UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2010

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

For the transition period from              to             .

Commission File Number 0-22759

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

None

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a smaller reporting company or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Check one:

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

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

Class	Outstanding at September 30, 2010
Common Stock, $0.01 par value per share	16,990,490

BANK OF THE OZARKS, INC.

FORM 10-Q

September 30, 2010

INDEX

PART I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2010 and 2009 and December 31, 2009	1
	Consolidated Statements of Income for the Three Months Ended September 30, 2010 and 2009 and the Nine Months Ended September 30, 2010 and 2009	2
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2010 and 2009	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Selected and Supplemental Financial Data	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	44
PART II.	Other Information
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Reserved	46
Item 5.	Other Information	46
Item 6.	Exhibits	46
Signature		47
Exhibit Index		48

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

	Unaudited September  30,						December 31,
	2010			2009			2009
	(Dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks	$	53,838		$	36,503		$	77,678
Interest earning deposits		524			524			616
Cash and cash equivalents		54,362			37,027			78,294
Investment securities—available for sale (“AFS”)		412,443			645,682			506,678
Loans and leases, excluding covered loans		1,888,936			1,931,372			1,904,104
Allowance for loan and lease losses		(40,250	)		(39,280	)		(39,619	)
Net loans and leases		1,848,686			1,892,092			1,864,485
Covered assets:
Loans		394,482			—			—
Other real estate owned		17,540			—			—
Federal Deposit Insurance Corporation (“FDIC”) loss share receivable		122,098			—			—
Premises and equipment, net		164,834			156,746			156,204
Foreclosed assets held for sale, net		41,868			63,946			61,148
Accrued interest receivable		15,055			15,500			14,760
Bank owned life insurance		59,198			47,841			47,421
Intangible assets, net		7,536			5,581			5,554
Other, net		38,050			25,271			36,267
Total assets	$	3,176,152		$	2,889,686		$	2,770,811
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand non-interest bearing	$	271,407		$	209,220		$	223,741
Savings and interest bearing transaction		1,271,374			781,949			927,977
Time		872,933			1,053,987			877,276
Total deposits		2,415,714			2,045,156			2,028,994
Repurchase agreements with customers		55,750			52,270			44,269
Other borrowings		294,502			361,679			342,553
Subordinated debentures		64,950			64,950			64,950
Accrued interest payable and other liabilities		25,732			16,218			17,575
Total liabilities		2,856,648			2,540,273			2,498,341
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized:
Series A fixed rate cumulative perpetual; liquidation preference of $1,000 per share; 75,000 shares issued and outstanding at September 30, 2009; no shares outstanding at September 30, 2010 and December 31, 2009		—			72,296			—
Common stock; $0.01 par value; 50,000,000 shares authorized; 16,990,490, 16,885,340 and 16,904,540 shares issued and outstanding at September 30, 2010, September 30, 2009 and December 31, 2009, respectively		170			169			169
Additional paid-in capital		44,416			44,099			41,584
Retained earnings		260,862			213,793			221,243
Accumulated other comprehensive income (loss)		10,624			15,597			6,032
Total stockholders’ equity before noncontrolling interest		316,072			345,954			269,028
Noncontrolling interest		3,432			3,459			3,442
Total stockholders’ equity		319,504			349,413			272,470
Total liabilities and stockholders’ equity	$	3,176,152		$	2,889,686		$	2,770,811

See accompanying notes to consolidated financial statements.

1

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	29,707		$	30,879		$	89,035		$	94,415
Covered loans		6,205			—			8,942			—
Investment securities:
Taxable		636			4,280			3,701			15,180
Tax-exempt		4,540			4,742			14,191			18,150
Deposits with banks and federal funds sold		4			3			16			8
Total interest income		41,092			39,904			115,885			127,753
Interest expense:
Deposits		5,028			6,406			15,137			25,000
Repurchase agreements with customers		92			151			302			461
Other borrowings		2,734			3,624			9,433			10,750
Subordinated debentures		470			491			1,323			1,713
Total interest expense		8,324			10,672			26,195			37,924
Net interest income		32,768			29,232			89,690			89,829
Provision for loan and lease losses		(4,300	)		(7,500	)		(11,900	)		(39,200	)
Net interest income after provision for loan and lease losses		28,468			21,732			77,790			50,629
Non-interest income:
Service charges on deposit accounts		4,002			3,234			11,137			9,084
Mortgage lending income		1,024			672			2,367			2,630
Trust income		802			801			2,518			2,198
Bank owned life insurance income		580			495			1,577			1,456
Gains on investment securities		570			142			4,318			20,660
Gains (losses) on sales of other assets		267			(51	)		232			(35	)
Gains on FDIC-assisted transactions		16,122			—			26,160			—
Other		1,816			517			3,367			1,800
Total non-interest income		25,183			5,810			51,676			37,793
Non-interest expense:
Salaries and employee benefits		10,539			7,823			27,810			23,717
Net occupancy and equipment		2,782			2,558			7,619			7,584
Other operating expenses		10,244			5,118			26,717			18,330
Total non-interest expense		23,565			15,499			62,146			49,631
Income before taxes		30,086			12,043			67,320			38,791
Provision for income taxes		9,878			2,599			20,310			8,387
Net income		20,208			9,444			47,010			30,404
Net loss attributable to noncontrolling interest		17			25			60			2
Preferred stock dividends and amortization of preferred stock discount		—			(1,078	)		—			(3,228	)
Net income available to common stockholders	$	20,225		$	8,391		$	47,070		$	27,178
Basic earnings per common share	$	1.19		$	0.50		$	2.78		$	1.61
Diluted earnings per common share	$	1.19		$	0.50		$	2.77		$	1.61
Dividends declared per common share	$	0.15		$	0.13		$	0.44		$	0.39

See accompanying notes to consolidated financial statements.

2

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

	Preferred Stock - Series A		Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total
	(Dollars in thousands)
Balances – January 1, 2009	$	71,880	$	169	$	43,314		$	193,195		$	15,624		$	3,421		$	327,603
Comprehensive income:
Net income		—		—		—			30,404			—			—			30,404
Net loss attributable to noncontrolling interest		—		—		—			2			—			(2	)		—
Other comprehensive income (loss):
Unrealized gains/losses on investment securities AFS, net of $8,086 tax effect		—		—		—			—			12,529			—			12,529
Reclassification of gains/losses included in net income, net of $8,104 tax effect		—		—		—			—			(12,556	)		—			(12,556	)
Total comprehensive income																		30,377
Common stock dividends		—		—		—			(6,580	)		—			—			(6,580	)
Preferred stock dividends		—		—		—			(2,812	)		—			—			(2,812	)
Amortization of preferred stock discount		416		—		—			(416	)		—			—			—
Issuance of 21,200 shares of common stock for exercise of stock options		—		—		245			—			—			—			245
Tax benefit (expense) on exercise and forfeiture of stock options		—		—		(10	)		—			—			—			(10	)
Stock-based compensation expense		—		—		550			—			—			—			550
Minority interest cash contribution		—		—		—			—			—			40			40
Balances – September 30, 2009	$	72,296	$	169	$	44,099		$	213,793		$	15,597		$	3,459		$	349,413
Balances – January 1, 2010	$	—	$	169	$	41,584		$	221,243		$	6,032		$	3,442		$	272,470
Comprehensive income:
Net income		—		—		—			47,010			—			—			47,010
Net loss attributable to noncontrolling interest		—		—		—			60			—			(60	)		—
Other comprehensive income (loss):
Unrealized gains/losses on investment securities AFS, net of $4,657 tax effect		—		—		—			—			7,216			—			7,216
Reclassification of gains/losses included in net income, net of $1,694 tax effect		—		—		—			—			(2,624	)		—			(2,624	)
Total comprehensive income																		51,602
Common stock dividends		—		—		—			(7,451	)		—			—			(7,451	)
Issuance of 85,950 shares of common stock for exercise of stock options		—		1		1,963			—			—			—			1,964
Tax benefit (expense) on exercise and forfeiture of stock options		—		—		271			—			—			—			271
Stock-based compensation expense		—		—		598			—			—			—			598
Noncontrolling interest cash contribution		—		—		—			—			—			50			50
Balances – September 30, 2010	$	—	$	170	$	44,416		$	260,862		$	10,624		$	3,432		$	319,504

See accompanying notes to consolidated financial statements.

