UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2013

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

For the transition period from                      to                     .

Commission File Number 0-22759

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)

ARKANSAS	71-0556208
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
17901 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS	72223
(Address of principal executive offices)	(Zip Code)

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

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

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

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

Large accelerated filer	x	Accelerated filer	¨
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, 2013
Common Stock, $0.01 par value per share	36,701,709

BANK OF THE OZARKS, INC.

FORM 10-Q

September  30, 2013

INDEX

PART I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2013 and 2012 and December 31, 2012	1
	Consolidated Statements of Income for the Three Months ended September 30, 2013 and 2012 and the Nine Months Ended September 30, 2013 and 2012	2
	Consolidated Statements of Comprehensive Income for the Three Months ended September 30, 2013 and 2012 and the Nine Months Ended September 30, 2013 and 2012	3
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2013 and 2012	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	Selected and Supplemental Financial Data	72
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74
Item 4.	Controls and Procedures	75
PART II.	Other Information
Item 1.	Legal Proceedings	76
Item 1A.	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	78
Item 5.	Other Information	78
Item 6.	Exhibits	78
Signature		79
Exhibit Index		80

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

	Unaudited
	September 30,						December 31,
	2013			2012			2012
	(Dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks	$	123,291		$	124,995		$	206,500
Interest earning deposits		1,167			1,647			1,467
Cash and cash equivalents		124,458			126,642			207,967
Investment securities - available for sale (“AFS”)		671,393			429,935			494,266
Loans and leases		2,522,589			2,030,832			2,115,834
Purchased loans not covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements (“purchased non-covered loans”)		399,058			2,173			41,534
Loans covered by FDIC loss share agreements (“covered loans”)		409,319			652,798			596,239
Allowance for loan and lease losses		(41,660	)		(38,672	)		(38,738	)
Net loans and leases		3,289,306			2,647,131			2,714,869
FDIC loss share receivable		89,642			174,899			152,198
Premises and equipment, net		245,055			221,618			225,754
Foreclosed assets not covered by FDIC loss share agreements		11,647			13,828			13,924
Foreclosed assets covered by FDIC loss share agreements		40,452			57,632			52,951
Accrued interest receivable		15,227			11,520			13,201
Bank owned life insurance (“BOLI”)		142,311			93,819			123,846
Intangible assets, net		20,039			10,680			11,827
Other, net		56,935			35,313			29,404
Total assets	$	4,706,465		$	3,823,017		$	4,040,207
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand non-interest bearing	$	724,413		$	528,277		$	578,528
Savings and interest bearing transaction		1,952,617			1,586,098			1,741,678
Time		977,656			777,360			780,849
Total deposits		3,654,686			2,891,735			3,101,055
Repurchase agreements with customers		50,254			32,511			29,550
Other borrowings		280,905			280,771			280,763
Subordinated debentures		64,950			64,950			64,950
FDIC clawback payable		25,705			24,934			25,169
Accrued interest payable and other liabilities		18,251			46,832			27,614
Total liabilities		4,094,751			3,341,733			3,529,101
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding at September 30, 2013 and 2012 or at December 31, 2012		0			0			0
Common stock; $0.01 par value; 50,000,000 shares authorized; 36,701,709, 34,664,580 and 35,271,724 shares issued and outstanding at September 30, 2013, September 30, 2012 and December 31, 2012, respectively		367			347			353
Additional paid-in capital		140,136			56,873			73,043
Retained earnings		468,186			407,671			423,485
Accumulated other comprehensive income (loss)		(453	)		12,960			10,783
Total stockholders’ equity before noncontrolling interest		608,236			477,851			507,664
Noncontrolling interest		3,478			3,433			3,442
Total stockholders’ equity		611,714			481,284			511,106
Total liabilities and stockholders’ equity	$	4,706,465		$	3,823,017		$	4,040,207

See accompanying notes to consolidated financial statements.

1

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	33,183		$	29,431		$	93,782		$	84,986
Purchased non-covered loans		5,653			55			7,366			211
Covered loans		10,501			15,347			34,845			47,710
Investment securities:
Taxable		1,988			757			4,456			2,177
Tax-exempt		4,006			3,864			11,599			12,083
Deposits with banks and federal funds sold		11			2			21			5
Total interest income		55,342			49,456			152,069			147,172
Interest expense:
Deposits		1,537			1,912			4,457			7,138
Repurchase agreements with customers		7			7			21			40
Other borrowings		2,732			2,628			8,064			8,020
Subordinated debentures		433			465			1,290			1,398
Total interest expense		4,709			5,012			13,832			16,596
Net interest income		50,633			44,444			138,237			130,576
Provision for loan and lease losses		(3,818	)		(3,080	)		(9,212	)		(9,212	)
Net interest income after provision for loan and lease losses		46,815			41,364			129,025			121,364
Non-interest income:
Service charges on deposit accounts		5,817			5,000			15,613			14,601
Mortgage lending income		1,276			1,672			4,660			4,101
Trust income		1,060			865			2,808			2,527
BOLI income		1,179			598			3,365			1,740
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		1,396			1,699			6,269			6,039
Other income from loss share and purchased non-covered loans, net		2,484			2,270			8,328			7,450
Net gains on investment securities		0			0			156			403
Gains on sales of other assets		2,501			1,425			7,586			4,377
Gain on merger and acquisition transaction		1,061			0			1,061			0
Other		1,226			962			3,498			2,774
Total non-interest income		18,000			14,491			53,344			44,012
Non-interest expense:
Salaries and employee benefits		16,456			15,040			47,445			43,666
Net occupancy and equipment		4,786			4,105			13,670			11,633
Other operating expenses		10,966			9,537			30,226			29,272
Total non-interest expense		32,208			28,682			91,341			84,571
Income before taxes		32,607			27,173			91,028			80,805
Provision for income taxes		10,224			7,883			28,255			24,417
Net income		22,383			19,290			62,773			56,388
Earnings attributable to noncontrolling interest		(33	)		(15	)		(36	)		(11	)
Net income available to common stockholders	$	22,350		$	19,275		$	62,737		$	56,377
Basic earnings per common share	$	0.62		$	0.56		$	1.76		$	1.63
Diluted earnings per common share	$	0.61		$	0.55		$	1.74		$	1.62
Dividends declared per common share	$	0.19		$	0.13		$	0.51		$	0.36

See accompanying notes to consolidated financial statements.

