UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
   
þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2007March 31, 2008
or
   
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition period from                    to                    
Commission File Number: 000-51904
HOME BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
   
Arkansas 71-0682831
   
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
719 Harkrider, Suite 100, Conway, Arkansas 72032
   
(Address of principal executive offices) (Zip Code)
(501) 328-4770
(Registrant’s telephone number, including area code)
Not Applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer”, “accelerated filerfiler” and large accelerated filer“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero       Accelerated filero       Non-accelerated filer
Large accelerated filer:oAccelerated filer:þNon-accelerated filer:oSmaller reporting company:o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date.
Common Stock Issued and Outstanding: 17,244,84818,342,886 shares as of October 31, 2007.April 25, 2008.
 
 

 


 

HOME BANCSHARES, INC.
FORM 10-Q
September 30, 2007March 31, 2008
INDEX
     
  Page No.
    
     
    
     
  4 
     
  5 
     
  6-7 
     
  8 
     
  9-239-24 
     
  2425 
     
  25-5426-53 
     
  55-5754-56 
     
57
   
 
  58 
     
  Other Information58 
     
58
   
 58
58
58
58
  59 
     
Item1A.
Risk FactorsExhibit List
  59
Item 2.59
Item 3.59
Item 4.59
Item 5.59
Item 6.59
Signatures60 
 Awareness of Independent Registered Public Accounting Firm
 CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a)
 CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a)
 CEO Certification Pursuant 18 U.S.C.to Section 1350906
 CFO Certification Pursuant 18 U.S.C.to Section 1350906

 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
     Some of our statements contained in this document, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation” are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to future events or our future financial performance and include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, our other business strategies and other statements that are not historical facts. Forward-looking statements are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, but not limited to, the following:
  the effects of future economic conditions, including inflation or a decrease in residential housing values;
 
  governmental monetary and fiscal policies, as well as legislative and regulatory changes;
 
  the risks of changes in interest rates or the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;
 
  the effects of terrorism and efforts to combat it;
 
  credit risks;
 
  the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with competitors offering banking products and services by mail, telephone and the Internet;
 
  the effect of any mergers, acquisitions or other transactions to which we or our subsidiaries may from time to time be a party, including our ability to successfully integrate any businesses that we acquire; and
 
  the failure of assumptions underlying the establishment of our allowance for loan losses.
     All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, see the “Risk Factors” section of our Form 10-K filed with the Securities and Exchange Commission on March 20, 2007.5, 2008.

 


PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Home BancShares, Inc.
Consolidated Balance Sheets
                
(In thousands, except share data) September 30, 2007 December 31, 2006  March 31, 2008 December 31, 2007 
 (Unaudited)  (Unaudited) 
Assets
  
Cash and due from banks $46,471 $53,004  $53,862 $51,468 
Interest-bearing deposits with other banks 2,573 6,696  5,828 3,553 
          
Cash and cash equivalents 49,044 59,700  59,690 55,021 
Federal funds sold 11,145 9,003  37,331 76 
Investment securities — available for sale 447,826 531,891  403,755 430,399 
Loans receivable 1,560,374 1,416,295  1,866,969 1,606,994 
Allowance for loan losses  (28,636)  (26,111)  (37,075)  (29,406)
          
Loans receivable, net 1,531,738 1,390,184  1,829,894 1,577,588 
Bank premises and equipment, net 66,770 57,339  71,155 67,702 
Foreclosed assets held for sale 4,915 435  5,097 5,083 
Cash value of life insurance 47,468 42,149  48,678 48,093 
Investments in unconsolidated affiliates 14,982 12,449  1,424 15,084 
Accrued interest receivable 15,186 13,736  14,649 14,321 
Deferred tax asset, net 9,499 8,361  10,583 9,163 
Goodwill 37,527 37,527  49,849 37,527 
Core deposit and other intangibles 8,141 9,458  7,934 7,702 
Mortgage servicing rights 2,333  
Other assets 23,431 18,416  28,773 23,871 
          
Total assets
 $2,267,672 $2,190,648  $2,571,145 $2,291,630 
          
  
Liabilities and Stockholders’ Equity
Liabilities and Stockholders’ Equity
  
Deposits:  
Demand and non-interest-bearing $217,666 $215,142  $255,532 $211,993 
Savings and interest-bearing transaction accounts 569,797 582,425  687,252 582,477 
Time deposits 811,108 809,627  911,954 797,736 
          
Total deposits 1,598,571 1,607,194  1,854,738 1,592,206 
Federal funds purchased 8,690 25,270   16,407 
Securities sold under agreements to repurchase 131,007 118,825  114,589 120,572 
FHLB borrowed funds 226,028 151,768  249,848 251,750 
Accrued interest payable and other liabilities 12,204 11,509  17,936 13,067 
Subordinated debentures 44,595 44,663  47,643 44,572 
          
Total liabilities
 2,021,095 1,959,229  2,284,754 2,038,574 
Stockholders’ equity:
  
Common stock, par value $0.01 in 2007 and 2006; shares authorized 50,000,000
in 2007 and 25,000,000 in 2006; shares issued and outstanding 17,243,036
in 2007 and 17,205,649 in 2006
 172 172 
Common stock, par value $0.01 in 2008 and 2007; shares authorized 50,000,000 in 2008 and 2007; shares issued and outstanding 18,337,222 in 2008 and 17,250,036 in 2007 183 173 
Capital surplus 195,429 194,595  220,052 195,649 
Retained earnings 54,871 41,544  65,575 59,489 
Accumulated other comprehensive loss  (3,895)  (4,892)
Accumulated other comprehensive income (loss) 581  (2,255)
          
Total stockholders’ equity
 246,577 231,419  286,391 253,056 
          
Total liabilities and stockholders’ equity
 $2,267,672 $2,190,648  $2,571,145 $2,291,630 
          
See Condensed Notes to Consolidated Financial Statements.

4


Home BancShares, Inc.
Consolidated Statements of Income
                
 Three Months Ended Nine Months Ended         
 September 30, September 30,  Three Months Ended March 31, 
(In thousands, except per share data) 2007 2006 2007 2006  2008 2007 
 (Unaudited)  (Unaudited) 
Interest income:
  
Loans $31,116 $26,748 $89,180 $72,593  $33,245 $28,288 
Investment securities  
Taxable 4,133 4,738 12,992 14,174  3,762 4,586 
Tax-exempt 1,043 883 3,094 2,815  1,168 1,026 
Deposits — other banks 53 38 132 103  55 49 
Federal funds sold 36 51 311 393  166 235 
              
Total interest income 36,381 32,458 105,709 90,078  38,396 34,184 
              
 
Interest expense:
  
Interest on deposits 14,416 12,010 42,640 32,683  13,522 14,133 
Federal funds purchased 194 178 646 636  69 205 
FHLB borrowed funds 2,426 1,825 6,270 4,787  2,575 1,811 
Securities sold under agreements to repurchase 1,267 1,258 3,772 3,122  588 1,224 
Subordinated debentures 758 751 2,254 2,245  811 749 
              
Total interest expense 19,061 16,022 55,582 43,473  17,565 18,122 
              
 
Net interest income
 17,320 16,436 50,127 46,605  20,831 16,062 
Provision for loan losses 547 649 2,047 1,723  4,809 820 
              
Net interest income after provision for loan losses
 16,773 15,787 48,080 44,882  16,022 15,242 
              
  
Non-interest income:
  
Service charges on deposit accounts 2,816 2,354 8,073 6,669  3,097 2,588 
Other services charges and fees 1,342 541 4,176 1,736 
Trust fees 27 166 81 487 
Other service charges and fees 1,763 1,500 
Data processing fees 192 215 619 623  210 218 
Mortgage banking income 451 435 1,277 1,285 
Mortgage lending income 632 348 
Mortgage servicing income 231  
Insurance commissions 153 153 613 642  272 289 
Income from title services 181 233 575 752  168 156 
Increase in cash value of life insurance 607 55 1,822 161  585 598 
Dividends from FHLB, FRB & bankers’ bank 218 180 652 440  281 227 
Equity in earnings of unconsolidated affiliates 47  (65)  (123)  (213)
Equity in earnings (loss) of unconsolidated affiliates 102  (114)
Gain on sale of equity investment 6,102  
Gain on sale of SBA loans   170 34  101  
Gain (loss) on sale of premises and equipment, net  (31) 129 150 157 
Gain on securities, net    1 
Gain (loss) on sale of premises and equipment  (2) 14 
Gain (loss) on OREO  (380) 37 
Gain (loss) on securities   
Other income 309 302 1,015 924  372 344 
              
Total non-interest income 6,312 4,698 19,100 13,698  13,534 6,205 
              
 
Non-interest expense:
  
Salaries and employee benefits 7,739 7,376 22,936 22,123  9,278 7,440 
Occupancy and equipment 2,446 2,223 6,998 6,351  2,702 2,210 
Data processing expense 644 651 1,958 1,888  786 644 
Other operating expenses 4,770 3,987 13,965 11,637  5,917 4,447 
              
Total non-interest expense 15,599 14,237 45,857 41,999  18,683 14,741 
              
Income before income taxes
 7,486 6,248 21,323 16,581  10,873 6,706 
Income tax expense 2,258 1,960 6,273 5,141  3,595 1,945 
              
Net income available to all shareholders
 5,228 4,288 15,050 11,440 
Less: Preferred stock dividends  49  359 
         
Income available to common shareholders
 $5,228 $4,239 $15,050 $11,081 
Net income
 $7,278 $4,761 
              
Basic earnings per share
 $0.30 $0.26 $0.87 $0.82  $0.40 $0.28 
              
Diluted earnings per share
 $0.30 $0.25 $0.86 $0.74  $0.39 $0.27 
              
See Condensed Notes to Consolidated Financial Statement.Statements.

5


Home BancShares, Inc.
Consolidated Statements of Stockholders’ Equity
                             
                      Accumulated  
                      Other  
  Preferred Preferred Common Capital Retained Comprehensive  
(In thousands, except share data) Stock A Stock B Stock Surplus Earnings Income (Loss) Total
 
Balance at January 1, 2006
  $ 21   $ 2   $ 121   $ 146,285   $ 27,331   $ (7,903)  $ 165,857 
Comprehensive income (loss):                            
Net income              11,440      11,440 
Other comprehensive income (loss):                            
Unrealized gain on investment securities available for sale, net of tax effect of $903                 1,409   1,409 
Unconsolidated affiliates unrecognized gain on investment securities available for sale, net of taxes recorded by the unconsolidated affiliate                 10   10 
                             
Comprehensive income                          12,859 
Conversion of 2,090,812 shares of preferred stock A to 1,650,489 shares of common stock  (21)     17   2         (2)
Conversion of 169,760 shares of preferred stock B to 509,280 shares of common stock     (2)  5   (3)         
Issuance of 2,875,000 shares of common stock from Initial Public Offering, net of offering costs of $4,545        29   47,176         47,205 
Issuance of 14,617 shares of preferred stock A from exercise of stock options           2         2 
Net issuance of 681 shares of preferred stock B from exercise of stock options           8         8 
Net issuance of 47,597 shares of common stock from exercise of stock options           446         446 
Tax benefit from stock options exercised           187         187 
Share-based compensation           303         303 
Cash dividends — Preferred Stock A, $0.1458 per share              (303)     (303)
Cash dividends — Preferred Stock B, $0.3325 per share              (56)     (56)
Cash dividends — Common Stock, $0.065 per share              (916)     (916)
                             
Balances at September 30, 2006 (unaudited)
        172   194,406   37,496   (6,484)  225,590 
Comprehensive income (loss):                            
Net income              4,478      4,478 
Other comprehensive income (loss):                            
Unrealized gain on investment securities available for sale, net of tax effect of $1,023                 1,585   1,585 
Unconsolidated affiliates unrecognized gain on investment securities available for sale, net of taxes recorded by the unconsolidated affiliate                 7   7 
                             
Comprehensive income                          6,070 
Issuance of 9,419 shares of common stock from exercise of stock options           88         88 
Tax benefit from stock options exercised           24         24 
Share-based compensation           77         77 
Cash dividends — Common Stock, $0.025 per share              (430)     (430)
                             
Balances at December 31, 2006
        172   194,595   41,544   (4,892)  231,419 
Three Months Ended March 31, 2008 and 2007
                     
              Accumulated    
              Other    
  Common  Capital  Retained  Comprehensive    
(In thousands, except share data) Stock  Surplus  Earnings  Income (Loss)  Total 
 
Balance at January 1, 2007
 $172  $194,595  $41,544  $(4,892) $231,419 
Comprehensive income (loss):                    
Net income        4,761      4,761 
Other comprehensive income (loss):                    
Unrealized gain on investment securities available for sale, net of tax effect of $497           771   771 
Unconsolidated affiliates unrecognized gain on investment securities available for sale, net of taxes recorded by the unconsolidated affiliate           1   1 
                    
Comprehensive income                  5,533 
Net issuance of 16,289 shares of common stock from exercise of stock options     123         123 
Tax benefit from stock options exercised     103         103 
Share-based compensation     109         109 
Cash dividends — Common Stock, $0.025 per share        (430)     (430)
   
Balances at March 31, 2007 (unaudited)
  172   194,930   45,875   (4,120)  236,857 
Comprehensive income (loss):                    
Net income        15,684      15,684 
Other comprehensive income (loss):                    
Unrealized gain on investment securities available for sale, net of tax effect of $1,142           1,770   1,770 
Unconsolidated affiliates unrecognized gain on investment securities available for sale, net of taxes recorded by the unconsolidated affiliate           95   95 
                    
Comprehensive income                  17,549 
Net issuance of 28,098 shares of common stock from exercise of stock options  1   231         232 
Tax benefit from stock options exercised     141         141 
Share-based compensation     347         347 
Cash dividends — Common Stock, $0.12 per share        (2,070)     (2,070)
   
Balances at December 31, 2007
  173   195,649   59,489   (2,255)  253,056 
See Condensed Notes to Consolidated Financial Statement.Statements.

6


Home BancShares, Inc.
Consolidated Statements of Stockholders’ Equity — Continued
                             
                      Accumulated    
                      Other    
  Preferred  Preferred  Common  Capital  Retained  Comprehensive    
(In thousands, except share data) Stock A  Stock B  Stock  Surplus  Earnings  Income (Loss)  Total 
 
Comprehensive income (loss):                            
Net income              15,050      15,050 
Other comprehensive income (loss):                            
Unrealized gain on investment securities available for sale, net of tax effect of $623                 966   966 
Unconsolidated affiliates unrecognized gain on investment securities available for sale, net of taxes recorded by the unconsolidated affiliate                 31   31 
                      
Comprehensive income                          16,047 
Net issuance of 37,387 shares of common stock from exercise of stock options           276         276 
Tax benefit from stock options exercised           218         218 
Share-based compensation           340         340 
Cash dividends — Common Stock, $0.10 per share              (1,723)     (1,723)
 ��                    
Balances at September 30, 2007
 $  $  $172  $95,429  $54,871  $(3,895) $246,577 
                      
Three Months Ended March 31, 2008 and 2007
                     
              Accumulated    
              Other    
  Common  Capital  Retained  Comprehensive    
(In thousands, except share data) Stock  Surplus  Earnings  Income (Loss)  Total 
 
Cumulative effect of adoption of EITF 06-4        (276)     (276)
Comprehensive income (loss):                    
Net income        7,278      7,278 
Other comprehensive income (loss):                    
Unrealized gain on investment securities available for sale, net of tax effect of $1,888           2,744   2,744 
Unconsolidated affiliates unrecognized gain on investment securities available for sale, net of taxes recorded by the unconsolidated affiliate           92   92 
                    
Comprehensive income                  10,114 
Issuance of 1,083,802 common shares pursuant to acquisition of Centennial Bancshares, Inc.  10   24,245         24,255 
Net issuance of 3,384 shares of common stock from exercise of stock options     23         23 
Tax benefit from stock options exercised     18         18 
Share-based compensation     117         117 
Cash dividends — Common Stock, $0.05 per share        (916)     (916)
   
Balances at March 31, 2008 (unaudited)
 $183  $220,052  $65,575  $581  $286,391 
   
See Condensed Notes to Consolidated Financial Statements.