3

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Nine Months Ended September 30,
	2010			2009
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	47,010		$	30,404
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		3,290			3,107
Amortization		270			83
Net loss attributable to noncontrolling interest		60			2
Provision for loan and lease losses		11,900			39,200
Provision for losses on foreclosed assets		7,128			2,172
Net accretion of investment securities AFS		(510	)		(3,924	)
Net gains on investment securities AFS		(4,318	)		(20,660	)
Originations and purchases of mortgage loans for sale		(123,974	)		(150,205	)
Proceeds from sales of mortgage loans for sale		113,554			147,825
Net accretion of covered loans		(8,942	)		—
(Gains) losses on dispositions of premises and equipment and other assets		(232	)		35
Gains on FDIC-assisted transactions		(26,160	)		—
Increase (decrease) in deferred income taxes		10,280			(74	)
Increase in cash surrender value of bank owned life insurance (“BOLI”)		(1,577	)		(1,456	)
Current tax benefit on exercise of stock options		(639	)		(110	)
Compensation expense under stock-based compensation plans		598			550
Changes in assets and liabilities:
Accrued interest receivable		244			3,376
Other assets, net		(1,348	)		(6,301	)
Accrued interest payable and other liabilities		1,896			(3,550	)
Net cash provided by operating activities		28,530			40,474
Cash flows from investing activities:
Proceeds from sales of investment securities AFS		251,528			321,163
Proceeds from maturities/calls/paydowns of investment securities AFS		42,874			229,015
Purchases of investment securities AFS		(103,817	)		(232,051	)
Net paydowns (fundings) of portfolio loans and leases		14,773			(8,155	)
Net cash flow from covered assets		37,880			—
Purchases of premises and equipment		(9,961	)		(8,094	)
Proceeds from dispositions of premises and equipment and other assets		13,564			16,558
(Investment in) repayment of unconsolidated investments and noncontrolling interest		(4,104	)		10
Purchase of BOLI		(10,200	)		—
Net cash proceeds received in FDIC-assisted transactions		141,085			—
Net cash provided by investing activities		373,622			318,446
Cash flows from financing activities:
Net decrease in deposits		(331,196	)		(296,258	)
Net repayments of other borrowings		(101,521	)		(63,268	)
Net increase in repurchase agreements with customers		11,481			5,406
Proceeds from exercise of stock options		1,964			245
Current tax benefit on exercise of stock options		639			110
Cash dividends paid on common stock		(7,451	)		(6,580	)
Cash dividends paid on preferred stock		—			(2,530	)
Net cash used by financing activities		(426,084	)		(362,875	)
Net decrease in cash and cash equivalents		(23,932	)		(3,955	)
Cash and cash equivalents – beginning of period		78,294			40,982
Cash and cash equivalents – end of period	$	54,362		$	37,027

See accompanying notes to consolidated financial statements.

4

BANK OF THE OZARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. Organization and Principles of Consolidation

Bank of the Ozarks, Inc. (the “Company”) is a bank holding company headquartered in Little Rock, Arkansas, which operates under the rules and regulations of the Board of Governors of the Federal Reserve System. The Company owns a wholly-owned state chartered bank subsidiary—Bank of the Ozarks (the “Bank”), four 100%-owned finance subsidiary business trusts—Ozark Capital Statutory Trust II (“Ozark II”), Ozark Capital Statutory Trust III (“Ozark III”), Ozark Capital Statutory Trust IV (“Ozark IV”) and Ozark Capital Statutory Trust V (“Ozark V”) (collectively, the “Trusts”) and, indirectly through the Bank, a subsidiary engaged in the development of real estate. The consolidated financial statements include the accounts of the Company, the Bank and the real estate subsidiary. Significant intercompany transactions and amounts have been eliminated in consolidation.

2. Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) in Article 10 of Regulation S-X and in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information, accounting policies and footnote disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. In the opinion of management all adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the full year or future periods.

Certain reclassifications of prior period amounts have been made to conform with the current period presentation. These reclassifications had no impact on previously reported net income.

3. Acquisitions

On March 26, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the Federal Deposit Insurance Corporation (“FDIC”) pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Unity National Bank (“Unity”) with five offices in Georgia, including two in Cartersville and one each in Rome, Adairsville and Calhoun.

On July 16, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Woodlands Bank (“Woodlands”) with eight offices, including Bluffton and Beaufort, South Carolina; Wilmington and Southport, North Carolina; Savannah, Georgia and three offices in Mobile, Alabama. On October 26, 2010, the Company closed four of the Woodlands offices, including Beaufort, South Carolina; Southport, North Carolina and two of the offices in Mobile, Alabama.

On September 10, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Horizon Bank (“Horizon”) with four offices in Florida, including two in Bradenton and one each in Palmetto and Brandon.

(The remainder of this page intentionally left blank)

5

A summary, at fair value, of the assets acquired and liabilities assumed in the Unity, Woodlands and Horizon transactions, as of the acquisition dates, is as follows.

	Unity			Woodlands			Horizon
	(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	45,401		$	13,447		$	11,775
Investment securities AFS		5,580			84,492			5,105
Loans not covered by loss share agreements		—			1,113			892
Covered assets:
Loans		135,205			187,998			93,003
Other real estate owned		8,859			5,029			3,683
FDIC loss share receivable		43,582			54,827			29,089
Core deposit intangible		1,657			200			396
Other assets		183			1,145			1,981
Total assets acquired		240,467			348,251			145,924
Liabilities assumed:
Deposits		220,806			344,723			152,387
Federal Home Loan Bank of Atlanta advances		24,078			10,142			19,251
Other liabilities		2,246			3,288			2,023
Total liabilities assumed		247,130			358,153			173,661
Net assets acquired at fair value		(6,663	)		(9,902	)		(27,737	)
Cash received from FDIC		16,700			24,260			29,502
Pre-tax gains on FDIC-assisted transactions	$	10,037		$	14,358		$	1,765

In conjunction with each of these acquisitions, the Bank entered into loss share agreements with the FDIC such that the Bank and the FDIC will share in the losses on assets covered under the loss share agreements. Pursuant to the terms of the loss share agreements for the Unity acquisition, on losses up to $65.0 million, the FDIC will reimburse the Bank for 80% of losses. On losses exceeding $65.0 million, the FDIC will reimburse the Bank for 95% of losses. Under the terms of the loss share agreements for the Woodlands acquisition, the FDIC will reimburse the Bank for 80% of such losses. Pursuant to the terms of the loss share agreements for the Horizon acquisition, the FDIC will reimburse the Bank on single family residential loans and related foreclosed real estate for (i) 80% of losses up to $11.8 million, (ii) 30% of losses between $11.8 million and $17.9 million and (iii) 80% of losses in excess of $17.9 million. For non-single family residential loans and related foreclosed real estate, the FDIC will reimburse the Bank for (i) 80% of losses up to $32.3 million, (ii) 0% of losses between $32.3 million and $42.8 million and (iii) 80% of losses in excess of $42.8 million. To the extent that actual losses incurred by the Bank are less than (i) $65 million on the Unity assets covered under the loss share agreements, (ii) $107 million on the Woodlands assets covered under the loss share agreements and (iii) $60 million on the Horizon assets covered under the loss share agreements, the Bank may be required to reimburse the FDIC under the clawback provisions of the loss share agreements. At September 30, 2010 the covered loans and covered other real estate owned and the related FDIC loss share receivable (collectively, the “covered assets”) and the FDIC clawback payable were reported at the net present value of expected future amounts to be paid or received.

Purchased loans acquired in a business combination, including loans purchased in the Unity, Woodlands and Horizon acquisitions, are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. In determining the estimated fair value of purchased loans, management considers a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, net present value of cash flows expected to be received, among others. Purchased loans are accounted for in accordance with guidance for certain loans or debt securities acquired in a transfer, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in cash flows will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

The accretable difference on purchased loans acquired in a business combination is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. The accretable difference that is expected to be accreted into future earnings of the Company totaled $88.6 million at September 30, 2010.

6

During the second and third quarters of 2010, the Company made adjustments to the values reported at March 31, 2010 and at June 30, 2010 for certain of the acquired assets and assumed liabilities in the Unity acquisition. These adjustments reflect new information, primarily updated appraisals and cash flow analyses, used by management to more accurately estimate cash flows expected to be collected and the associated impact on the FDIC loss share receivable and the FDIC clawback payable. The combined effect of these adjustments in the initial values assigned to the acquired assets and assumed liabilities in the Unity acquisition was $36,000 pre-tax, which the Company considers to be immaterial.

4. Earnings Per Common Share (“EPS”)

Basic EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding after consideration of the dilutive effect, if any, of the Company’s outstanding common stock options and common stock warrant using the treasury stock method. No options to purchase shares of the Company’s common stock were excluded from the diluted EPS calculation for the quarter and nine months ended September 30, 2010 as all options were dilutive for those periods. Options to purchase 437,150 shares of the Company’s common stock and options to purchase 455,150 shares of the Company’s common stock, respectively, were not included in the diluted EPS calculation for the quarter and nine months ended September 30, 2009 because inclusion would have been antidilutive. Additionally, a warrant for the purchase of 379,811 shares of the Company’s common stock at an exercise price of $29.62 was outstanding at September 30, 2009 (none at September 30, 2010) but was not included in the diluted EPS calculation for the quarter and nine months ended September 30, 2009 as inclusion would have been antidilutive.