2

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Net income available to common stockholders	$	22,383		$	19,290		$	62,773		$	56,388
Other comprehensive income (loss):
Unrealized gains and losses on investment securities AFS		732			2,482			(18,333	)		6,381
Tax effect of unrealized gains and losses on investment securities AFS		(287	)		(974	)		7,191			(2,503	)
Reclassification of gains and losses on investment securities AFS included in net income		0			0			(156	)		(403	)
Tax effect of reclassification of gains and losses on investment securities AFS included in net income		0			0			62			158
Total other comprehensive income (loss)		445			1,508			(11,236	)		3,633
Total comprehensive income	$	22,828		$	20,798		$	51,537		$	60,021

See accompanying notes to consolidated financial statements.

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3

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

								Accumulated
			Additional					Other			Non-
	Common		Paid-In		Retained			Comprehensive			Controlling
	Stock		Capital		Earnings			Income (Loss)			Interest		Total
	(Dollars in thousands)
Balances – January 1, 2012	$	345	$	51,145	$	363,734		$	9,327		$	3,422	$	427,973
Net income		0		0		56,388			0			0		56,388
Earnings attributable to noncontrolling interest		0		0		(11	)		0			11		0
Total other comprehensive income (loss)		0		0		0			3,633			0		3,633
Common stock dividends		0		0		(12,440	)		0			0		(12,440	)
Issuance of 200,700 shares of common stock for exercise of stock options		2		3,120		0			0			0		3,122
Tax benefit on exercise and forfeiture of stock options		0		843		0			0			0		843
Stock-based compensation expense		0		1,765		0			0			0		1,765
Balances – September 30, 2012	$	347	$	56,873	$	407,671		$	12,960		$	3,433	$	481,284
Balances – January 1, 2013		353		73,043		423,485			10,783			3,442		511,106
Net income		0		0		62,773			0			0		62,773
Earnings attributable to noncontrolling interest		0		0		(36	)		0			36		0
Total other comprehensive income (loss)		0		0		0			(11,236	)		0		(11,236	)
Common stock dividends		0		0		(18,036	)		0			0		(18,036	)
Issuance of 178,400 shares of common stock for exercise of stock options		2		2,615		0			0			0		2,617
Tax benefit on exercise and forfeiture of stock options		0		1,458		0			0			0		1,458
Issuance of 1,257,385 shares of common stock for acquisition of The First National Bank of Shelby (“First National Bank”), net of issuance costs of $285,000		12		59,782		0			0			0		59,794
Stock-based compensation expense		0		3,238		0			0			0		3,238
Balances – September 30, 2013	$	367	$	140,136	$	468,186		$	(453	)	$	3,478	$	611,714

See accompanying notes to consolidated financial statements

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4

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Nine Months Ended
	September 30,
	2013			2012
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	62,773		$	56,388
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation		5,317			4,657
Amortization		1,924			1,527
Earnings attributable to noncontrolling interest		(36	)		(11	)
Provision for loan and lease losses		9,212			9,212
Provision for losses on foreclosed and other assets		1,072			1,182
Net amortization of investment securities AFS		450			26
Net gains on investment securities AFS		(156	)		(403	)
Originations of mortgage loans held for sale		(172,210	)		(182,611	)
Proceeds from sales of mortgage loans held for sale		191,570			172,345
Accretion of covered loans		(34,845	)		(47,710	)
Accretion of purchased non-covered loans		(7,366	)		(211	)
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		(6,269	)		(6,039	)
Gains on sales of other assets		(7,586	)		(4,377	)
Gain in merger and acquisition transaction		(1,061	)		0
Deferred income tax (benefit) expense		(2,070	)		765
Increase in cash surrender value of BOLI		(3,365	)		(1,740	)
Tax benefit on exercise of stock options		(1,458	)		(1,213	)
Stock-based compensation expense		3,238			1,765
Changes in assets and liabilities:
Accrued interest receivable		(900	)		1,348
Other assets, net		2,473			1,613
Accrued interest payable and other liabilities		2,137			(18,092	)
Net cash provided (used) by operating activities		42,844			(11,579	)
Cash flows from investing activities:
Proceeds from sales of investment securities AFS		999			8,525
Proceeds from maturities/calls/paydowns of investment securities AFS		71,860			46,252
Purchases of investment securities AFS		(124,193	)		(26,678	)
Net advances on loans and leases not covered by FDIC loss share agreements		(428,273	)		(138,941	)
Payments received on purchased non-covered loans		37,666			2,837
Payments received on covered loans		177,094			157,762
Payments received from FDIC under loss share agreements		66,993			122,722
Other net decreases in covered assets and FDIC loss share receivable		21,634			12,856
Purchases of premises and equipment		(7,815	)		(40,889	)
Proceeds from sales of other assets		47,975			46,311
Purchase of BOLI		0			(30,000	)
Cash (invested in) received from unconsolidated investments and noncontrolling interest		(571	)		200
Net cash proceeds received in merger and acquisition transaction		56,786			0
Net cash (used) provided by investing activities		(79,845	)		160,957
Cash flows from financing activities:
Net decrease in deposits		(46,987	)		(52,183	)
Net advances (repayments) of other borrowings		142			(21,076	)
Net increase (decrease) in repurchase agreements with customers		14,298			(299	)
Proceeds from exercise of stock options		2,617			3,122
Tax benefit on exercise of stock options		1,458			1,213
Cash dividends paid on common stock		(18,036	)		(12,440	)
Net cash used by financing activities		(46,508	)		(81,663	)
Net (decrease) increase in cash and cash equivalents		(83,509	)		67,715
Cash and cash equivalents – beginning of period		207,967			58,927
Cash and cash equivalents – end of period	$	124,458		$	126,642

See accompanying notes to consolidated financial statements.

