UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2014

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

For the transition period from                      to                     .

Commission File Number 0-22759

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

BANK OF THE OZARKS, INC.

FORM 10-Q

March 31, 2014

INDEX

PART I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2014 and 2013 and December 31, 2013	1
	Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013	2
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013	3
	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2014 and 2013	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Selected and Supplemental Financial Data	74
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	76
Item 4.	Controls and Procedures	77
PART II.	Other Information
Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	79
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 3.	Defaults Upon Senior Securities	79
Item 4.	Mine Safety Disclosures	79
Item 5.	Other Information	79
Item 6.	Exhibits	79
Signature		80
Exhibit Index		81

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

	Unaudited
	March 31,						December 31,
	2014			2013			2013
	(Dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks	$	187,101		$	160,699		$	195,094
Interest earning deposits		1,250			1,876			881
Cash and cash equivalents		188,351			162,575			195,975
Investment securities - available for sale (“AFS”)		687,661			487,648			669,384
Loans and leases		2,778,503			2,157,771			2,632,565
Purchased loans not covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements (“purchased non-covered loans”)		488,533			38,071			372,723
Loans covered by FDIC loss share agreements (“covered loans”)		304,955			544,268			351,791
Allowance for loan and lease losses		(43,861	)		(38,422	)		(42,945	)
Net loans and leases		3,528,130			2,701,688			3,314,134
FDIC loss share receivable		57,782			132,699			71,854
Premises and equipment, net		254,973			227,458			245,472
Foreclosed assets not covered by FDIC loss share agreements		17,076			11,290			11,851
Foreclosed assets covered by FDIC loss share agreements		43,793			51,040			37,960
Accrued interest receivable		15,486			12,785			14,359
Bank owned life insurance (“BOLI”)		144,601			124,928			143,473
Intangible assets, net		20,993			11,258			19,158
Other, net		70,047			28,449			63,448
Total assets	$	5,028,893		$	3,951,818		$	4,787,068
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand non-interest bearing	$	886,341		$	588,841		$	746,320
Savings and interest bearing transaction		2,199,545			1,653,886			2,073,497
Time		830,318			748,345			897,210
Total deposits		3,916,204			2,991,072			3,717,027
Repurchase agreements with customers		51,140			30,714			53,103
Other borrowings		280,885			280,756			280,895
Subordinated debentures		64,950			64,950			64,950
FDIC clawback payable		26,202			25,384			25,897
Accrued interest payable and other liabilities		32,842			31,810			16,768
Total liabilities		4,372,223			3,424,686			4,158,640
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding at March 31, 2014 and 2013 or at December 31, 2013		0			0			0
Common stock; $0.01 par value; 50,000,000 shares authorized; 36,944,152, 35,366,824 and 36,855,852 shares issued and outstanding at March 31, 2014, March 31, 2013 and December 31, 2013, respectively		369			354			369
Additional paid-in capital		147,584			76,102			143,385
Retained earnings		502,044			438,194			484,876
Accumulated other comprehensive income (loss)		3,211			9,029			(3,672	)
Total stockholders’ equity before noncontrolling interest		653,208			523,679			624,958
Noncontrolling interest		3,462			3,453			3,470
Total stockholders’ equity		656,670			527,132			628,428
Total liabilities and stockholders’ equity	$	5,028,893		$	3,951,818		$	4,787,068

See accompanying notes to consolidated financial statements.

1

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

	Three Months Ended
	March 31,
	2014			2013
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	33,412		$	29,880
Purchased non-covered loans		7,480			989
Covered loans		9,405			12,864
Investment securities:
Taxable		2,360			1,285
Tax-exempt		4,397			3,744
Deposits with banks and federal funds sold		3			7
Total interest income		57,057			48,769
Interest expense:
Deposits		1,581			1,546
Repurchase agreements with customers		12			7
Other borrowings		2,655			2,649
Subordinated debentures		413			428
Total interest expense		4,661			4,630
Net interest income		52,396			44,139
Provision for loan and lease losses		(1,304	)		(2,728	)
Net interest income after provision for loan and lease losses		51,092			41,411
Non-interest income:
Service charges on deposit accounts		5,639			4,722
Mortgage lending income		954			1,741
Trust income		1,316			883
BOLI income		1,130			1,083
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		692			2,392
Other income from loss share and purchased non-covered loans, net		3,311			2,155
Net gains on investment securities		5			156
Gains on sales of other assets		974			1,974
Gain on merger and acquisition transaction		4,667			0
Other		1,672			1,251
Total non-interest income		20,360			16,357
Non-interest expense:
Salaries and employee benefits		17,689			15,694
Net occupancy and equipment		5,044			4,514
Other operating expenses		14,721			9,023
Total non-interest expense		37,454			29,231
Income before taxes		33,998			28,537
Provision for income taxes		8,730			8,526
Net income		25,268			20,011
Earnings attributable to noncontrolling interest		8			(11	)
Net income available to common stockholders	$	25,276		$	20,000
Basic earnings per common share	$	0.68		$	0.57
Diluted earnings per common share	$	0.68		$	0.56
Dividends declared per common share	$	0.22		$	0.15

See accompanying notes to consolidated financial statements.

2

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

	Three Months Ended
	March 31,
	2014			2013
	(Dollars in thousands)
Net income	$	25,268		$	20,011
Other comprehensive income (loss):
Unrealized gains and losses on investment securities AFS		11,330			(2,729	)
Tax effect of unrealized gains and losses on investment securities AFS		(4,444	)		1,069
Reclassification of gains and losses on investment securities AFS included in net income		(5	)		(156	)
Tax effect of reclassification of gains and losses on investment securities AFS included in net income		2			62
Total other comprehensive income (loss)		6,883			(1,754	)
Total comprehensive income	$	32,151		$	18,257

See accompanying notes to consolidated financial statements.

3

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interest			Total
	(Dollars in thousands)
Balances – January 1, 2013	$	353	$	73,043	$	423,485		$	10,783		$	3,442		$	511,106
Net income		0		0		20,011			0			0			20,011
Earnings attributable to noncontrolling interest		0		0		(11	)		0			11			0
Total other comprehensive income (loss)		0		0		0			(1,754	)		0			(1,754	)
Common stock dividends		0		0		(5,291	)		0			0			(5,291	)
Issuance of 95,100 shares of common stock for exercise of stock options		1		1,367		0			0			0			1,368
Excess tax benefit on exercise and forfeiture of stock options		0		700		0			0			0			700
Stock-based compensation expense		0		992		0			0			0			992
Balances – March 31, 2013	$	354	$	76,102	$	438,194		$	9,029		$	3,453		$	527,132
Balances – January 1, 2014	$	369	$	143,385	$	484,876		$	(3,672	)	$	3,470		$	628,428
Net income		0		0		25,268			0			0			25,268
Earnings attributable to noncontrolling interest		0		0		8			0			(8	)		0
Total other comprehensive income (loss)		0		0		0			6,883			0			6,883
Common stock dividends		0		0		(8,108	)		0			0			(8,108	)
Issuance of 88,300 shares of common stock for exercise of stock options		0		1,505		0			0			0			1,505
Excess tax benefit on exercise and forfeiture of stock options		0		1,323		0			0			0			1,323
Stock-based compensation expense		0		1,371		0			0			0			1,371
Balances – March 31, 2014	$	369	$	147,584	$	502,044		$	3,211		$	3,462		$	656,670