Basic and diluted EPS are computed as follows.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands, except per share amounts)
Common shares – weighted-average (basic)		16,981		16,887		16,946		16,878
Common share equivalents – weighted-average		86		18		69		17
Common shares – diluted		17,067		16,905		17,015		16,895
Net income available to common stockholders	$	20,225	$	8,391	$	47,070	$	27,178
Basic EPS	$	1.19	$	0.50	$	2.78	$	1.61
Diluted EPS		1.19		0.50		2.77		1.61

5. Investment Securities

At September 30, 2010 and 2009 and at December 31, 2009, the Company classified all of its investment securities portfolio as available for sale (“AFS”). Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss).

The following table presents the amortized cost and estimated fair value of investment securities at September 30, 2010 and 2009 and at December 31, 2009. The Company’s holdings of “other equity securities” include Federal Home Loan Bank of Dallas (“FHLB – Dallas”), Federal Home Loan Bank of Atlanta (“FHLB – Atlanta”) and First National Banker’s Bankshares, Inc. (“FNBB”) shares which do not have readily determinable fair values and are carried at cost.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value (1)
	(Dollars in thousands)
September 30, 2010:
Obligations of state and political subdivisions	$	376,347	$	18,941	$	(1,460	)	$	393,828
U.S. Government agency residential mortgage-backed securities		193		—		—			193
Other equity securities		18,422		—		—			18,422
Total	$	394,962	$	18,941	$	(1,460	)	$	412,443
December 31, 2009:
Obligations of state and political subdivisions	$	385,581	$	10,517	$	(2,211	)	$	393,887
U.S. Government agency residential mortgage-backed securities		93,159		1,351		—			94,510
Corporate obligations		1,596		269		—			1,865
Collateralized debt obligation		100		—		—			100
Other equity securities		16,316		—		—			16,316
Total	$	496,752	$	12,137	$	(2,211	)	$	506,678

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	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value (1)
	(Dollars in thousands)
September 30, 2009:
Obligations of state and political subdivisions	$	360,067	$	20,219	$	(513	)	$	379,773
U.S. Government agency residential mortgage-backed securities		241,856		5,826		—			247,682
Corporate obligations		1,592		225		—			1,817
Collateralized debt obligation		100		—		—			100
Other equity securities		16,310		—		—			16,310
Total	$	619,925	$	26,270	$	(513	)	$	645,682

(1) The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. For investment securities traded in an active market, the fair values are obtained from independent pricing services and based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables and pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.

The following table shows estimated fair value of investment securities AFS having gross unrealized losses and the amount of such unrealized losses, aggregated by investment category and length of time that individual investment securities have been in a continuous unrealized loss position, at September 30, 2010 and 2009 and at December 31, 2009.

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
September 30, 2010:
Obligations of state and political subdivisions	$	37,529	$	1,213	$	5,718	$	248	$	43,246	$	1,460
Total temporarily impaired securities	$	37,529	$	1,213	$	5,718	$	248	$	43,246	$	1,460
December 31, 2009:
Obligations of states and political subdivisions	$	90,010	$	1,453	$	32,967	$	758	$	122,977	$	2,211
Total temporarily impaired securities	$	90,010	$	1,453	$	32,967	$	758	$	122,977	$	2,211
September 30, 2009:
Obligations of state and political subdivisions	$	25,894	$	316	$	8,422	$	197	$	34,316	$	513
Total temporarily impaired securities	$	25,894	$	316	$	8,422	$	197	$	34,316	$	513

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment for the investment securities portfolio, management considers the credit quality of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors. At September 30, 2010 and 2009 and December 31, 2009 management determined the unrealized losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality of the investments. Accordingly, management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

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The following shows the amortized cost and estimated fair value of investment securities AFS by maturity or estimated date of repayment at September 30, 2010 and December 31, 2009.

	September 30, 2010				December 31, 2009
Maturity or Estimated Repayment Date	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
One year or less	$	2,814	$	2,903	$	42,696	$	43,312
After one year to five years		18,785		19,136		73,243		74,442
After five years to ten years		24,654		25,453		36,586		37,988
After ten years		348,709		364,951		344,227		350,936
Total	$	394,962	$	412,443	$	496,752	$	506,678

For purposes of this maturity distribution, all investment securities AFS are shown based on their contractual maturity date, except (i) FHLB – Dallas, FHLB – Atlanta and FNBB stock with no contractual maturity date are shown in the longest maturity category, (ii) U.S. Government agency residential mortgage-backed securities are allocated among various maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds and interest rate levels at September 30, 2010 and December 31, 2009 and (iii) mortgage-backed securities issued by housing authorities of states and political subdivisions are allocated among various maturities based on an estimated repayment schedule projected by management as of September 30, 2010 and December 31, 2009. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Sales activities in the Company’s investment securities AFS were as follows.

	Nine Months Ended September 30,
	2010			2009
	(Dollars in thousands)
Sales proceeds	$	251,528		$	321,163
Gross realized gains	$	4,881		$	24,480
Gross realized losses		(402	)		(2,920	)
Other-than-temporary impairment charges		(161	)		(900	)
Net gains on investment securities	$	4,318		$	20,660

6. FHLB Advances

FHLB advances, all of which are from FHLB – Dallas, with original maturities exceeding one year totaled $280.8 million at September 30, 2010. Interest rates on these advances ranged from 2.53% to 5.12% at September 30, 2010 with a weighted-average interest rate of 3.84%. At September 30, 2010 aggregate annual maturities and weighted-average interest rates of FHLB advances with an original maturity of over one year were as follows.

Maturity	Amount		Weighted-Average Interest Rate
	(Dollars in thousands)
2010	$	9		4.81	%
2011		31		4.80
2012		21		4.64
2013		18		4.54
2014		19		4.54
Thereafter		280,687		3.84
	$	280,785		3.84

Included in the above table are $280.0 million of FHLB advances that contain quarterly call features and are callable as follows.

	Amount		Weighted-Average Interest Rate			Maturity
			(Dollars in thousands)
Callable quarterly	$	260,000		3.90	%		2017
Callable quarterly		20,000		2.53			2018
	$	280,000		3.80

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7. Subordinated Debentures

The Company had the following issues of trust preferred securities outstanding and subordinated debentures owed to the Trusts at September 30, 2010.

Description	Subordinated Debentures Owed to Trusts		Trust  Preferred Securities of the Trusts		Interest Rate Spread  to 90-day LIBOR			Interest Rate  at September 30, 2010			Final Maturity Date
	(Dollars in thousands)
Ozark III	$	14,434	$	14,000		2.95	%		3.48	%		September 25, 2033
Ozark II		14,433		14,000		2.90			3.19			September 29, 2033
Ozark IV		15,464		15,000		2.22			2.56			September 28, 2034
Ozark V		20,619		20,000		1.60			1.89			December 15, 2036
	$	64,950	$	63,000

At September 30, 2010 the Company had $64.9 million of subordinated debentures outstanding and had an asset of $1.9 million representing its investment in the common equity issued by the Trusts. The interest rates on the subordinated debentures and related trust preferred securities are based on a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically. The sole assets of the Trusts are the adjustable rate debentures and the liabilities of the Trusts are the trust preferred securities. At September 30, 2010 the Trusts did not have any restricted net assets. The Company has, through various contractual arrangements, unconditionally guaranteed payment of all obligations of the Trusts with respect to the trust preferred securities. There are no restrictions on the ability of the Trusts to transfer funds to the Company in the form of cash dividends, loans or advances.

The trust preferred securities and the subordinated debentures mature at or near the thirtieth anniversary date of their issuance. However, these securities and debentures may be prepaid at par, subject to regulatory approval, prior to maturity at any time on or after September 25 and 29, 2008, respectively, for the Ozark III and Ozark II securities and debentures; on or after September 28, 2009 for the Ozark IV securities and debentures; and on or after December 15, 2011 for the Ozark V securities or debentures, or at an earlier date upon certain changes in tax laws, investment company laws or regulatory capital requirements.

8. Supplemental Data for Cash Flows

Supplemental cash flow information is as follows.

	Nine Months Ended September 30,
	2010		2009
	(Dollars in thousands)
Cash paid during the period for:
Interest	$	27,113	$	39,842
Taxes		10,279		13,304
Supplemental schedule of non-cash investing and financing activities:
Net change in unrealized gains and losses on investment securities AFS		7,555		49
Unsettled AFS investment security purchases		—		3,029
Loans transferred to foreclosed assets held for sale		10,952		69,607
Loans advanced for sales of foreclosed assets		9,476		1,324

9. Guarantees and Commitments

Outstanding standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer in third party arrangements. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2010 was $7.0 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at September 30, 2010 totaled $6.2 million.