5

BANK OF THE OZARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. Organization and Principles of Consolidation

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

2. Basis of Presentation

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

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

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

3. Acquisition

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

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

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

6

	July 31, 2013
	As Recorded by First National Bank			Fair Value Adjustments				As Recorded by the Company
	(Dollars in thousands)
Assets acquired:
Cash and due from banks	$	69,285		$	0			$	69,285
Investment securities		149,943			(599	)	a		149,344
Loans and leases		432,250			(44,183	)	b		388,067
Allowance for loan losses		(13,931	)		13,931		b		0
Premises and equipment		14,318			5,064		c		19,382
Foreclosed assets		3,073			(915	)	d		2,158
Accrued interest receivable		1,234			(110	)	e		1,124
BOLI		14,812			0				14,812
Core deposit intangible asset		0			10,136		f		10,136
Deferred income taxes		12,179			12,325		g		24,504
Other		4,277			(251	)	e		4,026
Total assets acquired		687,440			(4,602	)			682,838
Liabilities assumed:
Deposits		595,668			4,950		h		600,618
Repurchase agreements with customers		6,405			0				6,405
Accrued interest payable and other liabilities		1,296			1,164		i		2,460
Total liabilities assumed		603,369			6,114				609,483
Net assets acquired	$	84,071		$	(10,716	)			73,355
Consideration paid:
Cash									12,215
Common stock									60,079
Total consideration paid									72,294
Gain on acquisition								$	1,061

Explanation of fair value adjustments

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

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

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

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

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

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

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

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

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

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

7

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

4. Earnings Per Common Share (“EPS”)

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(In thousands, except per share amounts)
Numerator:
Distributed earnings allocated to common stock	$	6,732	$	4,498	$	18,036	$	12,440
Undistributed earnings allocated to common stock		15,618		14,777		44,701		43,937
Net earnings allocated to common stock	$	22,350	$	19,275	$	62,737	$	56,377
Denominator:
Denominator for basic EPS – weighted-average common shares		36,272		34,647		35,669		34,591
Effect of dilutive securities – stock options		376		316		325		281
Denominator for diluted EPS – weighted-average common shares and assumed conversions		36,648		34,963		35,994		34,872
Basic EPS	$	0.62	$	0.56	$	1.76	$	1.63
Diluted EPS	$	0.61	$	0.55	$	1.74	$	1.62

5. Investment Securities

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

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8

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
September 30, 2013:
Obligations of state and political subdivisions	$	432,362	$	7,423	$	(8,217	)	$	431,568
U.S. Government agency securities		225,263		4,077		(4,029	)		225,311
Corporate obligations		717		0		0			717
Other equity securities		13,797		0		0			13,797
Total	$	672,139	$	11,500	$	(12,246	)	$	671,393
December 31, 2012:
Obligations of state and political subdivisions	$	345,224	$	16,586	$	(293	)	$	361,517
U.S. Government agency securities		116,835		1,466		(17	)		118,284
Corporate obligations		776		0		0			776
Other equity securities		13,689		0		0			13,689
Total	$	476,524	$	18,052	$	(310	)	$	494,266
September 30, 2012:
Obligations of state and political subdivisions	$	330,965	$	18,784	$	(211	)	$	349,538
U.S. Government agency securities		63,192		2,752		0			65,944
Corporate obligations		777		0		0			777
Other equity securities		13,676		0		0			13,676
Total	$	408,610	$	21,536	$	(211	)	$	429,935

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9

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

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
September 30, 2013:
Obligations of state and political subdivisions	$	122,614	$	7,523	$	8,020	$	694	$	130,634	$	8,217
U.S. Government agency securities		60,861		4,029		0		0		60,861		4,029
Total temporarily impaired securities	$	183,475	$	11,552	$	8,020	$	694	$	191,495	$	12,246
December 31, 2012:
Obligations of state and political subdivisions	$	14,085	$	188	$	7,324	$	105	$	21,409	$	293
U.S. Government agency securities		14,320		17		0		0		14,320		17
Total temporarily impaired securities	$	28,405	$	205	$	7,324	$	105	$	35,729	$	310
September 30, 2012:
Obligations of state and political subdivisions	$	1,796	$	75	$	7,540	$	136	$	9,336	$	211
Total temporarily impaired securities	$	1,796	$	75	$	7,540	$	136	$	9,336	$	211

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

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

	September 30, 2013
Maturity or Estimated Repayment	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
One year or less	$	26,250	$	26,686
After one year to five years		91,986		93,498
After five years to ten years		136,239		136,052
After ten years		417,664		415,157
Total	$	672,139	$	671,393

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

10

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(Dollars in thousands)
Sales proceeds	$	0	$	0	$	999	$	8,525
Gross realized gains	$	0	$	0	$	156	$	403
Gross realized losses		0		0		0		0
Net gains on investment securities	$	0	$	0	$	156	$	403

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

Allowance for loan and lease losses

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Beginning balance	$	39,372		$	38,862		$	38,738		$	39,169
Non-covered loans and leases charged off		(754	)		(1,763	)		(3,203	)		(5,096	)
Recoveries of non-covered loans and leases previously charged off		142			174			925			549
Net non-covered loans and leases charged off		(612	)		(1,589	)		(2,278	)		(4,547	)
Covered loans charged off		(918	)		(1,681	)		(4,012	)		(5,162	)
Net charge-offs – total loans and leases		(1,530	)		(3,270	)		(6,290	)		(9,709	)
Provision for loan and lease losses:
Non-covered loans and leases		2,900			1,399			5,200			4,050
Covered loans		918			1,681			4,012			5,162
Total provision		3,818			3,080			9,212			9,212
Ending balance	$	41,660		$	38,672		$	41,660		$	38,672