See accompanying notes to consolidated financial statements

4

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Three Months Ended
	March 31,
	2014			2013
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	25,268		$	20,011
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,855			1,891
Amortization		813			568
Earnings attributable to noncontrolling interest		8			(11	)
Provision for loan and lease losses		1,304			2,728
Provision for losses on foreclosed assets		64			121
Net amortization of investment securities AFS		111			106
Net gains on investment securities AFS		(5	)		(156	)
Originations of mortgage loans held for sale		(38,748	)		(59,880	)
Proceeds from sales of mortgage loans held for sale		38,535			76,103
Accretion of covered loans		(9,405	)		(12,864	)
Accretion of purchased non-covered loans		(7,480	)		(989	)
Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable		(692	)		(2,392	)
Gains on sales of other assets		(974	)		(1,974	)
Gain on merger and acquisition transaction		(4,667	)		0
Deferred income tax (benefit) expense		(242	)		67
Increase in cash surrender value of BOLI		(1,130	)		(1,083	)
Excess tax benefit on exercise and forfeiture of stock options		(1,323	)		(700	)
Stock-based compensation expense		1,371			992
Changes in assets and liabilities:
Accrued interest receivable		(813	)		416
Other assets, net		(285	)		1,017
Accrued interest payable and other liabilities		14,631			7,374
Net cash provided by operating activities		18,196			31,345
Cash flows from investing activities:
Proceeds from sales of investment securities AFS		1,224			999
Proceeds from maturities/calls/paydowns of investment securities AFS		13,279			39,540
Purchases of investment securities AFS		(18,349	)		(38,249	)
Net advances on loans and leases, excluding covered loans and purchased non-covered loans		(148,100	)		(60,050	)
Payments received on purchased non-covered loans		46,846			4,451
Payments received on covered loans		39,843			48,633
Payments received from FDIC under loss share agreements		10,610			22,565
Other net decreases in covered assets and FDIC loss share receivable		5,423			8,322
Purchases of premises and equipment		(3,433	)		(4,121	)
Proceeds from sales of other assets		11,313			13,294
Cash invested in unconsolidated investments		(881	)		(72	)
Net cash received in merger and acquisition transaction		80,656			0
Net cash provided by investing activities		38,431			35,312
Cash flows from financing activities:
Net decrease in deposits		(56,742	)		(109,983	)
Net repayments of other borrowings		(266	)		(7	)
Net (decrease) increase in repurchase agreements with customers		(1,963	)		1,164
Proceeds from exercise of stock options		1,505			1,368
Excess tax benefit on exercise and forfeiture of stock options		1,323			700
Cash dividends paid on common stock		(8,108	)		(5,291	)
Net cash used by financing activities		(64,251	)		(112,049	)
Net decrease in cash and cash equivalents		(7,624	)		(45,392	)
Cash and cash equivalents – beginning of period		195,975			207,967
Cash and cash equivalents – end of period	$	188,351		$	162,575

See accompanying notes to consolidated financial statements.

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.

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

2. Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) in Article 10 of Regulation S-X and in accordance with the instructions to Form 10-Q and GAAP for interim financial information. Certain information, accounting policies and footnote disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, all adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the full year or future periods.

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

3. Acquisitions

Bancshares, Inc.

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

6

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

	March 5, 2014
	As Recorded by Bancshares			Fair Value Adjustments			As Recorded by the Company
	(Dollars in thousands)
Assets acquired:
Cash and due from banks	$	102,156		$	0		$	102,156
Investment securities		1,860			(1	)a		1,859
Loans and leases		165,939			(10,764	)b		155,175
Allowance for loan losses		(5,280	)		5,280	b		0
Premises and equipment		6,259			1,619	c		7,878
Foreclosed assets		7,634			(2,916	)d		4,718
Accrued interest receivable and other assets		608			(294	)e		314
Core deposit intangible asset		0			2,648	f		2,648
Deferred income taxes		7,110			1,881	g		8,991
Total assets acquired		286,286			(2,547	)		283,739
Liabilities assumed:
Deposits		255,798			121	h		255,919
Accrued interest payable and other liabilities		1,358			295	i		1,653
Total liabilities assumed		257,156			416			257,572
Net assets acquired	$	29,130		$	(2,963	)		26,167
Total cash consideration paid								(21,500	)
Gain on acquisition							$	4,667

Explanation of fair value adjustments

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

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

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

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

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

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

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

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

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

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

The First National Bank of Shelby

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

7

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

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

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

Explanation of fair value adjustments

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

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

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

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

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

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

g- This adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting purposes and their basis for federal income tax purposes. Management has determined that acquired net operating loss carryforwards and other acquired assets with built-in losses are expected to be settled or otherwise recovered in future periods where the realization of such benefits would be subject to section 382 limitations. Accordingly, as of the date of acquisition, the Company established a deferred tax valuation allowance of approximately $4.1 million to reflect its assessment that the realization of the benefits from the settlement or recovery of certain of these acquired assets and net operating losses is expected to be subject to section 382 limitations. To the extent that additional information becomes available, management may be required to adjust its estimates and assumptions regarding the realization of the benefits associated with these acquired assets by adjusting this deferred tax valuation allowance.

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

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

8

Summit Bancorp, Inc.

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

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

4. Earnings Per Common Share (“EPS”)

Basic EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding after consideration of the dilutive effect, if any, of the Company’s outstanding common stock options using the treasury stock method. No options to purchase shares of the Company’s common stock for the three months ended March 31, 2014 were excluded from the diluted EPS calculation as all options were dilutive. Options to purchase 254,550 shares of the Company’s common stock for the three months ended March 31, 2013 were excluded from the diluted EPS calculations as inclusion would have been anti-dilutive.

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

	Three Months Ended
	March 31,
	2014		2013
	(In thousands, except per share amounts)
Numerator:
Distributed earnings allocated to common stock	$	8,108	$	5,291
Undistributed earnings allocated to common stock		17,168		14,709
Net earnings allocated to common stock	$	25,276	$	20,000
Denominator:
Denominator for basic EPS – weighted-average common shares		36,901		35,322
Effect of dilutive securities – stock options		346		309
Denominator for diluted EPS – weighted-average common shares and assumed conversions		37,247		35,631
Basic EPS	$	0.68	$	0.57
Diluted EPS	$	0.68	$	0.56

5. Investment Securities

At March 31, 2014 and 2013 and at December 31, 2013, the Company classified all of its investment securities portfolio as AFS. Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss).