At September 30, 2010 the Company had outstanding commitments to extend credit, excluding commitments to extend credit on loans covered by FDIC loss share agreements, totaling $166 million. These commitments extend over varying periods of time with the majority to be disbursed or to expire within a one-year period.

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10. Stock-Based Compensation

The Company has a nonqualified stock option plan for certain employees of the Company. This plan provides for the granting of incentive nonqualified options to purchase shares of common stock in the Company. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under this plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. While the vesting period and the termination date for the employee plan options are determined when options are granted, all such employee options outstanding at September 30, 2010 were issued with a vesting date of three years after issuance and expire seven years after issuance.

The Company also has a nonqualified stock option plan for non-employee directors. This plan permits each director who is not otherwise an employee of the Company, or any subsidiary, to receive options to purchase 1,000 shares of the Company’s common stock on the day following his or her election as a director of the Company at each annual meeting of stockholders and up to 1,000 shares upon election or appointment for the first time as a director of the Company. These options are exercisable immediately and expire ten years after issuance.

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

The following table summarizes stock option activity for the nine months ended September 30, 2010.

	Options			Weighted- Average Exercise Price/Share		Weighted- Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)(1)
Outstanding – January 1, 2010		562,750		$	28.34
Granted		10,000			37.99
Exercised		(85,950	)		22.85
Forfeited		(21,850	)		29.30
Outstanding – September 30, 2010		464,950			29.59		4.1	$	3,423
Fully vested and exercisable – September 30, 2010		231,050		$	31.45		3.3	$	1,276
Expected to vest in future periods		207,410
Fully vested and expected to vest – September 30, 2010		438,460		$	29.73		4.1	$	3,170

(1) Based on closing price of $36.93 per share on September 30, 2010.

Intrinsic value for stock options is defined as the amount by which the current market price of the underlying stock exceeds the exercise price. For those stock options where the exercise price exceeds the current market price of the underlying stock, the intrinsic value is zero. The total intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $1.6 million and $0.3 million, respectively.

Options to purchase 10,000 shares and 9,000 shares, respectively, of the Company’s common stock were issued during the nine months ended September 30, 2010 and 2009. Stock-based compensation expense for stock options included in non-interest expense was $0.1 million and $0.2 million for the quarters ended September 30, 2010 and 2009, respectively, and $0.5 million and $0.7 million for the nine months ended September 30, 2010 and 2009, respectively. Total unrecognized compensation cost related to nonvested stock-based compensation was $0.5 million at September 30, 2010 and is expected to be recognized over a weighted-average period of 1.5 years.

The Company has a restricted stock plan that permits issuance of up to 200,000 shares of restricted stock or restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock plan. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under the restricted stock plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. Shares of common stock issued under the restricted stock plan may be shares of original issuance, shares held in treasury or shares that have been reacquired by the Company. All restricted stock awards outstanding at September 30, 2010 were issued with a vesting date of three years after issuance.

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11

The following table summarizes non-vested restricted stock activity for the nine months ended September 30, 2010.

	Nine Months Ended September 30, 2010
Outstanding – January 1, 2010		18,600
Granted		—
Forfeited		—
Vested		—
Outstanding – September 30, 2010		18,600
Weighted-average grant date fair value	$	24.44

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (generally three years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in non-interest expense was $0.1 million for the nine months ended September 30, 2010. Unrecognized compensation expense for nonvested restricted stock awards was $0.3 million at September 30, 2010 and is expected to be recognized over 2.1 years.

On October 19, 2010 the Company’s Personnel and Compensation Committee approved the issuance of (i) options to purchase 100,900 shares of the Company’s common stock and (ii) restricted stock awards for 37,300 shares of restricted stock. Both the option grants and restricted stock awards were issued with terms similar to the Company’s existing grants and awards. Total compensation expense for these option grants and restricted stock awards is expected to be $2.4 million and is expected to be recognized ratably over the three-year vesting period.

11. Comprehensive Income

Total comprehensive income consists of net income, net income attributable to noncontrolling interest, unrealized gains and losses on investment securities AFS, net of income taxes, and reclassification adjustments for unrealized gains and losses on investment securities AFS sold, net of income taxes. Total comprehensive income was $25.1 million and $15.8 million, respectively, for the three months ended September 30, 2010 and 2009 and $51.6 and $30.4 million, respectively, for the nine months ended September 30, 2010 and 2009.

12. Fair Value Measurements

The Company measures certain of its assets and liabilities on a fair value basis using various valuation techniques and assumptions, depending on the nature of the asset or liability. Fair value is defined by Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures,” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, fair value is used either annually or on a non-recurring basis to evaluate certain assets and liabilities for impairment or for disclosure purposes.

In accordance with ASC Topic 820, the Company applied the following fair value hierarchy.

Level 1	–	Quoted prices for identical instruments in active markets.
Level 2	–	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.
Level 3	–	Instruments whose inputs are unobservable.

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

	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
September 30, 2010:
Assets:
Investment securities AFS(1):
Obligations of state and political subdivisions	$	—	$	373,412	$	20,416	$	393,828
U.S. Government agency residential mortgage-backed securities		—		193		—		193
Total investment securities AFS		—		373,605		20,416		394,021
Impaired loans and leases		—		—		15,977		15,977
Foreclosed assets held for sale, net		—		—		41,868		41,868
Derivative assets – interest rate lock commitments (“IRLC”) and forward sales commitments (“FSC”)		—		—		136		136
Total assets at fair value	$	—	$	373,605	$	78,397	$	452,002
Liabilities:
Derivative liabilities – IRLC and FSC		—		—		136		136
Total liabilities at fair value	$	—	$	—	$	136	$	136
December 31, 2009:
Assets:
Investment securities AFS(2):
Obligations of state and political subdivisions	$	—	$	377,297	$	16,590	$	393,887
U.S. Government agency residential mortgage-backed securities		—		94,510		—		94,510
Corporate obligations		—		1,865		—		1,865
Collateralized debt obligation		—		—		100		100
Total investment securities AFS		—		473,672		16,690		490,362
Impaired loans and leases		—		—		19,204		19,204
Foreclosed assets held for sale, net		—		—		61,148		61,148
Derivative assets – IRLC and FSC		—		—		210		210
Total assets at fair value	$	—	$	473,672	$	97,252	$	570,924
Liabilities:
Derivative liabilities – IRLC and FSC	$	—	$	—	$	210	$	210
Total liabilities at fair value	$	—	$	—	$	210	$	210

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13

	Level 1		Level 2		Level 3			Total
	(Dollars in thousands)
September 30, 2009:
Assets:
Investment securities AFS(2):
Obligations of state and political subdivisions	$	—	$	363,183	$	16,590		$	379,773
U.S. Government agency residential mortgage-backed securities		—		247,682		—			247,682
Corporate obligations		—		1,817		—			1,817
Collateralized debt obligation		—		—		100			100
Total investment securities AFS		—		612,682		16,690			629,372
Impaired loans and leases		—		—		15,918			15,918
Foreclosed assets held for sale, net		—		—		63,946			63,946
Derivative assets – IRLC and FSC		—		—		179			179
Total assets at fair value	$	—	$	612,682	$	96,733		$	709,415
Liabilities:
Derivative liabilities – IRLC and FSC	$	—	$	—	$	(179	)	$	(179	)
Total liabilities at fair value	$	—	$	—	$	(179	)	$	(179	)

(1) Does not include $18.4 million at September 30, 2010 of FHLB – Dallas, FHLB – Atlanta and FNBB stock that do not have readily determinable fair values and are carried at cost.

(2) Does not include $16.3 million at both December 31, 2009 and September 30, 2009 of FHLB – Dallas and FNBB stock that do not have readily determinable fair values and are carried at cost.

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

Investment securities – The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest rate tables and pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.

The Company has determined that certain of its investment securities had a limited to non-existent trading market at September 30, 2010. As a result, the Company considers these investments as Level 3 in the fair value hierarchy. Specifically, the fair values of certain obligations of state and political subdivisions consisting of certain unrated private placement bonds (the “private placement bonds”) in the amount of $20.4 million at September 30, 2010 were calculated using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active”. This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades for the private placement bonds. The private placement bonds are generally prepayable at par value at the option of the issuer. As a result, management believes the private placement bonds should be individually valued at the lower of (i) the matrix pricing provided by the Company’s third party pricing services for comparable unrated municipal securities or (ii) par value. At September 30, 2010, the third parties pricing matrices valued the Company’s portfolio of private placement bonds at $23.2 million which exceeded the aggregate of the lower of the matrix pricing or par value of the private placement bonds by $2.8 million. Accordingly, at September 30, 2010 the Company reported the private placement bonds at the lower of the matrix pricing or par value of $20.4 million.

