loans including covered loans and indemnification asset
    2,312,684       35,835       6.15       1,979,967       30,199       6.05  
 
                                       
Total interest-earning assets
    2,852,026       40,146       5.58       2,299,476       34,318       5.92  
 
                                           
Non-earning assets
    449,710                       271,871                  
 
                                           
Total assets
  $ 3,301,736                     $ 2,571,347                  
 
                                           
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities
                                               
Interest-bearing liabilities
                                               
Savings and interest-bearing transaction accounts
  $ 892,232     $ 1,388       0.62 %   $ 663,387     $ 1,138       0.68 %
Time deposits
    1,211,551       4,931       1.61       843,286       5,351       2.52  
 
                                       
Total interest-bearing deposits
    2,103,783       6,319       1.19       1,506,673       6,489       1.71  
Federal funds purchased
                0.00       2,847       2       0.28  
Securities sold under agreement to repurchase
    68,595       137       0.79       63,989       126       0.78  
FHLB borrowed funds
    211,792       1,854       3.47       288,406       2,379       3.27  
Subordinated debentures
    46,623       599       5.10       47,520       623       5.20  
 
                                       
Total interest-bearing liabilities
    2,430,793       8,909       1.45       1,909,435       9,619       2.00  
 
                                           
Non-interest bearing liabilities
                                               
Non-interest bearing deposits
    346,105                       290,435                  
Other liabilities
    23,688                       14,371                  
 
                                           
Total liabilities
    2,800,586                       2,214,241                  
Stockholders’ equity
    501,150                       357,106                  
 
                                           
Total liabilities and stockholders’ equity
  $ 3,301,736                     $ 2,571,347                  
 
                                           
Net interest spread
                    4.13 %                     3.92 %
Net interest income and margin
          $ 31,237       4.35 %           $ 24,699       4.26 %
 
                                           

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Table 3: Average Balance Sheets and Net Interest Income Analysis
                                                 
    Nine Months Ended September 30,  
    2010     2009  
    Average Balance     Income / Expense     Yield / Rate     Average Balance     Income / Expense     Yield / Rate  
                    (Dollars in thousands)                  
ASSETS
                                               
Earnings assets
                                               
Interest-bearing balances due from banks
  $ 153,071     $ 258       0.23 %   $ 6,762     $ 27       0.53 %
Federal funds sold
    12,835       13       0.14       9,095       12       0.18  
Investment securities — taxable
    207,867       5,364       3.45       202,333       6,673       4.41  
Investment securities — non-taxable
    140,301       7,228       6.89       127,333       6,553       6.88  
Gross loans including covered loans and indemnification asset
    2,167,223       99,119       6.11       1,975,626       88,945       6.02  
 
                                       
Total interest-earning assets
    2,681,297       111,982       5.58       2,321,149       102,210       5.89  
 
                                           
Non-earning assets
    358,047                       265,375                  
 
                                           
Total assets
  $ 3,039,344                     $ 2,586,524                  
 
                                           
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities
                                               
Interest-bearing liabilities
                                               
Savings and interest-bearing transaction accounts
  $ 837,181     $ 3,777       0.60 %   $ 668,227     $ 3,599       0.72 %
Time deposits
    1,027,432       13,709       1.78       876,304       18,139       2.77  
 
                                       
Total interest-bearing deposits
    1,864,613       17,486       1.25       1,544,531       21,738       1.88  
Federal funds purchased
    25             0.00       3,910       6       0.21  
Securities sold under agreement to repurchase
    61,428       349       0.76       73,509       361       0.66  
FHLB borrowed funds
    234,152       6,113       3.49       282,356       7,128       3.38  
Subordinated debentures
    47,181       1,796       5.09       47,543       1,958       5.51  
 
                                       
Total interest-bearing liabilities
    2,207,399       25,744       1.56       1,951,849       31,191       2.14  
 
                                           
Non-interest bearing liabilities
                                               
Non-interest bearing deposits
    330,238                       280,317                  
Other liabilities
    18,650                       11,816                  
 
                                           
Total liabilities
    2,556,287                       2,243,982                  
Stockholders’ equity
    483,057                       342,542                  
 
                                           
Total liabilities and stockholders’ equity
  $ 3,039,344                     $ 2,586,524                  
 
                                           
Net interest spread
                    4.02 %                     3.75 %
Net interest income and margin
          $ 86,238       4.30 %           $ 71,019       4.09 %
 
                                           

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     Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three-month and nine-month periods ended September 30, 2010 compared to the same periods in 2009, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.
Table 4: Volume/Rate Analysis
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2010 over 2009     2010 over 2009  
    Volume     Yield/Rate     Total     Volume     Yield/Rate     Total  
                    (In thousands)                  
Increase (decrease) in:
                                               
Interest income:
                                               
Interest-bearing balances due from banks
  $ 91     $ (6 )   $ 85     $ 256     $ (25 )   $ 231  
Federal funds sold
    2             2       4       (3 )     1  
Investment securities — taxable
    351       (317 )     34       179       (1,488 )     (1,309 )
Investment securities — non-taxable
    129       (58 )     71       668       7       675  
Loans receivable
    5,148       488       5,636       8,744       1,430       10,174  
 
                                   
Total interest income
    5,721       107       5,828       9,851       (79 )     9,772  
 
                                   
 
                                               
Interest expense:
                                               
Interest-bearing transaction and savings deposits
    364       (114 )     250       820       (642 )     178  
Time deposits
    1,877       (2,297 )     (420 )     2,765       (7,195 )     (4,430 )
Federal funds purchased
    (1 )     (1 )     (2 )     (3 )     (3 )     (6 )
Securities sold under agreement to repurchase
    9       2       11       (65 )     53       (12 )
FHLB borrowed funds
    (664 )     139       (525 )     (1,251 )     236       (1,015 )
Subordinated debentures
    (12 )     (12 )     (24 )     (15 )     (147 )     (162 )
 
                                   
Total interest expense
    1,573       (2,283 )     (710 )     2,251       (7,698 )     (5,447 )
 
                                   
 
                                               
Increase (decrease) in net interest income
  $ 4,148     $ 2,390     $ 6,538     $ 7,600     $ 7,619     $ 15,219  
 
                                   
Provision for Loan Losses
     Our management assesses the adequacy of the allowance for loan losses by applying the provisions of FASB ASC 310-10-35 (formerly Statement of Financial Accounting Standards No. 5, Accounting for Contingencies and No. 114, Accounting by Creditors for Impairment of a Loan). Specific allocations are determined for loans considered to be impaired and loss factors are assigned to the remainder of the loan portfolio to determine an appropriate level in the allowance for loan losses. The allowance is increased, as necessary, by making a provision for loan losses. The specific allocations for impaired loans are assigned based on an estimated net realizable value after a thorough review of the credit relationship. The potential loss factors associated with the remainder of the loan portfolio are based on an internal net loss experience, as well as management’s review of trends within the portfolio and related industries.
     During these tough economic times, the Company continues to follow our historical conservative procedures for lending and evaluating the provision and allowance for loan losses. We have not and do not participate in higher risk lending such as subprime. Our practice continues to be primarily traditional real estate lending with strong loan-to-value ratios. While there have been declines in our collateral value, particularly Florida, these declines have been addressed in our assessment of the adequacy of the allowance for loan losses.

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     Generally, commercial, commercial real estate, and residential real estate loans are assigned a level of risk at origination. Thereafter, these loans are reviewed on a regular basis. The periodic reviews generally include loan payment and collateral status, the borrowers’ financial data, and key ratios such as cash flows, operating income, liquidity, and leverage. A material change in the borrower’s credit analysis can result in an increase or decrease in the loan’s assigned risk grade. Aggregate dollar volume by risk grade is monitored on an on-going basis.
     Our management reviews certain key loan quality indicators on a monthly basis, including current economic conditions, delinquency trends and ratios, portfolio mix changes, and other information management deems necessary. This review process provides a degree of objective measurement that is used in conjunction with periodic internal evaluations. To the extent that this review process yields differences between estimated and actual observed losses, adjustments are made to the loss factors used to determine the appropriate level of the allowance for loan losses.
     During the first quarter of 2008, we began to experience a decline in our asset quality, particularly in the Florida market. In 2009, non-performing non-covered loans ended the year with a balance of $39.9 million. As of September 30, 2010, non-performing non-covered loans are $41.6 million.
     The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings, to maintain the allowance for loan losses at a level that is considered adequate in relation to the estimated risk inherent in the loan portfolio. Our provision for loan losses decreased $550,000, or 15.5%, to $3.0 million for the three-month period ended September 30, 2010, from $3.6 million for the same period in 2009. Our provision for loan losses increased $2.6 million, or 34.9%, to $9.9 million for the nine-month period ended September 30, 2010, from $7.3 million for the same period in 2009. The net loans charged off for the three-month period ended September 30, 2010 were $2.8 million compared to $4.1 million for the same period in 2009. The net loans charged off for the nine-month period ended September 30, 2010 were $9.0 million compared to $6.5 million for the same period in 2009. The decreased provision for loan loss is a result of the decline in charge-offs for the three-month period ended September 30, 2010. The increased provision for loan loss is a result of the higher charge-offs for the nine-month period ended September 30, 2010. The net charge-offs for the three-months ended were $2.5 million and $326,000 for Arkansas and Florida, respectively. The net charge-offs for the nine-months ended were $5.8 million and $3.2 million for Arkansas and Florida, respectively.
     While charge-offs in Florida have slowed recently, we have seen an increase in charge-offs for our Arkansas market. The Florida franchise continues to contain the larger portion of our non-performing loans.
Non-Interest Income
     Total non-interest income was $8.3 million for the three-month period ended September 30, 2010 compared to $7.6 million for the same period in 2009. Total non-interest income was $33.2 million for the nine-month period ended September 30, 2010 compared to $23.1 million for the same period in 2009. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, mortgage lending, insurance, title fees, increase in cash value of life insurance, dividends and FDIC indemnification accretion.
     Table 5 measures the various components of our non-interest income for the three-month and nine-month periods ended September 30, 2010 and 2009, respectively, as well as changes for the three-month and nine-month periods ended September 30, 2010 compared to the same period in 2009.