9

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
March 31, 2014:
Obligations of state and political subdivisions	$	447,368	$	10,010	$	(4,630	)	$	452,748
U.S. Government agency securities		219,836		3,526		(3,622	)		219,740
Corporate obligations		686		0		0			686
Other equity securities		14,487		0		0			14,487
Total	$	682,377	$	13,536	$	(8,252	)	$	687,661
December 31, 2013:
Obligations of state and political subdivisions	$	438,390	$	6,230	$	(8,631	)	$	435,989
U.S. Government agency securities		222,510		2,352		(5,993	)		218,869
Corporate obligations		716		0		0			716
Other equity securities		13,810		0		0			13,810
Total	$	675,426	$	8,582	$	(14,624	)	$	669,384
March 31, 2013:
Obligations of state and political subdivisions	$	366,753	$	14,441	$	(958	)	$	380,236
U.S. Government agency securities		91,589		1,488		(114	)		92,963
Corporate obligations		748		0		0			748
Other equity securities		13,701		0		0			13,701
Total	$	472,791	$	15,929	$	(1,072	)	$	487,648

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

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
March 31, 2014:
Obligations of state and political subdivisions	$	51,961	$	2,048	$	47,890	$	2,582	$	99,851	$	4,630
U.S. Government agency securities		69,783		3,582		1,038		40		70,821		3,622
Total temporarily impaired securities	$	121,744	$	5,630	$	48,928	$	2,622	$	170,672	$	8,252
December 31, 2013:
Obligations of states and political subdivisions	$	132,568	$	7,237	$	10,823	$	1,394	$	143,391	$	8,631
U.S. Government agency securities		127,274		5,993		0		0		127,274		5,993
Total temporarily impaired securities	$	259,842	$	13,230	$	10,823	$	1,394	$	270,665	$	14,624
March 31, 2013:
Obligations of state and political subdivisions	$	49,071	$	850	$	7,267	$	108	$	56,338	$	958
U.S. Government agency securities		21,436		114		0		0		21,436		114
Total temporarily impaired securities	$	70,507	$	964	$	7,267	$	108	$	77,774	$	1,072

10

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment of its investment securities portfolio, management considers the credit quality of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors. At March 31, 2014 management determined the unrealized losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality of the investments. Accordingly, management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

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

	March 31, 2014
Maturity or Estimated Repayment	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
One year or less	$	26,941	$	27,336
After one year to five years		86,815		88,008
After five years to ten years		140,304		140,653
After ten years		428,317		431,664
Total	$	682,377	$	687,661

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

The following table is a summary of sales activities in the Company’s investment securities AFS for the periods indicated.

	Three Months Ended March 31,
	2014		2013
	(Dollars in thousands)
Sales proceeds	$	1,224	$	999
Gross realized gains	$	5	$	156
Gross realized losses		0		0
Net gains on investment securities	$	5	$	156

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

Allowance for Loan and Lease Losses

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

	Three Months Ended March 31,
	2014			2013
	(Dollars in thousands)
Beginning balance	$	42,945		$	38,738
Non-covered loans and leases charged off		(920	)		(1,347	)
Recoveries of non-covered loans and leases previously charged off		736			331
Net non-covered loans and leases charged off		(184	)		(1,016	)
Covered loans charged off		(204	)		(2,028	)
Net charge-offs – total loans and leases		(388	)		(3,044	)
Provision for loan and lease losses:
Non-covered loans and leases		1,100			700
Covered loans		204			2,028
Total provision		1,304			2,728
Ending balance	$	43,861		$	38,422

11

At March 31, 2014 and 2013, the Company identified covered loans acquired in its FDIC-assisted acquisitions where the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $0.2 million for such loans during the first quarter of 2014 and $2.0 million for such loans during the first quarter of 2013. The Company also recorded provision for loan and lease losses of $0.2 million during the first quarter of 2014 and $2.0 million during the first quarter of 2013 to cover such charge-offs. In addition to those net charge-offs, the Company transferred certain of these covered loans to covered foreclosed assets. As a result, the Company had $29.3 million and $51.2 million, respectively, of impaired covered loans at March 31, 2014 and 2013.

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

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

	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Three months ended March 31, 2014:
Real estate:
Residential 1-4 family	$	4,701	$	(199	)	$	22	$	98		$	4,622
Non-farm/non-residential		13,633		(73	)		3		450			14,013
Construction/land development		12,306		0			8		514			12,828
Agricultural		3,000		(15	)		5		28			3,018
Multifamily residential		2,504		0			0		(75	)		2,429
Commercial and industrial		2,855		(374	)		628		(371	)		2,738
Consumer		917		(41	)		18		(63	)		831
Direct financing leases		2,266		(146	)		6		312			2,438
Other		763		(72	)		46		207			944
Covered loans		0		(204	)		0		204			0
Purchased non-covered loans		0		0			0		0			0
Total	$	42,945	$	(1,124	)	$	736	$	1,304		$	43,861
Year ended December 31, 2013:
Real estate:
Residential 1-4 family	$	4,820	$	(837	)	$	106	$	612		$	4,701
Non-farm/non-residential		10,107		(1,111	)		122		4,515			13,633
Construction/land development		12,000		(137	)		174		269			12,306
Agricultural		2,878		(261	)		14		369			3,000
Multifamily residential		2,030		(4	)		4		474			2,504
Commercial and industrial		3,655		(922	)		433		(311	)		2,855
Consumer		1,015		(214	)		104		12			917
Direct financing leases		2,050		(482	)		33		665			2,266
Other		183		(359	)		144		795			763
Covered loans		0		(4,675	)		0		4,675			0
Purchased non-covered loans		0		0			0		0			0
Total	$	38,738	$	(9,002	)	$	1,134	$	12,075		$	42,945
Three months ended March 31, 2013:
Real estate:
Residential 1-4 family	$	4,820	$	(280	)	$	95	$	(78	)	$	4,557
Non-farm/non-residential		10,107		(41	)		102		893			11,061
Construction/land development		12,000		(58	)		5		(631	)		11,316
Agricultural		2,878		0			2		23			2,903
Multifamily residential		2,030		0			0		(40	)		1,990
Commercial and industrial		3,655		(716	)		9		113			3,061
Consumer		1,015		(61	)		58		22			1,034
Direct financing leases		2,050		(80	)		9		161			2,140
Other		183		(111	)		51		237			360
Covered loans		0		(2,028	)		0		2,028			0
Purchased non-covered loans		0		0			0		0			0
Total	$	38,738	$	(3,375	)	$	331	$	2,728		$	38,422