7


Home BancShares, Inc.

Consolidated Statements of Cash Flows
                
 Period Ended September 30,  Period Ended March 31, 
(In thousands) 2007 2006  2008 2007 
 (Unaudited)  (Unaudited) 
Operating Activities
  
Net income $15,050 $11,440  $7,278 $4,761 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:  
Depreciation 3,342 3,416  1,388 1,065 
Amortization/Accretion 1,378 1,861  667 305 
Share-based compensation 340 303  117 109 
Tax benefits from stock options exercised  (218)  (187)  (18)  (103)
Gain on sale of assets  (232)  (443)
Provision for loan losses 2,047 1,723 
Loss (gain) on assets 281 12 
Gain on sale of equity investment  (6,102)  
Provision for loan loss 4,809 820 
Deferred income tax benefit  (1,788)  (1,121)  (1,475)  (597)
Equity in earnings of unconsolidated affiliates 123 213 
Equity in loss of unconsolidated affiliates  (102) 114 
Increase in cash value of life insurance  (1,822)  (161)  (585)  (598)
Originations of mortgage loans held for sale  (74,654)  (67,353)  (34,959)  (17,609)
Proceeds from sales of mortgage loans held for sale 72,516 67,965  34,062 15,619 
Changes in assets and liabilities:  
Accrued interest receivable  (1,450)  (2,736) 837  (595)
Other assets  (5,015)  (9,568)  (2,958)  (3,046)
Accrued interest payable and other liabilities 918 3,916  3,474 786 
          
Net cash provided by operating activities 10,535 9,268  6,714 1,043 
          
Investing Activities
  
Net (increase) decrease in federal funds sold  (2,142)  (24,026)  (34,465)  (1,682)
Net (increase) decrease in loans  (149,066)  (185,106)  (68,912)  (57,088)
Purchases of investment securities available for sale  (133,446)  (88,944)  (9,275)  (84,664)
Proceeds from maturities of investment securities available for sale 218,993 110,725  65,862 141,406 
Proceeds from sales of investment securities available for sale  1,000 
Proceeds from sale of loans 2,957 540  1,904  
Proceeds from foreclosed assets held for sale 548 1,626  62 110 
Purchases of premises and equipment, net  (12,923)  (5,900)  (1,429)  (4,491)
Purchase of bank owned life insurance  (3,497)  
Investments in unconsolidated affiliates  (2,625)  (3,000)
Acquisition of Centennial Bancshares, Inc., net funds received 1,663  
Proceeds from sale of investment in unconsolidated affiliate 19,862  
          
Net cash used in investing activities  (81,201)  (193,085)  (24,728)  (6,409)
          
Financing Activities
  
Net increase (decrease) in deposits  (8,623) 130,425  83,395 21,066 
Net increase (decrease) in securities sold under agreements to repurchase 12,182 12,621   (5,983) 9,510 
Net increase (decrease) in federal funds purchased  (16,580)  (44,495)  (16,407) 180 
Net increase (decrease) in FHLB and other borrowed funds 74,260 54,063   (37,447)  (23,926)
Repayment of line of credit   (14,000)
Proceeds from initial public offering, net  47,205 
Proceeds from exercise of stock options 276 456  23 123 
Tax benefits from stock options exercised 218 187  18 103 
Conversion of preferred stock A fractional shares   (2)
Dividends paid  (1,723)  (1,275)  (916)  (430)
          
Net cash provided by financing activities 60,010 185,185  22,683 6,626 
          
Net change in cash and cash equivalents  (10,656) 1,368  4,669 1,260 
Cash and cash equivalents — beginning of year 59,700 44,679  55,021 59,700 
          
Cash and cash equivalents — end of period $49,044 $46,047  $59,690 $60,960 
          
See Condensed Notes to Consolidated Financial Statements.

8


Home BancShares, Inc.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies
  Nature of Operations
     Home BancShares, Inc. (the Company or HBI) is a financial holding company headquartered in Conway, Arkansas. The Company is primarily engaged in providing a full range of banking services to individual and corporate customers through its fivesix wholly owned community bank subsidiaries. Three of our bank subsidiaries are located in the central Arkansas market area, a fourth serves central and southern Arkansas, a fifth serves Stone County in north central Arkansas, and a fifthsixth serves the Florida Keys and southwestern Florida. The Company is subject to competition from other financial institutions. The Company also is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
     A summary of the significant accounting policies of the Company follows:
  Operating Segments
     The Company is organized on a subsidiary bank-by-bank basis upon which management makes decisions regarding how to allocate resources and assess performance. Each of the subsidiary banks provides a group of similar community banking services, including such products and services as loans, time deposits, checking and savings accounts. The individual bank segments have similar operating and economic characteristics and have been reported as one aggregated operating segment.
  Use of Estimates
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
     Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of foreclosed assets. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets, management obtains independent appraisals for significant properties.
  Principles of Consolidation
     The consolidated financial statements include the accounts of HBI and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

9


  Investments in Unconsolidated Affiliates
     The Company had a 20.4% and 20.1% investment in White River Bancshares, Inc. (WRBI) at September 30, 2007 and December 31, 2006, respectively.2007. The Company’s investment in WRBI at September 30, 2007 and December 31, 20062007 totaled $13.7 million and $11.1 million, respectively. The$13.8 million. On March 3, 2008, WRBI repurchased the Company’s interest in WRBI which resulted in a one-time gain of $6.1 million. Prior to this date, the investment in WRBI iswas accounted for on the equity method. The Company’s share of WRBI operating income included in non-interest income in the three months ended September 30, 2007during 2008 totaled $47,000. The Company’s share of WRBI operating loss included in non-interest income in the nine months ended September 30, 2007 totaled $123,000. The Company’s share of WRBI operating loss included in non-interest income in the three and nine months ended September 30, 2006 totaled $65,000 and $213,000, respectively. The Company’s share of WRBI unrealized gain on investment securities available for sale at September 30, 2007 amounted to $31,000. The Company’s share of WRBI unrealized loss on investment securities available for sale at September 30, 2006 amounted to $7,000.$102,000. See the “Acquisitions” footnote related to the Company’s acquisition and disposal of WRBI.
     The Company has invested funds representing 100% ownership in fourfive statutory trusts which issue trust preferred securities. The Company’s investment in these trusts was $1.4 million at March 31, 2008 and $1.3 million at September 30, 2007 and December 31, 2006,2007, respectively. Under generally accepted accounting principles, these trusts are not consolidated.
     The summarized financial information below represents an aggregation of the Company’s unconsolidated affiliates as of September 30,March 31, 2008 and 2007, and 2006, and for the three-month and nine-month periods then ended:
                        
 Three Months Ended September 30, Nine Months Ended September 30, March 31,
 2007 2006 2007 2006 2008 2007
 (In thousands)  (In thousands)
Assets $552,126 $373,534 $552,126 $373,534  $47,425 $402,142 
Liabilities 485,220 315,975 485,220 315,975  46,000 345,695 
Equity 66,906 57,559 66,906 57,559  1,424 56,447 
Net income (loss) 233  (319)  (462)  (992) 163  (415)
  Interim financial information
     The accompanying unaudited consolidated financial statements as of September 30,March 31, 2008 and 2007 and 2006 have been prepared in condensed format, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
     The information furnished in these interim statements reflects all adjustments, which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 20062007 Form 10-K, filed with the Securities and Exchange Commission.

10


Earnings per Share
     Basic earnings per share are computed based on the weighted average number of shares outstanding during each year. Diluted earnings per share are computed using the weighted average common shares and all potential dilutive common shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three-month and nine-month periods ended September 30:March 31:
                        
 Three Months Ended Nine Months Ended  2008 2007 
 September 30, September 30,  (In thousands) 
 2007 2006 2007 2006 
 (In thousands) 
Net income available to all shareholders $5,228 $4,288 $15,050 $11,440 
Less: Preferred stock dividends   (49)   (359)
         
Income available to common shareholders $5,228 $4,239 $15,050 $11,081 
         
Net income $7,278 $4,761 
  
Average shares outstanding 17,239 16,361 17,231 13,585  18,335 17,219 
Effect of potential share issuance for acquisition earn out 181  
Effect of common stock options 298 192 290 134  276 282 
Effect of preferred stock options  10  22 
Effect of preferred stock conversions  728  1,674 
              
Diluted shares outstanding 17,537 17,291 17,521 15,415  18,792 17,501 
              
  
Basic earnings per share $0.30 $0.26 $0.87 $0.82  $0.40 $0.28 
Diluted earnings per share $0.30 $0.25 $0.86 $0.74  $0.39 $0.27 
2. Acquisitions
     On August 24, 2007,January 1, 2008, HBI andacquired Centennial Bancshares, Inc. (“CBI”) announced, an Arkansas bank holding company. Centennial Bancshares, Inc. owned Centennial Bank, located in Little Rock, Arkansas which had total assets of $234.1 million, loans of $192.8 million and total deposits of $178.8 million on the signingdate of definitive agreement (the “Merger Agreement”)acquisition. The consideration for the acquisition of CBI by HBImerger was $25.4 million, which was paid approximately 4.6%, or $1.2 million in exchange for stock of HBIcash and cash (the “Merger”). Immediately after the Merger, Centennial Bank, a wholly owned subsidiary of CBI, will be operated as a subsidiary bank of HBI. The CBI shareholders that are accredited investors will receive whole95.4%, or $24.3 million, in shares of HBI equal to the productCompany’s common stock. In connection with the acquisition, $3.0 million of 16.8153the purchase price, consisting of $139,000 in cash and the number of130,052 shares of CBI surrendered.the Company’s common stock, was placed in escrow related to possible losses from identified loans and an IRS examination. In the first quarter of 2008, the IRS examination was completed which resulted in $1.0 million of the escrow proceeds being released. The unaccredited investors, which are projected to represent a 2% ownership of CBI, will receive in the aggregate approximately $500,000 in cash. The Merger Agreementmerger further provides for an earn out based upon 2008 earnings of up to a maximum of $4,000,000 which can be paid in cash or the Company’s stock of HBI at the election of the accredited shareholders. Based uponAs a result of this transaction, the closing priceCompany recorded goodwill of HBI stock on September 30, 2007$12.3 million and a core deposit intangible of $21.79 per share the total purchase price excluding the earn out is approximately $24.8 million. The Merger is conditioned upon regulatory approval and other customary conditions.$694,000.
     In January 2005, HBI purchased 20% of the common stock during the formation of White River Bancshares, Inc. of Fayetteville, Arkansas for $9.1 million. White River Bancshares owns all of the stock of Signature Bank of Arkansas, with branch locations in the northwest Arkansas area. In January 2006, White River Bancshares issued an additional $15.0 million of their common stock. To maintain a 20% ownership, the Company made an additional investment in White River Bancshares of $3.0 million in January 2006. During April 2007, White River Bancshares acquired 100% of the stock of Brinkley Bancshares, Inc. in Brinkley, Arkansas. As a result, HBI made a $2.6 million additional investment in White River Bancshares on June 29, 2007 to maintain its 20% ownership. At September 30, 2007,On March 3, 2008, White River BancShares repurchased HBI’s 20% investment in White River Bancshares had approximately $507.8 millionresulting in total assets, $411.8 million in total loans and $424.6 million in total deposits.a one-time gain for HBI of $6.1 million.

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3. Investment Securities
     The amortized cost and estimated market value of investment securities were as follows:
                                
 September 30, 2007  March 31, 2008 
 Available for Sale  Available for Sale 
 Gross Gross    Gross Gross   
 Amortized Unrealized Unrealized Estimated  Amortized Unrealized Unrealized Estimated 
 Cost Gains (Losses) Fair Value  Cost Gains (Losses) Fair Value 
 (In thousands)  (In thousands) 
U.S. government-sponsored enterprises $148,815 $98 $(2,313) $146,600  $85,367 $1,042 $(8) $86,401 
Mortgage-backed securities 191,777 50  (4,501) 187,326  194,077 1,555  (1,517) 194,115 
State and political subdivisions 101,803 1,117  (754) 102,166  111,915 1,520  (1,106) 112,329 
Other securities 11,893   (159) 11,734  11,266   (356) 10,910 
                  
 
Total $454,288 $1,265 $(7,727) $447,826  $402,625 $4,117 $(2,987) $403,755 
                  
                                
 December 31, 2006  December 31, 2007 
 Available for Sale  Available for Sale 
 Gross Gross    Gross Gross   
 Amortized Unrealized Unrealized Estimated  Amortized Unrealized Unrealized Estimated 
 Cost Gains (Losses) Fair Value  Cost Gains (Losses) Fair Value 
 (In thousands)  (In thousands) 
U.S. government-sponsored enterprises $199,085 $79 $(2,927) $196,237  $126,898 $268 $(872) $126,294 
Mortgage-backed securities 225,747 41  (5,988) 219,800  184,949 179  (3,554) 181,574 
State and political subdivisions 102,536 1,360  (496) 103,400  111,014 1,105  (812) 111,307 
Other securities 12,631   (177) 12,454  11,411   (187) 11,224 
                  
 
Total $539,999 $1,480 $(9,588) $531,891  $434,272 $1,552 $(5,425) $430,399 
                  
     Assets, principally investment securities, having a carrying value of approximately $208.8$169.3 million and $287.2$210.6 million at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Also, investment securities pledged as collateral for repurchase agreements totaled approximately $131.0$114.6 million and $118.8$120.6 million at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively.
     During 2007, the Company did not sell any available for sale securities. During the three monthsthree-month periods ended September 30, 2006,March 31, 2008 and 2007, no available for sale securities were sold. During the nine months ended September 30, 2006, $1.0 million in available for sale securities were sold. The gross realized gains on such sales totaled $1,000. The income tax expense/benefit related to net security gains and losses was 39.23% of the gross amounts for the periods.

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     The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. In completing these evaluations the Company follows the requirements of paragraph 16 of SFAS No. 115, EITF 03-1, Staff Accounting Bulletin 59 and FASB Staff Position No. 115-1. Certain investment securities are valued less than their historical cost. These declines primarily resulted from recent increases in market interest rates.rates during 2005 and 2006. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold these securities to recovery.maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other than temporaryother-than-temporary, impairment is identified.