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Table 5: Non-Interest Income
                                                                 
    Three Months Ended                     Nine Months Ended        
    September 30,     2010 Change     September 30,     2010 Change  
    2010     2009     from 2009     2010     2009     from 2009  
    (Dollars in thousands)  
Service charges on deposit accounts
  $ 3,551     $ 3,785     $ (234 )     (6.2) %   $ 10,275     $ 10,792     $ (517 )     (4.8) %
Other service charges and fees
    1,816       1,705       111       6.5       5,353       5,330       23       0.4  
Mortgage lending income
    760       488       272       55.7       1,822       2,183       (361 )     (16.5 )
Mortgage servicing income
          171       (171 )     (100.0 )     314       562       (248 )     (44.1 )
Insurance commissions
    248       173       75       43.4       904       628       276       43.9  
Income from title services
    98       150       (52 )     (34.7 )     353       441       (88 )     (20.0 )
Increase in cash value of life insurance
    330       495       (165 )     (33.3 )     1,106       1,546       (440 )     (28.5 )
Dividends from FHLB, FRB & bankers’ bank
    151       114       37       32.5       419       320       99       30.9  
Gain on acquisitions
                      0.0       9,334             9,334       100.0  
Gain on sale of SBA loans
                      0.0       18             18       100.0  
Gain (loss) on sale of premises and equipment, net
    2       (21 )     23       (109.5 )     221       (33 )     254       (769.7 )
Gain (loss) on OREO, net
    (1,063 )     4       (1,067 )     (26,675.0 )     (1,308 )     (141 )     (1,167 )     827.7  
Gain (loss) on securities, net
    (37 )           (37 )     100.0       (37 )     (3 )     (34 )     1,133.3  
FDIC indemnification accretion
    1,895             1,895       100.0       2,631             2,631       100.0  
Other income
    556       500       56       11.2       1,767       1,483       284       19.2  
 
                                                   
Total non-interest income
  $ 8,307     $ 7,564     $ 743       9.8 %   $ 33,172     $ 23,108     $ 10,064       43.6 %
 
                                                   
     Non-interest income increased $743,000, or 9.8%, to $8.3 million for the three-month period ended September 30, 2010 from $7.6 million for the same period in 2009. The primary factors that resulted in this increase are new income from FDIC indemnification accretion offset by the additional loss on OREO.
     Non-interest income increased $10.1 million, or 43.6%, to $33.2 million for the nine-month period ended September 30, 2010 from $23.1 million for the same period in 2009. Excluding the gain on acquisitions, non-interest income for the nine-month period ended September 30, 2010 increased $730,000 or 3.2% for the same period in 2009. The primary factors that resulted in this increase are new income from FDIC indemnification accretion offset by the additional loss on OREO.
     Because the FDIC will reimburse us for certain acquired loans should we experience a loss, an indemnification asset was recorded at fair value at the acquisition date. The difference between the fair value recorded at the acquisition date and the gross reimbursements expected to be received from the FDIC are accreted into income over the life of the indemnification asset using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.
     During the second quarter of 2010, we sold our mortgage servicing portfolio to a third party. This transaction resulted in a gain of approximately $79,000 and was recorded as other income. The servicing portfolio historically did not provide a material amount of profit or loss nor was it expected to in the future. The sale will allow management to focus more of its time to community banking. Plus, it will reduce our balance sheet risk from exposure to an impairment of the mortgage servicing rights.

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Non-Interest Expense
     Non-interest expense consists of salaries and employee benefits, occupancy and equipment, data processing, and other expenses such as advertising, amortization of intangibles, amortization of mortgage servicing rights, electronic banking expense, FDIC and state assessment, mortgage servicing and legal and accounting fees.
     Table 6 below sets forth a summary of non-interest expense for the three-month and nine-month periods ended September 30, 2010 and 2009, as well as changes for the three-month and nine-month periods ended September 30, 2010 compared to the same period in 2009.
Table 6: Non-Interest Expense
                                                                 
    Three Months                     Nine Months        
    Ended                     Ended        
    September 30,     2010 Change     September 30,     2010 Change  
    2010     2009     from 2009     2010     2009     from 2009  
    (Dollars in thousands)  
Salaries and employee benefits
  $ 9,637     $ 7,987     $ 1,650       20.7 %   $ 27,251     $ 25,363     $ 1,888       7.4 %
Occupancy and equipment
    3,264       2,706       558       20.6       9,036       8,050       986       12.2  
Data processing expense
    848       790       58       7.3       2,664       2,380       284       11.9  
Other operating expenses:
                                                               
Advertising
    532       567       (35 )     (6.2 )     1,351       2,023       (672 )     (33.2 )
Merger and acquisition expenses
    1,653       2       1,651       82,550.0       2,970       1,640       1,330       81.1  
Amortization of intangibles
    674       462       212       45.9       1,736       1,387       349       25.2  
Amortization of mortgage servicing rights
          218       (218 )     (100.0 )     436       583       (147 )     (25.2 )
Electronic banking expense
    495       686       (191 )     (27.8 )     1,468       2,438       (970 )     (39.8 )
Directors’ fees
    176       239       (63 )     (26.4 )     502       760       (258 )     (33.9 )
Due from bank service charges
    142       104       38       36.5       335       311       24       7.7  
FDIC and state assessment
    908       913       (5 )     (0.5 )     2,792       3,827       (1,035 )     (27.0 )
Insurance
    309       278       31       11.2       905       846       59       7.0  
Legal and accounting
    426       74       352       475.7       1,170       877       293       33.4  
Mortgage servicing expense
    4       75       (71 )     (94.7 )     164       225       (61 )     (27.1 )
Other professional fees
    385       278       107       38.5       1,066       787       279       35.5  
Operating supplies
    226       217       9       4.1       619       622       (3 )     (0.5 )
Postage
    167       163       4       2.5       481       512       (31 )     (6.1 )
Telephone
    240       164       76       46.3       530       523       7       1.3  
Other expense
    1,208       1,116       92       8.2       3,363       3,414       (51 )     (1.5 )
 
                                                   
Total non-interest expense
  $ 21,294     $ 17,039     $ 4,255       25.0 %   $ 58,839     $ 56,568     $ 2,271       4.0 %
 
                                                   
     The Board of Directors of the FDIC have increased insured institutions’ normal recurring assessment and imposed a special assessment in 2009. We are generally unable to control the amount and timetable for payment of premiums that we are required to pay for FDIC insurance. These increased assessment fees from historical levels are in response to the current banking crisis in the United States. Our special assessment expense for the second quarter of 2009 was $1.2 million.
     Non-interest expense increased $4.3 million, or 25.0%, to $21.3 million for the three-month period ended September 30, 2010, from $17.0 million for the same period in 2009. Excluding the merger and acquisition expenses, non-interest expense increased $2.6 million or 15.3%. This increase is primarily the result of the additional operating costs associated with the branch locations acquired from the four FDIC-assisted transactions in March and July 2010 and the normal increase in cost of doing business offset by cost savings from our efficiency study and charter consolidation completed in 2009.