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

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

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11

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

	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Three months ended September 30, 2013:
Real estate:
Residential 1-4 family	$	4,653	$	(111	)	$	11	$	294		$	4,847
Non-farm/non-residential		12,464		(19	)		0		304			12,749
Construction/land development		11,290		(7	)		13		1,434			12,730
Agricultural		2,595		(260	)		5		182			2,522
Multifamily residential		1,854		0			0		203			2,057
Commercial and industrial		2,929		(55	)		56		(172	)		2,758
Consumer		993		(57	)		19		(13	)		942
Direct financing leases		2,041		(152	)		9		262			2,160
Other		553		(93	)		29		406			895
Covered loans		0		(918	)		0		918			0
Total	$	39,372	$	(1,672	)	$	142	$	3,818		$	41,660
Nine months ended September 30, 2013:
Real estate:
Residential 1-4 family	$	4,820	$	(528	)	$	113	$	442		$	4,847
Non-farm/non-residential		10,107		(612	)		118		3,136			12,749
Construction/land development		12,000		(136	)		21		845			12,730
Agricultural		2,878		(260	)		9		(105	)		2,522
Multifamily residential		2,030		0			0		27			2,057
Commercial and industrial		3,655		(887	)		431		(441	)		2,758
Consumer		1,015		(176	)		90		13			942
Direct financing leases		2,050		(338	)		29		419			2,160
Other		183		(266	)		114		864			895
Covered loans		0		(4,012	)		0		4,012			0
Total	$	38,738	$	(7,215	)	$	925	$	9,212		$	41,660

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

	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Year ended December 31, 2012:
Real estate:
Residential 1-4 family	$	3,848	$	(1,312	)	$	107	$	2,177		$	4,820
Non-farm/non-residential		12,203		(1,226	)		18		(888	)		10,107
Construction/land development		9,478		(466	)		106		2,882			12,000
Agricultural		3,383		(997	)		141		351			2,878
Multifamily residential		2,564		0			0		(534	)		2,030
Commercial and industrial		4,591		(1,323	)		35		352			3,655
Consumer		1,209		(732	)		238		300			1,015
Direct financing leases		1,632		(361	)		2		777			2,050
Other		261		(219	)		8		133			183
Covered loans		0		(6,195	)		0		6,195			0
Total	$	39,169	$	(12,831	)	$	655	$	11,745		$	38,738

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12

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

	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Three months ended September 30, 2012:
Real estate:
Residential 1-4 family	$	4,957	$	(385	)	$	42	$	313		$	4,927
Non-farm/non-residential		9,916		(94	)		1		(138	)		9,685
Construction/land development		11,805		(26	)		70		391			12,240
Agricultural		2,959		(767	)		3		807			3,002
Multifamily residential		1,870		0			0		(207	)		1,663
Commercial and industrial		4,136		(127	)		8		(89	)		3,928
Consumer		1,089		(114	)		22		41			1,038
Direct financing leases		1,886		(101	)		2		201			1,988
Other		244		(149	)		26		80			201
Covered loans		0		(1,681	)		0		1,681			0
Total	$	38,862	$	(3,444	)	$	174	$	3,080		$	38,672
Nine months ended September 30, 2012:
Real estate:
Residential 1-4 family	$	3,848	$	(1,016	)	$	99	$	1,996		$	4,927
Non-farm/non-residential		12,203		(800	)		13		(1,731	)		9,685
Construction/land development		9,478		(369	)		101		3,030			12,240
Agricultural		3,383		(985	)		129		475			3,002
Multifamily residential		2,564		0			0		(901	)		1,663
Commercial and industrial		4,591		(917	)		29		225			3,928
Consumer		1,209		(324	)		88		65			1,038
Direct financing leases		1,632		(295	)		1		650			1,988
Other		261		(390	)		89		241			201
Covered loans		0		(5,162	)		0		5,162			0
Total	$	39,169	$	(10,258	)	$	549	$	9,212		$	38,672

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13

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

	Allowance for Loan and Lease Losses						Loans and Leases Excluding Purchased Non-Covered Loans and Covered Loans
	ALLL for Individually Evaluated Impaired Loans and Leases		ALLL for All Other Loans and Leases		Total ALLL		Individually Evaluated Impaired Loans and Leases		All Other Loans and Leases		Total Loans and Leases
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	490	$	4,357	$	4,847	$	3,535	$	247,491	$	251,026
Non-farm/non-residential		6		12,743		12,749		3,572		1,032,046		1,035,618
Construction/land development		2		12,728		12,730		217		713,981		714,198
Agricultural		187		2,335		2,522		951		47,002		47,953
Multifamily residential		0		2,057		2,057		310		163,606		163,916
Commercial and industrial		613		2,145		2,758		739		121,424		122,163
Consumer		4		938		942		33		27,265		27,298
Direct financing leases		0		2,160		2,160		0		81,984		81,984
Other		1		894		895		20		78,413		78,433
Total	$	1,303	$	40,357	$	41,660	$	9,377	$	2,513,212	$	2,522,589
December 31, 2012:
Real estate:
Residential 1-4 family	$	518	$	4,302	$	4,820	$	2,906	$	269,146	$	272,052
Non-farm/non-residential		53		10,054		10,107		2,898		805,008		807,906
Construction/land development		7		11,993		12,000		542		578,234		578,776
Agricultural		254		2,624		2,878		985		49,634		50,619
Multifamily residential		0		2,030		2,030		0		141,243		141,243
Commercial and industrial		649		3,006		3,655		761		159,043		159,804
Consumer		0		1,015		1,015		33		29,748		29,781
Direct financing leases		0		2,050		2,050		0		68,022		68,022
Other		2		181		183		22		7,609		7,631
Total	$	1,483	$	37,255	$	38,738	$	8,147	$	2,107,687	$	2,115,834
September 30, 2012:
Real estate:
Residential 1-4 family	$	457	$	4,470	$	4,927	$	3,221	$	269,465	$	272,686
Non-farm/non-residential		54		9,631		9,685		2,521		794,287		796,808
Construction/land development		57		12,183		12,240		321		567,891		568,212
Agricultural		256		2,746		3,002		1,096		52,511		53,607
Multifamily residential		0		1,663		1,663		0		105,854		105,854
Commercial and industrial		693		3,235		3,928		864		127,217		128,081
Consumer		1		1,037		1,038		33		30,856		30,889
Direct financing leases		0		1,988		1,988		0		65,395		65,395
Other		2		199		201		24		9,276		9,300
Total	$	1,520	$	37,152	$	38,672	$	8,080	$	2,022,752	$	2,030,832