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4: Loans Receivable and Allowance for Loan Losses
     The various categories of loans are summarized as follows:
                
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
 (In thousands)  (In thousands) 
Real estate:  
Commercial real estate loans  
Non-farm/non-residential $590,083 $465,306  $765,881 $607,638 
Construction/land development 365,236 393,410  341,442 367,422 
Agricultural 22,432 11,659  24,739 22,605 
Residential real estate loans  
Residential 1-4 family 251,057 229,588  343,475 259,975 
Multifamily residential 38,528 37,440  73,220 45,428 
          
Total real estate 1,267,336 1,137,403  1,548,757 1,303,068 
Consumer 45,212 45,056  55,251 46,275 
Commercial and industrial 206,744 206,559  224,756 219,062 
Agricultural 25,506 13,520  17,559 20,429 
Other 15,576 13,757  20,646 18,160 
          
Total loans receivable before allowance for loan losses 1,560,374 1,416,295  1,866,969 1,606,994 
Allowance for loan losses 28,636 26,111  37,075 29,406 
          
Total loans receivable, net $1,531,738 $1,390,184  $1,829,894 $1,577,588 
          

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The following is a summary of activity within the allowance for loan losses:
                
 2007 2006  2008 2007 
 (In thousands)  (In thousands) 
Balance, beginning of year $26,111 $24,175  $29,406 $26,111 
Additions  
Provision charged to expense 2,047 1,723  4,809 820 
Allowance for loan loss of Centennial Bancshares, Inc. 3,382  
  
Net (recoveries) loans charged off  
Losses charged to allowance, net of recoveries of $818 and $1,039 for the first nine months of 2007 and 2006, respectively  (478)  (54)
Losses charged to allowance, net of recoveries of $101 and $103 for the first three months of 2008 and 2007, respectively 522  (3)
          
  
Balance, September 30 $28,636 25,952 
Balance, March 31 $37,075 26,934 
      
  
Additions  
Provision charged to expense 584  2,422 
 
Net loans charged off 
Losses charged to allowance, net of recoveries of $104 for the last three months of 2006 425 
Net (recoveries) loans charged off 
Losses charged to allowance, net of recoveries of $776 for the last nine months of 2007  (50)
      
  
Balance, end of year $26,111  $29,406 
      
     At September 30, 2007 andMarch 31, 2008, there were no accruing loans delinquent 90 days or more. At December 31, 2006,2007, accruing loans delinquent 90 days or more totaled $150,000 and $641,000, respectively.$301,000. Non-accruing loans at September 30, 2007March 31, 2008 and December 31, 20062007 were $2.6$12.0 million and $3.9$3.0 million, respectively.
     During the three-month periodsperiod ended September 30,March 31, 2008, the Company sold $1.8 million of the guaranteed portion of certain SBA loans, which resulted in a gain of $101,000. During the three-month period ended March 31, 2007, and 2006, the Company did not sell any of the guaranteed portion of SBA loans. During the nine-month periods ended September 30, 2007 and 2006, the Company sold $2.8 million and $506,000, respectively, of the guaranteed portion of certain SBA loans, which resulted in gains of $170,000 and $34,000, respectively.

13


     Mortgage loans held for sale of approximately $4.5$5.7 million and $2.4$4.8 million at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively, are included in residential 1—4 family loans. Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis.
     At September 30, 2007March 31, 2008 and December 31, 2006,2007, impaired loans totaled $7.9$33.2 million and $11.2$11.9 million, respectively. As of September 30,March 31, 2008 and 2007, and 2006, average impaired loans were $11.8$22.5 million and $6.2$10.0 million, respectively. All impaired loans had designated reserves for possible loan losses. Reserves relative to impaired loans were $1.5$6.8 million and $2.1$2.6 million at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively. Interest recognized on impaired loans during 20072008 and 20062007 was immaterial.

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5: Goodwill and Core Deposits and Other Intangibles
     Changes in the carrying amount of the Company’s goodwill and core deposits and other intangibles for the three-month period ended March 31, 2008 and for the year ended December 31, 2007, were as follows:
         
  March 31,  December 31, 
  2008  2007 
  (In thousands) 
Goodwill
        
Balance, beginning of period $37,527  $37,527 
Acquisition of Centennial Bancshares, Inc.  12,322    
       
Balance, end of period $49,849  $37,527 
       
         
  2008  2007 
  (In thousands) 
Core Deposit and Other Intangibles
        
Balance, beginning of period $7,702  $9,458 
Acquisition of Centennial Bancshares, Inc.  694    
Amortization expense  (462)  (439)
       
Balance, March 31 $7,934   9,019 
        
Amortization expense      (1,317)
        
Balance, end of year     $7,702 
        
     The carrying basis and accumulated amortization of the Company’s core deposits and other intangibles at September 30, 2007March 31, 2008 and December 31, 2006, were as follows:2007 were:
                
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
 (In thousands)  (In thousands) 
Gross carrying amount $13,457 $13,457  $14,151 $13,457 
Accumulated amortization 5,316 3,999  6,217 5,755 
          
 
Net carrying amount $8,141 $9,458  $7,934 $7,702 
          
     Core deposit and other intangible amortization for the three months ended September 30,March 31, 2008 and 2007 and 2006 was approximately $439,000. Core deposit intangible amortization for the nine months ended September 30, 2007$462,000 and 2006 was approximately $1.3 million.$439,000, respectively. Including all of the mergers completed, HBI’s estimated amortization expense of core deposits and other intangibles for each of the years 20072008 through 20112012 is: 2007 — $1.7 million; 2008 — $1.7$1.8 million; 2009 — $1.7$1.8 million; 2010 — $1.6$1.8 million; 2011 - - $1.1 million; and 20112012$981,000.$619,000.
     The carrying amount of the Company’s goodwill was $37.5 million at September 30, 2007 and December 31, 2006.     Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
6: Deposits
     The aggregate amount of time deposits with a minimum denomination of $100,000 was $432.6$532.2 million and $486.3$435.5 million at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $5.9$5.7 million and $5.0$5.8 million for the three months ended September 30,March 31, 2008 and 2007, and 2006, respectively. Interest expense applicable to certificates in excess of $100,000 totaled $17.2 million and $13.6 million for the nine months ended September 30, 2007 and 2006, respectively.

15


     Deposits totaling approximately $188.7$228.5 million and $203.0$185.6 million at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively, were public funds obtained primarily from state and political subdivisions in the United States.

14


7: FHLB Borrowed Funds
     The Company’s FHLB borrowed funds were $226.0$249.8 million and $151.8$251.8 million at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively. The outstanding balance for September 30, 2007March 31, 2008 includes $87.0$10.0 million of short-term advances and $139.0$239.8 million of long-term advances. The outstanding balance for December 31, 20062007 includes $5.0$116.0 million of short-term advances and $146.8$135.8 million of long-term advances. The long-term FHLB advances mature from 2007the current year to 20202025 with interest rates ranging from 2.019%1.955% to 5.575%5.416% and are secured by loans in the Company’s loan portfolio.and investments securities.
8: Subordinated Debentures
     Subordinated Debentures at September 30,March 31, 2007 and December 31, 20062007 consisted of guaranteed payments on trust preferred securities with the following components:
                
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
 (In thousands)  (In thousands) 
Subordinated debentures, issued in 2003, due 2033, fixed at 6.40%, during the first five years and at a floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, thereafter, callable in 2008 without penalty $20,619 $20,619 
Subordinated debentures, issued in 2003, due 2033, fixed at 6.40%, during the first five years and at a floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty $20,619 $20,619 
Subordinated debentures, issued in 2000, due 2030, fixed at 10.60%, callable in 2010 with a penalty ranging from 5.30% to 0.53% depending on the year of prepayment, callable in 2020 without penalty 3,356 3,424  3,311 3,333 
Subordinated debentures, issued in 2003, due 2033, floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, callable in 2008 without penalty 5,155 5,155 
Subordinated debentures, issued in 2003, due 2033, floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, currently callable without penalty 5,155 5,155 
Subordinated debentures, issued in 2005, due 2035, fixed rate of 6.81% during the first ten years and at a floating rate of 1.38% above the three-month LIBOR rate, reset quarterly, thereafter, callable in 2010 without penalty 15,465 15,465  15,465 15,465 
Subordinated debentures, issued in 2006, due 2036, fixed rate of 6.75% during the first five years and at a floating rate of 1.85% above the three-month LIBOR rate, reset quarterly, thereafter, callable in 2011 without penalty 3,093  
          
Total subordinated debt $44,595 $44,663  $47,643 $44,572 
          

16


     As a result of the acquisition of Marine Bancorp, Inc., the Company has an interest rate swap agreement that effectively converts the floating rate on the $5.2 million trust preferred security noted above into a fixed interest rate of 7.29%, thus reducing the impact of interest rate changes on future interest expense until the call date.
     The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Company, the sole asset of each trust. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The Company wholly owns the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The Company’s obligations under the junior subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.

15


9: Income Taxes
     The following is a summary of the components of the provision for income taxes for the three-month and nine-month periods ended September 30:March 31:
                
 Three Months Ended Nine Months Ended 
 September 30, September 30,         
 2007 2006 2007 2006  2008 2007 
 (In thousands)  (In thousands) 
Current:  
Federal $2,568 $1,859 $7,086 $5,224  $4,345 $2,252 
State 363 369 970 1,038  725 290 
              
Total current 2,931 2,228 8,056 6,262  5,070 2,542 
              
 
Deferred:  
Federal  (567)  (224)  (1,499)  (935)  (1,245)  (501)
State  (106)  (44)  (284)  (186)  (230)  (96)
              
Total deferred  (673)  (268)  (1,783)  (1,121)  (1,475)  (597)
              
Provision for income taxes $2,258 $1,960 $6,273 $5,141  $3,595 $1,945 
              
     The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows for the three-month and nine-month periods ended September 30:March 31:
                
 Three Months Ended Nine Months Ended 
 September 30, September 30,         
 2007 2006 2007 2006  2008 2007
Statutory federal income tax rate  35.00%  35.00%  35.00%  35.00%  35.00%  35.00%
Effect of nontaxable interest income  (4.60)  (4.51)  (4.75)  (5.48)  (4.62)  (4.94)
Cash value of life insurance  (2.83)  (0.30)  (2.99)  (0.34)  (1.89)  (3.12)
State income taxes, net of federal benefit 2.23 2.37 2.09 2.12  2.96 1.88 
Other 0.36  (1.19) 0.07  (0.29) 1.61 0.18 
              
Effective income tax rate  30.16%  31.37%  29.42%  31.01%  33.06%  29.00%
              

1617


     The types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities, and their approximate tax effects, are as follows:
                
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
 (In thousands)  (In thousands) 
Deferred tax assets:  
Allowance for loan losses $11,212 $10,219  $14,421 $11,512 
Deferred compensation 341 244  449 397 
Defined benefit pension plan  107 
Stock options 283 155  374 328 
Non-accrual interest income 513 489  603 562 
Investment in unconsolidated subsidiary 552 485  104 519 
Unrealized loss on securities 2,534 3,179 
Unrealized (gain) loss on securities  (373) 1,519 
Net operating loss carryforward 491  
Other 148 170  658 148 
          
Gross deferred tax assets 15,583 15,048  16,727 14,985 
          
Deferred tax liabilities:  
Accelerated depreciation on premises and equipment 1,964 2,082  2,032 1,997 
Core deposit intangibles 3,061 3,552  3,003 2,897 
Market value of cash flow hedge 3 25   4 
FHLB dividends 639 567  762 681 
Other 417 461  347 243 
          
Gross deferred tax liabilities 6,084 6,687  6,144 5,822 
          
Net deferred tax assets $9,499 $8,361  $10,583 $9,163 
          
10: Common Stock and Stock Compensation Plans
     On August 1, 2006, the Company redeemed and converted the issued and outstanding shares of Home BancShares’s Class A Preferred Stock and Class B Preferred Stock into Home BancShares Common Stock. The conversion of the preferred stock increased the Company’s outstanding common stock by approximately 2.2 million shares.
     The holder’s of shares of Class A Preferred Stock, received 0.789474 of Home BancShares Common Stock for each share of Class A Preferred Stock owned, plus a check for the pro rata amount of the third quarter Class A Preferred Stock dividend accrued through July 31, 2006. The Class A Preferred shareholders did not receive fractional shares, instead they received cash at a rate of $12.67 times the fraction of a share they otherwise would have been entitled to.
     The holders of shares of Class B Preferred Stock received three shares of Home BancShares Common Stock for each share of Class B Preferred Stock owned, plus a check for the pro rata amount of the third quarter Class B Preferred Stock dividend accrued through July 31, 2006.
     On June 22, 2006, the Company priced its initial public offering of 2.5 million shares of common stock at $18.00 per share. The total price to the public for the shares offered and sold by the Company was $45.0 million. The amount of expenses incurred for the Company’s account in connection with the offering includes approximately $3.1 million of underwriting discounts and commissions and offering expenses of approximately $1.0 million. The Company received net proceeds of approximately $40.9 million from its sale of shares after deducting sales commissionshas a stock option and expenses.
     On July 21, 2006, the underwriter’s of the Company’s initial public offering exercised and completed their option to purchase an additional 375,000 shares of common stock to cover over-allotments effective July 26, 2006. The Company received net proceeds of approximately $6.3 million from this sale of shares after deducting sales commissions.

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     On March 13, 2006, the Company’s board of directors adopted the 2006 Stock Option and Performance Incentive Plan. The Plan was submitted to the shareholders for approval at the 2006 annual meeting of shareholders.performance incentive plan. The purpose of the Planplan is to attract and retain highly qualified officers, directors, key employees, and other persons, and to motivate those persons to improve our business results. This plan which was amended at the 2007 shareholder meeting provides for the granting of incentive nonqualified options to purchase up to 1.5 million shares of common stock in the Company.
     The Plan amends and restates various prior plans that were either adopted by the Company or companies that were acquired. Awards made under any of the prior plans will be subject to the terms and conditions of the Plan, which is designed not to impair the rights of award holders under the prior plans. The Plan goes beyond the prior plans by including new types of awards (such as unrestricted stock, performance shares, and performance and annual incentive awards) in addition to the stock options (incentive and non-qualified), stock appreciation rights, and restricted stock that could have been awarded under one or more of the prior plans. In addition, the Company’s outstanding preferred stock options are also subject to the Plan.
     As of March 13, 2006, options for a total of 613,604 shares of common stock outstanding under the prior plans became subject to the Plan. Also, on that date, the Company’s board of directors replaced 341,000 outstanding stock appreciation rights with 354,640 options, each with an exercise price of $13.18. During 2005, the Company had issued 341,000 stock appreciation rights at $12.67 for certain executive employees throughout the Company. The appreciation rights were on a five-year cliff-vesting schedule with all appreciation rights vesting on December 31, 2009. The vesting was also subject to various financial performance goals of the Company and the subsidiary banks over the five-year period ending January 1, 2010. The options issued in replacement of the stock appreciation rights are subject to achievement of the same financial goals by the Company and the bank subsidiaries over the five-year period ending January 1, 2010.
     On January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (R), “Share-Based Payment” (“SFAS123(R)”), using the modified-prospective-transition method. Under that transition method, compensation cost is recognized beginning in 2006 includes: (a) the compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB Statement No. 123, and (b) the compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123 (R). Prior to January 1, 2006, the Company accounted for stock-based compensation using the intrinsic value method.     Total unrecognized compensation cost, net of income tax benefit, related to non-vested awards, which are expected to be recognized over the vesting periods, is approximately $650,000$582,000 as of September 30, 2007.
     As a result of adopting SFAS 123(R), the Company’s income before income taxes and net income for the three months ended September 30, 2007, are $118,000 and $72,000 lower, respectively, than if the Company had continued to account for share-based compensation under the intrinsic method. As a result of adopting SFAS 123(R), the Company’s income before income taxes and net income for the nine months ended September 30, 2007, are $340,000 and $207,000 lower, respectively, than if the Company had continued to account for share-based compensation under the intrinsic method. Basic and diluted earnings per share for the three months ended September 30, 2007, would have been $0.31 and $0.30, respectively, if the Company had not adopted Statement 123(R), compared to reported basic and diluted earnings per share of $0.30. Basic and diluted earnings per share for the nine months ended September 30, 2007, would have been $0.88 and $0.87, respectively, if the Company had not adopted Statement 123(R), compared to reported basic and diluted earnings per share of $0.87 and $0.86, respectively. For purposes of pro forma disclosures as required by SFAS No. 123(R), the estimated fair value of stock options is amortized over the options’ vesting period.March 31, 2008. The intrinsic value of the stock options outstanding and stock options vested at September 30, 2007March 31, 2008 was $10.1$9.1 million and $6.7$6.1 million, respectively. The intrinsic value of the stock options exercised during the three-month and nine-month periodsperiod ended September 30, 2007March 31, 2008 was $62,000 and $579,000, respectively.$46,000.