Impaired loans and leases – Fair values are measured on a nonrecurring basis and are based on the underlying collateral value of the impaired loan or lease, net of selling costs, or the estimated discounted cash flows for such loan or lease. In accordance with the provisions of ASC Topic 310, “Receivables,” the Company has reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $7.2 million to the estimated fair value of $16.0 million for such loans and leases at September 30, 2010. The $7.2 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $6.2 million of partial charge-offs, which reduced the carrying value to $17.0 million, and $1.0 million of specific loan and lease loss allocations.

14

Foreclosed assets held for sale, net – Fair values of repossessed personal properties and real estate acquired through or in lieu of foreclosure are measured on a nonrecurring basis and are generally based on third party appraisals less estimated cost to sell.

Derivative assets and liabilities – The fair values of IRLC and FSC derivative assets and liabilities are measured on a recurring basis and are based primarily on the fluctuation of interest rates between the date on which the IRLC and FSC were entered and the measurement date.

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

	Investment Securities AFS			Derivative Assets – IRLC and FSC			Derivative Liabilities – IRLC and FSC
	(Dollars in thousands)
Balances – January 1, 2010	$	16,590		$	210		$	(210	)
Total realized gains (losses) included in earnings		—			(74	)		74
Total unrealized gains (losses) included in comprehensive income		(472	)		—			—
Purchases, sales, issuances and settlements, net		252			—			—
Transfers in and/or out of Level 3		4,046			—			—
Balances – September 30, 2010	$	20,416		$	136		$	(136	)
Balances – January 1, 2009	$	30,020		$	477		$	(477	)
Total realized gains (losses) included in earnings		(3,753	)		(298	)		298
Purchases, sales, issuances and settlements, net		(9,577	)		—			—
Transfers in and/or out of Level 3		—			—			—
Balances – September 30, 2009	$	16,690		$	179		$	(179	)

13. Fair Value of Financial Instruments

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

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

Investment securities – The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. The Company’s investments in the common stock of the FHLB – Dallas, FHLB – Atlanta and FNBB totaling $18.4 million at September 30, 2010 and its investments in the common stock of FHLB – Dallas and FNBB totaling $16.3 million at both December 31, 2009 and September 30, 2009 do not have readily determinable fair values and are carried at cost.

Loans and leases – The fair value of loans and leases, excluding those covered by FDIC loss share agreements, net of allowance for loan and lease losses (“ALLL”) is estimated by discounting the future cash flows using the current rate at which similar loans or leases would be made to borrowers or lessees with similar credit ratings and for the same remaining maturities.

Covered loans – The fair value of covered loans is based on the net present value of future cash proceeds expected to be received using discount rates that are derived from current market rates and reflect the level of interest risk in the covered loans.

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

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

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

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

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

Derivative assets and liabilities – The fair values of IRLC and FSC derivative assets and liabilities are based primarily on the fluctuation of interest rates between the date on which the IRLC and FSC were entered and the measurement date.

Off-balance sheet instruments – The fair values of commercial loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and were not material at September 30, 2010 and 2009 or at December 31, 2009.

The fair values of certain of these instruments were calculated by discounting expected cash flows, which contain numerous uncertainties and involve significant judgments by management. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values represent values at which the respective financial instruments could be sold individually or in the aggregate.

The following table presents the estimated fair values, for the dates indicated, of the Company’s financial instruments.

	September 30,
	2010				2009				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	54,362	$	54,362	$	37,027	$	37,027	$	78,294	$	78,294
Investment securities AFS		412,443		412,443		645,682		645,682		506,678		506,678
Loans and leases, net of ALLL		1,848,686		1,829,348		1,892,092		1,889,857		1,864,485		1,841,953
Covered loans		394,482		396,168		—		—		—		—
FDIC loss share receivable		122,098		121,715		—		—		—		—
Derivative assets – IRLC and FSC		136		136		179		179		210		210
Financial liabilities:
Demand, NOW, savings and money market deposits	$	1,542,781	$	1,542,781	$	991,169	$	991,169	$	1,151,718	$	1,151,718
Time deposits		872,933		878,571		1,053,987		1,057,563		877,276		881,463
Repurchase agreements with customers		55,750		55,750		52,270		52,270		44,269		44,269
Other borrowings		294,502		365,374		361,679		445,183		342,553		423,404
Subordinated debentures		64,950		29,251		64,950		28,793		64,950		27,650
Derivative liabilities – IRLC and FSC		136		136		179		179		210		210

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14. Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Topic 820 by requiring more robust disclosures about (i) the different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in Level 3 fair value measurements, and (iv) the transfers between Levels 1, 2, and 3. Among other things, ASU 2010-06 requires separate disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements as opposed to presenting such activity on a net basis. The new disclosures required by ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the roll forward of activity in Level 3 fair value measurements which are effective for interim and annual periods beginning after December 15, 2010. The provisions of ASU 2010-06 did not have a material impact on the Company’s financial position, results of operations or liquidity, but will require expansion of the Company’s future disclosures about fair value measurements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 amends Topic 310 by requiring disclosure of additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of the allowance for credit losses. Specifically, ASU 2010-20 requires entities to provide disclosures on a disaggregated basis, consisting of portfolio segment and class of financing receivable. A portfolio segment is defined by ASU 2010-20 as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. Classes of financing receivables generally are a disaggregation of portfolio segments. ASU 2010-20 amends existing disclosures to require an entity to provide, on a disaggregated basis, (i) a rollforward schedule of the allowance for credit losses from the beginning to the end of the reporting period, with the ending balance further disaggregated on the basis of impairment method, (ii) the recorded investment in financing receivables for each disaggregated ending balance, (iii) the nonaccrual status of financing receivables by class, and (iv) impaired financing receivables by class. Additionally, ASU 2010-20 required additional disclosures, including (i) credit quality indictors of financing receivables by class, (ii) aging of past due financing receivables by class, (iii) nature and extent of troubled debt restructurings (“TDRs”) by class and their effect on the allowance for credit losses, (iv) nature and extend of financing receivables by class modified as TDRs within the previous 12 months that defaulted during the reporting period and their effect on the allowance, and (v) significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segment. The provisions of ASU 2010-20 are effective for interim and annual reporting periods ending on or after December 15, 2010. ASU 2010-20 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity, but will require expansion of its disclosures about credit quality and the allowance for loan and lease losses.

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

GENERAL

Net income available to common stockholders for Bank of the Ozarks, Inc. (the “Company”) was $20.2 million for the third quarter of 2010, a 141.0% increase from $8.4 million for the comparable quarter in 2009. Diluted earnings per common share were $1.19 for the quarter ended September 30, 2010, a 138.0% increase from $0.50 for the quarter ended September 30, 2009. For the nine months ended September 30, 2010, net income available to common stockholders totaled $47.1 million, a 73.2% increase from $27.2 million for the first nine months of 2009. Diluted earnings per common share for the first nine months of 2010 were $2.77 compared to $1.61 for the comparable period in 2009, a 72.0% increase.

The Company’s annualized return on average assets was 2.60% for the third quarter of 2010 compared to 1.14% for the third quarter of 2009. Its annualized return on average common stockholders’ equity was 26.28% for the third quarter of 2010 compared to 12.46% for the third quarter of 2009. The Company’s annualized return on average assets was 2.15% for the first nine months of 2010 compared to 1.19% for the first nine months of 2009. Its annualized return on average common stockholders’ equity was 21.79% for the first nine months of 2010 compared to 13.64% for the first nine months of 2009.

Total assets were $3.18 billion at September 30, 2010 compared to $2.77 billion at December 31, 2009. Loans and leases, excluding those covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements, were $1.89 billion at September 30, 2010 compared to $1.90 billion at December 31, 2009. Loans covered by FDIC loss share agreements were $0.39 billion at September 30, 2010 compared to none at December 31, 2009. Deposits were $2.42 billion at September 30, 2010 compared to $2.03 billion at December 31, 2009.

Common stockholders’ equity was $316 million at September 30, 2010 compared to $269 million at December 31, 2009. Book value per common share was $18.60 at September 30, 2010 compared to $15.91 at December 31, 2009. Changes in common stockholders’ equity and book value per common share reflect earnings, dividends paid, stock option and warrant transactions and changes in unrealized gains and losses on investment securities available for sale (“AFS”).

Annualized results for these interim periods may not be indicative of results for the full year or future periods.

ANALYSIS OF RESULTS OF OPERATIONS

The Company is a bank holding company whose primary business is commercial banking conducted through its wholly-owned state chartered bank subsidiary – Bank of the Ozarks (the “Bank”). The Company’s results of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans, including covered loans, leases and investments, and the interest expense incurred on interest bearing liabilities, such as deposits, borrowings and subordinated debentures. The Company also generates non-interest income, including service charges on deposit accounts, mortgage lending income, trust income, bank owned life insurance (“BOLI”) income, other charges and fees, gains and losses on investment securities and from sales of other assets and, during 2010, gains on FDIC-assisted transactions.