12

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

	Allowance for Loan and Lease Losses						Loans and Leases, Excluding Purchased Non-Covered Loans and Covered Loans
	ALLL for Individually Evaluated Impaired Loans and Leases		ALLL for All Other Loans and Leases		Total ALLL		Individually Evaluated Impaired Loans and Leases		All Other Loans and Leases		Total Loans and Leases
	(Dollars in thousands)
March 31, 2014:
Real estate:
Residential 1-4 family	$	385	$	4,237	$	4,622	$	3,811	$	248,977	$	252,788
Non-farm/non-residential		29		13,984		14,013		1,627		1,142,856		1,144,483
Construction/land development		2		12,826		12,828		325		795,801		796,126
Agricultural		243		2,775		3,018		817		43,091		43,908
Multifamily residential		0		2,429		2,429		0		195,332		195,332
Commercial and industrial		624		2,114		2,738		626		137,038		137,664
Consumer		3		828		831		48		23,721		23,769
Direct financing leases		0		2,438		2,438		0		92,856		92,856
Other		0		944		944		10		91,567		91,577
Total	$	1,286	$	42,575	$	43,861	$	7,264	$	2,771,239	$	2,778,503
December 31, 2013:
Real estate:
Residential 1-4 family	$	438	$	4,263	$	4,701	$	4,047	$	245,509	$	249,556
Non-farm/non-residential		15		13,618		13,633		2,159		1,101,955		1,104,114
Construction/land development		2		12,304		12,306		236		722,321		722,557
Agricultural		229		2,771		3,000		883		44,313		45,196
Multifamily residential		0		2,504		2,504		0		208,337		208,337
Commercial and industrial		652		2,203		2,855		686		123,382		124,068
Consumer		3		914		917		50		26,132		26,182
Direct financing leases		0		2,266		2,266		0		86,321		86,321
Other		2		761		763		26		66,208		66,234
Total	$	1,341	$	41,604	$	42,945	$	8,087	$	2,624,478	$	2,632,565
March 31, 2013:
Real estate:
Residential 1-4 family	$	440	$	4,117	$	4,557	$	2,681	$	253,947	$	256,628
Non-farm/non-residential		36		11,025		11,061		3,166		820,525		823,691
Construction/land development		0		11,316		11,316		334		622,968		623,302
Agricultural		349		2,554		2,903		1,106		48,354		49,460
Multifamily residential		0		1,990		1,990		0		142,714		142,714
Commercial and industrial		661		2,400		3,061		853		126,889		127,742
Consumer		0		1,034		1,034		49		28,502		28,551
Direct financing leases		0		2,140		2,140		0		71,420		71,420
Other		2		358		360		15		34,248		34,263
Total	$	1,488	$	36,934	$	38,422	$	8,204	$	2,149,567	$	2,157,771

13

The following table is a summary of impaired loans and leases, excluding purchased non-covered loans and covered loans, as of and for the three months ended March 31, 2014.

	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Three Months Ended March 31, 2014
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,164	$	(1,726	)	$	1,438	$	385	$	1,677
Non-farm/non-residential		188		(127	)		61		29		53
Construction/land development		38		(22	)		16		2		16
Agricultural		360		(12	)		348		243		409
Commercial and industrial		1,368		(803	)		565		624		588
Consumer		103		(80	)		23		3		23
Other		0		0			0		0		8
Total impaired loans and leases with a related ALLL		5,221		(2,770	)		2,451		1,286		2,774
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		2,845		(472	)		2,373		0		2,252
Non-farm/non-residential		2,702		(1,136	)		1,566		0		1,840
Construction/land development		390		(81	)		309		0		264
Agricultural		513		(44	)		469		0		441
Multifamily residential		133		(133	)		0		0		0
Commercial and industrial		220		(159	)		61		0		68
Consumer		34		(9	)		25		0		26
Other		30		(20	)		10		0		10
Total impaired loans and leases without a related ALLL		6,867		(2,054	)		4,813		0		4,901
Total impaired loans and leases	$	12,088	$	(4,824	)	$	7,264	$	1,286	$	7,675

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 year ended December 31, 2013.

	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Year Ended December 31, 2013
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,609	$	(1,692	)	$	1,917	$	438	$	1,638
Non-farm/non-residential		121		(75	)		46		15		93
Construction/land development		38		(22	)		16		2		17
Agricultural		511		(42	)		469		229		514
Commercial and industrial		2,016		(1,405	)		611		652		578
Consumer		178		(156	)		22		3		10
Other		40		(25	)		15		2		10
Total impaired loans and leases with a related ALLL		6,513		(3,417	)		3,096		1,341		2,860
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		2,939		(808	)		2,131		0		1,541
Non-farm/non-residential		3,234		(1,120	)		2,114		0		4,344
Construction/land development		300		(81	)		219		0		303
Agricultural		426		(12	)		414		0		404
Multifamily residential		133		(133	)		0		0		124
Commercial and industrial		85		(10	)		75		0		172
Consumer		39		(12	)		27		0		24
Other		31		(20	)		11		0		9
Total impaired loans and leases without a related ALLL		7,187		(2,196	)		4,991		0		6,921
Total impaired loans and leases	$	13,700	$	(5,613	)	$	8,087	$	1,341	$	9,781

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 three months ended March 31, 2013.

	Principal Balance		Net Charge-offs to Date			Principal Balance, Net of Charge-offs		Specific ALLL		Weighted Average Carrying Value – Three Months Ended March 31, 2013
	(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family	$	3,046	$	(1,688	)	$	1,358	$	440	$	1,513
Non-farm/non-residential		175		(8	)		167		36		185
Construction/land development		90		(90	)		0		0		25
Agricultural		711		(12	)		699		349		629
Commercial and industrial		2,323		(1,723	)		600		661		581
Consumer		12		(12	)		0		0		0
Other		257		(247	)		10		2		10
Total impaired loans and leases with a related ALLL		6,614		(3,780	)		2,834		1,488		2,943
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family		1,534		(211	)		1,323		0		1,281
Non-farm/non-residential		3,606		(607	)		2,999		0		2,848
Construction/land development		466		(132	)		334		0		412
Agricultural		610		(203	)		407		0		416
Multifamily residential		133		(133	)		0		0		0
Commercial and industrial		678		(425	)		253		0		226
Consumer		72		(23	)		49		0		40
Other		25		(20	)		5		0		9
Total impaired loans and leases without a related ALLL		7,124		(1,754	)		5,370		0		5,232
Total impaired loans and leases	$	13,738	$	(5,534	)	$	8,204	$	1,488	$	8,175

Management has determined that certain of the Company’s impaired loans and leases do not require any specific allowance at March 31, 2014 and 2013 or at December 31, 2013 because (i) management’s analysis of such individual loans and leases resulted in no impairment or (ii) all identified impairment on such loans and leases has previously been charged off.

Interest income on impaired loans and leases is recognized on a cash basis when and if actually collected. Total interest income recognized on impaired loans and leases for the three months ended March 31, 2014 and 2013 and for the year ended December 31, 2013 was not material.

16

Credit Quality Indicators

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

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

	Satisfactory		Moderate		Watch		Substandard		Total
	(Dollars in thousands)
March 31, 2014:
Real estate:
Residential 1-4 family (1)	$	244,259	$	0	$	2,449	$	6,080	$	252,788
Non-farm/non-residential		954,057		130,787		53,658		5,981		1,144,483
Construction/land development		613,474		155,254		23,254		4,144		796,126
Agricultural		21,228		9,914		9,747		3,019		43,908
Multifamily residential		164,062		29,625		389		1,256		195,332
Commercial and industrial		103,039		31,434		1,642		1,549		137,664
Consumer (1)		23,203		0		220		346		23,769
Direct financing leases		91,927		881		0		48		92,856
Other (1)		89,181		2,253		113		30		91,577
Total	$	2,304,430	$	360,148	$	91,472	$	22,453	$	2,778,503
December 31, 2013:
Real estate:
Residential 1-4 family (1)	$	239,940	$	0	$	3,140	$	6,476	$	249,556
Non-farm/non-residential		916,304		128,624		52,388		6,798		1,104,114
Construction/land development		550,436		144,435		23,574		4,112		722,557
Agricultural		21,647		11,098		9,788		2,663		45,196
Multifamily residential		177,144		30,029		391		773		208,337
Commercial and industrial		87,568		33,071		1,664		1,765		124,068
Consumer (1)		25,574		0		230		378		26,182
Direct financing leases		85,363		955		0		3		86,321
Other (1)		63,799		2,237		119		79		66,234
Total	$	2,167,775	$	350,449	$	91,294	$	23,047	$	2,632,565
March 31, 2013:
Real estate:
Residential 1-4 family(1)	$	249,396	$	0	$	1,641	$	5,591	$	256,628
Non-farm/non-residential		665,298		97,517		48,170		12,706		823,691
Construction/land development		438,742		134,417		35,128		15,015		623,302
Agricultural		25,658		11,111		9,662		3,029		49,460
Multifamily residential		109,268		32,268		399		779		142,714
Commercial and industrial		96,163		27,126		2,355		2,098		127,742
Consumer(1)		27,919		0		204		428		28,551
Direct financing leases		70,187		1,233		0		0		71,420
Other(1)		32,357		1,584		261		61		34,263
Total	$	1,714,988	$	305,256	$	97,820	$	39,707	$	2,157,771