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     As a result of adopting SFAS 123(R), the Company’s income before income taxes and net income for the three months ended September 30, 2006, are $98,000 and $67,000 lower, respectively, than if the Company had continued to account for share-based compensation under the intrinsic method. As a result of adopting SFAS 123(R), the Company’s income before income taxes and net income for the nine months ended September 30, 2006, are $303,000 and $209,000 lower, respectively, than if the Company had continued to account for share-based compensation under the intrinsic method. Basic and diluted earnings per share were not impacted by SFAS 123(R) for the three months ended September 30, 2006. Basic and diluted earnings per share for the nine months ended September 30, 2006, would have been $0.83 and $0.76, respectively, if the Company had not adopted Statement 123(R), compared to reported basic and diluted earnings per share of $0.82 and $0.74, respectively.
     The table below summarized the transactions under the Company’s stock option plans at September 30, 2007March 31, 2008 and December 31, 20062007 and changes during the nine-monththree-month period and year then ended, respectively:
                                
 For Nine Months Ended For the Year Ended  For the Three Months Ended For the Year Ended
 September 30, 2007 December 31, 2006  March 31, 2008 December 31, 2007
 Weighted   Weighted  Weighted Weighted
 Average   Average  Average Average
 Exercisable   Exercisable  Exercisable Exercisable
 Shares (000) Price Shares (000) Price  Shares (000) Price Shares (000) Price
Outstanding, beginning of year 1,032 $11.39 630 $10.07  1,014 $12.01 1,032 $11.39 
Granted 41 23.02 410 14.22  42 20.37 41 23.02 
Converted options of preferred stock A   9 8.66 
Converted options of preferred stock B   71 6.36 
Forfeited  (12) 12.29  (31) 12.90   (1) 13.18  (14) 12.27 
Exercised  (37) 7.40  (57) 9.40   (3) 6.87  (45) 7.99 
          
Outstanding, end of period 1,024 12.01 1,032 11.39  1,052 12.36 1,014 12.01 
          
Exercisable, end of period 557 $9.78 560 $9.27  567 $10.11 558 $9.80 
          
     For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options. The weighted-average fair value of options granted during the ninethree months ended September 30, 2007March 31, 2008 and year-ended December 31, 2006,2007, was $5.34$2.69 and $3.39,$5.34, respectively. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
                
 For Nine Months Ended For the Year Ended  For the Three Months Ended For the Year Ended
 September 30, 2007 December 31, 2006  March 31, 2008 December 31, 2007
Expected dividend yield  0.46%  0.59%  0.98%  0.46%
Expected stock price Volatility  9.44%  9.23%
Expected stock price volatility  2.70%  9.44%
Risk-free interest rate  4.65%  4.80%  3.36%  4.65%
Expected life of options 6.1 years 6.3 years  6.4 years 6.1 years 

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     The following is a summary of currently outstanding and exercisable options at September 30, 2007:March 31, 2008:
                                        
Options Outstanding Options Exercisable 
 Options Outstanding Options Exercisable
 Weighted-    
 Weighted-    Average    
 Average Weighted-   Weighted-  Remaining Weighted- Weighted-
 Options Remaining Average Options Average  Options Contractual Average Options Average
 Outstanding Contractual Life Exercise Exercisable Exercise  Outstanding Life (in Exercise Exercisable Exercise
Exercise Prices Shares (000) (in years) Price Shares(000) Price  Shares (000) years) Price Shares (000) Price
$6.14 to $6.68 48 4.6 $6.38 48 $6.38 
$7.33 to $8.66 204 4.6 7.43 204 7.43 
$9.33 to $10.31 105 5.9 10.17 101 10.18 
$ 6.14 to $ 6.68 46 4.2 $6.39 46 $6.39 
$ 7.33 to $ 8.66 203 4.1 7.43 203 7.43 
$ 9.33 to $10.31 103 5.4 10.18 102 10.18 
$11.34 to $11.67 69 7.6 11.41 63 11.38  63 7.2 11.41 60 11.40 
$12.67 to $12.67 184 9.2 12.67 128 12.67  184 8.7 12.67 131 12.67 
$13.18 to $13.18 320 8.5 13.18 3 13.18  317 8.0 13.18 3 13.18 
$19.79 to $21.17 53 8.9 21.14 10 21.17  95 9.0 20.80 10 21.17 
$21.89 to $22.12 20 9.6 22.05    20 9.1 22.05 2 22.01 
$23.27 to $24.15 21 9.3 24.11    21 8.8 24.11 10 24.13 
          
 1,024 557  1,052 567 
          
11. Non-Interest Expense
     The table below shows the components of non-interest expense for three and nine months ended September 30, 2007March 31, 2008 and 2006:2007:
                
 Three Months Ended Nine Months Ended 
 September 30, September 30,         
 2007 2006 2007 2006  2008 2007 
 (In thousands)  (In thousands) 
Salaries and employee benefits $7,739 $7,376 $22,936 $22,123  $9,278 $7,440 
Occupancy and equipment 2,446 2,223 6,998 6,351  2,702 2,210 
Data processing expense 644 651 1,958 1,888  786 644 
Other operating expenses:  
Advertising 646 568 1,855 1,738  614 629 
Amortization of intangibles 439 439 1,317 1,303  462 439 
Amortization of mortgage servicing rights 147  
Electronic banking expense 618 152 1,803 430  752 530 
Directors’ fees 225 203 617 609  231 174 
Due from bank service charges 55 91 162 245  62 56 
FDIC and state assessment 266 142 757 394  315 260 
Insurance 211 285 683 741  228 244 
Legal and accounting 308 191 930 747  280 319 
Mortgage servicing expense 87  
Other professional fees 201 204 585 487  833 170 
Operating supplies 241 202 694 684  244 226 
Postage 163 171 498 500  180 164 
Telephone 227 251 688 755  231 228 
Other expense 1,170 1,088 3,376 3,004  1,251 1,008 
              
Total other operating expenses 4,770 3,987 13,965 11,637  5,917 4,447 
              
Total non-interest expense $15,599 $14,237 $45,857 $41,999  $18,683 $14,741 
              

20


     At its April 20, 2007 meeting, our Board of Directors approved a Chairman’s Retirement Plan for John Allison, our Chairman and CEO. Beginning on Mr. Allison’s 65th birthday, he will receive a $250,000 annual benefit to be paid for 10 consecutive years or until his death, whichever shall occur later. This will result in an increaseexpense of approximately $388,000 and $535,000 to non-interest expense for 2007 and 2008, respectively. An expense of $130,000 and $258,000 was accrued for the three and nine months ended September 30, 2007, respectively.March 31, 2008. This expense was accrued using an 8 percent discount factor.
12: Concentration of Credit Risks
     The Company’s primary market area is in central Arkansas, north central Arkansas, northwest Arkansas, southern Arkansas, southwest Florida and the Florida Keys (Monroe County). The Company primarily grants loans to customers located within these geographical areas unless the borrower has an established relationship with the Company.
     The diversity of the Company’s economic base tends to provide a stable lending environment. Although the Company has a loan portfolio that is diversified in both industry and geographic area, a substantial portion of its debtors’ ability to honor their contracts is dependent upon real estate values, tourism demand and the economic conditions prevailing in its market areas.
13: Significant Estimates and Concentrations
     Accounting principles generally accepted in the United Sates of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses and certain concentrations of credit risk are reflected in Note 4, while deposit concentrations are reflected in Note 6.
14: Commitments and Contingencies
     In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of their customers. These commitments and contingent liabilities include lines of credit and commitments to extend credit and issue standby letters of credit. The Company applies the same credit policies and standards as they do in the lending process when making these commitments. The collateral obtained is based on the assessed creditworthiness of the borrower.
     At September 30, 2007March 31, 2008 and December 31, 2006,2007, commitments to extend credit of $292.0$307.7 million and $227.5$315.4 million, respectively, were outstanding. A percentage of these balances are participated out to other banks; therefore, the Company can call on the participating banks to fund future draws. Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
     Outstanding standby letters of credit are contingent commitments issued by the Company, generally to guarantee the performance of a customer in third-party borrowing arrangements. The term of the guarantee is dependent upon the credit worthiness of the borrower some of which are long-term. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2007March 31, 2008 and December 31, 2006,2007, is $17.8 million and $16.1$15.8 million, respectively.
     The Company and/or its subsidiary banks have various unrelated legal proceedings, most of which involve loan foreclosure activity pending, which, in the aggregate, are not expected to have a material adverse effect on the financial position of the Company and its subsidiaries.

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15: Regulatory Matters
     The Company’s subsidiaries are subject to a legal limitation on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. Arkansas bank regulators have specified that the maximum dividend limit state banks may pay to the parent company without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of the preceding year. Since, the Company’s Arkansas bank subsidiaries are also under supervision of the Federal Reserve, they are further limited if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Under Florida state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. A financial holding company is required to maintain risk based capital ratios for its subsidiary banks at or above well capitalized. As the result of historical special dividends paid and leveraged capital positions, the Company’s subsidiary banks do not have any significant undivided profits available for payment of dividends to the Company without prior approvalas of the regulatory agencies at September 30, 2007.March 31, 2008.
     The Federal Reserve Board’s risk-based capital guidelines include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) and undercapitalized institution. The criteria for a well-capitalized institution are: a 5% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio, and a 10% “total risk-based capital” ratio. As of September 30, 2007,March 31, 2008, each of the fivesix subsidiary banks met the capital standards for a well-capitalized institution. The Company’s “Tier 1 leverage capital” ratio, “Tier 1 risk-based capital” ratio, and “total risk-based capital” ratio was 11.40%11.09%, 13.44%13.05%, and 14.69%14.31%, respectively, as of September 30, 2007.March 31, 2008.
16: Additional Cash Flow Information
     In connection with the Centennial Bancshares, Inc. acquisition accounting for using the purchase method, the Company acquired approximately $241.5 million in assets, assumed $218.9 million in liabilities, issued $24.3 million of equity and received net funds of $1.7 million during the three months ended March 31, 2008. The Company paid interest and taxes during the three and nine months ended as follows:
                
 Three Months Ended Nine Months Ended        
 September 30, September 30, Three Months Ended March 31,
 2007 2006 2007 2006 2008 2007
 (In thousands)  (In thousands)
Interest paid $18,587 $15,528 $55,531 $42,354  $18,440 $18,739 
Income taxes paid 1,620 1,100 7,320 4,520  650 350 
17: Adoption of Recent Accounting Pronouncements
     In February 2007,FAS 157
     Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards Board (FASB) issuedNo. 157,Fair Value Measurements(FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the period.

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     FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1Quoted prices in active markets for identical assets or liabilities
Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
     Available-for-sale securities are the only material instruments valued on a recurring basis which are held by the Company at fair value. The Company does not have any Level 1 securities. Primarily all of the Company’s securities are considered to be Level 2 securities. These Level 2 securities consist of U.S. government-sponsored enterprises, mortgage-backed securities plus state and political subdivisions. Level 3 securities were immaterial.
     Impaired loans are the only material instruments valued on a non-recurring basis which are held by the Company at fair value. Impaired loans are considered a Level 3 valuation.
     Compared to prior years, the adoption of SFAS 157 did not have any impact on our 2008 consolidated financial statements.
FAS 159
     Statement of Financial Accounting Standards No. 159, “TheThe Fair Value Option for Financial Assets and Financial Liabilities” to provideLiabilities(FAS 159) became effective for the Company on January 1, 2008. FAS 159 allows companies with an option to report selected financial assets and liabilities at fair value. Because we did not elect the fair value measurement provision for any of our financial assets or liabilities, the adoption of SFAS 159 did not have any impact on our 2008 consolidated financial statements. Presently, we have not determined whether we will elect the fair value measurement provisions for future transactions.
EITF 06-4 and 06-10
     Effective January 1, 2008, the Company adopted EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements and EITF 06-10, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements. As a result of the adoption of EITF 06-4, the Company recognized the effect of applying the EITF with a change in accounting principle through a cumulative-effect adjustment to retained earnings for $276,000. Additionally, this change will result in an increase of approximately $100,000 in annual non-interest expense as a result of the mortality cost for 2008 and beyond. The objectiveadoption of EITF 06-10 did not have any impact on our 2008 consolidated financial statements.

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18: Recent Accounting Pronouncements
     In December 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(revised 2007), Business Combinations, (“SFAS 141(R)”). SFAS 141(R), which replaces SFAS 141, Business Combinations, establishes accounting standards for all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree) including mergers and combinations achieved without the transfer of consideration. SFAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Goodwill is measured as the excess of consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the identifiable net assets acquired. In the event that the fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest (referred to improve financial reporting by providing entities withas a “bargain purchase”), SFAS 141(R) requires the opportunityacquirer to mitigate volatilityrecognize that excess in reported earnings caused by measuring relatedas a gain attributable to the acquirer. In addition, SFAS 141(R) requires costs incurred to effect an acquisition to be recognized separately from the acquisition and requires the recognition of assets andor liabilities differently without having to apply complex hedge accounting provisions. This statement shall be effectivearising from noncontractual contingencies as of the acquisition date only if it is more likely than not that they meet the definition of an asset or liability in FASB Concepts Statement No. 6, Elements of Financial Statements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of eachthe first annual reporting entity’s firstperiod beginning on or after December 15, 2008, which for us is the fiscal year that begins after November 15, 2007.beginning January 1, 2009. The Company is currently evaluating the impact of the adoption of this standard, but does not expect it to have a material effect on the Company’s financial position or results of operations.operation.

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     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this standard, but does not expect it to have a material effect on the Company’s financial position or results of operations.
     In September 2006, the FASB Emerging Issue Task Force (EITF) issued EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The EITF determined that for an endorsement split-dollar life insurance arrangement within the scope of the Issue, the employer should recognize a liability for future benefits in accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or APB Opinion 12, Omnibus Opinion-1967, based on the substantive agreement with the employee. In March 2007, the FASB Emerging Issue Task Force (EITF) issued EITF 06-10, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements. The EITF determined that an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either Statement 106 (if, in substance, a postretirement benefit plan exists) or Opinion 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. These Issues are effective for fiscal years beginning after December 15, 2007, with earlier application permitted. Entities should recognize the effects of applying EITF 06-4 through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. As of September 30, 2007, the Company has split-dollar life insurance arrangements with two executives of the Company that have death benefits. The Company is currently evaluating the impact that the adoption of EITF 06-4 and EITF 06-10, but does not expect it to have a material effect on the Company’s financial position or results of operations.
     In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which provides clarification for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 31, 2006. The Company adopted the Interpretation during the first quarter of 2007 without material effect on the Company’s financial position or results of operations.
     Presently, the Company is not aware of any other changes from the Financial Accounting Standards Board that will have a material impact on the Company’s present or future financial statements.

2324


Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Home BancShares, Inc.
Conway, Arkansas
We have reviewed the accompanying condensed consolidated balance sheet of Home BancShares, Inc. as of September 30, 2007March 31, 2008 and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30,March 31, 2008 and 2007 and 2006 and statements of stockholders’ equity and cash flows for the nine-monththree-month periods ended September 30, 2007March 31, 2008 and 2006.2007. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 20062007 and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 15, 2007,4, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 20062007 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ BKD, LLP  
/s/ BKD, LLP                    
Little Rock, Arkansas
November 7, 2007May 5, 2008

2425


Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on March 20, 2007,5, 2008, which includes the audited financial statements for the year ended December 31, 2006.2007.Unless the context requires otherwise, the terms “Company”, “us”, “we”, and “our” refer to Home BancShares, Inc. on a consolidated basis.
General
     We are a financial holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our fivesix wholly owned bank subsidiaries. As of September 30, 2007,March 31, 2008, we had, on a consolidated basis, total assets of $2.27$2.57 billion, loans receivable of $1.56$1.87 billion, total deposits of $1.60$1.85 billion, and shareholders’ equity of $246.6$286.4 million.
     We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income. Deposits are our primary source of funding. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance by calculating our return on average equity, return on average assets, and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income.
                 