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     Non-interest expense increased $2.3 million, or 4.0%, to $58.9 million for the nine-month period ended September 30, 2010, from $56.6 million for the same period in 2009. Excluding the $1.2 million special assessment and the merger and acquisition expenses, non-interest expense increased $2.1 million or 3.91%. This increase is primarily the cost savings from our efficiency study and charter consolidation completed in 2009 offset by the additional operating costs associated with the branch locations acquired from the four FDIC-assisted transactions during 2010 and the normal increase in cost of doing business.
Income Taxes
     The provision for income taxes increased $1.2 million, or 35.0%, to $4.6 million for the three-month period ended September 30, 2010, from $3.4 million as of September 30, 2009. The provision for income taxes increased $7.6 million, or 89.2%, to $16.1 million for the nine-month period ended September 30, 2010, from $8.5 million as of September 30, 2009. The effective income tax rate was 32.5% and 33.9% for the three-month and nine-month periods ended September 30, 2010, compared to 32.0% and 31.1% for the same periods in 2009, respectively. The primary cause of this increase is the result of our overall improved earnings plus the $9.3 million gain on acquisitions for the year-to-date comparison at our marginal tax rate of 39.225%.
Financial Condition as of and for the Period Ended September 30, 2010 and December 31, 2009
     Our total assets as of September 30, 2010 increased $707.3 million, an annualized growth of 35.1%, to $3.39 billion from the $2.68 billion reported as of December 31, 2009. Our loan portfolio not covered by loss share increased slightly by $5.0 million, an annualized growth of 0.34%, to $1.96 billion as of September 30, 2010, from $1.95 billion as of December 31, 2009. Stockholders’ equity increased $33.5 million to $498.5 million as of September 30, 2010, compared to $465.0 million as of December 31, 2009. The increase in assets is primarily associated with assets acquired in our recent FDIC-assisted acquisitions. The increase in stockholders’ equity is primarily associated with the $37.4 million of comprehensive income less the $6.5 million of dividends paid for 2010. The annualized growth in stockholders’ equity for the first nine months of 2010 was 9.6%.
Loans Receivable Not Covered by Loss Share
     Our non-covered loan portfolio averaged $1.96 billion during the three-month and nine-month periods ended September 30, 2010. Non-covered loans were $1.96 billion as of September 30, 2010, compared to $1.95 billion as of December 31, 2009, a modest annualized increase of 0.34%. The slow down in loan growth from our historical expansion rates was not unexpected. Our customers have grown more cautious in this weaker economy.
     The most significant components of the non-covered loan portfolio were commercial real estate, residential real estate, consumer, and commercial and industrial loans. These non-covered loans are primarily originated within our market areas of central Arkansas, north central Arkansas, northwest Arkansas, southern Arkansas, the Florida Keys, and southwest Florida and are generally secured by residential or commercial real estate or business or personal property within our market areas.
     Certain credit markets have experienced difficult conditions and volatility during 2009 and 2010, particularly Florida. The Florida market currently is approximately 92.9% secured by real estate and 15.8% of our loan portfolio not covered by loss share.

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     Table 7 presents our loan balances not covered by loss share by category as of the dates indicated.
Table 7: Loan Portfolio Not Covered by Loss Share
                 
    As of     As of  
    September 30, 2010     December 31, 2009  
    (In thousands)  
Real estate:
               
Commercial real estate loans:
               
Non-farm/non-residential
  $ 824,041     $ 808,983  
Construction/land development
    366,302       368,723  
Agricultural
    27,019       33,699  
Residential real estate loans:
               
Residential 1-4 family
    377,843       382,504  
Multifamily residential
    59,032       62,609  
 
           
Total real estate
    1,654,237       1,656,518  
Consumer
    35,729       39,084  
Commercial and industrial
    215,245       219,847  
Agricultural
    23,177       10,280  
Other
    26,875       24,556  
 
           
Loans receivable not covered by loss share
  $ 1,955,263     $ 1,950,285  
 
           
     Non-Covered Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized over a 15 to 25 year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.
     As of September 30, 2010, non-covered commercial real estate loans totaled $1.22 billion, or 62.3% of our non-covered loan portfolio, which is comparable to $1.21 billion, or 62.1% of our non-covered loan portfolio, as of December 31, 2009. Florida non-covered commercial real estate loans are approximately 10.1% of our non-covered loan portfolio.
     Non-Covered Residential Real Estate Loans. We originate one to four family, owner occupied residential mortgage loans generally secured by property located in our primary market area. The majority of our non-covered residential mortgage loans consist of loans secured by owner occupied, single family residences. Non-covered residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.
     As of September 30, 2010, non-covered residential real estate loans totaled $436.9 million, or 22.3% of our non-covered loan portfolio, which is comparable to $445.1 million, or 22.8% of our non-covered loan portfolio, as of December 31, 2009. Florida non-covered residential real estate loans are approximately 4.6% of our non-covered loan portfolio.
     Non-Covered Consumer Loans. Our non-covered consumer loan portfolio is composed of secured and unsecured loans originated by our banks. The performance of consumer loans will be affected by the local and regional economy as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.

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     As of September 30, 2010, our non-covered installment consumer loan portfolio totaled $35.7 million, or 1.8% of our total non-covered loan portfolio, compared to the $39.1 million, or 2.0% of our non-covered loan portfolio as of December 31, 2009. This decrease is associated with normal payoffs and pay downs.
     Non-Covered Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. The terms for commercial loans are generally one to seven years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally speaking, accounts receivable are financed at between 50% and 80% of accounts receivable less than 60 days past due. Inventory financing will range between 50% and 60% (with no work in process) depending on the borrower and nature of inventory. We require a first lien position for those loans.
     As of September 30, 2010, non-covered commercial and industrial loans outstanding totaled $215.2 million, or 11.0% of our non-covered loan portfolio, which is comparable to $219.8 million, or 11.3% of our non-covered loan portfolio, as of December 31, 2009.
  Total Loans Receivable
Table 8: Total Loans Receivable
As of September 30, 2010
                         
    Loans     Loans        
    Receivable Not     Receivable     Total  
    Covered by     Covered by FDIC     Loans  
    Loss Share     Loss Share     Receivable  
    (In thousands)  
Real estate:
                       
Commercial real estate loans
                       
Non-farm/non-residential
  $ 824,041     $ 142,571     $ 966,612  
Construction/land development
    366,302       111,850       478,152  
Agricultural
    27,019       1,805       28,824  
Residential real estate loans
                       
Residential 1-4 family
    377,843       110,271       488,114  
Multifamily residential
    59,032       12,014       71,046  
 
                 
Total real estate
    1,654,237       378,511       2,032,748  
Consumer
    35,729       215       35,944  
Commercial and industrial
    215,245       29,136       244,381  
Agricultural
    23,177       1       23,178  
Other
    26,875       376       27,251  
 
                 
Total
  $ 1,955,263     $ 408,239     $ 2,363,502  
 
                 
  Non-Performing Assets Not Covered by Loss Share
     We classify our non-covered problem loans into three categories: past due loans, special mention loans and classified loans (accruing and non-accruing).

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     When management determines that a loan is no longer performing, and that collection of interest appears doubtful, the loan is placed on non-accrual status. Loans that are 90 days past due are placed on non-accrual status unless they are adequately secured and there is reasonable assurance of full collection of both principal and interest. Our management closely monitors all loans that are contractually 90 days past due, treated as “special mention” or otherwise classified or on non-accrual status.
     Table 9 sets forth information with respect to our non-performing non-covered assets as of September 30, 2010 and December 31, 2009. As of these dates, all non-performing non-covered restructured loans are included in non-accrual non-covered loans.
Table 9: Non-performing Assets Not Covered by Loss Share
                 
    As of     As of  
    September 30,     December 31,  
    2010     2009  
    (Dollars in thousands)  
Non-accrual non-covered loans
  $ 41,412     $ 37,056  
Non-covered loans past due 90 days or more (principal or interest payments)
    162       2,889  
 
           
Total non-performing non-covered loans
    41,574       39,945  
 
           
Other non-performing non-covered assets
               
Non-covered foreclosed assets held for sale, net
    12,695       16,484  
Other non-performing non-covered assets
    87       371  
 
           
Total other non-performing non-covered assets
    12,782       16,855  
 
           
Total non-performing non-covered assets
  $ 54,356     $ 56,800  
 
           
 
               
Allowance for loan losses to non-performing non-covered loans
    105.32 %     107.57 %
Non-performing non-covered loans to total non-covered loans
    2.13       2.05  
Non-performing non-covered assets to total non-covered assets
    1.95       2.12  
     Our non-performing non-covered loans are comprised of non-accrual non-covered loans and non-covered loans that are contractually past due 90 days. Our bank subsidiary recognizes income principally on the accrual basis of accounting. When loans are classified as non-accrual, the accrued interest is charged off and no further interest is accrued, unless the credit characteristics of the loan improves. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for loan losses.
     Since December 31, 2007, the weakened real estate market, particularly in Florida, has and may continue to increase our level of non-performing non-covered loans. While we believe our allowance for loan losses is adequate at September 30, 2010, as additional facts become known about relevant internal and external factors that affect loan collectability and our assumptions, it may result in us making additions to the provision for loan loss during 2010.
     Troubled debt restructurings (“TDR”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, the Bank will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan.
     In this current real estate crisis the Nation in general and Florida in particular has been experiencing, it has become more common to restructure or modify the terms of certain loans under certain conditions. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. We have not forgiven any material principal amounts on any loan modifications to date. Only non-performing restructured loans are included in our non-performing non-covered loans. As of September 30, 2010, we had $72.1 million of non-covered restructured loans that are in compliance with the modified terms and are not reported as past due or non-accrual in Table 9. Of the $72.1 million in non-covered restructured loans, $25.0 million are also reported as non-covered impaired loans. Our Florida market contains $47.2 million of these non-covered restructured loans.