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14

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

	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Three Months Ended September 30, 2013		Weighted Average Carrying Value – Nine Months Ended September 30, 2013
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,601	$	(1,662	)	$	1,939	$	490	$	1,624	$	1,569
Non-farm/non-residential		37		0			37		6		24		105
Construction/land development		129		(112	)		17		2		8		17
Agricultural		459		(42	)		417		187		421		525
Commercial and industrial(1)		2,270		(1,713	)		557		613		558		570
Consumer		39		(13	)		26		4		13		7
Other		145		(137	)		8		1		8		9
Total impaired loans and leases with a related ALLL		6,680		(3,679	)		3,001		1,303		2,656		2,802
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		2,244		(648	)		1,596		0		1,507		1,394
Non-farm/non-residential		4,645		(1,110	)		3,535		0		6,957		4,902
Construction/land development		281		(81	)		200		0		236		324
Agricultural		801		(267	)		534		0		386		401
Multifamily residential		443		(133	)		310		0		311		155
Commercial and industrial		397		(215	)		182		0		166		196
Consumer		19		(12	)		7		0		7		23
Other		32		(20	)		12		0		8		8
Total impaired loans and leases without a related ALLL		8,862		(2,486	)		6,376		0		9,578		7,403
Total impaired loans and leases	$	15,542	$	(6,165	)	$	9,377	$	1,303	$	12,234	$	10,205

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

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15

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

	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Year Ended December 31, 2012
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,316	$	(1,648	)	$	1,668	$	518	$	1,622
Non-farm/non-residential		203		0			203		53		234
Construction/land development		141		(90	)		51		7		38
Agricultural		632		(73	)		559		254		291
Commercial and industrial(1)		2,085		(1,523	)		562		649		620
Consumer		15		(12	)		3		0		8
Other		223		(213	)		10		2		24
Total impaired loans and leases with a related ALLL		6,615		(3,559	)		3,056		1,483		2,837
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		1,531		(293	)		1,238		0		1,721
Non-farm/non-residential		3,363		(668	)		2,695		0		2,432
Construction/land development		628		(137	)		491		0		600
Agricultural		733		(307	)		426		0		374
Multifamily residential		133		(133	)		0		0		0
Commercial and industrial		614		(415	)		199		0		426
Consumer		50		(20	)		30		0		31
Other		65		(53	)		12		0		13
Total impaired loans and leases without a related ALLL		7,117		(2,026	)		5,091		0		5,597
Total impaired loans and leases	$	13,732	$	(5,585	)	$	8,147	$	1,483	$	8,434

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

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16

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

	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Three Months Ended September 30, 2012		Weighted Average Carrying Value – Nine Months Ended September 30, 2012
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,307	$	(1,683	)	$	1,624	$	457	$	1,684	$	1,606
Non-farm/non-residential		211		(7	)		204		54		231		245
Construction/land development		139		(38	)		101		57		50		34
Agricultural		618		(176	)		442		256		262		202
Commercial and industrial(1)		2,045		(1,426	)		619		693		605		640
Consumer		953		(950	)		3		1		3		10
Other		305		(295	)		10		2		38		29
Total impaired loans and leases with a related ALLL		7,578		(4,575	)		3,003		1,520		2,873		2,766
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		1,802		(205	)		1,597		0		1,725		1,882
Non-farm/non-residential		2,322		(5	)		2,317		0		2,232		2,344
Construction/land development		342		(122	)		220		0		400		636
Agricultural		972		(318	)		654		0		390		357
Multifamily residential		161		(161	)		0		0		0		0
Commercial and industrial		285		(40	)		245		0		294		502
Consumer		549		(519	)		30		0		30		31
Other		14		0			14		0		15		13
Total impaired loans and leases without a related ALLL		6,447		(1,370	)		5,077		0		5,086		5,765
Total impaired loans and leases	$	14,025	$	(5,945	)	$	8,080	$	1,520	$	7,959	$	8,531