  Key Financial Measures  
  As of and for the Three Months As of and for the Nine Months
  Ended September 30, Ended September 30,
  2007 2006 2007 2006
  (Dollars in thousands, except per share data)
Total assets $2,267,672  $2,113,498  $2,267,672  $2,113,498 
Loans receivable  1,560,374   1,387,279   1,560,374   1,387,279 
Total deposits  1,598,571   1,557,533   1,598,571   1,557,533 
Net income  5,228   4,288   15,050   11,440 
Basic earnings per share  0.30   0.26   0.87   0.82 
Diluted earnings per share  0.30   0.25   0.86   0.74 
Diluted cash earnings per share (1)  0.31   0.26   0.90   0.79 
Annualized net interest margin — FTE  3.55%  3.57%  3.49%  3.54%
Efficiency ratio  62.47   63.72   62.65   65.66 
Annualized return on average assets  0.92   0.83   0.91   0.77 
Annualized return on average equity  8.60   7.81   8.48   8.25 
Key Financial Measures
         
  As of or for the Three Months
  Ended March 31,
  2008 2007
  (Dollars in thousands, except per share data)
Total assets $2,571,145  $2,203,576 
Loans receivable  1,866,969   1,475,376 
Total deposits  1,854,738   1,628,260 
Net income  7,278   4,761 
Basic earnings per share  0.40   0.28 
Diluted earnings per share  0.39   0.27 
Diluted cash earnings per share (1)  0.40   0.29 
Annualized net interest margin — FTE  3.78%  3.42%
Efficiency ratio  51.94   62.52 
Annualized return on average assets  1.15   0.88 
Annualized return on average equity  10.35   8.30 
 
(1) See Table 16 “Diluted Cash Earnings Per Share” for a reconciliation to GAAP for diluted cash earnings per share.
Overview
     Our net income increased 21.9%52.9% to $5.2$7.3 million for the three-month period ended September 30, 2007,March 31, 2008, from $4.3$4.8 million for the same period in 2006. For the nine months ended September 30, 2007, net income increased 31.6% to $15.1 million compared to $11.4 million for the same period in 2006.2007. On a diluted earnings per share basis, our net earnings increased 20.0%44.4% to $0.30$0.39 for the three-month period ended September 30, 2007,March 31, 2008, as compared to $0.25$0.27 for the same period in 2006. Diluted earnings per share increased 16.2% to $0.86 per share for the nine months ended September 30, 2007 compared to $0.74 for the same period in 2006.2007. The increase in earnings per share foris associated with our acquisition of Centennial Bancshares, Inc., a $6.1 million gain on the threesale of our investment in White River Bancshares, Inc. and nine months ended September 30, 2007 is primarily associated with organic growth of our bank subsidiaries.subsidiaries offset by the additional provision for loan loss associated with the unfavorable economic conditions, particularly in the Florida market and a $380,000 loss on a foreclosed owner occupied strip center in Florida and $660,000 of costs associated with an efficiency study.

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     Our annualized return on average assets was 0.92%1.15% and 0.91%0.88% for the three and nine months ended September 30,March 31, 2008 and 2007, compared to 0.83% and 0.77% for the same periods in 2006, respectively. Our annualized return on average equity was 8.60%10.35% and 8.48%8.30% for the three and nine months ended September 30,March 31, 2008 and 2007, compared to 7.81% and 8.25% for the same periods in 2006, respectively. The increases were primarily due to the improvementpreviously discussed improvements in net income for the three and nine months ended September 30, 2007,March 31, 2008, compared to the same periodsperiod in 2006.2007.
     Our annualized net interest margin, on a fully taxable equivalent basis, was 3.55%3.78% and 3.49%3.42% for the three and nine months ended September 30,March 31, 2008 and 2007, compared to 3.57% and 3.54% for the same periods in 2006, respectively. Competitive pressures and a slightly inverted yield curve put pressure on our net interest margin causing the decline from September 30, 2006 to September 30, 2007. The current competitive pressures have eased somewhat during 2007 allowing for an improvement of our net interest margin on a linked quarter basis by achievingOur strong loan growth thatwhich was partially funded by maturitiesrun off in the investment portfolio.portfolio combined with improved pricing on our deposit growth allowed the Company to improve net interest margin.
     Our efficiency ratio (calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income) was 62.47%51.94% and 62.65%62.52% for three and nine months ended September 30,March 31, 2008 and 2007, compared to 63.72% and 65.66% for the same periods in 2006, respectively. The improvement in our efficiency ratio for the three months ended September 30, 2007 compared to the same period in 2006 is primarily due to the continued improvement$6.1 million gain on the sale of our operations. The improvementinvestment in our efficiency ratio forWhite River Bancshares, Inc. combined with the nine months ended September 30, 2007 compared to the same period in 2006 is primarily due to an increase in net interest income from the net proceeds of our initial public offering and continued improvement of our operations.
     Our total assets increased $77.0$279.5 million, an annualized growth of 4.7%49.1%, to $2.27$2.57 billion as of September 30, 2007,March 31, 2008, from $2.19$2.29 billion as of December 31, 2006.2007. Our loan portfolio increased $144.1$260.0 million, an annualized growth of 13.6%65.1%, to $1.56$1.87 billion as of September 30, 2007,March 31, 2008, from $1.42$1.61 billion as of December 31, 2006.2007. Shareholders’ equity increased $15.2$33.3 million, an annualized growth of 8.8%53.0%, to $246.6$286.4 million as of September 30, 2007,March 31, 2008, compared to $231.4$253.1 million as of December 31, 2006.2007. Asset and loan increases are primarily associated with our acquisition of Centennial Bancshares and organic growth of our bank subsidiaries. During the first quarter of 2008 we experienced $67.2 million of organic loan growth. The increase in stockholders’ equity was primarily the result of the $24.3 million in additional capital that was issued upon our acquisition of Centennial Bancshares, Inc. combined with the retained earnings for the ninethree months.
     As of September 30, 2007,March 31, 2008, our non-performing loans decreasedincreased to $2.7$12.0 million, or 0.17%0.64%, of total loans from $4.5$3.3 million, or 0.32%0.20%, of total loans as of December 31, 2006.2007. The allowance for loan losses as a percent of non-performing loans increaseddecreased to 1052.0%308.1% as of September 30, 2007,March 31, 2008, compared to 574.4%904.0% from December 31, 2006. These ratios reflect2007. The increase in non-performing loans is associated with the continuing commitmentunfavorable economic conditions in the Florida market combined with our acquisition of our management to improve and maintain sound asset quality.Centennial Bancshares, Inc.
Critical Accounting Policies
     Overview.We prepare our consolidated financial statements based on the selection of certain accounting policies, generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. Our accounting policies are described in detail in the notes to our consolidated financial statements in Note 1 of the audited consolidated financial statements included in our Form 10-K, filed with the Securities and Exchange Commission.
     We consider a policy critical if (i) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate; and (ii) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that the accounting policies most critical to us are those associated with our lending practices, including the accounting for the allowance for loan losses, investments, intangible assets, income taxes and stock options.

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     Investments.Securities available for sale are reported at fair value with unrealized holding gains and losses reported as a separate component of shareholders’ equity and other comprehensive income (loss). Securities that are held as available for sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available for sale.

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     Loans Receivable and Allowance for Loan Losses.Substantially all of our loans receivable are reported at their outstanding principal balance adjusted for any charge-offs, as it is management’s intent to hold them for the foreseeable future or until maturity or payoff, except for mortgage loans held for sale. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding.
     The allowance for loan losses is established through a provision for loan losses charged against income. The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable credit losses on identifiable loans that may become uncollectible and probable credit losses inherent in the remainder of the loan portfolio. The amounts of provisions for loan losses are based on management’s analysis and evaluation of the loan portfolio for identification of problem credits, internal and external factors that may affect collectibility,collectability, relevant credit exposure, particular risks inherent in different kinds of lending, current collateral values and other relevant factors.
     We consider a loan to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms thereof. We apply this policy even if delays or shortfalls in payments are expected to be insignificant. All non-accrual loans and all loans that have been restructured from their original contractual terms are considered impaired loans. The aggregate amount of impaired loans is used in evaluating the adequacy of the allowance for loan losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for loan losses when in the process of collection it appears likely that losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When accrual of interest is discontinued, all unpaid accrued interest is reversed.
     Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for loan losses when management believes that the collectibilitycollectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for loan losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.
     Intangible Assets.Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles are being amortized over 84 to 114 months on a straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual impairment test of goodwill and core deposit intangibles as required by SFAS No. 142,Goodwill and Other Intangible Assets, in the fourth quarter.

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     Income Taxes.We use the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Any estimated tax exposure items identified would be considered in a tax contingency reserve. Changes in any tax contingency reserve would be based on specific development, events, or transactions.
     We and our subsidiaries file consolidated tax returns. Our subsidiaries provide for income taxes on a separate return basis, and remit to us amounts determined to be currently payable.
     Stock Options.Prior to 2006, we elected to follow Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB 25), and related interpretations in accounting for employee stock options using the fair value method. Under APB 25, because the exercise price of the options equals the estimated market price of the stock on the issuance date, no compensation expense is recorded. On January 1, 2006, we adopted SFAS No. 123,Share-Based Payment(Revised 2004) which establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods and services, or (ii) incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant.
Acquisitions and Equity Investments
     On August 24, 2007,January 1, 2008, we announced the signing of a definitive agreement for the acquisition ofacquired Centennial Bancshares, Inc., an Arkansas bank holding company. Centennial Bancshares, Inc. in exchange for our stock and cash. Immediately after the acquisition,owned Centennial Bank, a wholly owned subsidiarylocated in Little Rock, Arkansas which had total assets of Centennial Bancshares, Inc.$234.1 million, loans of $192.8 million and total deposits of $178.8 million on the date of acquisition. The consideration for the merger was $25.4 million, which was paid approximately 4.6%, will be operated as our subsidiary bank. The Centennial Bancshares shareholders that are accredited investors will receive wholeor $1.2 million in cash and 95.4%, or $24.3 million, in shares of our stock equal tocommon stock. In connection with the productacquisition, $3.0 million of 16.8153the purchase price, consisting of $139,000 in cash and the number of130,052 shares of Centennial Bancsharesour common stock, surrendered.was placed in escrow related to possible losses from identified loans and an IRS examination. In the first quarter of 2008, the IRS examination was completed which resulted in $1.0 million of the escrow proceeds being released. The unaccredited investors, which are projected to represent a 2% ownership of Centennial Bancshares, will receive in the aggregate approximately $500,000 in cash. The definitive agreementmerger further provides for an earn out based upon 2008 earnings of up to a maximum of $4,000,000 which can be paid in cash or our stock at the election of the accredited shareholders. Based upon the closing priceAs a result of our stock on September 30, 2007this transaction, we recorded goodwill of $21.79 per share the total purchase price excluding the earn out is approximately $24.8 million. The acquisition is conditioned upon regulatory approval$12.3 million and other customary conditions.a core deposit intangible of $694,000.
     In January 2005, we purchased 20% of the common stock during the formation of White River Bancshares, Inc. of Fayetteville, Arkansas for $9.1 million. White River Bancshares owns all of the stock of Signature Bank of Arkansas, with branch locations in northwest Arkansas. In January 2006, White River Bancshares issued an additional $15.0 million of common stock. To maintain our 20% ownership, we made an additional investment of $3.0 million in January 2006. During April 2007, White River Bancshares acquired 100% of the stock of Brinkley Bancshares, Inc. in Brinkley, Arkansas. As a result, we made a $2.6 million additional investment in White River Bancshares on June 29, 2007 to maintain our 20% ownership. At September 30, 2007,On March 3, 2008, White River Bancshares had approximately $507.8 million in total assets, $411.8 million in total loans and $424.6 million in total deposits.
     We have offered White River Bancshares, Inc. an opportunity to repurchaserepurchased our 20% investment in their company at $150.00 per share. Presently, this transaction is under consideration by their Board of Directors. If the transaction moves forward, it will be on terms that resultwhich resulted in a modest accretion to the 2008 earnings and would include a one-time gain.gain of $6.1 million.

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     In our continuing evaluation of our growth plans for the Company, we believe properly priced bank acquisitions can complement our organic growth and de novo branching growth strategies. The Company’s acquisition focus will be to expand in its primary market areas of Arkansas and Florida. However, management was familiar with the Texas market with a prior institution and, if opportunities arise, would look to expand through a banking acquisition in the Texas market. We are continually evaluating potential bank acquisitions to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.
De Novo Branching
     We intend to continue to open new (commonly referred to de novo) branches in our current markets and in other attractive market areas if opportunities arise. During 2007,2008, we opened branch locations in the Arkansas communities of Quitman, Searcy (2 branches),Morrilton and Bryant plus Key West and Key Largo, Florida. Also during 2007, we consolidated two of our Cabot branch locations into one new financial center.Cabot. Presently, we are evaluating additional opportunities andbut have two pendingno firm commitments for any additional de novo branch locations in Morrilton and Cabot, Arkansas.locations.
Results of Operations
     Our net income increased 21.9%52.9% to $5.2$7.3 million for the three-month period ended September 30, 2007,March 31, 2008, from $4.3$4.8 million for the same period in 2006. For the nine months ended September 30, 2007, net income increased 31.6% to $15.1 million compared to $11.4 million for the same period in 2006.2007. On a diluted earnings per share basis, our net earnings increased 20.0%44.4% to $0.30$0.39 for the three-month period ended September 30, 2007,March 31, 2008, as compared to $0.25$0.27 for the same period in 2006. Diluted earnings per share increased 16.2% to $0.86 per share for the nine months ended September 30, 2007 compared to $0.74 for the same period in 2006.2007. The increase in earnings per share is primarily associated with our acquisition of Centennial Bancshares, Inc., a $6.1 million gain on the sale of our investment in White River Bancshares, Inc. and organic growth of our bank subsidiaries.subsidiaries offset by the additional provision for loan loss associated with the unfavorable economic conditions, particularly in the Florida market and a $380,000 loss on a foreclosed owner occupied strip center in Florida and $660,000 of costs associated with an efficiency study.
     Net Interest Income.Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate.
     The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal FundsDuring 2007, the federal funds rate which is the cost to banks of immediately available overnight funds, began in 2004 at 1%. During 2004, the Federal Funds rate increased 125 basis points to end the year at 2.25%. Over the next 6 quarters, the Federal Funds rate increased 50 basis points in each of the six quarters until June 29, 2006 when it reached 5.25%. The rate then remained constant until September 18, 2007, when the Federal Funds rate was lowered by 50 basis points to 4.75%. The Federal Funds rate decreased another 25 basis points on October 31, 2007 and December 11, 2007. Due to thisthese reductions occurring late in the third quarter of 2007, the impact for the quarteryear was minimal. Average interest rates for 2007 reflect the higher interest rate environment that existed until September 18, 2007 when the Federal Funds rate was lowered. Going forward, we will begin to see more of an impact of the decrease in the Federal Funds rate as our earning assets and interest-bearing liabilities begin to reprice. Average interest rates forDuring 2008, the threerate decreased by 75 basis points on January 22, 2008, 50 basis points on January 30, 2008 and nine months ended September 30, 2007 reflect the higher interest rate environment that existed until September75 basis points on March 18, 2007 when the Federal Funds rate was lowered.2008.