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     To facilitate this process, a loan modification that might not otherwise be considered may be granted resulting in classification as a troubled debt restructuring. These loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on an accrual status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can pay the new terms and may result in the loan being returned to an accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan will remain in a nonaccrual status.
     The majority of the Bank’s loan modifications relate to commercial lending and involve either reducing the interest rate, changing from a principal and interest payment to interest-only, a lengthening of the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. The amount of troubled debt restructurings increased during 2009 and 2010, as the Bank continued to work with borrowers who are experiencing financial difficulties. 89.6% and 75.0% of all restructured loans were performing to the terms of the restructure as of September 30, 2010 and December 31, 2009, respectively.
     Total foreclosed assets held for sale not covered by loss share were $12.7 million as of September 30, 2010, compared to $16.5 million as of December 31, 2009 for a decrease of $3.8 million. The foreclosed assets held for sale not covered by loss share are comprised of $7.3 million of assets located in Florida with the remaining $5.4 million of assets located in Arkansas. During 2010 we sold one of the two large foreclosed housing developments in the Florida Keys. The remaining housing development has vacant lots and one completed model home. The property is currently listed for sale with a broker. The carrying value of this non covered property is $4.0 million. No other foreclosed assets held for sale not covered by loss share have a carrying value greater than $1.0 million.
     At September 30, 2010, total foreclosed assets held for sale were $31.3 million. Table 10 shows the summary of foreclosed assets held for sale as of September 30, 2010.
Table 10: Total Foreclosed Assets Held For Sale
                         
    September 30, 2010  
    Not Covered by     Covered by FDIC        
    Loss Share     Loss Share     Total  
            (In thousands)          
Commercial real estate loans
                       
Non-farm/non-residential
  $ 5,394     $ 4,132     $ 9,526  
Construction/land development
    3,392             3,392  
Residential real estate loans
                       
Residential 1-4 family
    3,645       14,431       18,076  
Multifamily residential
    264             264  
 
                 
Total
  $ 12,695     $ 18,563     $ 31,258  
 
                 
     Total non-performing non-covered loans were $41.6 million as of September 30, 2010, which is comparable to the $39.9 million as of December 31, 2009. As of September 30, 2010 and December 31, 2009, non-performing non-covered loans are $29.3 million and $30.2 million in the Florida market, respectively.
     If the non-accrual non-covered loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $616,000 and $477,000 for the three-month periods ended September 30, 2010 and 2009, respectively, and $1.8 million and $1.4 million for the nine-month periods ended September 30, 2010 and 2009, respectively, would have been recorded. The interest income recognized on the non-covered non-accrual loans for the three-month period ended September 30, 2010 and 2009 was considered immaterial.

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     A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans may include non-performing loans (loans past due 90 days or more and non-accrual loans) and certain other loans identified by management that are still performing. As of September 30, 2010, average non-covered impaired loans were $54.5 million compared to $40.1 million as of September 30, 2009. As of September 30, 2010, non-covered impaired loans were $63.6 million compared to $44.4 million as of December 31, 2009 for an increase of $19.2 million. This increase is the result of the underlying value of collateral on non-covered loans continuing to deteriorate in the current unfavorable economic conditions. As of September 30, 2010, our Florida market accounted for $31.7 million of the non-covered impaired loans.
     We evaluated loans purchased in conjunction with the acquisitions of Old Southern, Key West and Coastal-Bayside for impairment in accordance with the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased covered loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected. All loans acquired in these two transactions were deemed to be covered impaired loans. These loans were not classified as nonperforming assets at September 30, 2010, as the loans are accounted for on a pooled basis and the pools are considered to be performing. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased impaired loans.
     Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories.
  Past Due and Non-Accrual Loans
     Table 11 shows the summary non-accrual loans as of September 30, 2010:
Table 11: Total Non-Accrual Loans
                         
    September 30, 2010  
    Not     Covered by        
    Covered by     FDIC        
    Loss Share     Loss Share     Total  
    (In thousands)  
Non-accrual loans
                       
Commercial real estate loans
                       
Non-farm/non-residential
  $ 11,820     $     $ 11,820  
Construction/land development
    6,211             6,211  
Agricultural
    220             220  
Residential real estate loans
                       
Residential 1-4 family
    16,521             16,521  
Multifamily residential
    1,049             1,049  
 
                 
Total real estate
    35,821             35,821  
Consumer
    1,024             1,024  
Commercial and industrial
    4,566             4,566  
Agricultural
                 
Other
    1             1  
 
                 
Total non-accrual loans
  $ 41,412     $     $ 41,412  
 
                 

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     Table 12 shows the summary of past due loans as of September 30, 2010:
Table 12: Total Loans Past Due 90 Days or More
                         
    September 30, 2010  
    Not     Covered by        
    Covered by     FDIC        
    Loss Share     Loss Share     Total  
    (In thousands)  
Non-accrual loans
                       
Commercial real estate loans
                       
Non-farm/non-residential
  $     $ 18,242     $ 18,242  
Construction/land development
    160       44,349       44,509  
Agricultural
          1,513       1,513  
Residential real estate loans
                     
Residential 1-4 family
    1       21,247       21,248  
Multifamily residential
                 
 
                 
Total real estate
    161       85,351       85,512  
Consumer
    1       198       199  
Commercial and industrial
          1,616       1,616  
Agricultural
                 
Other
                 
 
                 
Total loans past due 90 days or more
  $ 162     $ 87,165     $ 87,327  
 
                 
     The Company’s total past due and non-accrual covered loans to total covered loans was 21.4% as of September 30, 2010.
  Allowance for Loan Losses
     Overview. The allowance for loan losses is maintained at a level which our management believes is adequate to absorb all probable losses on loans in the loan portfolio. The amount of the allowance is affected by: (i) loan charge-offs, which decrease the allowance; (ii) recoveries on loans previously charged off, which increase the allowance; and (iii) the provision of possible loan losses charged to income, which increases the allowance. In determining the provision for possible loan losses, it is necessary for our management to monitor fluctuations in the allowance resulting from actual charge-offs and recoveries and to periodically review the size and composition of the loan portfolio in light of current and anticipated economic conditions. If actual losses exceed the amount of allowance for loan losses, our earnings could be adversely affected.
     As we evaluate the allowance for loan losses, we categorize it as follows: (i) specific allocations; (ii) allocations for classified assets with no specific allocation; (iii) general allocations for each major loan category; and (iv) miscellaneous allocations.
     Specific Allocations. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. Typically, when it becomes evident through the payment history or a financial statement review that a loan or relationship is no longer supported by the cash flows of the asset and/or borrower and has become collateral dependent, we will use appraisals or other collateral analysis to determine if collateral impairment has occurred. The amount or likelihood of loss on this credit may not yet be evident, so a charge-off would not be prudent. However, if the analysis indicates that an impairment has occurred, then a specific allocation will be determined for this loan. If our existing appraisal is outdated or has been subject to significant market changes, we will obtain a new appraisal for this impairment analysis. Since all of the Company’s impaired loans are collateral dependent at the present time, third-party appraisals were used to determine the necessary impairment for these loans. This analysis will be performed each quarter in connection with the preparation of the analysis of the adequacy of the allowance for loan losses, and if necessary, adjustments will be made to the specific allocation provided for a particular loan.