The Company’s non-interest expense consists of employee compensation and benefits, net occupancy and equipment and other operating expenses. The Company’s results of operations are significantly impacted by its provision for loan and lease losses and its provision for income taxes. The following discussion provides a comparative summary of the Company’s operations for the three and nine months ended September 30, 2010 and 2009 and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report.

Net Interest Income

Net interest income is analyzed in the discussion and the following tables on a fully taxable equivalent (“FTE”) basis. The adjustment to convert certain income to a FTE basis consists of dividing federal tax-exempt income by one minus the Company’s statutory federal income tax rate of 35%. The FTE adjustments to net interest income were $2.4 million and $2.6 million for the quarters ended September 30, 2010 and 2009, respectively, and $7.7 million and $9.8 million for the nine months ended September 30, 2010 and 2009, respectively. No adjustments have been made in this analysis for income exempt from state income taxes or for interest expense deductions disallowed under the provisions of the Internal Revenue Code as a result of investment in certain tax-exempt securities.

Net interest income for the third quarter of 2010 increased 10.8% to $35.2 million compared to $31.8 million for the third quarter of 2009. Net interest income decreased 2.3% to $97.3 million for the nine months ended September 30, 2010 compared to $99.6 million for the nine months ended September 30, 2009.

The increase in net interest income for the third quarter of 2010 compared to the third quarter of 2009 was primarily a result of the 51 basis points (“bps”) improvement in the Company’s net interest margin for the third quarter of 2010 compared to the same period in 2009. The decrease in net interest income for the first nine months of 2010 compared to the first nine months of 2009 was primarily a result of the 9.2% decrease in the Company’s average earning assets in the first nine months of 2010 compared to the same period in 2009, partially offset by a 37 bps improvement in the Company’s net interest margin in the first nine months of 2010 compared to the same period in 2009.

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The decrease in average earning assets for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 was due primarily to a decrease in the Company’s average investment securities of $304 million. From September 30, 2009 to September 30, 2010, the Company was a net seller of investment securities, reducing its period-end portfolio by $233 million at September 30, 2010 compared to September 30, 2009. This reduction in the overall investment securities portfolio was primarily a result of the Company’s ongoing evaluations of interest rate risk and to free up capital for FDIC-assisted acquisitions.

Net interest margin increased 51 bps to 5.31% for the third quarter of 2010 compared to 4.80% for the third quarter of 2009. Net interest margin increased 37 bps to 5.14% for the first nine months of 2010 compared to 4.77% for the first nine months of 2009.

These increases in net interest margin are primarily attributable to a 48 bps decrease for the third quarter and a 56 bps decrease for the first nine months of 2010 in the rates on average interest bearing liabilities compared to the same periods in 2009. The decrease in the rates on average interest bearing liabilities was primarily attributable to a 48 bps decrease for the third quarter and a 64 bps decrease for the first nine months of 2010 in the average rates of interest bearing deposits, the largest component of the Company’s interest bearing liabilities, compared to the same periods in 2009. This decrease in the average rate on interest bearing deposits was principally due to (i) effectively managing the repricing of time deposits which resulted in lower rates paid on these deposits as they were renewed or repriced and (ii) a favorable shift in the mix of the Company’s deposits, resulting in the Company’s average balance of time deposits, which generally pay higher rates than other deposits, decreasing to 36.9% and 39.3% of average deposits, respectively, in the third quarter and first nine months of 2010 compared to 52.1% and 53.2%, respectively, in the third quarter and first nine months of 2009.

The Company’s other interest bearing liabilities include (i) repurchase agreements with customers (“repos”), (ii) other borrowings comprised primarily of Federal Home Loan Bank (“FHLB”) advances, and, to a lesser extent, Federal Reserve Bank (“FRB”) borrowings and federal funds purchased, and (iii) subordinated debentures. The rates paid on repos decreased 38 bps for the third quarter and 32 bps for the nine months ended September 30, 2010 compared to the same periods in 2009. The rates paid on the Company’s other borrowings decreased 13 bps for the third quarter and increased 25 bps for the nine months ended September 30, 2010 compared to the same periods in 2009. Other borrowings consist primarily of fixed rate callable FHLB advances. The decrease in rates for other borrowings for the quarter ended September 30, 2010 compared to the same period in 2009 was primarily due to the repayment of $60 million of callable FHLB advances with a weighted-average interest rate of 6.25% that were repaid on their maturity dates in May 2010. The increase in rates for other borrowings for the nine months ended September 30, 2010 compared to the first nine months of 2009 was due primarily to the decreased utilization of lower rate short-term federal funds purchased and short-term FHLB advances during the first nine months of 2010 compared to the same period in 2009, partially offset by the repayment of $60 million of FHLB advances. The rates paid on the Company’s subordinated debentures, which are tied to a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically, declined 13 bps for the third quarter and 81 bps for the nine months ended September 30, 2010 compared to the same periods of 2009 as a result of the decrease in the 90-day LIBOR.

Yields on average earning assets increased 16 bps for the third quarter but decreased 7 bps for the first nine months of 2010 compared to the same periods in 2009. This increase for the third quarter of 2010 compared to the same period in 2009 was primarily due to the shift in the composition of average earning assets resulting from a reduction in the volume of investment securities offset by the addition of covered loans. The decrease for the first nine months of 2010 compared to the same period in 2009 was due primarily to a 29 bps decline in the aggregate yield on the Company’s investment securities, partially offset by the addition of higher yielding covered loans as a component to the Company’s average earning assets for the nine months ended September 30, 2010 compared to the same period in 2009.

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Average Consolidated Balance Sheets and Net Interest Analysis - FTE

	Three Months Ended September 30,														Nine Months Ended September 30,
	2010							2009							2010							2009
	Average Balance		Income/ Expense		Yield/ Rate			Average Balance		Income/ Expense		Yield/ Rate			Average Balance		Income/ Expense		Yield/ Rate			Average Balance		Income/ Expense		Yield/ Rate
	(Dollars in thousands)
ASSETS
Earning assets:
Interest earning deposits and federal funds sold	$	1,180	$	4		1.46	%	$	517	$	3		1.95	%	$	1,298	$	16		1.64	%	$	529	$	8		2.03	%
Investment securities:
Taxable		57,056		636		4.42			296,700		4,280		5.72			99,705		3,701		4.96			353,242		15,180		5.75
Tax-exempt – FTE		378,096		6,982		7.33			353,491		7,296		8.19			388,650		21,832		7.51			438,739		27,922		8.51
Loans and leases – FTE		1,896,203		29,712		6.22			1,978,863		30,882		6.19			1,893,971		89,044		6.29			1,998,154		94,428		6.32
Covered loans*		297,941		6,205		8.26			—		—		—			149,035		8,942		8.02			—		—		—
Total earning assets – FTE		2,630,476		43,539		6.57			2,629,571		42,461		6.41			2,532,659		123,535		6.52			2,790,664		137,538		6.59
Non-interest earning assets		453,313							281,080							398,025							275,457
Total assets	$	3,083,789						$	2,910,651						$	2,930,684						$	3,066,121
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest bearing transaction	$	1,200,779	$	2,279		0.75	%	$	765,878	$	1,664		0.86	%	$	1,079,036	$	6,543		0.81	%	$	825,141	$	5,220		0.85	%
Time deposits of $100,000 or more		443,209		1,365		1.22			686,517		2,756		1.59			479,853		4,466		1.24			722,864		11,414		2.11
Other time deposits		417,080		1,384		1.32			375,755		1,986		2.10			376,975		4,128		1.46			433,294		8,366		2.58
Total interest bearing deposits		2,061,068		5,028		0.97			1,828,150		6,406		1.39			1,935,864		15,137		1.05			1,981,299		25,000		1.69
Repurchase agreements with customers		51,618		92		0.71			54,922		151		1.09			50,009		302		0.81			54,436		461		1.13
Other borrowings		307,264		2,734		3.53			392,705		3,624		3.66			325,175		9,433		3.88			395,626		10,750		3.63
Subordinated debentures		64,950		470		2.87			64,950		491		3.00			64,950		1,323		2.72			64,950		1,713		3.53
Total interest bearing liabilities		2,484,900		8,324		1.33			2,340,727		10,672		1.81			2,375,998		26,195		1.47			2,496,311		37,924		2.03
Non-interest bearing liabilities:
Non-interest bearing deposits		267,605							211,940							245,223							206,016
Other non-interest bearing liabilities		22,468							15,233							17,214							21,875
Total liabilities		2,774,973							2,567,900							2,638,435							2,724,202
Preferred stock		—							72,228							—							72,090
Common stockholders’ equity		305,378							267,082							288,800							266,383
Noncontrolling interest		3,438							3,441							3,449							3,446
Total liabilities and stockholders’ equity	$	3,083,789						$	2,910,651						$	2,930,684						$	3,066,121
Net interest income – FTE			$	35,215						$	31,789						$	97,340						$	99,614
Net interest margin – FTE						5.31	%						4.80	%						5.14	%						4.77	%

* Covered loans are loans covered by FDIC loss share agreements.