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     Net interest income on a fully taxable equivalent basis increased $1.0$4.9 million, or 5.9%29.2%, to $18.0$21.5 million for the three-month period ended September 30, 2007,March 31, 2008, from $17.0$16.7 million for the same period in 2006.2007. This increase in net interest income was the result of a $4.0$4.3 million increase in interest income offset by $3.0 million increasecombined with a $557,000 decrease in interest expense. The $4.0$4.3 million increase in interest income was primarily the result of our acquisition of Centennial Bancshares, Inc. and organic growth of our bank subsidiaries combined withoffset by the repricing of our earning assets in the higherdeclining interest rate environment. The higher level of earning assets resulted in an improvement in interest income of $3.0$6.3 million, and our earning assets repricing in the higherdeclining interest rate environment resulted in a $1.0$2.0 million increasedecrease in interest income for the three-month period ended September 30, 2007.March 31, 2008. The $3.0 million increase$557,000 decrease in interest expense for the three-month period ended September 30, 2007,March 31, 2008, is primarily the result of organic growth of our bank subsidiaries combined withoffset by our interest bearing liabilities repricing in the higherdeclining interest rate environment. The higher level of interest-bearing liabilities resulted in additional interest expense of $1.6$2.7 million. The repricing of our interest bearing liabilities in the higherdeclining interest rate environment resulted in a $1.4$3.3 million increasedecrease in interest expense for the three-month period ended September 30, 2007.
     Net interest income on a fully taxable equivalent basis increased $3.7 million, or 7.7%, to $52.0 million for the nine-month period ended September 30, 2007, from $48.3 million for the same period in 2006. This increase in net interest income was the result of a $15.8 million increase in interest income offset by $12.1 million increase in interest expense. The $15.8 million increase in interest income was primarily the result of organic growth of our bank subsidiaries combined with the repricing of our earning assets in the higher interest rate environment. The higher level of earning assets resulted in an improvement in interest income of $11.0 million, and our earning assets repricing in the higher interest rate environment resulted in a $4.8 million increase in interest income for the nine-month period ended September 30, 2007. The $12.1 million increase in interest expense for the nine-month period ended September 30, 2007, is primarily the result of organic growth of our bank subsidiaries combined with our interest bearing liabilities repricing in the higher interest rate environment. The higher level of interest-bearing liabilities resulted in additional interest expense of $4.6 million. The repricing of our interest bearing liabilities in the higher interest rate environment resulted in a $7.5 million increase in interest expense for the nine-month period ended September 30, 2007.March 31, 2008.
     Net interest margin, on a fully taxable equivalent basis, was 3.55% and 3.49%3.78% for the three and nine months ended September 30, 2007March 31, 2008 compared to 3.57% and 3.54%3.42% for the same periodsperiod in 2006, respectively. During 2006, competitive pressures and a slightly inverted yield curve put pressure2007. Our strong loan growth which was partially funded by run off in the investment portfolio combined with improved pricing on the Company’s net interest margin. The current competitive pressures have eased somewhat during 2007, allowingour deposit growth allowed the Company to improve net interest margin on a linked quarter basis by achieving strong long growth that was partially funded by maturities in the investment portfolio.margin.
     Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three-month and nine-month periods ended September 30,March 31, 2008 and 2007, and 2006, as well as changes in fully taxable equivalent net interest margin for the three-month and nine-month periodsperiod ended September 30, 2007,March 31, 2008, compared to the same periodsperiod in 2006.2007.

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Table 1: Analysis of Net Interest Income
                
 Three Months Ended Nine Months Ended         
 September 30, September 30,  Three Months Ended March 31, 
 2007 2006 2007 2006  2008 2007 
 (Dollars in thousands)  (Dollars in thousands) 
Interest income $36,381 $32,458 $105,709 $90,078  $38,396 $34,184 
Fully taxable equivalent adjustment 634 521 1,867 1,676  716 610 
              
Interest income — fully taxable equivalent 37,015 32,979 107,576 91,754  39,112 34,794 
Interest expense 19,061 16,022 55,582 43,473  17,565 18,122 
              
Net interest income — fully taxable equivalent $17,954 $16,957 $51,994 $48,281  $21,547 $16,672 
              
 
Yield on earning assets — fully taxable equivalent  7.31%  6.95%  7.23%  6.73%  6.86%  7.13%
Cost of interest-bearing liabilities 4.26 3.93 4.24 3.67  3.50 4.23 
Net interest spread — fully taxable equivalent 3.05 3.02 2.99 3.06  3.36 2.90 
Net interest margin — fully taxable equivalent 3.55 3.57 3.49 3.54  3.78 3.42 
Table 2: Changes in Fully Taxable Equivalent Net Interest Margin
        
 Three Months ��Nine Months 
 Ended Ended     
 September 30, September 30,  March 31, 
 2007 vs. 2006 2007 vs. 2006  2008 vs. 2007 
 (In thousands)  (In thousands) 
Increase in interest income due to change in earning assets $3,029 $10,996  $6,326 
Increase in interest income due to change in earning asset yields 1,007 4,826 
Decrease in interest income due to change in earning asset yields 2,008 
Increase in interest expense due to change in interest-bearing liabilities 1,569 4,599  2,728 
Increase in interest expense due to change in interest rates paid on interest-bearing liabilities 1,470 7,510 
Decrease in interest expense due to change in interest rates paid on interest-bearing liabilities 3,285 
        
Increase in net interest income $997 $3,713  $4,875 
        

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     Table 3 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three-month and nine-month periods ended September 30, 2007March 31, 2008 and 2006.2007. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.

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Table 3: Average Balance Sheets and Net Interest Income Analysis
                                          
 Three Months Ended September 30,  Three Months Ended March 31, 
 2007 2006  2008 2007 
 Average Income / Yield / Average Income / Yield /  Average Income / Yield / Average Income / Yield 
 Balance Expense Rate Balance Expense Rate  Balance Expense Rate Balance Expense / Rate 
 (Dollars in thousands)  (Dollars in thousands) 
ASSETS
  
Earning assets 
Earnings assets 
Interest-bearing balances due from banks $3,894 $53  5.40% $2,927 $38  5.15% $5,397 $55  4.10% $3,793 $49  5.24%
Federal funds sold 2,995 36 4.77 3,887 51 5.21  22,701 166 2.94 18,031 235 5.29 
Investment securities — taxable 366,530 4,133 4.47 418,753 4,738 4.49  324,101 3,762 4.67 407,373 4,586 4.57 
Investment securities — non-taxable 87,953 1,614 7.28 91,931 1,361 5.87  109,314 1,826 6.72 97,785 1,581 6.56 
Loans receivable 1,547,858 31,179 7.99 1,364,587 26,791 7.79  1,831,338 33,303 7.31 1,450,789 28,343 7.92 
                  
Total interest-earning assets 2,009,230 37,015 7.31 1,882,085 32,979 6.95  2,292,851 39,112 6.86 1,977,771 34,794 7.13 
          
Non-earning assets 234,003 177,846  257,680 219,924 
          
Total assets $2,243,233 $2,059,931  $2,550,531 $2,197,695 
          
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
  
Liabilities  
Interest-bearing liabilities  
Interest-bearing transaction and savings deposits $586,710 $4,375  2.96% $516,207 $3,358  2.58% $650,235 $3,405  2.11% $592,101 $4,335  2.97%
Time deposits 813,676 10,041 4.90 769,271 8,652 4.46  917,348 10,117 4.44 820,942 9,798 4.84 
                  
Total interest-bearing deposits 1,400,386 14,416 4.08 1,285,478 12,010 3.71  1,567,583 13,522 3.47 1,413,043 14,133 4.06 
Federal funds purchased 14,446 194 5.33 13,232 178 5.34  6,578 69 4.22 15,397 205 5.40 
Securities sold under agreement to repurchase 125,877 1,267 3.99 118,796 1,258 4.20  117,426 588 2.01 115,754 1,224 4.29 
FHLB and other borrowed funds 191,887 2,426 5.02 153,921 1,825 4.70 
FHLB borrowed funds 276,357 2,575 3.75 148,897 1,811 4.93 
Subordinated debentures 44,609 758 6.74 44,699 751 6.67  47,656 811 6.84 44,654 749 6.80 
                  
Total interest-bearing liabilities 1,777,205 19,061 4.26 1,616,126 16,022 3.93  2,015,600 17,565 3.50 1,737,745 18,122 4.23 
          
Non-interest bearing liabilities  
Non-interest-bearing deposits 212,298 213,682  237,028 214,461 
Other liabilities 12,577 12,179  15,155 12,718 
          
Total liabilities 2,002,080 1,841,987  2,267,783 1,964,924 
Shareholders’ equity 241,153 217,944  282,748 232,771 
          
Total liabilities and shareholders’ equity $2,243,233 $2,059,931  $2,550,531 $2,197,695 
          
Net interest spread  3.05%  3.02%  3.36%  2.90%
Net interest income and margin $17,954 3.55 $16,957 3.57  $21,547  3.78% $16,672  3.42%
          

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  Nine Months Ended September 30, 
  2007  2006 
  Average  Income /  Yield /  Average  Income /  Yield / 
  Balance  Expense  Rate  Balance  Expense  Rate 
  (Dollars in thousands) 
ASSETS
                        
Earning assets                        
Interest-bearing balances due from banks $3,336  $132   5.29% $2,916  $103   4.72%
Federal funds sold  7,973   311   5.22   11,062   393   4.75 
Investment securities — taxable  382,985   12,992   4.54   426,549   14,174   4.44 
Investment securities — non-taxable  94,227   4,781   6.78   92,179   4,367   6.33 
Loans receivable  1,501,983   89,360   7.95   1,289,594   72,717   7.54 
                     
Total interest-earning assets  1,990,504   107,576   7.23   1,822,300   91,754   6.73 
                       
Non-earning assets  227,419           173,821         
                       
Total assets $2,217,923          $1,996,121         
                       
                         
LIABILITIES AND SHAREHOLDERS’ EQUITY
                        
Liabilities                        
Interest-bearing liabilities                        
Interest-bearing transaction and savings deposits $598,070  $13,357   2.99% $523,843  $9,323   2.38%
Time deposits  805,125   29,283   4.86   747,782   23,360   4.18 
                     
Total interest-bearing deposits  1,403,195   42,640   4.06   1,271,625   32,683   3.44 
Federal funds purchased  16,071   646   5.37   17,221   636   4.94 
Securities sold under agreement to repurchase  120,451   3,772   4.19   107,798   3,122   3.87 
FHLB and other borrowed funds  168,046   6,270   4.99   141,994   4,787   4.51 
Subordinated debentures  44,631   2,254   6.75   44,722   2,245   6.71 
                     
Total interest-bearing liabilities  1,752,394   55,582   4.24   1,583,360   43,473   3.67 
                      
Non-interest bearing liabilities                        
Non-interest-bearing deposits  215,716           216,366         
Other liabilities  12,422           10,903         
                       
Total liabilities  1,980,532           1,810,629         
Shareholders’ equity  237,391           185,492         
                       
Total liabilities and shareholders’ equity $2,217,923          $1,996,121         
                       
Net interest spread          2.99%          3.06%
Net interest income and margin     $51,994   3.49      $48,281   3.54 
                       
     Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three-month and nine-month periodsperiod ended September 30, 2007March 31, 2008 compared to the same periodsperiod in 2006,2007, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.

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Table 4: Volume/Rate Analysis
                                    
 Three Months Ended September 30, Nine Months Ended September 30,  Three Months Ended March 31, 
 2007 over 2006 2007 over 2006  2008 over 2007 
 Volume Yield/Rate Total Volume Yield/Rate Total  Volume Yield/Rate Total 
 (In thousands)  (In thousands) 
Increase (decrease) in:  
Interest income:  
Interest-bearing balances due from banks 13 2 15 16 13 29  $18 $(12) $6 
Federal funds sold  (11)  (4)  (15)  (117) 35  (82) 51  (120)  (69)
Investment securities — taxable  (589)  (16)  (605)  (1,473) 291  (1,182)  (963) 139  (824)
Investment securities — non-taxable  (61) 314 253 99 315 414  192 53 245 
Loans receivable 3,677 711 4,388 12,471 4,172 16,643  7,028  (2,068) 4,960 
                    
Total interest income 3,029 1,007 4,036 10,996 4,826 15,822  6,326  (2,008) 4,318 
                    
  
Interest expense:  
Interest-bearing transaction and savings deposits 491 526 1,017 1,441 2,593 4,034  395  (1,325)  (930)
Time deposits 517 872 1,389 1,886 4,037 5,923  1,098  (779) 319 
Federal funds purchased 16  16  (44) 54 10   (100)  (36)  (136)
Securities sold under agreement to repurchase 73  (64) 9 384 266 650  18  (654)  (636)
FHLB and other borrowed funds 474 127 601 937 546 1,483 
FHLB borrowed funds 1,266  (502) 764 
Subordinated debentures  (2) 9 7  (5) 14 9  51 11 62 
                    
Total interest expense 1,569 1,470 3,039 4,599 7,510 12,109  2,728  (3,285)  (557)
                    
  
Increase (decrease) in net interest income $1,460 $(463) $997 $6,397 $(2,684) $3,713  $3,598 $1,277 $4,875 
                    
     Provision for Loan Losses.Our management assesses the adequacy of the allowance for loan losses by applying the provisions of Statement of Financial Accounting Standards No. 5 and No. 114. Specific allocations are determined for loans considered to be impaired and loss factors are assigned to the remainder of the loan portfolio to determine an appropriate level in the allowance for loan losses. The allowance is increased, as necessary, by making a provision for loan losses. The specific allocations for impaired loans are assigned based on an estimated net realizable value after a thorough review of the credit relationship. The potential loss factors associated with the remainder of the loan portfolio are based on an internal net loss experience, as well as management’s review of trends within the portfolio and related industries.
     Generally, commercial, commercial real estate, and residential real estate loans are assigned a level of risk at origination. Thereafter, these loans are reviewed on a regular basis. The periodic reviews generally include loan payment and collateral status, the borrowers’ financial data, and key ratios such as cash flows, operating income, liquidity, and leverage. A material change in the borrower’s credit analysis can result in an increase or decrease in the loan’s assigned risk grade. Aggregate dollar volume by risk grade is monitored on an ongoing basis.

33


     Our management reviews certain key loan quality indicators on a monthly basis, including current economic conditions, delinquency trends and ratios, portfolio mix changes, and other information management deems necessary. This review process provides a degree of objective measurement that is used in conjunction with periodic internal evaluations. To the extent that this review process yields differences between estimated and actual observed losses, adjustments are made to the loss factors used to determine the appropriate level of the allowance for loan losses.

34


     The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings, to maintain the allowance for loan losses at a level that is considered adequate in relation to the estimated risk inherent in the loan portfolio. Our provision for loan losses decreased $102,000,increased $4.0 million, or 15.7%486.5%, to $547,000$4.8 million for the three-month period ended September 30, 2007,March 31, 2008, from $649,000$820,000 for the same period in 2006. Our provision for loan losses increased $300,000, or 18.8%, to $2.0 million for the nine-month period ended September 30, 2007, from $1.7 million for the same period in 2006.2007. The decreaseincrease in the provision for the three months ended September 30, 2007 compared to the same periodis primarily associated with a decline in 2006 was impacted by the lower rate ofasset quality, particularly in our Florida market combined with growth in the loan portfolioportfolio. The decrease in our asset quality is primarily related to the thirdunfavorable economic conditions that are impacting our Florida market. During the first quarter of 2007.2008, we recorded a provision for loan loss in our Florida subsidiary of $3.4 million.
     Non-Interest Income.Total non-interest income was $6.3$13.5 million for the three-month period ended September 30, 2007March 31, 2008 compared to $4.7$6.2 million for the same period in 2006. Total non-interest income was $19.1 million for the nine-month period ended September 30, 2007 compared to $13.7 million for the same period in 2006.2007. Our non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, data processing fees, mortgage banking income, insurance commissions, income from title services, increases in cash value of life insurance, dividends, equity in earnings of unconsolidated affiliates and other income.
     Table 5 measures the various components of our non-interest income for the three-month and nine-month periods ended September 30,March 31, 2008 and 2007, and 2006, respectively, as well as changes for the three-month and nine-month periodsperiod ended September 30, 2007March 31, 2008 compared to the same periodsperiod in 2006.2007.
Table 5: Non-Interest Income
                                                