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

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

17

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

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

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

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

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

18

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

	30-89 Days Past Due (1)		90 Days or More (2)		Total Past Due		Current (3)		Total
	(Dollars in thousands)
March 31, 2014:
Real estate:
Residential 1-4 family	$	3,167	$	2,108	$	5,275	$	247,513	$	252,788
Non-farm/non-residential		647		1,376		2,023		1,142,460		1,144,483
Construction/land development		7,077		3,950		11,027		785,099		796,126
Agricultural		495		582		1,077		42,831		43,908
Multifamily residential		0		0		0		195,332		195,332
Commercial and industrial		891		16		907		136,757		137,664
Consumer		240		78		318		23,451		23,769
Direct financing leases		59		0		59		92,797		92,856
Other		17		9		26		91,551		91,577
Total	$	12,593	$	8,119	$	20,712	$	2,757,791	$	2,778,503
December 31, 2013:
Real estate:
Residential 1-4 family	$	4,228	$	2,004	$	6,232	$	243,324	$	249,556
Non-farm/non-residential		2,093		1,867		3,960		1,100,154		1,104,114
Construction/land development		235		153		388		722,169		722,557
Agricultural		517		540		1,057		44,139		45,196
Multifamily residential		773		0		773		207,564		208,337
Commercial and industrial		418		31		449		123,619		124,068
Consumer		261		78		339		25,843		26,182
Direct financing leases		0		0		0		86,321		86,321
Other		18		24		42		66,192		66,234
Total	$	8,543	$	4,697	$	13,240	$	2,619,325	$	2,632,565
March 31, 2013:
Real estate:
Residential 1-4 family	$	2,220	$	943	$	3,163	$	253,465	$	256,628
Non-farm/non-residential		3,427		2,917		6,344		817,347		823,691
Construction/land development		313		107		420		622,882		623,302
Agricultural		233		796		1,029		48,431		49,460
Multifamily residential		0		0		0		142,714		142,714
Commercial and industrial		511		221		732		127,010		127,742
Consumer		236		42		278		28,273		28,551
Direct financing leases		0		0		0		71,420		71,420
Other		10		0		10		34,253		34,263
Total	$	6,950	$	5,026	$	11,976	$	2,145,795	$	2,157,771

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

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

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

19

Covered Loans

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

	FV 1		FV 2		Total Covered Loans
	(Dollars in thousands)
March 31, 2014:
Real estate:
Residential 1-4 family	$	98,333	$	3,621	$	101,954
Non-farm/non-residential		122,022		14,534		136,556
Construction/land development		28,981		10,394		39,375
Agricultural		10,690		339		11,029
Multifamily residential		7,701		310		8,011
Commercial and industrial		7,672		130		7,802
Consumer		87		4		91
Other		137		0		137
Total	$	275,623	$	29,332	$	304,955
December 31, 2013:
Real estate:
Residential 1-4 family	$	105,218	$	5,835	$	111,053
Non-farm/non-residential		138,573		25,135		163,708
Construction/land development		33,475		14,267		47,742
Agricultural		10,807		343		11,150
Multifamily residential		8,709		457		9,166
Commercial and industrial		8,582		137		8,719
Consumer		106		5		111
Other		142		0		142
Total	$	305,612	$	46,179	$	351,791
March 31, 2013:
Real estate:
Residential 1-4 family	$	138,427	$	5,872	$	144,299
Non-farm/non-residential		239,511		25,485		264,996
Construction/land development		73,589		18,700		92,289
Agricultural		17,162		1,001		18,163
Multifamily residential		9,755		142		9,897
Commercial and industrial		13,317		0		13,317
Consumer		352		43		395
Other		912		0		912
Total	$	493,025	$	51,243	$	544,268

For covered loans, management separately monitors this portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. To the extent that a loan is performing in accordance with or exceeding management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 1, is not included in any of the Company’s credit quality ratios, is not considered to be an impaired loan and is not considered in the determination of the required allowance for loan and lease losses. For any loan that is exceeding management’s performance expectation established in conjunction with the determination of Day 1 Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 2, is included in certain of the Company’s credit quality metrics, is considered an impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. At March 31, 2014 and 2013 and December 31, 2013, the Company had no allowance for its covered loans because all losses had been charged off on covered loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

20

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

	30-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Covered Loans
	(Dollars in thousands)
March 31, 2014:
Real estate:
Residential 1-4 family	$	5,555	$	9,273	$	14,828	$	87,126	$	101,954
Non-farm/non-residential		5,318		22,019		27,337		109,219		136,556
Construction/land development		1,616		13,174		14,790		24,585		39,375
Agricultural		974		1,521		2,495		8,534		11,029
Multifamily residential		0		3,145		3,145		4,866		8,011
Commercial and industrial		628		1,674		2,302		5,500		7,802
Consumer		9		0		9		82		91
Other		0		0		0		137		137
Total	$	14,100	$	50,806	$	64,906	$	240,049	$	304,955
December 31, 2013:
Real estate:
Residential 1-4 family	$	5,341	$	12,409	$	17,750	$	93,303	$	111,053
Non-farm/non-residential		6,954		32,462		39,416		124,292		163,708
Construction/land development		2,173		20,914		23,087		24,655		47,742
Agricultural		237		1,328		1,565		9,585		11,150
Multifamily residential		375		3,240		3,615		5,551		9,166
Commercial and industrial		605		2,001		2,606		6,113		8,719
Consumer		10		0		10		101		111
Other		0		0		0		142		142
Total	$	15,695	$	72,354	$	88,049	$	263,742	$	351,791
March 31, 2013:
Real estate:
Residential 1-4 family	$	10,263	$	19,527	$	29,790	$	114,509	$	144,299
Non-farm/non-residential		12,416		50,173		62,589		202,407		264,996
Construction/land development		7,404		38,357		45,761		46,528		92,289
Agricultural		1,614		3,441		5,055		13,108		18,163
Multifamily residential		1,557		2,670		4,227		5,670		9,897
Commercial and industrial		676		3,772		4,448		8,869		13,317
Consumer		178		8		186		209		395
Other		0		0		0		912		912
Total	$	34,108	$	117,948	$	152,056	$	392,212	$	544,268