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Non-Interest Income

The Company’s non-interest income consists primarily of (1) service charges on deposit accounts, (2) mortgage lending income, (3) trust income, (4) BOLI income, (5) appraisal fees, credit life commissions and other credit related fees, (6) safe deposit box rental, operating lease income, brokerage fees and other miscellaneous fees, (7) gains and losses on investment securities and sales of other assets and (8) gains on the purchases of failed banks in FDIC-assisted transactions.

Non-interest income for the third quarter of 2010 increased 333.4% to $25.2 million compared to $5.8 million for the third quarter of 2009 primarily as a result of $16.1 million of pre-tax bargain purchase gains on two FDIC-assisted acquisitions. Non-interest income for the nine months ended September 30, 2010 increased 52.6% to $51.7 million compared to $37.8 million for the nine months ended September 30, 2009. The Company’s results for the first nine months of 2010 included pre-tax bargain purchase gains of $26.2 million on three FDIC-assisted acquisitions, which was partially offset by a $16.1 million reduction in net gains on investment securities and sales of other assets in the first nine months of 2010 compared to the first nine months of 2009.

Service charges on deposit accounts, traditionally the Company’s largest source of non-interest income, increased 23.7% for the third quarter of 2010 to $4.0 million compared to $3.2 million for the third quarter of 2009. Service charges on deposit accounts increased 21.5% for the nine months ended September 30, 2010 to $11.0 million compared to $9.1 million for the same period in 2009. The increase in service charges on deposit accounts is due primarily to a number of factors including (i) the organic growth in core deposit accounts, (ii) increased utilization of fee-based services by many of the Company’s customers, and (iii) the addition of core deposit customers from three FDIC-assisted acquisitions during 2010. On August 15, 2010, new regulations became effective prohibiting banks from utilizing overdraft protection programs to pay customers into overdraft for non-recurring electronic debit transactions without affirmative customer opt-in. The impact to the Company of these new regulations was minimized because the Company had a well-planned and effective opt-in program for its affected customers.

Mortgage lending income increased 52.4% for the third quarter of 2010 to $1.0 million compared to $0.7 million for the third quarter of 2009. Mortgage lending income decreased 10.0% for the nine months ended September 30, 2010 to $2.4 million compared to $2.6 million for the same period in 2009. The volume of originations of mortgage loans available for sale increased 61.0 % for the third quarter, but decreased 16.7% for the first nine months of 2010 compared to the same periods in 2009. During the third quarter of 2010, approximately 64% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 36% were related to new home purchases, compared to approximately 46% for refinancings and approximately 54% for new home purchases in the third quarter of 2009. During the first nine months of 2010, approximately 54% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 46% were related to new home purchases, compared to approximately 65% for refinancings and approximately 35% for new home purchases in the first nine months of 2009.

Trust income was $0.8 million for both quarters ended September 30, 2010 and 2009. Trust income increased 14.6% for the nine months ended September 30, 2010 to $2.5 million compared to $2.2 million for the same period in 2009.

Net gains on investment securities and from sales of other assets were $0.8 million for the third quarter of 2010 compared to net gains in such categories of $0.1 million for the third quarter of 2009. Net gains on investment securities and from sales of other assets were $4.6 million for the nine months ended September 30, 2010 compared to $20.6 million for the same period in 2009.

On March 26, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Unity National Bank (“Unity”). This FDIC-assisted transaction resulted in the Company recognizing a pre-tax bargain purchase gain of $10.0 million in the first quarter of 2010.

On July 16, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Woodlands Bank (“Woodlands”). This FDIC-assisted transaction resulted in the Company recognizing a pre-tax bargain purchase gain of $14.4 million in the third quarter of 2010.

On September 10, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Horizon Bank (“Horizon”). This FDIC-assisted transaction resulted in the Company recognizing a pre-tax bargain purchase gain of $1.8 million in the third quarter of 2010.

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Non-interest income from all other sources was $2.4 million in the third quarter of 2010 compared to $1.0 million for the third quarter of 2009, and was $5.0 million for the nine months ended September 30, 2009 compared to $3.3 million for the same period in 2009. The increase in non-interest income from other sources was due primarily to the accretion of the FDIC loss share receivable, net of the amortization of the FDIC clawback payable, of $0.9 million for the quarter and $1.2 million for the nine months ended September 30, 2010.

The following table presents non-interest income for the three and nine months ended September 30, 2010 and 2009.

Non-Interest Income

	Three Months  Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009
	(Dollars in thousands)
Service charges on deposit accounts	$	4,002	$	3,234		$	11,137	$	9,084
Mortgage lending income		1,024		672			2,367		2,630
Trust income		802		801			2,518		2,198
BOLI income		580		495			1,577		1,456
Appraisal fees, credit life commissions and other credit related fees		42		59			193		443
Safe deposit box rental, operating lease income, brokerage fees and other miscellaneous fees		421		300			1,077		925
Gains on investment securities		570		142			4,318		20,660
Gains (losses) on sales of other assets		267		(51	)		232		(35	)
Gains on FDIC-assisted transactions		16,122		—			26,160		—
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		906		—			1,177		—
Other		447		158			920		432
Total non-interest income	$	25,183	$	5,810		$	51,676	$	37,793

Non-Interest Expense

Non-interest expense increased 52.0% to $23.6 million for the third quarter of 2010 compared to $15.5 million for the third quarter of 2009. Non-interest expense increased 25.2% for the nine months ended September 30, 2010 to $62.1 million compared to $49.6 million for the same period in 2009. The increase in non-interest expense for the third quarter and the nine months ended September 30, 2010 compared to the same periods in 2009 was due primarily to write downs of the carrying value of items in other real estate owned totaling $2.7 million and $7.1 million, respectively, for the third quarter and nine months ended September 30, 2010, compared to $0.2 million and $2.2 million, respectively, for the third quarter and nine months ended September 30, 2009. Additionally, during the third quarter and nine months ended September 30, 2010, the Company incurred $1.7 million and $2.5 million, respectively, of aggregate costs associated with (i) its FDIC-assisted acquisitions, (ii) the conversion of Unity’s operating systems that was completed in July 2010, and (iii) preparation for the conversion of the Woodlands and Horizon operating systems in November 2010 and January 2011, respectively.

At September 30, 2010 the Company had 90 offices, consisting of 89 full service banking offices and one loan production office, compared to 73 offices, consisting of 72 full service banking offices and one loan production office, at September 30, 2009. The Company had 838 full time equivalent employees at September 30, 2010 compared to 705 full time equivalent employees at September 30, 2009.

The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 39.0% for the quarter ended September 30, 2010 compared to 41.2% for the quarter ended September 30, 2009. The Company’s efficiency ratio was 41.7% for the nine months ended September 30, 2010 compared to 36.1% for the nine months ended September 30, 2009.

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The following table presents non-interest expense for the three and nine months ended September 30, 2010 and 2009.

Non-Interest Expense

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2010		2009		2010		2009
	(Dollars in thousands)
Salaries and employee benefits	$	10,539	$	7,823	$	27,810	$	23,717
Net occupancy and equipment		2,782		2,558		7,619		7,584
Other operating expenses:
Postage and supplies		555		379		1,411		1,162
Advertising and public relations		684		229		1,570		765
Telephone and data lines		405		471		1,312		1,386
Professional and outside services		1,113		432		2,250		1,389
ATM expense		280		149		604		570
Software expense		736		400		1,899		1,114
FDIC insurance		840		683		2,538		3,601
FDIC and state assessments		119		171		560		536
Loan collection and repossession expense		1,039		1,120		2,884		2,687
Write down of other real estate owned		2,736		188		7,128		2,172
Amortization of intangibles		133		27		270		83
Other		1,604		869		4,291		2,865
Total non-interest expense	$	23,565	$	15,499	$	62,146	$	49,631

Income Taxes

The provision for income taxes was $9.9 million for the third quarter of 2010 and $20.3 million for the first nine months of 2010 compared to $2.6 million for the third quarter of 2009 and $8.4 million for the first nine months of 2009. The effective income tax rate was 32.8% for the third quarter and 30.2% for the first nine months of 2010 compared to 21.6% for the third quarter and first nine months of 2009. The primary factor in the increase in the effective tax rate in the third quarter and first nine months of 2010 compared to the same periods in 2009 was the increase in taxable income as a percentage of pre-tax income as the Company’s taxable income increased and its interest income exempt from income taxes declined both in amount and as a percentage of pre-tax income.