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

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

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

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17

Credit Quality Indicators

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

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

	Satisfactory		Moderate		Watch		Substandard		Total
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family (1)	$	242,202	$	0	$	1,438	$	7,386	$	251,026
Non-farm/non-residential		839,345		134,754		51,589		9,930		1,035,618
Construction/land development		544,324		136,270		29,122		4,482		714,198
Agricultural		23,926		11,688		9,317		3,022		47,953
Multifamily residential		132,722		29,716		394		1,084		163,916
Commercial and industrial		91,913		26,843		1,210		2,197		122,163
Consumer (1)		26,763		0		172		363		27,298
Direct financing leases		80,967		992		0		25		81,984
Other (1)		74,221		4,005		132		75		78,433
Total	$	2,056,383	$	344,268	$	93,374	$	28,564	$	2,522,589
December 31, 2012:
Real estate:
Residential 1-4 family (1)	$	263,737	$	0	$	3,146	$	5,169	$	272,052
Non-farm/non-residential		649,494		109,429		38,231		10,752		807,906
Construction/land development		395,821		130,057		37,069		15,829		578,776
Agricultural		25,854		12,105		9,509		3,151		50,619
Multifamily residential		112,360		24,092		4,009		782		141,243
Commercial and industrial		121,898		31,338		3,950		2,618		159,804
Consumer (1)		29,079		0		424		278		29,781
Direct financing leases		66,657		1,365		0		0		68,022
Other (1)		6,116		1,204		239		72		7,631
Total	$	1,671,016	$	309,590	$	96,577	$	38,651	$	2,115,834
September 30, 2012:
Real estate:
Residential 1-4 family(1)	$	264,831	$	0	$	1,666	$	6,189	$	272,686
Non-farm/non-residential		643,663		102,293		40,412		10,440		796,808
Construction/land development		352,131		160,107		40,015		15,959		568,212
Agricultural		27,014		12,886		10,237		3,470		53,607
Multifamily residential		78,241		23,128		3,701		784		105,854
Commercial and industrial		90,550		30,654		3,223		3,654		128,081
Consumer(1)		30,445		0		89		355		30,889
Direct financing leases		63,916		1,454		0		25		65,395
Other(1)		7,474		1,499		253		74		9,300
Total	$	1,558,265	$	332,021	$	99,596	$	40,950	$	2,030,832

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

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

18

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

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

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

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

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

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19

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

	30-89 Days Past Due (1)		90 Days or More (2)		Total Past Due		Current (3)		Total
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	1,661	$	2,376	$	4,037	$	246,989	$	251,026
Non-farm/non-residential		2,321		3,312		5,633		1,029,985		1,035,618
Construction/land development		1,662		136		1,798		712,400		714,198
Agricultural		322		571		893		47,060		47,953
Multifamily residential		0		310		310		163,606		163,916
Commercial and industrial		349		131		480		121,683		122,163
Consumer		177		66		243		27,055		27,298
Direct financing leases		111		25		136		81,848		81,984
Other		17		0		17		78,416		78,433
Total	$	6,620	$	6,927	$	13,547	$	2,509,042	$	2,522,589
December 31, 2012:
Real estate:
Residential 1-4 family	$	3,656	$	1,160	$	4,816	$	267,236	$	272,052
Non-farm/non-residential		3,284		2,524		5,808		802,098		807,906
Construction/land development		868		329		1,197		577,579		578,776
Agricultural		952		570		1,522		49,097		50,619
Multifamily residential		312		0		312		140,931		141,243
Commercial and industrial		1,091		185		1,276		158,528		159,804
Consumer		425		57		482		29,299		29,781
Direct financing leases		0		0		0		68,022		68,022
Other		9		0		9		7,622		7,631
Total	$	10,597	$	4,825	$	15,422	$	2,100,412	$	2,115,834
September 30, 2012:
Real estate:
Residential 1-4 family	$	2,533	$	1,624	$	4,157	$	268,529	$	272,686
Non-farm/non-residential		2,959		2,043		5,002		791,806		796,808
Construction/land development		698		108		806		567,406		568,212
Agricultural		944		335		1,279		52,328		53,607
Multifamily residential		0		0		0		105,854		105,854
Commercial and industrial		500		281		781		127,300		128,081
Consumer		159		86		245		30,644		30,889
Direct financing leases		0		25		25		65,370		65,395
Other		26		0		26		9,274		9,300
Total	$	7,819	$	4,502	$	12,321	$	2,018,511	$	2,030,832

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

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

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

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20

Covered Loans

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

	FV 1		FV 2		Total Covered Loans
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	114,163	$	6,379	$	120,542
Non-farm/non-residential		171,886		25,566		197,452
Construction/land development		40,172		19,214		59,386
Agricultural		11,203		1,138		12,341
Multifamily residential		9,153		215		9,368
Commercial and industrial		9,877		57		9,934
Consumer		132		6		138
Other		158		0		158
Total	$	356,744	$	52,575	$	409,319
December 31, 2012:
Real estate:
Residential 1-4 family	$	146,687	$	5,661	$	152,348
Non-farm/non-residential		271,705		16,399		288,104
Construction/land development		90,321		14,766		105,087
Agricultural		18,937		753		19,690
Multifamily residential		9,871		830		10,701
Commercial and industrial		18,495		1		18,496
Consumer		123		53		176
Other		1,637		0		1,637
Total	$	557,776	$	38,463	$	596,239
September 30, 2012:
Real estate:
Residential 1-4 family	$	162,762	$	4,125	$	166,887
Non-farm/non-residential		299,494		14,833		314,327
Construction/land development		105,844		10,840		116,684
Agricultural		20,815		73		20,888
Multifamily residential		10,060		869		10,929
Commercial and industrial		21,848		47		21,895
Consumer		211		0		211
Other		977		0		977
Total	$	622,011	$	30,787	$	652,798