At March 31, 2014 and 2013 and December 31, 2013, a significant portion of the Company’s covered loans were contractually past due, including many that were 90 days or more past due. However, the elevated level of delinquencies of covered loans at the dates of acquisition was considered in the Company’s performance expectations used in its determination of the Day 1 Fair Values for all covered loans. Accordingly, all covered loans continue to accrete interest income and all covered loans rated FV 1 continue to perform in accordance with or better than management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

21

Purchased Non-Covered Loans

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

	Purchased Non-Covered Loans Without Evidence of Credit Deterioration at Acquisition										Purchased Non-Covered Loans With Evidence of Credit Deterioration  at Acquisition				Total Purchased Non-Covered
	FV 33		FV 44		FV 55		FV 36		FV 77		FV 66		FV 88		Loans
	(Dollars in thousands)
March 31, 2014:
Real estate:
Residential 1-4 Family	$	27,899	$	37,442	$	21,933	$	34,004	$	0	$	17,374	$	0	$	138,652
Non-farm/non-residential		59,720		102,836		32,160		2,701		0		18,911		0		216,328
Construction/land development		9,880		18,384		10,605		4,550		0		11,094		0		54,513
Agricultural		1,260		7,490		842		146		0		360		0		10,098
Multifamily residential		3,216		5,903		5,002		1,046		0		3,098		0		18,265
Total real estate		101,975		172,055		70,542		42,447		0		50,837		0		437,856
Commercial and industrial		10,766		14,526		5,138		2,648		0		5,303		0		38,381
Consumer		1,448		204		332		4,065		0		560		0		6,609
Other		1,204		2,835		529		200		0		919		0		5,687
Total	$	115,393	$	189,620	$	76,541	$	49,360	$	0	$	57,619	$	0	$	488,533
December 31, 2013:
Real estate:
Residential 1-4 Family	$	27,111	$	32,259	$	21,035	$	35,733	$	0	$	14,947	$	0	$	131,085
Non-farm/non-residential		42,193		72,621		20,685		1,191		0		16,258		0		152,948
Construction/land development		5,930		8,106		2,137		4,553		0		4,907		0		25,633
Agricultural		1,547		6,619		823		164		0		365		0		9,518
Multifamily residential		3,531		5,565		5,268		959		0		1,887		0		17,210
Total real estate		80,312		125,170		49,948		42,600		0		38,364		0		336,394
Commercial and industrial		9,592		9,730		2,250		1,879		0		1,483		0		24,934
Consumer		1,013		141		171		4,794		0		736		0		6,855
Other		1,202		2,897		157		237		0		47		0		4,540
Total	$	92,119	$	137,938	$	52,526	$	49,510	$	0	$	40,630	$	0	$	372,723
March 31, 2013:
Real estate:
Residential 1-4 Family	$	3,290	$	6,883	$	5,164	$	864	$	0	$	2,533	$	0	$	18,734
Non-farm/non-residential		395		920		2,663		54		0		359		0		4,391
Construction/land development		389		670		129		161		0		576		0		1,925
Agricultural		767		819		700		139		0		543		0		2,968
Total real estate		4,841		9,292		8,656		1,218		0		4,011		0		28,018
Commercial and industrial		325		1,485		1,166		375		0		640		0		3,991
Consumer		728		140		67		1,246		0		1,310		0		3,491
Other		159		114		88		2,020		0		190		0		2,571
Total	$	6,053	$	11,031	$	9,977	$	4,859	$	0	$	6,151	$	0	$	38,071

22

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

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

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

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

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

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

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

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

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

The Company had no loans rated FV 77 or FV 88 at March 31, 2014 and 2013 or December 31, 2013. Additionally, the Company had no allowance for its purchased non-covered loans at March 31, 2014 and 2013 or December 31, 2013 as (i) all such loans were performing in accordance with management’s expectations established in conjunction with the determination of the Day 1 Fair Values or (ii) all losses on purchased non-covered loans whose performance had deteriorated from management’s expectations established in conjunction with the deterioration of the Day 1 Fair Values had been charged off.

23

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

	30-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Purchased Non-Covered Loans
	(Dollars in thousands)
March 31, 2014:
Real estate:
Residential 1-4 family	$	5,902	$	5,985	$	11,887	$	126,765	$	138,652
Non-farm/non-residential		3,842		7,126		10,968		205,360		216,328
Construction/land development		363		3,363		3,726		50,787		54,513
Agriculture		155		26		181		9,917		10,098
Multifamily residential		0		1,994		1,994		16,271		18,265
Commercial and industrial		400		304		704		37,677		38,381
Consumer		170		179		349		6,260		6,609
Other		8		19		27		5,660		5,687
Total	$	10,840	$	18,996	$	29,836	$	458,697	$	488,533
December 31, 2013:
Real estate:
Residential 1-4 family	$	6,615	$	4,703	$	11,318	$	119,767	$	131,085
Non-farm/non-residential		4,886		5,779		10,665		142,283		152,948
Construction/land development		265		4,045		4,310		21,323		25,633
Agriculture		134		25		159		9,359		9,518
Multifamily residential		421		1,225		1,646		15,564		17,210
Commercial and industrial		614		388		1,002		23,932		24,934
Consumer		411		237		648		6,207		6,855
Other		0		33		33		4,507		4,540
Total	$	13,346	$	16,435	$	29,781	$	342,942	$	372,723
March 31, 2013:
Real estate:
Residential 1-4 family	$	1,277	$	540	$	1,817	$	18,570	$	20,387
Construction/land development		442		112		554		4,108		4,662
Agriculture		79		442		521		2,448		2,969
Multifamily residential		0		0		0		0		0
Commercial and industrial		346		84		430		3,561		3,991
Consumer		197		136		333		3,158		3,491
Other		220		81		301		2,270		2,571
Total	$	2,561	$	1,395	$	3,956	$	34,115	$	38,071

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7. Income Taxes

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

	March 31,						December 31,
	2014			2013			2013
	(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses	$	16,842		$	14,830		$	16,576
Differences in amounts reflected in financial statements and income tax basis of purchased non-covered loans		18,453			1,288			17,167
Stock-based compensation		1,415			1,358			2,400
Deferred compensation		1,888			1,818			1,775
Foreclosed assets		4,831			3,047			3,165
Investment securities AFS		600			0			5,056
Differences in amounts reflected in financial statements and income tax basis of assets acquired and liabilities assumed in FDIC-assisted acquisitions		5,393			0			3,424
Acquired net operating losses		13,180			0			7,509
Other, net		4,891			0			3,858
Total gross deferred tax assets		67,493			22,341			60,930
Less valuation allowance		(4,529	)		0			(4,102	)
Net deferred tax asset		62,964			22,341			56,828
Deferred tax liabilities:
Accelerated depreciation on premises and equipment		17,954			14,851			17,459
Investment securities AFS		0			6,952			0
Differences in amounts reflected in financial statements and income tax basis of assets acquired and liabilities assumed in FDIC-assisted acquisitions		0			6,103			0
Acquired intangible assets		5,066			616			4,227
Other, net		0			1,600			0
Total gross deferred tax liabilities		23,020			30,122			21,686
Net deferred tax assets (liabilities)	$	39,944		$	(7,781	)	$	35,142

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

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

25

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

8. Supplemental Data for Cash Flows

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

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

9. Guarantees and Commitments

Outstanding standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer in third party arrangements. The maximum amount of future payments the Company could be required to make under these guarantees at March 31, 2014 was $4.8 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at March 31, 2014 totaled $4.3 million.