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     As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or by law at 105 days past due, we will reflect that loan as nonperforming. It will remain nonperforming until it performs in a manner that it is reasonable to expect that we will collect the full principal and accrued interest.
     When the amount or likelihood of a loss on a loan has been determined, a charge-off should be taken in the period it is determined. If a partial charge-off occurs, the quarterly impairment analysis will determine if the loan is still impaired, and thus continues to require a specific allocation.
     Allocations for Classified Assets with No Specific Allocation. We establish allocations for loans rated “special mention” through “loss” in accordance with the guidelines established by the regulatory agencies. A percentage rate is applied to each loan category to determine the level of dollar allocation.
     General Allocations. We establish general allocations for each major loan category. This section also includes allocations to loans, which are collectively evaluated for loss such as residential real estate, commercial real estate, consumer loans and commercial and industrial loans. The allocations in this section are based on a historical review of loan loss experience and past due accounts. We give consideration to trends, changes in loan mix, delinquencies, prior losses, and other related information.
     Miscellaneous Allocations. Allowance allocations other than specific, classified, and general are included in our miscellaneous section.
     Charge-offs and Recoveries. Total charge-offs decreased to $3.0 million for the three months ended September 30, 2010, compared to $4.5 million for the same period in 2009. Total charge-offs increased to $10.8 million for the nine months ended September 30, 2010, compared to $7.8 million for the same period in 2009. Total recoveries decreased to $217,000 for the three months ended September 30, 2010, compared to $347,000 for the same period in 2009. Total recoveries increased to $1.8 million for the nine months ended September 30, 2010, compared to $1.4 million for the same period in 2009. For the three months ended September 30, 2010, the net charge-offs were $2.5 million and $326,000 for Arkansas and Florida, respectively. For the nine months ended September 30, 2010, the net charge-offs were $5.8 million and $3.2 million for Arkansas and Florida, respectively. The increases in charge-offs, recoveries and net charge-offs are reflective of the proactive stance we take on asset quality issues.

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     Table 13 shows the allowance for loan losses, charge-offs and recoveries as of and for the three-month and nine-month periods ended September 30, 2010 and 2009.
Table 13: Analysis of Allowance for Loan Losses
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
            (Dollars in thousands)          
Balance, beginning of period
  $ 43,614     $ 41,804     $ 42,968     $ 40,385  
Loans charged off
                               
Real estate:
                               
Commercial real estate loans:
                               
Non-farm/non-residential
    2       1,773       858       2,759  
Construction/land development
    162       241       1,113       881  
Agricultural
                       
Residential real estate loans:
                               
Residential 1-4 family
    801       1,632       3,550       2,307  
Multifamily residential
                       
 
                       
Total real estate
    965       3,646       5,521       5,947  
Consumer
    403       396       1,967       1,136  
Commercial and industrial
    1,679       441       3,315       732  
Agricultural
                       
Other
          8       16       15  
 
                       
Total loans charged off
    3,047       4,491       10,819       7,830  
 
                       
Recoveries of loans previously charged off
                               
Real estate:
                               
Commercial real estate loans:
                               
Non-farm/non-residential
    51       14       799       121  
Construction/land development
    1       12       55       20  
Agricultural
    16       16       52       188  
Residential real estate loans:
                               
Residential 1-4 family
    33       162       416       585  
Multifamily residential
                       
 
                       
Total real estate
    101       204       1,322       914  
Consumer
    103       90       408       348  
Commercial and industrial
    13       53       39       76  
Agricultural
                       
Other
                16       17  
 
                       
Total recoveries
    217       347       1,785       1,355  
 
                       
Net loans charged off
    2,830       4,144       9,034       6,475  
Provision for loan losses
    3,000       3,550       9,850       7,300  
 
                       
Balance, September 30
  $ 43,784     $ 41,210     $ 43,784     $ 41,210  
 
                       
Annualized net charge-offs to average non-covered loans
    0.57 %     0.83 %     0.62 %     0.44 %
Allowance for loan losses to period end non-covered loans
    2.24       2.09       2.24       2.09  
Allowance for loan losses to net charge-offs
    390       251       362       476  

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     Allocated Allowance for Loan Losses. We use a risk rating and specific reserve methodology in the calculation and allocation of our allowance for loan losses. While the allowance is allocated to various loan categories in assessing and evaluating the level of the allowance, the allowance is available to cover charge-offs incurred in all loan categories. Because a portion of our portfolio has not matured to the degree necessary to obtain reliable loss data from which to calculate estimated future losses, the unallocated portion of the allowance is an integral component of the total allowance. Although unassigned to a particular credit relationship or product segment, this portion of the allowance is vital to safeguard against the imprecision inherent in estimating credit losses.
     The changes for the period ended December 31, 2009 in the allocation of the allowance for loan losses for the individual types of loans are primarily associated with changes in the ASC 310 calculations, both individual and aggregate, and changes in the ASC 450 calculations. These calculations are affected by changes in individual loan impairments, changes in asset quality, net charge-offs during the period and normal changes in the outstanding loan portfolio, as well any changes to the general allocation factors due to changes within the actual characteristics of the loan portfolio.
     Table 14 presents the allocation of allowance for loan losses as of September 30, 2010 and December 31, 2009.
Table 14: Allocation of Allowance for Loan Losses
                                 
    As of September 30, 2010     As of December 31, 2009  
    Allowance     % of     Allowance     % of  
    Amount     loans(1)     Amount     loans(1)  
    (Dollars in thousands)  
Real estate:
                               
Commercial real estate loans:
                               
Non-farm/non-residential
  $ 13,804       42.2 %   $ 13,284       41.5 %
Construction/land development
    10,909       18.7       9,624       18.9  
Agricultural
    181       1.4       284       1.7  
Residential real estate loans:
                               
Residential 1-4 family
    12,114       19.3       10,654       19.6  
Multifamily residential
    1,766       3.0       694       3.2  
 
                       
Total real estate
    38,774       84.6       34,540       84.9  
Consumer
    935       1.8       1,705       2.0  
Commercial and industrial
    3,693       11.0       6,067       11.3  
Agricultural
    297       1.2       279       0.5  
Other
          1.4             1.3  
Unallocated
    85             377        
 
                       
Total
  $ 43,784       100.0 %   $ 42,968       100.0 %
 
                       
 
(1)   Percentage of loans in each category to loans receivable not covered by loss share.
Investments and Securities
     Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. As of September 30, 2010, we had no held-to-maturity or trading securities.

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     Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity as other comprehensive income. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available for sale. Available-for-sale securities were $380.7 million as of September 30, 2010, compared to $322.1 million as of December 31, 2009. The estimated effective duration of our securities portfolio was 2.1 years as of September 30, 2010.
     As of September 30, 2010, $98.6 million, or 25.9%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $115.6 million, or 35.9%, of our available-for-sale securities as of December 31, 2009. To reduce our income tax burden, $153.6 million, or 40.4%, of our available-for-sale securities portfolio as of September 30, 2010, was primarily invested in tax-exempt obligations of state and political subdivisions, compared to $145.9 million, or 45.3%, of our available-for-sale securities as of December 31, 2009. Also, we had approximately $125.7 million, or 33.0%, invested in obligations of U.S. Government-sponsored enterprises as of September 30, 2010, compared to $56.1 million, or 17.4%, of our available-for-sale securities as of December 31, 2009. The Company does not have any preferred securities issued by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.
     Certain investment securities are valued at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, we believe the declines in fair value for these securities are temporary. It is our intent to hold these securities to recovery. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other than temporary impairment is identified.
     Table 15 presents the carrying value and fair value of investment securities as of September 30, 2010 and December 31, 2009.
Table 15: Investment Securities
                                 
    As of September 30, 2010  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     (Losses)     Fair Value  
    (In thousands)  
Available-for-Sale
                               
U.S. government-sponsored enterprises
  $ 122,635     $ 3,015     $     $ 125,650  
Mortgage-backed securities
    96,279       3,363       (1,022 )     98,620  
State and political subdivisions
    148,754       4,958       (88 )     153,624  
Other securities
    2,892             (69 )     2,823  
 
                       
Total
  $ 370,560     $ 11,336     $ (1,179 )   $ 380,717  
 
                       
                                 
    As of December 31, 2009  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     (Losses)     Fair Value  
    (In thousands)  
Available-for-Sale
                               
U.S. government-sponsored enterprises
  $ 56,439     $ 130     $ (463 )   $ 56,106  
Mortgage-backed securities
    114,464       2,813       (1,690 )     115,587  
State and political subdivisions
    145,086       2,224       (1,375 )     145,935  
Other securities
    5,837             (1,350 )     4,487  
 
                       
Total
  $ 321,826     $ 5,167     $ (4,878 )   $ 322,115  
 
                       