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ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Portfolio

At September 30, 2010 the Company’s loan and lease portfolio, excluding loans covered by FDIC loss share agreements, was $1.89 billion, compared to $1.90 billion at December 31, 2009 and $1.93 billion at September 30, 2009. Real estate loans, the Company’s largest category of loans, consist of all loans secured by real estate as evidenced by mortgages or other liens, including all loans made to finance the development of real property construction projects, provided such loans are secured by real estate. Total real estate loans were $1.65 billion at September 30, 2010, compared to $1.63 billion at December 31, 2009 and $1.64 billion at September 30, 2009. The amount and type of loans and leases outstanding, excluding loans covered by FDIC loss share agreements, at September 30, 2010 and 2009 and at December 31, 2009 and their respective percentage of the total loan and lease portfolio are reflected in the following table.

Loan and Lease Portfolio

	September 30,								December 31,
	2010				2009				2009
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	276,090	14.6	%	$	283,334	14.7	%	$	282,733	14.9	%
Non-farm/non-residential		686,340	36.3			635,737	32.9			606,880	31.9
Construction/land development		498,258	26.4			586,974	30.4			600,342	31.5
Agricultural		87,363	4.6			84,113	4.3			86,237	4.5
Multifamily residential		103,230	5.5			49,729	2.6			55,860	2.9
Total real estate		1,651,281	87.4			1,639,887	84.9			1,632,052	85.7
Commercial and industrial		126,678	6.7			162,004	8.4			150,208	7.9
Consumer		55,200	2.9			67,384	3.5			63,561	3.4
Direct financing leases		41,571	2.2			42,368	2.2			40,353	2.1
Agricultural (non-real estate)		11,949	0.7			17,177	0.9			15,509	0.8
Other		2,257	0.1			2,552	0.1			2,421	0.1
Total loans and leases	$	1,888,936	100.0	%	$	1,931,372	100.0	%	$	1,904,104	100.0	%

The amount and type of non-farm/non-residential loans, excluding loans covered by FDIC loss share agreements, at September 30, 2010 and 2009 and at December 31, 2009, and their respective percentage of the total non-farm/non-residential loan portfolio are reflected in the following table.

Non-Farm/Non-Residential Loans

	September 30,								December 31,
	2010				2009				2009
	(Dollars in thousands)
Retail, including shopping centers and strip centers	$	225,172	32.8	%	$	201,599	31.7	%	$	182,343	30.0	%
Churches and schools		56,243	8.2			58,625	9.2			58,601	9.6
Office, including medical offices		94,003	13.7			57,423	9.0			53,797	8.9
Office warehouse, warehouse and mini-storage		65,716	9.6			63,690	10.0			64,608	10.6
Gasoline stations and convenience stores		15,659	2.3			17,732	2.8			17,942	3.0
Hotels and motels		45,152	6.6			32,757	5.2			39,206	6.5
Restaurants and bars		39,757	5.8			45,664	7.2			45,597	7.5
Manufacturing and industrial facilities		11,424	1.6			29,947	4.7			34,859	5.7
Nursing homes and assisted living centers		29,978	4.4			30,348	4.8			30,171	5.0
Hospitals, surgery centers and other medical		62,230	9.0			56,758	8.9			38,662	6.4
Golf courses, entertainment and recreational facilities		13,516	2.0			15,296	2.4			15,162	2.5
Other non-farm/non residential		27,490	4.0			25,898	4.1			25,932	4.3
Total	$	686,340	100.0	%	$	635,737	100.0	%	$	606,880	100.0	%

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The amount and type of construction/land development loans, excluding loans covered by FDIC loss share agreements, at September 30, 2010 and 2009 and at December 31, 2009, and their respective percentage of the total construction/land development loan portfolio are reflected in the following table.

Construction/Land Development Loans

	September 30,								December 31,
	2010				2009				2009
	(Dollars in thousands)
Unimproved land	$	97,306	19.5	%	$	101,849	17.4	%	$	98,386	16.4	%
Land development and lots:
1-4 family residential and multifamily		179,047	35.9			192,082	32.7			189,691	31.6
Non-residential		74,444	15.0			75,468	12.9			74,744	12.5
Construction:
1-4 family residential:
Owner occupied		14,144	2.8			15,393	2.6			12,878	2.1
Non-owner occupied:
Pre-sold		4,549	0.9			11,287	1.9			6,626	1.1
Speculative		44,817	9.0			58,554	10.0			54,719	9.1
Multifamily		58,138	11.7			61,684	10.5			78,540	13.1
Industrial, commercial and other		25,813	5.2			70,657	12.0			84,758	14.1
Total	$	498,258	100.0	%	$	586,974	100.0	%	$	600,342	100.0	%

The establishment of interest reserves for construction and development loans is an established banking practice, but the handling of such interest reserves varies widely within the industry. Many of the Company’s construction and development loans provide for the use of interest reserves, and based upon its knowledge of general industry practices, the Company believes that its practices related to such interest reserves, discussed below, are appropriate and conservative. When the Company underwrites construction and development loans, it considers the expected total project costs, including hard costs such as land, site work and construction costs and soft costs such as architectural and engineering fees, closing costs, leasing commissions and construction period interest. Based on the total project costs and other factors, the Company determines the required borrower cash equity contribution and the maximum amount the Company is willing to loan. In the vast majority of cases, the Company requires that all of the borrower’s cash equity contribution be contributed prior to any material loan advances. This ensures that the borrower’s cash equity required to complete the project will in fact be available for such purposes. As a result of this practice, the borrower’s cash equity typically goes toward the purchase of the land and early stage hard costs and soft costs. This results in the Company funding the loan later as the project progresses, and accordingly the Company typically funds the majority of the construction period interest through loan advances. However, when the Company initially determines the borrower’s cash equity requirement, the Company typically requires borrower’s cash equity in an amount to cover a majority, or all, of the soft costs, including an amount equal to construction period interest, and an appropriate portion of the hard costs. In the third quarter of 2010, the Company advanced construction period interest totaling approximately $1.1 million on construction and development loans. While the Company advanced these sums as part of the funding process, the Company believes that the borrowers in effect had in most cases already provided for these sums as part of their initial equity contribution. Specifically, the maximum committed balance of all construction and development loans which provide for the use of interest reserves at September 30, 2010 was approximately $340.6 million, of which $287.2 million was outstanding at September 30, 2010 and $53.4 million remained to be advanced. The weighted average loan to cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 63%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 37%. The weighted average final loan to value ratio on such loans, based on the most recent appraisals and assuming such loans are ultimately fully advanced, is expected to be approximately 54%.

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The amount and type of the Company’s real estate loans, excluding loans covered by FDIC loss share agreements, at September 30, 2010 based on the metropolitan statistical area (“MSA”) and other geographic areas in which the principal collateral is located are reflected in the following table.

Geographic Distribution of Real Estate Loans

	Residential 1-4 Family		Non-Farm/Non Residential		Construction/ Land Development		Agricultural		Multifamily Residential		Total
	(Dollars in thousands)
Arkansas:
Little Rock – North Little Rock – Conway, AR MSA	$	71,467	$	185,654	$	78,774	$	15,833	$	8,061	$	359,789
Fayetteville – Springdale – Rogers, AR/MO MSA		10,120		21,323		25,178		5,948		1,039		63,608
Fort Smith, AR/OK MSA		38,612		50,673		6,965		4,710		2,529		103,489
Hot Springs, AR MSA		7,820		8,666		6,712		—		1,481		24,679
Western Arkansas (1)		28,170		39,160		7,745		10,580		1,552		87,207
Northern Arkansas (2)		80,565		34,542		14,627		36,461		591		166,786
All other Arkansas (3)		5,972		8,255		1,410		1,632		—		17,269
Total Arkansas		242,726		348,273		141,411		75,164		15,253		822,827
Texas:
Dallas – Fort Worth – Arlington, TX MSA		6,969		157,484		153,187		—		35,107		352,747
Houston – Sugar Land – Baytown, TX MSA		—		11,727		44,944		—		—		56,671
San Antonio, TX MSA		—		9,703		11,651		—		—		21,354
Austin – Round Rock, TX MSA		—		—		1,719		—		17,455		19,174
Texarkana, TX – Texarkana, AR MSA		13,363		11,234		3,831		400		1,153		29,981
All other Texas (3)		1,037		16,019		764		—		17,362		35,182
Total Texas		21,369		206,167		216,096		400		71,077		515,109
North Carolina/South Carolina:
Charlotte – Gastonia – Concord, NC/SC MSA		1,484		29,046		37,362		—		6,114		74,006
All other North Carolina (3)		165		28,927		45,946		—		—		75,038
All other South Carolina (3)		5,431		7,351		5,961		—		6,618		25,361
Total North Carolina/ South Carolina		7,080		65,324		89,269		—		12,732		174,405
California		—		2,638		26,960		—		—		29,598
Virginia		—		—		18,728		—		—