At March 31, 2014 the Company had outstanding commitments to extend credit, excluding mortgage interest rate lock commitments, totaling $1.42 billion. While many of these commitments are expected to be disbursed within the next 12 months, the following table shows the contractual maturities of outstanding commitments to extend credit as of the date indicated.

Contractual Maturities at March 31, 2014
Maturity	Amount
(Dollars in thousands)
2014	$	122,993
2015		150,413
2016		484,602
2017		430,883
2018		200,667
Thereafter		25,641
Total	$	1,415,199

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10. Stock-Based Compensation

The Company has a nonqualified stock option plan for certain employees of the Company. This plan provides for the granting of nonqualified options to purchase shares of common stock in the Company. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under this plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. While the vesting period and the termination date for the employee plan options are determined when options are granted, all such employee options outstanding at March 31, 2014 were issued with a vesting date three years after issuance and an expiration date seven years after issuance.

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

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

The following table summarizes stock option activity for both the employee and non-employee director stock option plans for the period indicated.

Three Months Ended March 31, 2014:	Options			Weighted- Average Exercise Price/Share		Weighted-Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding – January 1, 2014		883,300		$	31.67
Granted		0			0.00
Exercised		(88,300	)		17.05
Forfeited		(8,150	)		34.90
Outstanding – March 31, 2014		786,850			33.28		5.4	$	27,368	(1)
Fully vested and exercisable – March 31, 2014		152,800		$	21.11		4.5	$	7,174	(1)
Expected to vest in future periods		507,640
Fully vested and expected to vest – March 31, 2014(2)		660,440		$	32.73		5.4	$	23,336	(1)

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

(2) At March 31, 2014 the Company estimated that outstanding options to purchase 126,410 shares of its common stock would not vest and would be forfeited prior to their vesting date.

Intrinsic value for stock options is defined as the amount by which the current market price of the underlying stock exceeds the exercise price. For those stock options where the exercise price exceeds the current market price of the underlying stock, the intrinsic value is zero. The total intrinsic value of options exercised during the three months ended March 31, 2014 and 2013 was $3.9 million and $2.2 million, respectively.

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

The Company has a restricted stock plan that permits issuance of up to 800,000 shares of restricted stock or restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock plan. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under the restricted stock plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. Shares of common stock issued under the restricted stock plan may be shares of original issuance, shares held in treasury or shares that have been reacquired by the Company. All restricted stock awards outstanding at March 31, 2014 were issued with a vesting date of three years after issuance.

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

	Three Months Ended
	March 31, 2014
Outstanding – January 1, 2014		308,050
Granted		0
Forfeited		0
Vested		0
Outstanding – March 31, 2014		308,050
Weighted-average grant date fair value	$	35.97

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in non-interest expense was $0.9 million and $0.6 million for the three months ended March 31, 2014 and 2013, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $7.0 million at March 31, 2014 and is expected to be recognized over a weighted-average period of 2.2 years.

11. Fair Value Measurements

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

The Company applies the following fair value hierarchy.

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

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

Level 3 – Instruments whose inputs are unobservable.

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

	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
March 31, 2014:
Investment securities AFS(1):
Obligations of state and political subdivisions	$	0	$	434,201	$	18,547	$	452,748
U.S. Government agency securities		0		219,740		0		219,740
Corporate obligations		0		686		0		686
Total investment securities AFS		0		654,627		18,547		673,174
Impaired non-covered loans and leases		0		0		5,978		5,978
Impaired covered loans		0		0		29,332		29,332
Foreclosed assets not covered by FDIC loss share agreements		0		0		17,076		17,076
Foreclosed assets covered by FDIC loss share agreements		0		0		43,793		43,793
Total assets at fair value	$	0	$	654,627	$	114,726	$	769,353
December 31, 2013:
Investment securities AFS(1):
Obligations of state and political subdivisions	$	0	$	417,307	$	18,682	$	435,989
U.S. Government agency securities		0		218,869		0		218,869
Corporate obligations		0		716		0		716
Total investment securities AFS		0		636,892		18,682		655,574
Impaired non-covered loans and leases		0		0		8,087		8,087
Impaired covered loans		0		0		46,179		46,179
Foreclosed assets not covered by FDIC loss share agreements		0		0		11,851		11,851
Foreclosed assets covered by FDIC loss share agreements		0		0		37,960		37,960
Total assets at fair value	$	0	$	636,892	$	122,759	$	759,651
March 31, 2013:
Investment securities AFS(1):
Obligations of state and political subdivisions	$	0	$	359,009	$	21,227	$	380,236
U.S. Government agency securities		0		66,089		26,874		92,963
Corporate obligations		0		748		0		748
Total investment securities AFS		0		425,846		48,101		473,947
Impaired non-covered loans and leases		0		0		6,716		6,716
Impaired covered loans		0		0		51,243		51,243
Foreclosed assets not covered by FDIC loss share agreements		0		0		11,290		11,290
Foreclosed assets covered by FDIC loss share agreements		0		0		51,040		51,040
Total assets at fair value	$	0	$	425,846	$	168,390	$	594,236

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

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

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

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

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

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

The Company has determined that certain of its investment securities had a limited to non-existent trading market at March 31, 2014. As a result, the Company considers these investments as Level 3 in the fair value hierarchy. Specifically, the fair values of certain obligations of state and political subdivisions consisting primarily of certain unrated private placement bonds (the “private placement bonds”) in the amount of $18.5 million at March 31, 2014 were calculated using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active.” This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades for the private placement bonds. The private placement bonds are generally prepayable at par value at the option of the issuer. As a result, management believes the private placement bonds should be individually valued at the lower of (i) the matrix pricing provided by the Company’s third party pricing services for comparable unrated municipal securities or (ii) par value. At March 31, 2014, the third parties’ pricing matrices valued the Company’s portfolio of private placement bonds at $18.6 million which exceeded the aggregate of the lower of the matrix pricing or par value of the private placement bonds by $0.1 million. Accordingly, at March 31, 2014, the Company reported the private placement bonds at $18.5 million, which was the lower of the matrix pricing or par value.

Impaired non-covered loans and leases – Fair values are measured on a nonrecurring basis and are based on the underlying collateral value of the impaired loan or lease, net of holding and selling costs, or the estimated discounted cash flows for such loan or lease. At March 31, 2014 the Company had reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $6.1 million to the estimated fair value of $6.0 million. The $6.1 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $4.8 million of partial charge-offs and $1.3 million of specific loan and lease loss allocations.

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Impaired covered loans – Impaired covered loans are measured at fair value on a non-recurring basis. In determining such fair value, management considers a number of factors including, among other things, the remaining life of the loan, estimated collateral value, estimated holding period and net present value of cash flows expected to be received. As a result, impaired covered loans include both a non-accretable difference (the credit component of the impaired loan) and an accretable difference (the yield component of the impaired loan). The accretable difference is the difference between the expected cash flows and the net present value of expected cash flows and is accreted into earnings using the effective yield method. In determining the net present value of expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per annum. As of March 31, 2014, the Company identified purchased loans covered by FDIC loss share agreements acquired in its FDIC-assisted acquisitions where the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $0.2 million for such loans during the first quarter of 2014. The Company also recorded provision for loan and lease losses of $0.2 million during the first quarter of 2014 to cover such charge-offs. At March 31, 2014, the Company had $29.3 million of impaired covered loans.