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Deposits
     Our deposits averaged $2.45 billion and $2.19 billion for the three-month and nine-month periods ended September 30, 2010. Total deposits increased $729.0 million, or an increase of 39.7%, to $2.56 billion as of September 30, 2010, from $1.84 billion as of December 31, 2009. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions.
     Our policy also permits the acceptance of brokered deposits. As of September 30, 2010 and December 31, 2009, brokered deposits were $87.7 million and $71.0 million, respectively. Included in these brokered deposits are $40.8 million and $36.8 million of Certificate of Deposit Account Registry Service (CDARS) as of September 30, 2010 and December 31, 2009, respectively. CDARS are deposits we have swapped our customer with other institutions. This gives our customer the potential for FDIC insurance of up to $50 million.
     The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing and do not anticipate a significant change in total deposits unless our liquidity position changes. We believe that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if we experience increased loan demand or other liquidity needs.
     The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Funds rate, which is the cost to banks of immediately available overnight funds, began in 2008 at 4.25%. During 2008, the rate decreased by 75 basis points on January 22, 2008, 50 basis points on January 30, 2008, 75 basis points on March 18, 2008, 25 basis points on April 30, 2008 and 50 basis points to a rate of 1.50% as of October 8, 2008. The rate continued to fall 50 basis points on October 29, 2008 and 75 to 100 basis points to a low of 0.25% to 0% on December 16, 2008, where the rate has remained.
     Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which is in excess of 10 percent of average total deposits, for the three-month and nine-month periods ended September 30, 2010 and 2009.
Table 16: Average Deposit Balances and Rates
                                 
    Three Months Ended September 30,  
    2010     2009  
    Average     Average     Average     Average  
    Amount     Rate Paid     Amount     Rate Paid  
    (Dollars in thousands)  
Non-interest-bearing transaction accounts
  $ 346,105       %   $ 290,435       %
Interest-bearing transaction accounts
    809,717       0.63       596,988       0.68  
Savings deposits
    82,515       0.46       66,399       0.72  
Time deposits:
                               
$100,000 or more
    706,707       1.41       493,487       2.53  
Other time deposits
    504,844       1.90       349,799       2.49  
 
                           
Total
  $ 2,449,888       1.02 %   $ 1,797,108       1.43 %
 
                           

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    Nine Months Ended September 30,  
    2010     2009  
    Average     Average     Average     Average  
    Amount     Rate Paid     Amount     Rate Paid  
    (Dollars in thousands)  
Non-interest-bearing transaction accounts
  $ 330,238       %   $ 280,317       %
Interest-bearing transaction accounts
    761,305       0.62       604,779       0.72  
Savings deposits
    75,876       0.44       63,448       0.68  
Time deposits:
                               
$100,000 or more
    573,766       1.70       499,404       2.74  
Other time deposits
    453,666       1.89       376,900       2.80  
 
                           
Total
  $ 2,194,851       1.07 %   $ 1,824,848       1.59 %
 
                           
Securities Sold Under Agreements to Repurchase
     We enter into short-term purchases of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) of substantially identical securities. The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the balance sheet at the amount advanced. Interest incurred on repurchase agreements is reported as interest expense. Securities sold under agreements to repurchase increased $11.0 million, or 17.8%, from $62.0 million as of December 31, 2009 to $73.0 million as of September 30, 2010.
FHLB Borrowed Funds
     Our FHLB borrowed funds were $187.4 million and $264.4 million at September 30, 2010 and December 31, 2009, respectively. The outstanding balance for September 30, 2010 includes $5.0 million of short-term advances and $182.4 million of long-term advances. All of the outstanding balance for December 31, 2009 was long-term advances. Our remaining FHLB borrowing capacity was $371.1 million and $418.3 million as of September 30, 2010 and December 31, 2009, respectively. Expected maturities will differ from contractual maturities, because FHLB may have the right to call or prepay certain obligations.
Subordinated Debentures
     Subordinated debentures, which consist of guaranteed payments on trust preferred securities, were $44.3 million and $47.5 million as of September 30, 2010 and December 31, 2009, respectively.

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     Table 17 reflects subordinated debentures as of September 30, 2010 and December 31, 2009, which consisted of guaranteed payments on trust preferred securities with the following components:
Table 17: Subordinated Debentures
                 
    As of     As of  
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Subordinated debentures, issued in 2003, due 2033, fixed at 6.40%, during the first five years and at a floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty
  $ 20,618     $ 20,618  
Subordinated debentures, issued in 2000, due 2030, fixed at 10.60%, called in the third quarter of 2010 with a penalty of 5.30%
          3,153  
Subordinated debentures, issued in 2003, due 2033, floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, currently callable without penalty
    5,155       5,155  
Subordinated debentures, issued in 2005, due 2035, fixed rate of 6.81% during the first ten years and at a floating rate of 1.38% above the three-month LIBOR rate, reset quarterly, thereafter, callable in the fourth quarter of 2010 without penalty
    15,465       15,465  
Subordinated debentures, issued in 2006, due 2036, fixed rate of 6.75% during the first five years and at a floating rate of 1.85% above the three-month LIBOR rate, reset quarterly, thereafter, callable in the fourth quarter of 2011 without penalty
    3,093       3,093  
 
           
Total
  $ 44,331     $ 47,484  
 
           
     The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in our subordinated debentures, the sole asset of each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. We wholly own the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related subordinated debentures. Our obligations under the subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by us of each respective trust’s obligations under the trust securities issued by each respective trust.
     Presently, the funds raised from the trust preferred offerings qualify as Tier 1 capital for regulatory purposes, subject to the applicable limit, with the balance qualifying as Tier 2 capital.
     The Company holds two trust preferred securities which are currently callable without penalty based on the terms of the specific agreements. The 2009 agreement between the Company and the Treasury limits our ability to retire any of our qualifying capital. As a result, the notes previously mentioned are not currently eligible to be paid off.
     During the third quarter of 2010, one trust preferred security became callable with a penalty of 5.30% based on the terms of the particular agreement. The Company requested permission from the Treasury to retire this source of capital. The Treasury subsequently granted the request to pay off this trust preferred security during the third quarter. Upon approval from the Treasury, the Company made the election to pay off this $3.2 million trust preferred security during the third quarter of 2010.

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Stockholders’ Equity
     Stockholders’ equity was $498.5 million at September 30, 2010 compared to $465.0 million at December 31, 2009, an increase of 7.2%. As of September 30, 2010 and December 31, 2009 our common equity to asset ratio was 13.2% and 15.5%, respectively. Book value per common share was $15.79 at September 30, 2010 compared to $14.71 at December 31, 2009 (stock dividend adjusted).
     Stock Dividends. On April 22, 2010, our Board of Directors declared a 10% stock dividend which was paid June 4, 2010 to shareholders of record as of May 14, 2010. Except for fractional shares, the holders’ of our common stock received 10% additional common stock on June 4, 2010. The common shareholders did not receive fractional shares; instead they received cash at a rate equal to the closing price of a share on June 4, 2010 times the fraction of a share they otherwise would have been entitled to.
     All share and per share amounts have been restated to reflect the retroactive effect of the stock dividend. After issuance, this stock dividend lowered our total capital position by approximately $11,000 as a result of the cash paid in lieu of fractional shares. Our financial statements reflect an increase in the number of outstanding shares of common stock, an increase in surplus and reduction of retained earnings.
     Stock Offering. In September 2009, the Company raised common equity through an underwritten public offering by issuing 5,445,000 shares of common stock at $18.05. The net proceeds of the offering after deducting underwriting discounts and commissions and offering expenses were $93.3 million. In October 2009, the underwriter’s of our stock offering exercised and completed their option to purchase an additional 816,750 shares of common stock at $18.05 to cover over-allotments. The net proceeds of the exercise of the over-allotment option after deducting underwriting discounts and commissions were $14.0 million. The total net proceeds of the offering after deducting underwriting discounts and commissions and offering expenses were $107.3 million.
     Troubled Asset Relief Program. On January 16, 2009, we issued and sold, and the United States Department of the Treasury purchased, (1) 50,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock Series A, liquidation preference of $1,000 per share, and (2) a ten-year warrant to purchase up to 316,943 shares of the Company’s common stock, par value $0.01 per share, at an exercise price of $23.664 per share, for an aggregate purchase price of $50.0 million in cash. Cumulative dividends on the Preferred Shares will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. As a result of the recent public stock offering, the number of shares of common stock underlying the ten-year warrant held by the Treasury, has been reduced by half to 158,471.50 shares of our common stock at an exercise price of $23.664 per share.
     These preferred shares will qualify as Tier 1 capital. The preferred shares will be callable at par after three years. Prior to the end of three years, the preferred shares may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock. The Treasury must approve any quarterly cash dividend on our common stock above $0.0545 per share (stock dividend adjusted) or share repurchases until three years from the date of the investment unless the shares are paid off in whole or transferred to a third party.
     Cash Dividends. We declared cash dividends on our common stock of $0.0540 and $0.0545 per share for the three-month periods ended September 30, 2010 and 2009, respectively. We declared cash dividends on our common stock of $0.1625 and $0.1635 per share for the nine-month periods ended September 30, 2010 and 2009, respectively. The common stock dividend payout ratio for the three months ended September 30, 2010 and 2009 was 16.06% and 16.56%, respectively. The common stock dividend payout ratio for the nine months ended September 30, 2010 and 2009 was 14.72% and 18.94%, respectively. The 2009 agreement between the Company and the Treasury limits the payment of dividends on the Common Stock to a quarterly cash dividend of not more than $0.0545 per share.