 Three Months Ended 2007 Nine Months Ended 2007  Three Months Ended   
 September 30, Change from September 30, Change from  March 31, 2008 Change 
 2007 2006 2006 2007 2006 2006  2008 2007 from 2007 
 (Dollars in thousands)  (Dollars in thousands) 
Service charges on deposit accounts $2,816 $2,354 $462  19.6% $8,073 $6,669 $1,404  21.1% $3,097 $2,588 $509  19.7%
Other service charges and fees 1,342 541 801 148.1 4,176 1,736 2,440 140.6  1,763 1,500 263 17.5 
Trust fees 27 166  (139)  (83.7) 81 487  (406)  (83.4)
Data processing fees 192 215  (23)  (10.7) 619 623  (4)  (0.6) 210 218  (8)  (3.7)
Mortgage banking income 451 435 16 3.7 1,277 1,285  (8)  (0.6)
Mortgage lending income 632 348 284 81.6 
Mortgage servicing income 231  231 100.0 
Insurance commissions 153 153   613 642  (29)  (4.5) 272 289  (17)  (5.9)
Income from title services 181 233  (52)  (22.3) 575 752  (177)  (23.5) 168 156 12 7.7 
Increase in cash value of life insurance 607 55 552 1,003.6 1,822 161 1,661 1,031.7  585 598  (13)  (2.2)
Dividends from FHLB, FRB & bankers’ bank 218 180 38 21.1 652 440 212 48.2  281 227 54 23.8 
Equity in earnings of unconsolidated affiliates 47  (65) 112  (172.3)  (123)  (213) 90  (42.3)
Gain on sale of SBA loans     170 34 136 400.0 
Gain (loss) on sale of premises and equip, net  (31) 129  (160)  (124.0) 150 157  (7)  (4.5)
Gain on securities, net      1  (1)  (100.0)
Equity in income (loss) of unconsolidated affiliates 102  (114) 216 189.5 
Gain on sale of equity investment 6,102  6,102 100.0 
Gain on sale of SBA 101  101 100.0 
Gain (loss) on sale of premises and equipment, net  (2) 14  (16)  (114.3)
Gain (loss) on OREO  (380) 37  (417)  (1,127.0)
Other income 309 302 7 2.3 1,015 924 91 9.8  372 344 28 8.1 
                    
Total non-interest income $6,312 $4,698 $1,614  34.4% $19,100 $13,698 $5,402  39.4% $13,534 $6,205 $7,329  118.1%
                    

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     Non-interest income increased $1.6$7.3 million, or 34.4%118.1%, to $6.3$13.5 million for the three-month period ended September 30, 2007March 31, 2008 from $4.7$6.2 million for the same period in 2006. Non-interest income increased $5.4 million, or 39.4%, to $19.1 million for the nine-month period ended September 30, 2007 from $13.7 million for the same period in 2006.2007. The primary factors that resulted in the increase include:
  TheOf the $509,000 aggregate increase in service charges on deposit accounts, was primarily a resultour acquisition of Centennial Bancshares, Inc. accounted for $130,000 of the increase. The remaining increase is related to organic growth of our bank subsidiaries and an improved fee process.
 
  TheOf the $263,000 aggregate increase in other service charges and fees, was primarilyour acquisition of Centennial Bancshares, Inc. accounted for $145,000 of the increase. The remaining increases are a result of increased retention of interchange fees an infrequent referral fee received in the first quarter of 2007 and organic growth. More specifically, during the fourth quartergrowth of 2006, we were able to negotiate with a new vendor the processing of interchange fees associated with our electronic banking transactions. This improved position is allowing us to retain more of the interchange fees by leveraging our in-house technology. During January 2007, we received a $125,000 referral fee from another institution for a large loan that we elected not to originate because it was outside our normal lending activities. We do not believe referral fees of this nature will be recurring.bank subsidiaries
 
  InOf the fourth quarter of 2006, we made a strategic decision to enter into an agent agreement for the management of our trust services to a non-affiliated third party. This change was caused by our aspiration to improve the overall profitability of the trust efforts. The aggregate decrease in trust fees for the three-month and nine-month periods ended September 30, 2007 was primarily the result of the vendor retaining a significant portion of our trust fees. The out-sourcing of the trust management resulted in $214,000 and $622,000 reductions of non-interest expense for the three-month and nine-month periods ended September 30, 2007, respectively, when compared to the same periods of the previous year. This non-interest expense reduction includes $162,000 and $490,000 related to salaries and employee benefits for the three and nine months ended September 30, 2007, respectively.
Late in the third quarter of 2007, White River Bancshares moved their data processing services in house. This resulted in a decrease in data processing fee income of approximately $17,000 in the third quarter of 2007. This will result in an annual reduction of our data processing fees of approximately $300,000.
Our community banks purchased $35 million and $3.5 million of additional bank owned life insurance on December 14, 2006 and April 23, 2007, respectively. The$284,000 aggregate increase in cash surrender valuemortgage lending income, our acquisition of Centennial Bancshares, Inc. accounted for $84,000 of the increase. The remaining increase is primarily related to these new policies.organic growth of our bank subsidiaries.
 
  The aggregate increase in dividendsnew revenue source, mortgage servicing income was primarily associated with the Federal Reserve Bank (FRB) stockrelated to our bank subsidiaries bought in connection with their change to supervisionacquisition of the Federal Reserve Board combined with additional stock they bought in Federal Home Loan Bank (FHLB) to increase their borrowing capacity with FHLB.Centennial Bancshares, Inc. As a result of this acquisition, we now have a mortgage loan servicing portfolio of approximately $290 million and purchased mortgage servicing rights of $2.3 million.
 
  The equity in earnings of unconsolidated affiliate is related to the 20% interest in White River Bancshares that we purchased during 2005. Because the investment in White River Bancshares is accounted for on the equity method, we recorded our share of White River Bancshares’ operating earnings. White River Bancshares had been operating at a loss as a result of their status as a start up company until the current quarter. The maturity oflate in 2007. White River Bancshares and their acquisition of Brinkley Bancshares, Inc. helped to improve their earnings and should allowrepurchased our interest in them to beon March 3, 2008. This resulted in a profitable position going forward.one time gain on the sale of the equity investment of $6.1 million.
The $380,000 loss on OREO is related to a foreclosure on an owner occupied strip center in the Florida market. Due to the unfavorable economic conditions in the Florida market, the current fair market value estimate required for this write down be taken on the property.

3635


The aggregate decrease in gain on sale of premises and equipment for the three months ended September 30, 2007 compared to the same period in 2006 is primarily a result of our banking subsidiary acquired in 2003 disposing of excess premises and equipment in 2006 that were no longer needed as a result of synergies achieved from the combined entities. Gain on sale of premises and equipment for the nine months ended September 30, 2007 remained constant when compared to the same period in 2006 due to a gain in the second quarter of 2007 associated with the final settlement of insurance proceeds associated with the damage incurred by the storm surge during Hurricane Wilma, which struck the Florida Keys during the fourth quarter of 2005.
     Non-Interest Expense.Non-interest expense consists of salary and employee benefits, occupancy and equipment, data processing, and other expenses such as advertising, amortization of intangibles, electronic banking expense, FDIC and state assessment, insurance,and legal and accounting fees, operating supplies and telephone.fees.
     Table 6 below sets forth a summary of non-interest expense for the three-month and nine-month periods ended September 30,March 31, 2008 and 2007, and 2006, as well as changes for the three-month and nine-month periodsperiod ended September 30, 2007March 31, 2008 compared to the same period in 2006.2007.
Table 6: Non-Interest Expense
                                
 Three Months Nine Months                   
 Ended 2007 Ended 2007  Three Months Ended   
 September 30, Change from September 30, Change from  March 31, 2008 Change 
 2007 2006 2006 2007 2006 2006  2008 2007 from 2007 
 (Dollars in thousands)  (Dollars in thousands) 
Salaries and employee benefits $7,739 $7,376 $363  4.9% $22,936 $22,123 $813  3.7% $9,278 $7,440 $1,838  24.7%
Occupancy and equipment 2,446 2,223 223 10.0 6,998 6,351 647 10.2  2,702 2,210 492 22.3 
Data processing expense 644 651  (7)  (1.1) 1,958 1,888 70 3.7  786 644 142 22.0 
Other operating expenses:  
Advertising 646 568 78 13.7 1,855 1,738 117 6.7  614 629  (15)  (2.4)
Amortization of intangibles 439 439   1,317 1,303 14 1.1  462 439 23 5.2 
Amortization of purchased mortgage servicing rights 147  147 100.0 
Electronic banking expense 618 152 466 306.6 1,803 430 1,373 319.3  752 530 222 41.9 
Directors’ fees 225 203 22 10.8 617 609 8 1.3  231 174 57 32.8 
Due from bank service charges 55 91  (36)  (39.6) 162 245  (83)  (33.9) 62 56 6 10.7 
FDIC and state assessment 266 142 124 87.3 757 394 363 92.1  315 260 55 21.2 
Insurance 211 285  (74)  (26.0) 683 741  (58)  (7.8) 228 244  (16)  (6.6)
Legal and accounting 308 191 117 61.3 930 747 183 24.5  280 319  (39)  (12.2)
Mortgage servicing expense 87  87 100.0 
Other professional fees 201 204  (3)  (1.5) 585 487 98 20.1  833 170 663 390.0 
Operating supplies 241 202 39 19.3 694 684 10 1.5  244 226 18 8.0 
Postage 163 171  (8)  (4.7) 498 500  (2)  (0.4) 180 164 16 9.8 
Telephone 227 251  (24)  (9.6) 688 755  (67)  (8.9) 231 228 3 1.3 
Other expense 1,170 1,088 82 7.5 3,376 3,004 372 12.4  1,251 1,008 243 24.1 
                    
Total non-interest expense $15,599 $14,237 $1,362  9.6% $45,857 $41,999 $3,858  9.2% $18,683 $14,741 $3,942  26.7%
                    
     Non-interest expense increased $1.4$3.9 million, or 9.6%26.7%, to $15.6$18.7 million for the three-month period ended September 30, 2007,March 31, 2008, from $14.2$14.7 million for the same period in 2006. Non-interest expense increased $3.9 million, or 9.2%, to $45.9 million for the nine-month period ended September 30, 2007, from $42.0 million for the same period in 2006.2007. The increase is the result of our acquisition of Centennial Bancshares, Inc. during the first quarter of 2008, the continued expansion of the Company and additional costs associated with an efficiency study performed during the first quarter of 2008 combined with the normal increased cost of doing business. The most significant component of the increase was related to our acquisition of Centennial Bancshares. Another component was the $466,000 and $1.4 million increase in electronic banking expense for the three and nine months ended September 30, 2007. The electronic banking increase was primarily the result$660,000 of additional costs associated with our ability to retain morean efficiency study performed by a third party in the first quarter of the interchange fee income.2008. The remaining increases are primarily the result of the continued expansion of the Company combined with the normal increased cost of doing business. During 20072008 and 2006,2007, we have opened fivetwo de novo branch locations in Florida and six in Arkansas.

3736


     At its April 20, 2007 meeting, our Board of Directors approved a Chairman’s Retirement Plan for John Allison, our Chairman and CEO. Beginning on Mr. Allison’s 65th birthday, he will receive a $250,000 annual benefit to be paid for 10 consecutive years or until his death, whichever shall occur later. This will result in an increase of approximately $388,000 and $535,000 to non-interest expense for 2007 and 2008, respectively.2008. An expense of $130,000 and $258,000 was accrued for the three and nine months ended September 30, 2007, respectively.March 31, 2008. During April 2007, we purchased $3.5 million of additional bank-owned life insurance to help offset a portion of the costs related to this retirement benefit.
     Income Taxes.The provision for income taxes increased $298,000,$1.7 million, or 15.2%84.8%, to $2.3$3.6 million for the three-month period ended September 30, 2007,March 31, 2008, from $2.0$1.9 million as of September 30, 2006. The provision for income taxes increased $1.2 million, or 22.0%, to $6.3 million for the nine-month period ended September 30, 2007, from $5.1 million as of September 30, 2006.March 31, 2007. The effective income tax rate was 30.16% and 29.42%33.1% for the three-month and nine-month periodsperiod ended September 30, 2007,March 31, 2008, compared to 31.37% and 31.01%29.0% for the same periodsperiod in 2006, respectively.2007. The lower effective incomeprimary cause of this increase is the result of our increased earnings which is tax-effected at a marginal tax rate for 2007 is primarily associated with our purchase of $3.5 million and $35 million in additional bank owned life insurance in the second quarter of 2007 and fourth quarter of 2006, respectively, which resulted in additional tax-free non-interest income.39.225%.
Financial Conditions as of and for the Quarter Ended September 30,March 31, 2008 and 2007 and 2006
     Our total assets increased $77.0$279.5 million, an annualized growth of 4.7%49.1%, to $2.27$2.57 billion as of September 30, 2007,March 31, 2008, from $2.19$2.29 billion as of December 31, 2006.2007. Our loan portfolio increased $144.1$260.0 million, an annualized growth of 13.6%65.1%, to $1.56$1.87 billion as of September 30, 2007,March 31, 2008, from $1.42$1.61 billion as of December 31, 2006.2007. Shareholders’ equity increased $15.2$33.3 million, an annualized growth of 8.8%53.0%, to $246.6$286.4 million as of September 30, 2007,March 31, 2008, compared to $231.4$253.1 million as of December 31, 2006.2007. Asset and loan increases are primarily associated with our acquisition of Centennial Bancshares, Inc. and organic growth of our bank subsidiaries. On January 1, 2008, as a result of our acquisition of Centennial Bancshares, assets and loans increased by $234.1 million and $192.8 million, respectively. The increase in stockholders’ equity was primarily the result of the issuance of $24.3 million in stock as a result of our acquisition of Centennial Bancshares and retained earnings for the ninethree months.
Loan Portfolio
     Our loan portfolio averaged $1.55 billion and $1.50$1.83 billion during the three-month and nine-month periodsperiod ended September 30, 2007. TotalMarch 31, 2008. Net loans were $1.56$1.83 billion as of September 30, 2007,March 31, 2008, compared to $1.42$1.58 billion as of December 31, 2006.2007. The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer, and commercial and industrial loans. These loans are primarily originated within our market areas of central Arkansas, north central Arkansas, northwest Arkansas, southern Arkansas, southwest Florida and the Florida Keys and are generally secured by residential or commercial real estate or business or personal property within our market areas.
     Certain credit markets have experienced difficult conditions and volatility during 2007.2007 and 2008, particularly Florida. These markets continue to experience pressure including the well publicized sub-prime mortgage market. The Company does not actively market or originate subprime mortgage loans.

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     Table 7 presents our loan balances by category as of the dates indicated.
Table 7: Loan Portfolio
                
 As of As of  As of As of 
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
 (In thousands)  (In thousands) 
Real estate:  
Commercial real estate loans:  
Non-farm/non-residential $590,083 $465,306  $765,881 $607,638 
Construction/land development 365,236 393,410  341,442 367,422 
Agricultural 22,432 11,659  24,739 22,605 
Residential real estate loans:  
Residential 1-4 family 251,057 229,588  343,475 259,975 
Multifamily residential 38,528 37,440  73,220 45,428 
          
Total real estate 1,267,336 1,137,403  1,548,757 1,303,068 
Consumer 45,212 45,056  55,251 46,275 
Commercial and industrial 206,744 206,559  224,756 219,062 
Agricultural 25,506 13,520  17,559 20,429 
Other 15,576 13,757  20,646 18,160 
          
Total loans receivable before allowance for loan losses 1,560,374 1,416,295  1,866,969 1,606,994 
Allowance for loan losses 28,636 26,111  37,075 29,406 
          
Total loans receivable, net $1,531,738 $1,390,184  $1,829,894 $1,577,588 
          
     Commercial Real Estate Loans.We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized over a 10 to 20 year period with balloon payments due at the end of one to five years. These loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.
     As of September 30, 2007,March 31, 2008, commercial real estate loans totaled $977.8 million,$1.13 billion, or 62.7%60.6% of our loan portfolio, compared to $870.3$997.7 million, or 61.5%62.1% of our loan portfolio, as of December 31, 2006. This2007. Our acquisition of Centennial Bancshares resulted in an increase of $91.5 million of commercial real estate. The remaining increase is primarily the result of strong demand for this type of loan product which resulted in organic growth of our loan portfolio.
     Residential Real Estate Loans.We originate one to four family, owner occupied residential mortgage loans generally secured by property located in our primary market area. The majority of our residential mortgage loans consist of loans secured by owner occupied, single family residences. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.