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

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21

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

	30-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Covered Loans
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	6,260	$	13,658	$	19,918	$	100,623	$	120,541
Non-farm/non-residential		8,557		39,841		48,398		149,054		197,452
Construction/land development		848		27,584		28,432		30,955		59,387
Agricultural		1,234		1,250		2,484		9,857		12,341
Multifamily residential		195		3,689		3,884		5,484		9,368
Commercial and industrial		27		2,961		2,988		6,946		9,934
Consumer		0		2		2		136		138
Other		0		0		0		158		158
Total	$	17,121	$	88,985	$	106,106	$	303,213	$	409,319
December 31, 2012:
Real estate:
Residential 1-4 family	$	9,539	$	20,958	$	30,497	$	121,851	$	152,348
Non-farm/non-residential		18,476		55,753		74,229		213,875		288,104
Construction/land development		6,693		42,604		49,297		55,790		105,087
Agricultural		1,063		3,338		4,401		15,289		19,690
Multifamily residential		0		3,345		3,345		7,356		10,701
Commercial and industrial		901		4,133		5,034		13,462		18,496
Consumer		29		5		34		142		176
Other		0		0		0		1,637		1,637
Total	$	36,701	$	130,136	$	166,837	$	429,402	$	596,239
September 30, 2012:
Real estate:
Residential 1-4 family	$	9,379	$	22,470	$	31,849	$	135,038	$	166,887
Non-farm/non-residential		13,776		51,407		65,183		249,144		314,327
Construction/land development		4,497		48,161		52,658		64,026		116,684
Agricultural		1,292		3,921		5,213		15,675		20,888
Multifamily residential		0		3,489		3,489		7,440		10,929
Commercial and industrial		1,321		3,105		4,426		17,469		21,895
Consumer		0		0		0		211		211
Other		0		0		0		977		977
Total	$	30,265	$	132,553	$	162,818	$	489,980	$	652,798

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

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22

Purchased Non-Covered Loans

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

	Purchased Non-Covered Loans Without Evidence of Credit Deterioration at Acquisition										Purchased Non-Covered Loans With Evidence of Credit Deterioration  at Acquisition				Total Purchased Non-Covered
	FV 33		FV 44		FV 55		FV 36		FV 77		FV 66		FV 88		Loans
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 Family	$	28,486	$	34,113	$	21,592	$	36,221	$	0	$	16,311	$	0	$	136,723
Non-farm/non-residential		46,201		71,637		25,591		3,509		0		16,786		0		163,724
Construction/land development		5,973		8,578		2,495		4,680		0		5,052		0		26,778
Agricultural		2,109		6,705		851		173		0		242		0		10,080
Multifamily residential		3,621		5,662		5,322		978		0		2,419		0		18,002
Commercial and industrial		10,684		10,793		3,150		4,004		0		1,598		0		30,229
Consumer		1,980		147		181		5,990		0		878		0		9,176
Other		1,333		2,323		163		329		0		198		0		4,346
Total	$	100,387	$	139,958	$	59,345	$	55,884	$	0	$	43,484	$	0	$	399,058
December 31, 2012:
Real estate:
Residential 1-4 Family	$	3,400	$	7,363	$	4,937	$	921	$	0	$	2,601	$	0	$	19,222
Non-farm/non-residential		420		1,370		2,680		10		0		362		0		4,842
Construction/land development		438		659		130		134		0		589		0		1,950
Agricultural		784		826		710		164		0		537		0		3,021
Multifamily residential		0		0		0		0		0		0		0		0
Commercial and industrial		576		1,802		1,788		384		0		783		0		5,333
Consumer		857		231		79		1,341		0		1,660		0		4,168
Other		222		110		107		2,336		0		223		0		2,998
Total	$	6,697	$	12,361	$	10,431	$	5,290	$	0	$	6,755	$	0	$	41,534
September 30, 2012:
Real estate:
Residential 1-4 Family	$	0	$	0	$	0	$	0	$	0	$	42	$	0	$	42
Non-farm/non-residential		0		0		0		0		0		0		0		0
Construction/land development		0		0		0		0		0		15		0		15
Agricultural		0		0		0		0		0		0		0		0
Multifamily residential		0		0		0		0		0		0		0		0
Commercial and industrial		0		0		0		0		0		225		0		225
Consumer		0		0		0		0		0		1,889		0		1,889
Other		0		0		0		0		0		2		0		2
Total	$	0	$	0	$	0	$	0	$	0	$	2,173	$	0	$	2,173

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23

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

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

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

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

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

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

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

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

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

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

24

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

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

	30-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Purchased Non-Covered Loans
	(Dollars in thousands)
September 30, 2013:
Real estate:
Residential 1-4 family	$	4,026	$	3,647	$	7,673	$	129,050	$	136,723
Non-farm/non-residential		3,319		4,136		7,455		156,269		163,724
Construction/land development		4,601		7,367		11,968		14,810		26,778
Agriculture		0		101		101		9,979		10,080
Multifamily residential		177		1,326		1,503		16,499		18,002
Commercial and industrial		357		535		892		29,337		30,229
Consumer		310		223		533		8,643		9,176
Other		38		182		220		4,126		4,346
Total	$	12,828	$	17,517	$	30,345	$	368,713	$	399,058
December 31, 2012:
Real estate:
Residential 1-4 family	$	2,322	$	1,594	$	3,916	$	15,306	$	19,222
Non-farm/non-residential		319		205		524		4,318		4,842
Construction/land development		148		322		470		1,480		1,950
Agriculture		272		904		1,176		1,845		3,021
Commercial and industrial		855		2,589		3,444		1,889		5,333
Consumer		431		1,295		1,726		2,442		4,168
Other		434		259		693		2,305		2,998
Total	$	4,781	$	7,168	$	11,949	$	29,585	$	41,534
September 30, 2012:
Real estate:
Residential 1-4 family	$	0	$	0	$	0	$	42	$	42
Construction/land development		0		0		0		15		15
Commercial and industrial		0		0		0		225		225
Consumer		152		78		230		1,659		1,889
Other		0		0		0		2		2
Total	$	152	$	78	$	230	$	1,943	$	2,173

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7. Foreclosed Assets Not Covered by FDIC Loss Share Agreements

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

	September 30,				December 31,
	2013		2012		2012
	(Dollars in thousands)
Real estate:
Residential 1-4 family	$	1,059	$	1,505	$	2,863
Non-farm/non-residential		3,038		3,468		2,481
Construction/land development		7,320		8,564		8,072
Agricultural		22		160		378
Total real estate		11,439		13,697		13,794
Commercial and industrial		190		91		102
Consumer		18		40		28
Foreclosed assets not covered by FDIC loss share agreements	$	11,647	$	13,828	$	13,924