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     Repurchase Program. On January 18, 2008, we announced the adoption by our Board of Directors of a stock repurchase program. The program authorizes us to repurchase up to 1,188,000 shares of our common stock. Under the repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that we intend to repurchase. The repurchase program may be suspended or discontinued at any time without prior notices. The timing and amount of any repurchases will be determined by management, based on its evaluation of current market conditions and other factors. The stock repurchase program will be funded using our cash balances, which we believe are adequate to support the stock repurchase program and our normal operations. As of September 30, 2010, we have not repurchased any shares in the program. The 2009 agreement between the Company and the Treasury limits our ability to repurchase common stock.
Liquidity and Capital Adequacy Requirements
     Risk-Based Capital. We as well as our bank subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and other discretionary actions by regulators that, if enforced, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings and other factors.
     Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of September 30, 2010 and December 31, 2009, we met all regulatory capital adequacy requirements to which we were subject.
     Table 18 presents our risk-based capital ratios as of September 30, 2010 and December 31, 2009.
Table 18: Risk-Based Capital
                 
    As of     As of  
    September 30,     December 31,  
    2010     2009  
    (Dollars in thousands)  
Tier 1 capital
               
Stockholders’ equity
  $ 498,468     $ 464,973  
Qualifying trust preferred securities
    43,000       46,000  
Goodwill and core deposit intangibles, net
    (66,429 )     (55,590 )
Unrealized (gain) loss on available-for-sale securities
    (6,171 )     (176 )
Servicing assets
          (109 )
 
           
Total Tier 1 capital
    468,868       455,098  
 
           
 
               
Tier 2 capital
               
Qualifying allowance for loan losses
    31,855       27,592  
 
           
Total Tier 2 capital
    31,855       27,592  
 
           
Total risk-based capital
  $ 500,723     $ 482,690  
 
           
Average total assets for leverage ratio
  $ 3,235,307     $ 2,611,964  
 
           
Risk weighted assets
  $ 2,536,499     $ 2,192,000  
 
           
 
               
Ratios at end of period Leverage ratio
    14.49 %     17.42 %
Tier 1 risk-based capital
    18.48       20.76  
Total risk-based capital
    19.74       22.02  
Minimum guidelines Leverage ratio
    4.00 %     4.00 %
Tier 1 risk-based capital
    4.00       4.00  
Total risk-based capital
    8.00       8.00  

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     As of the most recent notification from regulatory agencies, our bank subsidiary was “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, our banking subsidiary and we must maintain minimum leverage, Tier 1 risk-based capital, and total risk-based capital ratios as set forth in the table. There are no conditions or events since that notification that we believe have changed the bank subsidiary’s category.
     Table 19 presents actual capital amounts and ratios as of September 30, 2010 and December 31, 2009, for our bank subsidiary and us.
Table 19: Capital and Ratios
                                                 
                                    Minimum To Be Well  
                                    Capitalized Under Prompt  
                    Minimum Capital     Corrective Action  
    Actual     Requirement     Provision  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
                    (Dollars in thousands)                  
As of September 30, 2010
                                               
Leverage ratios:
                                               
Home BancShares
  $ 468,868       14.49 %   $ 129,432       4.00 %   $ N/A       N/A %
Centennial Bank
    357,911       10.86       131,827       4.00       164,784       5.00  
Tier 1 capital ratios:
                                               
Home BancShares
  $ 468,868       18.48 %   $ 101,487       4.00 %   $ N/A       N/A %
Centennial Bank
    357,911       14.11       101,463       4.00       152,195       6.00  
Total risk-based capital ratios:
                                               
Home BancShares
  $ 500,723       19.74 %   $ 202,927       8.00 %   $ N/A       N/A %
Centennial Bank
    389,762       15.37       202,869       8.00       253,586       10.00  
 
                                               
As of December 31, 2009
                                               
Leverage ratios:
                                               
Home BancShares
  $ 455,098       17.42 %   $ 104,500       4.00 %   $ N/A       N/A %
Centennial Bank (Formerly FSB)
    266,220       10.21       104,298       4.00       130,372       5.00  
Tier 1 capital ratios:
                                               
Home BancShares
  $ 455,098       20.76 %   $ 87,687       4.00 %   $ N/A       N/A %
Centennial Bank (Formerly FSB)
    266,220       12.21       87,214       4.00       130,821       6.00  
Total risk-based capital ratios:
                                               
Home BancShares
  $ 482,690       22.02 %   $ 175,364       8.00 %   $ N/A       N/A %
Centennial Bank (Formerly FSB)
    293,665       13.47       174,411       8.00       218,014       10.00  
Non-GAAP Financial Measurements
     We had $68.1 million, $57.7 million, and $58.2 million total goodwill, core deposit intangibles and other intangible assets as of September 30, 2010, December 31, 2009 and September 30, 2009, respectively. Because of our level of intangible assets and related amortization expenses, management believes diluted cash earnings per share, tangible book value per common share, cash return on average assets, cash return on average tangible common equity and tangible common equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculation of diluted earnings per share, book value, return on average assets, return on average common equity, and common equity to assets, are presented in Tables 20 through 24, respectively. Per share amounts have been adjusted for the stock dividend which occurred in June of 2010.

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Table 20: Diluted Cash Earnings Per Share
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands, except per share data)  
GAAP net income available to common stockholders
  $ 8,890     $ 6,569     $ 29,388     $ 17,019  
Intangible amortization after-tax
    410       282       1,055       844  
 
                       
Cash earnings available to common stockholders
  $ 9,300     $ 6,851     $ 30,443     $ 17,863  
 
                       
 
                               
GAAP diluted earnings per common share
  $ 0.31     $ 0.29     $ 1.03     $ 0.76  
Intangible amortization after-tax
    0.02       0.01       0.04       0.04  
 
                       
Diluted cash earnings per common share
  $ 0.33     $ 0.30     $ 1.07     $ 0.80  
 
                       
Table 21: Tangible Book Value Per Share
                 
    As of     As of  
    September 30, 2010     December 31, 2009  
    (Dollars in thousands, except per share data)  
Book value per common share: A/B
  $ 15.79     $ 14.71  
Tangible book value per common share: (A-C-D)/B
    13.40       12.67  
 
               
(A) Total common equity
  $ 449,057     $ 415,698  
(B) Common shares outstanding
    28,434       28,259  
(C) Goodwill
    59,663       53,039  
(D) Core deposit and other intangibles
    8,402       4,698  
Table 22: Cash Return on Average Assets
                                 
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2010     2009     2010     2009  
            (Dollars in thousands)          
Return on average assets: A/C
    1.15 %     1.12 %     1.38 %     0.98 %
Cash return on average assets: B/(C-D)
    1.22       1.19       1.46       1.05  
 
                               
(A) Net income available to all stockholders
  $ 9,560     $ 7,239     $ 31,398     $ 18,925  
Intangible amortization after-tax
    410       282       1,055       844  
 
                       
(B) Cash earnings
  $ 9,970     $ 7,521     $ 32,453     $ 19,769  
 
                       
 
                               
(C) Average assets
  $ 3,301,736     $ 2,571,347     $ 3,039,344     $ 2,586,524  
(D) Average goodwill, core deposits and other intangible assets
    65,584       58,425       61,151       58,149  

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Table 23: Cash Return on Average Tangible Common Equity
                                 
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2010     2009     2010     2009  
            (Dollars in thousands)          
Return on average common equity: A/C
    7.81 %     8.46 %     9.06 %     7.69 %
Return on average tangible common equity: B/(C-D)
    9.55       10.89       10.92       10.04  
 
                               
(A) Net income available to common stockholders
  $ 8,890     $ 6,569     $ 29,388     $ 17,019  
(B) Cash earnings available to common stockholders
    9,300       6,851       30,443       17,863  
(C) Average common equity
    451,767       307,903       433,719       296,086  
(D) Average goodwill, core deposits and other intangible assets
    65,584       58,425       61,151       58,149  
Table 24: Tangible Common Equity to Tangible Assets
                 
    As of     As of  
    September 30, 2010     December 31, 2009  
    (Dollars in thousands)  
Equity to assets: B/A
    14.69 %     17.32 %
Common equity to assets: C/A
    13.24       15.48  
Tangible common equity to tangible assets: (C-D-E)/(A-D-E)
    11.46       13.63  
 
               
(A) Total assets
  $ 3,392,137     $ 2,684,865  
(B) Total equity
    498,468       464,973  
(C) Total common equity
    449,057       415,698  
(D) Goodwill
    59,663       53,039  
(E) Core deposit and other intangibles
    8,402       4,698  
Recently Issued Accounting Pronouncements
     See Note 20 to the Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.