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

Foreclosed assets covered by FDIC loss share agreements – Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets are initially recorded at Day 1 Fair Values. In estimating the Day 1 Fair Values of covered foreclosed assets, management considers a number of factors including, among others, appraised value, estimated selling prices, estimated holding periods and net present value of cash flows expected to be received. Discount rates ranging from 8.0% to 9.5% per annum were used to determine the net present value of covered foreclosed assets for purposes of establishing the Day 1 Fair Values. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest income to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of foreclosed assets held for sale are generally based on third party appraisals, broker price opinions or other valuations of property, resulting in a Level 3 classification.

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

	Investment Securities AFS
	(Dollars in thousands)
Balance – January 1, 2014	$	18,682
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		248
Paydowns and maturities		(383	)
Sales		0
Transfers in and/or out of Level 3		0
Balance – March 31, 2014	$	18,547
Balance – January 1, 2013	$	104,172
Total realized gains (losses) included in earnings		0
Total unrealized gains (losses) included in comprehensive income		(108	)
Paydowns and maturities		(27,570	)
Sales		0
Transfers in and/or out of Level 3		(28,393	)
Balance – March 31, 2013	$	48,101

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

Loans and leases – The fair value of loans and leases, including covered loans and purchased non-covered loans, is estimated by discounting the contractual cash flows to be received in future periods using the current rate at which similar loans or leases would be made to borrowers or lessees with similar credit ratings and for the same remaining maturities.

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

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

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

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

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

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

Off-balance sheet instruments – The fair values of commercial loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, and were not material at March 31, 2014 and 2013 or at December 31, 2013.

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

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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.

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

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

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

	Three Months Ended
	March 31,
	2014			2013
	(Dollars in thousands)
Beginning balance of AOCI – unrealized gains and losses on investment securities AFS	$	(3,672	)	$	10,783
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications		6,886			(1,660	)
Amounts reclassified from AOCI		(3	)		(94	)
Total other comprehensive income (loss)		6,883			(1,754	)
Ending balance of AOCI – unrealized gains and losses on investment securities AFS	$	3,211		$	9,029

Amounts reclassified from AOCI to net gains on investment securities in the consolidated statements of income related entirely to unrealized gains/losses on investment securities AFS. For the three months ended March 31, 2014 and 2013, respectively, amounts reclassified for net gains on investment securities were $5,000 and $156,000, with related tax effects of $2,000 and $62,000, respectively.

14. Recent Accounting Pronouncements

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

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

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

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

The Company’s non-interest expense consists primarily of employee compensation and benefits, net occupancy and equipment expense and other operating expenses. The Company’s results of operations are significantly affected by its provision for loan and lease losses and its provision for income taxes.

CRITICAL ACCOUNTING POLICIES

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

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

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

The Company’s internal grading system assigns grades to all loans and leases, except residential 1-4 family loans, consumer loans, purchased non-covered loans, covered loans and certain other loans, with each grade being assigned an allowance allocation percentage. The grade for each graded individual loan or lease is determined by the account officer and other approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing assessment

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of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by senior management and as part of the Company’s internal loan review process. These risk elements include, among others, the following: (1) for non-farm/non-residential, multifamily residential, and agricultural real estate loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan repayment requirements), operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age, condition, value, nature and marketability of the collateral and the specific risks and volatility of income, property value and operating results typical of properties of that type; (2) for construction and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or ability to lease property constructed for lease, the quality and nature of contracts for presale or preleasing, if any, experience and ability of the developer and loan-to-cost and loan-to-value ratios; (3) for commercial and industrial loans and leases, the operating results of the commercial, industrial or professional enterprise, the borrower’s or lessee’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in the applicable industry and the age, condition, value, nature and marketability of collateral; and (4) for non-real estate agricultural loans and leases, the operating results, experience and ability of the borrower or lessee, historical and expected market conditions and the age, condition, value, nature and marketability of collateral. In addition, for each category the Company considers secondary sources of income and the financial strength of the borrower or lessee and any guarantors.

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

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

Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the day 1 fair values (“Day 1 Fair Values”).

For 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’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is considered in the determination of the required level of ALLL. To the extent that a revised loss estimate exceeds the loss estimate established in the determination of the Day 1 Fair Values, such deterioration will result in an allowance allocation or a charge-off.

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

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

At March 31, 2014 and 2013, the Company had no allowance for its purchased non-covered loans and its covered loans because all losses had been charged off on such loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

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

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payments. If a loan or lease is determined to be uncollectible, the portion of the principal determined to be uncollectible will be charged against the ALLL. Loans for which the terms have been modified and for which (i) the borrower is experiencing financial difficulties and (ii) a concession has been granted to the borrower by the Company are considered troubled debt restructurings (“TDRs”) and are included in impaired loans and leases. Income on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs which continue to accrue interest, is recognized on a cash basis when and if actually collected. For the three months ended March 31, 2014, there were no defaults during the preceding 12 months on any loans that were considered TDRs.

All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan or lease, excluding purchased non-covered loans with evidence of credit deterioration at the date of purchase and covered loans, to be impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms thereof. The Company considers a purchased non-covered loan with evidence of credit deterioration at the date of purchase and a covered loan to be impaired once a decrease in expected cash flows or other deterioration in the loan’s expected performance, subsequent to the determination of the Day 1 Fair Values, results in an allowance allocation, a partial or full charge-off or in a provision for loan and lease losses. Most of the Company’s nonaccrual loans and leases, excluding purchased non-covered loans and covered loans, and all TDRs are considered impaired. The majority of the Company’s impaired loans and leases are dependent upon collateral for repayment. For such loans and leases, impairment is measured by comparing collateral value, net of holding and selling costs, to the current investment in the loan or lease. For all other impaired loans and leases, the Company compares estimated discounted cash flows to the current investment in the loan or lease. To the extent that the Company’s current investment in a particular loan or lease exceeds its estimated net collateral value or its estimated discounted cash flows, the impaired amount is specifically considered in the determination of the ALLL or is charged off as a reduction of the ALLL.

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

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

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

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

AFS investment securities are stated at estimated fair value, with the unrealized gains and losses determined on a specific identification basis. Such unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity and included in other comprehensive income (loss). The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. Additionally, the valuation of investment securities acquired may include certain unobservable inputs. All fair value estimates received by the Company for its investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

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

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

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

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

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

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

The accretable difference on covered loans is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. In determining the net present value of the expected cash flows for purposes of establishing the Day 1 Fair Values, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan. At March 31, 2014, the weighted average period during which management expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment under the FDIC loss share agreements) is 2.5 years.

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Management separately monitors the covered loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is typically reviewed (i) when it is modified or extended, (ii) when material information becomes available to the Company that provides additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows which include a substantial portion of each acquired covered loan portfolio. Management separately reviews the performance of the portfolio of covered loans on an annual basis, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determination