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

	Nine Months Ended September 30,
	2013			2012
	(Dollars in thousands)
Balance – beginning of period	$	13,924		$	31,762
Loans and other assets transferred into foreclosed assets		4,497			7,021
Foreclosed assets acquired from First National Bank		2,158			0
Sales of foreclosed assets		(8,240	)		(23,773	)
Writedowns of foreclosed assets		(692	)		(1,182	)
Balance – end of period	$	11,647		$	13,828

8. Supplemental Data for Cash Flows

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

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

9. Guarantees and Commitments

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

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

Contractual Maturities at September 30, 2013
Maturity	Amount
(Dollars in thousands)
2013	$	26,252
2014		157,339
2015		159,918
2016		431,067
2017		211,918
Thereafter		144,602
Total	$	1,131,096

10. Stock-Based Compensation

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

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

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

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

	Options			Weighted-Average Exercise Price/ Share		Weighted-Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)(1)
Outstanding – January 1, 2013		957,150		$	22.12
Granted		24,000			40.87
Exercised		(178,400	)		14.67
Forfeited		(38,700	)		25.71
Outstanding – September 30, 2013		764,050			24.27		5.0	$	18,084	(1)
Fully vested and exercisable – September 30, 2013		165,700		$	19.36		4.5	$	4,734	(1)
Expected to vest in future periods		487,385
Fully vested and expected to vest – September 30, 2013(2)		653,085		$	23.95		5.0	$	15,666	(1)

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

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

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

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

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

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

	Nine Months Ended
	September 30, 2013
Outstanding – January 1, 2013		295,250
Granted		0
Forfeited		(5,800	)
Vested		0
Outstanding – September 30, 2013		289,450
Weighted-average grant date fair value	$	26.05

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

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

11. Fair Value Measurements

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

The Company applies the following fair value hierarchy.

Level 1 –  Quoted prices for identical instruments in active markets.

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

Level 3 – Instruments whose inputs are unobservable.

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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, 2013:
Investment securities AFS(1):
Obligations of state and political subdivisions	$	0	$	412,770	$	18,798	$	431,568
U.S. Government agency securities		0		225,311		0		225,311
Corporate obligations		0		717		0		717
Total investment securities AFS		0		638,798		18,798		657,596
Impaired non-covered loans and leases		0		0		8,074		8,074
Impaired covered loans		0		0		52,575		52,575
Foreclosed assets not covered by FDIC loss share agreements		0		0		11,647		11,647
Foreclosed assets covered by FDIC loss share agreements		0		0		40,452		40,452
Total assets at fair value	$	0	$	638,798	$	131,546	$	770,344
December 31, 2012:
Investment securities AFS(1):
Obligations of state and political subdivisions	$	0	$	332,107	$	29,410	$	361,517
U.S. Government agency securities		0		43,522		74,762		118,284
Corporate obligations		0		776		0		776
Total investment securities AFS		0		376,405		104,172		480,577
Impaired non-covered loans and leases		0		0		6,664		6,664
Impaired covered loans		0		0		38,463		38,463
Foreclosed assets not covered by FDIC loss share agreements		0		0		13,924		13,924
Foreclosed assets covered by FDIC loss share agreements		0		0		52,951		52,951
Total assets at fair value	$	0	$	376,405	$	216,174	$	592,579
September 30, 2012:
Investment securities AFS(1):
Obligations of state and political subdivisions	$	0	$	326,396	$	23,142	$	349,538
U.S. Government agency securities		0		65,944		0		65,944
Corporate obligations		0		777		0		777
Total investment securities AFS		0		393,117		23,142		416,259
Impaired non-covered loans and leases		0		0		6,560		6,560
Impaired covered loans		0		0		30,787		30,787
Foreclosed assets not covered by FDIC loss share agreements		0		0		13,828		13,828
Foreclosed assets covered by FDIC loss share agreements		0		0		57,632		57,632
Total assets at fair value	$	0	$	393,117	$	131,949	$	525,066

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

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

Description	Fair Values at September 30, 2013	Technique	Unobservable Inputs
(Dollars in thousands)
Impaired non-covered loans and leases	$  8,074	Third party appraisal or discounted cash flows	1.     Management discount based on underlying collateral characteristics and market conditions 2.     Life of loan
Impaired covered loans	$52,575	Third party appraisal and/or discounted cash flows	1.     Life of loan 2.     Discount rate
Foreclosed assets not covered by FDIC loss share agreements	$11,647	Third party appraisals, broker price opinions and/or discounted cash flows	1.     Management discount based on asset characteristics and market conditions 2.     Discount rate 3.     Holding period
Foreclosed assets covered by FDIC loss share agreements	$40,452	Third party appraisals and/or discounted cash flows	1.     Discount rate 2.     Holding period

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

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

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

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

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

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

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

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

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

	Investment Securities AFS
	(Dollars in thousands)
Balance – January 1, 2013	$	104,172
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		(1,940	)
Paydowns and maturities		(32,647	)
Transfers in and/or out of Level 3		(50,787	)
Balance – September 30, 2013	$	18,798
Balance – January 1, 2012	$	24,192
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		363
Paydowns and maturities		(1,063	)
Sales		(350	)
Transfers in and/or out of Level 3		0
Balance – September 30, 2012	$	23,142

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

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12. Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

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

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

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

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

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

		September 30,
		2013				2012				December 31, 2012
	Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
		(Dollars in thousands)
Financial assets:
Cash and cash equivalents	Level 1	$	124,458	$	124,458	$	126,642	$	126,642	$	207,967	$	207,967
Investment securities AFS	Levels 2 and 3		671,393		671,393		429,935		429,935		494,266		494,266
Loans and leases, net of ALLL	Level 3		3,289,306		3,263,428		2,647,131		2,637,527		2,714,869		2,683,896
FDIC loss share receivable	Level 3		89,642		89,617		174,899		174,804