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Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Liquidity and Market Risk Management
     Liquidity Management. Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows us to have sufficient funds available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. Our primary source of liquidity at our holding company is dividends paid by our bank subsidiary. Applicable statutes and regulations impose restrictions on the amount of dividends that may be declared by our bank subsidiary. Further, any dividend payments are subject to the continuing ability of the bank subsidiary to maintain compliance with minimum federal regulatory capital requirements and to retain its characterization under federal regulations as a “well-capitalized” institution.
     Our bank subsidiary has potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers. Many of these obligations and commitments to fund future borrowings to our loans customers are expected to expire without being drawn upon, therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.
     Liquidity needs can be met from either assets or liabilities. On the asset side, our primary sources of liquidity include cash and due from banks, federal funds sold, available-for-sale investment securities and scheduled repayments and maturities of loans. We maintain adequate levels of cash and cash equivalents to meet our day-to-day needs. As of September 30, 2010, our cash and cash equivalents were $208.1 million, or 6.1% of total assets, compared to $173.5 million, or 6.5% of total assets, as of December 31, 2009. Our investment securities and federal funds sold were $381.5 million as of September 30, 2010 and $333.9 million as of December 31, 2009.
     We may occasionally use our Fed funds lines of credit in order to temporarily satisfy short-term liquidity needs. We have Fed funds lines with three other financial institutions pursuant to which we could have borrowed up to $12.5 million and $17.5 million on an unsecured basis as of September 30, 2010 and December 31, 2009, respectively. These lines may be terminated by the respective lending institutions at any time.
     We also maintain lines of credit with the Federal Home Loan Bank. Our FHLB borrowed funds were $187.4 million and $264.4 million at September 30, 2010 and December 31, 2009, respectively. These outstanding balances include $5.0 million in short-term advances and $182.4 million in long-term advances. Our FHLB borrowing capacity was $371.1 million and $418.3 million as of September 30, 2010 and December 31, 2009.
     We believe that we have sufficient liquidity to satisfy our current operations.
     Market Risk Management. Our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. We do not hold market risk sensitive instruments for trading purposes. The information provided should be read in connection with our audited consolidated financial statements.
     Asset/Liability Management. Our management actively measures and manages interest rate risk. The asset/liability committees of the boards of directors of our holding company and bank subsidiary are also responsible for approving our asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing our interest rate sensitivity position.

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     One of the tools that our management uses to measure short-term interest rate risk is a net interest income simulation model. This analysis calculates the difference between net interest income forecasted using base market rates and using a rising and a falling interest rate scenario. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and proportional to the change in market rates, depending on their contracted index. Some loans and investments include the opportunity of prepayment (embedded options), and accordingly the simulation model uses indexes to estimate these prepayments and reinvest their proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.
     This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet remains static and that its structure does not change over the course of the year. It does not account for all factors that impact this analysis, including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.
     Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.
     Interest Rate Sensitivity. Our primary business is banking and the resulting earnings, primarily net interest income, are susceptible to changes in market interest rates. It is management’s goal to maximize net interest income within acceptable levels of interest rate and liquidity risks.
     A key element in the financial performance of financial institutions is the level and type of interest rate risk assumed. The single most significant measure of interest rate risk is the relationship of the repricing periods of earning assets and interest-bearing liabilities. The more closely the repricing periods are correlated, the less interest rate risk we assume. We use repricing gap and simulation modeling as the primary methods in analyzing and managing interest rate risk.
     Gap analysis attempts to capture the amounts and timing of balances exposed to changes in interest rates at a given point in time. Our gap position as of September 30, 2010 was asset sensitive with a one-year cumulative repricing gap of 15.2%. During these periods, the amount of change our asset base realizes in relation to the total change in market interest rate exceeds that of the liability base.
     We have a portion of our securities portfolio invested in mortgage-backed securities. Mortgage-backed securities are included based on their final maturity date. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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     Table 25 presents a summary of the repricing schedule of our interest-earning assets and interest-bearing liabilities (gap) as of September 30, 2010.
Table 25: Interest Rate Sensitivity
                                                                 
    Interest Rate Sensitivity Period  
    0-30     31-90     91-180     181-365     1-2     2-5     Over 5        
    Days     Days     Days     Days     Years     Years     Years     Total  
                            (Dollars in thousands)                          
Earning assets
                                                               
Interest-bearing deposits due from banks
  $ 168,173     $     $     $     $     $     $     $ 168,173  
Federal funds sold
    800                                           800  
Investment securities
    26,205       8,641       49,037       36,837       47,397       51,835       160,765       380,717  
Loans receivable
    751,971       225,214       273,123       408,162       367,297       261,602       76,133       2,363,502  
       
Total earning assets
    947,149       233,855       322,160       444,999       414,694       313,437       236,898       2,913,192  
       
 
                                                               
Interest-bearing liabilities
                                                               
Interest-bearing transaction and savings deposits
    34,547       66,769       100,153       200,307       174,962       174,962       175,046       926,746  
Time deposits
    153,870       190,542       304,993       321,501       223,969       73,696       297       1,268,868  
Federal funds purchased
                                               
Securities sold under repurchase agreements
    62,063                         1,460       4,381       5,111       73,015  
FHLB borrowed funds
    5,112       5,027       27,040       7,372       12,314       45,853       84,675       187,393  
Subordinated debentures
    25,773                         3,093             15,465       44,331  
       
Total interest- bearing liabilities
    281,365       262,338       432,186       529,180       415,798       298,892       280,594       2,500,353  
       
Interest rate sensitivity gap
  $ 665,784     $ (28,483 )   $ (110,026 )   $ (84,181 )   $ (1,104 )   $ 14,545     $ (43,696 )   $ 412,839  
       
Cumulative interest rate sensitivity gap
  $ 665,784     $ 637,301     $ 527,275     $ 443,094     $ 441,990     $ 456,535     $ 412,839          
Cumulative rate sensitive assets to rate sensitive liabilities
    336.6 %     217.2 %     154.0 %     129.4 %     123.0 %     120.6 %     116.5 %        
Cumulative gap as a % of total earning assets
    22.9 %     21.9 %     18.1 %     15.2 %     15.2 %     15.7 %     14.2 %        

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Item 4: CONTROLS AND PROCEDURES
Article I. Evaluation of Disclosure Controls
     Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and procedures were also effective in ensuring that information required to be disclosed in our Exchange Act report is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosures.
Article II. Changes in Internal Control Over Financial Reporting
     There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2010, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
     There are no material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which Home BancShares, Inc. or its subsidiaries are a party or of which any of their property is the subject.
Item 1A. Risk Factors
     Other than the risk factor described below resulting from our recent FDIC-assisted acquisitions, there were no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2009. See the discussion of our risk factors in the Form 10-K, as filed with the SEC. The risks described are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Our loss sharing agreements with the FDIC limit our ability to enter into certain change of control transactions, including the sale of significant amounts of our common stock by us or our shareholders, without the consent of the FDIC.
     The loss sharing agreements we entered into with the FDIC in connection with our acquisitions of Old Southern Bank and Key West Bank require the consent of the FDIC in connection with certain change of control transactions, including the sale by the Company or by any individual shareholder, or group of shareholders acting in concert, of shares of our common stock totaling more than 9% of our outstanding common stock. This requirement could restrict or delay our ability to raise additional capital to fund acquisition or growth opportunities or for other purposes, or to pursue a merger or consolidation transaction that management may believe is in the best interest of our shareholders. This could also restrict or delay the ability of our shareholders to sell a substantial amount of our shares. In addition, if such a transaction were to occur without the FDIC’s consent, we could lose the benefit of the loss-share coverage provided by these agreements for certain covered assets.

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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
     Not applicable.
Item 3: Defaults Upon Senior Securities
     Not applicable.
Item 4: (Reserved)
Item 5: Other Information
     Not applicable.
Item 6: Exhibits
     
 
   
12.1
  Computation of Ratios of Earnings to Fixed Charges
 
   
15
  Awareness of Independent Registered Public Accounting Firm
 
   
31.1
  CEO Certification Pursuant Rule 13a-14(a)/15d-14(a)
 
   
31.2
  CFO Certification Pursuant Rule 13a-14(a)/15d-14(a)
 
   
32.1
  CEO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes — Oxley Act of 2002
 
   
32.2
  CFO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes — Oxley Act of 2002

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HOME BANCSHARES, INC.
(Registrant)
         
     
Date: November 8, 2010  /s/ C. Randall Sims    
  C. Randall Sims, Chief Executive Officer   
     
 
     
Date: November 8, 2010  /s/ Randy E. Mayor    
  Randy E. Mayor, Chief Financial Officer   
     

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