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     As of September 30, 2007,March 31, 2008, we had $289.6$416.7 million, or 18.6%22.3% of our loan portfolio, in residential real estate loans, compared to the $267.0$305.4 million, or 18.9%19.0% of our loan portfolio, as of December 31, 2006.2007. Our acquisition of Centennial Bancshares resulted in an increase of $65.4 million of residential real estate loans. The changing market conditions have given our community banks the opportunity to retain more residential real estate loans. These loans have normal maturities of less than five years.
     Consumer Loans.Our consumer loan portfolio is composed of secured and unsecured loans originated by our banks. The performance of consumer loans will be affected by the local and regional economy as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.
     As of September 30, 2007,March 31, 2008, our installment consumer loan portfolio totaled $45.2$55.3 million, or 2.9%3.0% of our total loan portfolio, which is comparablecompared to the $45.1$46.3 million, or 3.2%2.9% of our loan portfolio as of December 31, 2006.2007. The primary cause for the increase is related to our acquisition of Centennial Bancshares which resulted in an increase of $8.3 million to consumer loans.
     Commercial and Industrial Loans.Commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. The terms for commercial loans are generally one to five years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally speaking, accounts receivable are financed at between 50% to 80% of accounts receivable less than 90 days past due. Inventory financing will range between 50% and 60% depending on the borrower and nature of inventory. We require a first lien position for those loans.
     As of September 30, 2007,March 31, 2008, commercial and industrial loans outstanding totaled $206.7$224.8 million, or 13.2%12.0% of our loan portfolio, which is comparablecompared to $206.6$219.1 million, or 14.6%13.6% of our loan portfolio, as of December 31, 2006.2007. Our acquisition of Centennial Bancshares resulted in an increase of $31.5 million of commercial and industrial loans. The offsetting decrease is related to the payoff of a couple of large credits during the first quarter of 2008.
  Non-Performing Assets
     We classify our problem loans into three categories: past due loans, special mention loans and classified loans (accruing and non-accruing).
     When management determines that a loan is no longer performing, and that collection of interest appears doubtful, the loan is placed on non-accrual status. Loans that are 90 days past due are placed on non-accrual status unless they are adequately secured and there is reasonable assurance of full collection of both principal and interest. Our management closely monitors all loans that are contractually 90 days past due, treated as “special mention” or otherwise classified or on non-accrual status. Generally, non-accrual loans that are 120 days past due without assurance of repayment are charged off against the allowance for loan losses.

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     Table 8 sets forth information with respect to our non-performing assets as of September 30, 2007March 31, 2008 and December 31, 2006.2007. As of these dates, we did not have any restructured loans within the meaning of Statement of Financial Accounting Standards No. 15.

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Table 8: Non-performing Assets
                
 As of As of  As of As of 
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
 (Dollars in thousands)  (Dollars in thousands) 
Non-accrual loans $2,572 $3,905  $12,033 $2,952 
Loans past due 90 days or more (principal or interest payments) 150 641   301 
          
Total non-performing loans 2,722 4,546  12,033 3,253 
     
      
Other non-performing assets  
Foreclosed assets held for sale 4,915 435  5,097 5,083 
Other non-performing assets  13  27 15 
          
Total other non-performing assets 4,915 448  5,124 5,098 
          
Total non-performing assets $7,637 $4,994  $17,157 $8,351 
          
  
Allowance for loan losses to non-performing loans  1,052.02%  574.37%  308.11%  903.97%
Non-performing loans to total loans 0.17 0.32  0.64 0.20 
Non-performing assets to total assets 0.34 0.23  0.67 0.36 
     Our non-performing loans are comprised of non-accrual loans and loans that are contractually past due 90 days. Our bank subsidiaries recognize income principally on the accrual basis of accounting. When loans are classified as non-accrual, the accrued interest is charged off and no further interest is accrued, unless the credit characteristics of the loan improves. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for loan losses.
     Total non-performing loans were $2.7$12.0 million as of September 30, 2007,March 31, 2008, compared to $4.5$3.3 million as of December 31, 20062007 for an increase of $8.7 million. Part of this increase is related to our acquisition of Centennial Bancshares on January 1, 2008 which reported $2.4 million of non-performing loans as of March 31, 2008. As anticipated, we saw an increase in non-performing loans from our Florida market. As a decreaseresult of $1.8the slowdown in housing sales in our Florida markets, our non-performing loans increased by $5.6 million. The weakening real estate market has and may continue to raise our level of non-performing loans going forward. When we reported our year-end results, we provided a projection for non-performing loans to total loans in the range of 0.60% to 2.0%. This continues to be our expected range for non-performing loans to total loans. While we believe our allowance for loan losses is adequate at March 31, 2008, as additional facts become known about relevant internal and external factors that effect loan collectability and our assumptions, it may result in us making additions to the provision for loan loss during 2008.
     If the non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $103,000$136,000 and $117,000$88,000 for the three-month periods ended September 30,March 31, 2008 and 2007, and 2006, respectively, and $193,000 and $374,000 for the nine months ended September 30, 2007 and 2006, respectively, would have been recorded. Interest income recognized on the non-accrual loans for the three-month and nine-month periods ended September 30,March 31, 2008 and 2007 and 2006 was considered immaterial.
     A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans may include non-performing loans (loans past due 90 days or more and non-accrual loans) and certain other loans identified by management that are still performing. At September 30, 2007 and December 31, 2006, impaired loans totaled $7.9 million and $11.2 million, respectively. As of September 30, 2007, year-to-dateMarch 31, 2008, average impaired loans were $11.8$22.5 million compared to $6.2$10.0 million as of September 30, 2006. These changes represent normal variations andMarch 31, 2007. At March 31, 2008, impaired loans were $33.2 million compared to $11.9 million at March 31, 2007 for an increase of $21.3 million. The unfavorable economic conditions that are not an indicationimpacting our Florida market accounted for $17.4 million of a change inthe $21.3 million increase, while the acquisition of Centennial Bancshares, increased our overall asset quality.impaired loans by $2.4 million.

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     The $4.5 million increasebalance in foreclosed assets held for sale is primarily the result of one credit located in the Florida Keys. This foreclosure wasis an owner occupied strip center. The space the proprietor occupied has subsequently been leased and the rest of the center is occupied. At this point, little or no loss is anticipated onIn the foreclosure.
     The appreciationfirst quarter of 2008, we took a $380,000 write down of the real estateproperty to reflect the current fair market value estimate. We are cautiously optimistic that this property can be disposed of during the second or third quarter of 2008.
     Due to the unfavorable economic conditions in the Florida Keys has slowed, as a result of the sluggish economy. This has the potentialmarket, current fair market value estimates required that this write down to decrease the real estate values in the Keys. While we have some concerns, management believes the loans are still adequately collateralized atbe taken on this time.

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     As a result of the building boom in northwest Arkansas, this market is experiencing over-development. More specifically, the number of residential real estate lots and commercial real estate projects available exceed the current demand. For example, “The Streetsmart Report” published in the second quarter of 2007 by Streetsmart Data Services, reported that the current absorption rate implies that the supply of remaining lots in northwest Arkansas active subdivisions is sufficient for approximately 58 months. Management will actively monitor the status of this market as it relates to our real estate loans and make changes to the allowance for loan losses if necessary. As of September 30, 2007, we had two credits amounting to $23.9 million in loans secured by real estate in northwest Arkansas. We anticipate no weakness in these credits as they are well-secured by substantial guarantors. At September 30, 2007, we had no loan participations in northwest Arkansas with our unconsolidated affiliate White River Bancshares Inc.property.
  Allowance for Loan Losses
     Overview.The allowance for loan losses is maintained at a level which our management believes is adequate to absorb all probable losses on loans in the loan portfolio. The amount of the allowance is affected by: (i) loan charge-offs, which decrease the allowance; (ii) recoveries on loans previously charged off, which increase the allowance; and (iii) the provision of possible loan losses charged to income, which increases the allowance. In determining the provision for possible loan losses, it is necessary for our management to monitor fluctuations in the allowance resulting from actual charge-offs and recoveries and to periodically review the size and composition of the loan portfolio in light of current and anticipated economic conditions. If actual losses exceed the amount of allowance for loan losses, our earnings could be adversely affected.
     As we evaluate the allowance for loan losses, we categorize it as follows: (i) specific allocations; (ii) allocations for classified assets with no specific allocation; (iii) general allocations for each major loan category; and (iv) miscellaneous allocations.
     Specific Allocations.As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. Our evaluation process in specific allocations includes a review of appraisals or other collateral analysis. These values are compared to the remaining outstanding principal balance. If a loss is determined to be reasonably possible, the possible loss is identified as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the expected future cash flows of the loan.
     Allocations for Classified Assets with No Specific Allocation.We establish allocations for loans rated “special mention” through “loss” in accordance with the guidelines established by the regulatory agencies. A percentage rate is applied to each loan category to determine the level of dollar allocation.
     General Allocations.We establish general allocations for each major loan category. This section also includes allocations to loans, which are collectively evaluated for loss such as residential real estate, commercial real estate, consumer loans and commercial and industrial loans. The allocations in this section are based on a historical review of loan loss experience and past due accounts. We give consideration to trends, changes in loan mix, delinquencies, prior losses, and other related information.
     Miscellaneous Allocations.Allowance allocations other than specific, classified, and general are included in our miscellaneous section.
     Charge-offs and Recoveries.Total charge-offs decreased $38,000,increased $523,000, or 18.1%523.0%, to $172,000$623,000 for the three months ended September 30, 2007,March 31, 2008, compared to the same period in 2006.2007. Total charge-offsrecoveries decreased $645,000,$2,000, or 65.5%1.9%, to $340,000$101,000 for the ninethree months ended September 30, 2007,March 31, 2008, compared to the same period in 2006. Total recoveries decreased $119,000, or 44.4%,2007. The changes in net charge-offs are due to $149,000 forour proactive stance on asset quality. The acquisition completed in the three months ended September 30, 2007, compared to the same period in 2006. Total recoveries decreased $221,000, or 21.3%, to $818,000 for the nine months ended September 30, 2007, compared to the same period in 2006. The overallfirst quarter of 2008 has a minimal impact on net recovery position for 2007 is a reflection of our thorough approach to asset quality.charge-offs.

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     Table 9 shows the allowance for loan losses, charge-offs and recoveries as of and for the three-month and nine-month periods ended September 30, 2007March 31, 2008 and 2006.2007.
Table 9: Analysis of Allowance for Loan Losses
                
 Three Months Ended Nine Months Ended         
 September 30, September 30,  As of March 31, 
 2007 2006 2007 2006  2008 2007 
 (Dollars in thousands)  (Dollars in thousands) 
Balance, beginning of period $28,112 $25,245 $26,111 $24,175  $29,406 $26,111 
 
Loans charged off  
Real estate:  
Commerical real estate loans: 
Commercial real estate loans: 
Non-farm/non-residential  64  322  16  
Construction/land development  43 8 45  44  
Agricultural  10  18    
Residential real estate loans:  
Residential 1-4 family 32 2 42 109  357 10 
Multifamily residential 6  6     
              
Total real estate 38 119 56 494  417 10 
Consumer 70 58 179 173  100 59 
Commercial and industrial 64 29 105 281  106 31 
Agricultural        
Other  4  37    
              
Total loans charged off 172 210 340 985  623 100 
         
      
Recoveries of loans previously charged off  
Real estate:  
Commercial real estate loans:  
Non-farm/non-residential 13 29 431 67  4 16 
Construction/land development  25 1 123  2 1 
Agricultural 5  5     
Residential real estate loans:  
Residential 1-4 family 47 93 151 344  29 24 
Multifamily residential 5 5 5 65    
              
Total real estate 70 152 593 599  35 41 
Consumer 18 14 94 45  34 36 
Commercial and industrial 58 87 100 150  31 19 
Agricultural        
Other 3 15 31 245  1 7 
              
Total recoveries 149 268 818 1,039  101 103 
              
Net (recoveries) loans charged off 23  (58)  (478)  (54) 522  (3)
Allowance for loan loss of Centennial Bancshares, Inc. 3,382  
Provision for loan losses 547 649 2,047 1,723  4,809 820 
              
Balance, September 30 $28,636 $25,952 $28,636 $25,952 
Balance, March 31 $37,075 $26,934 
              
Net (recoveries) charge-offs to average loans  0.01%  (0.02)%  (0.04)%  (0.01)%  0.11%  %
Allowance for loan losses to period-end loans 1.84 1.87 1.84 1.87 
Allowance for loan losses to period end loans 1.99 1.83 
Allowance for loan losses to net (recoveries) charge-offs 31,382  (11,278)  (4,481)  (35,946) 1,766  (221,375)

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     Allocated Allowance for Loan Losses.We use a risk rating and specific reserve methodology in the calculation and allocation of our allowance for loan losses. While the allowance is allocated to various loan categories in assessing and evaluating the level of the allowance, the allowance is available to cover charge-offs incurred in all loan categories. Because a portion of our portfolio has not matured to the degree necessary to obtain reliable loss data from which to calculate estimated future losses, the unallocated portion of the allowance is an integral component of the total allowance. Although unassigned to a particular credit relationship or product segment, this portion of the allowance is vital to safeguard against the imprecision inherent in estimating credit losses.
     The changes for the period ended September 30, 2007March 31, 2008 in the allocation of the allowance for loan losses for the individual types of loans forare primarily associated with the most part are consistent with thedecline in asset quality, particularly in our Florida market, our acquisition of Centennial Bancshares, Inc. on January 1, 2008 and normal changes in the outstanding loan portfolio for those products from December 31, 2006. In the opinion of management, any allocation changes not consistent with the changes in the loan portfolio product would be considered normal operating changes, not downgrading or upgrading of any one particular type of loans in the loan portfolio.2007.
     Table 10 presents the allocation of allowance for loan losses as of September 30, 2007March 31, 2008 and December 31, 2006.2007.
Table 10: Allocation of Allowance for Loan Losses
                
 As of As of                 
 September 30, 2007 December 31, 2006  As of March 31, 2008 As of December 31, 2007 
 Allowance % of Allowance % of  Allowance % of Allowance % of 
 Amount loans(1) Amount loans(1)  Amount loans(1) Amount loans(1) 
 (Dollars in thousands)  (Dollars in thousands) 
Real estate:  
Commercial real estate loans:  
Non farm/non-residential $11,626  37.8% $9,130  32.8%
Non-farm/non-residential $14,355  41.0% $11,475  37.8%
Construction/land development 7,283 23.4 7,494 27.8  9,363 18.3 7,332 22.9 
Agricultural 655 1.4 505 0.8  367 1.3 311 1.4 
Residential real estate loans:  
Residential 1-4 family 3,269 16.1 3,091 16.2  6,291 18.4 3,968 16.2 
Multifamily residential 600 2.5 909 2.6  1,190 4.0 727 2.8 
                  
Total real estate 23,433 81.2 21,129 80.2  31,566 83.0 23,813 81.1 
Consumer 864 2.9 861 3.2  956 3.0 905 2.9 
Commercial and industrial 3,355 13.3 3,237 14.6  3,652 12.0 3,243 13.6 
Agricultural 876 1.6 456 1.0  532 0.9 599 1.3 
Other 18 1.0 11 1.0  14 1.1 14 1.1 
Unallocated 90  417   355  832  
                  
Total $28,636  100.0% $26,111  100.0% $37,075  100.0% $29,406  100.0%
                  
 
(1) Percentage of loans in each category to loans receivable.
Investments and Securities
     Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. As of September 30, 2007,March 31, 2008, we had no held-to-maturity or trading securities.

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     Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of shareholders’ equity as other comprehensive income. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available for sale. Available-for-sale securities were $447.8$403.8 million as

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of September 30, 2007,March 31, 2008, compared to $531.9$430.4 million as of December 31, 2006.2007. The estimated duration of our securities portfolio was 2.92.5 years as of September 30, 2007.March 31, 2008.
     As of September 30, 2007, $187.3March 31, 2008, $194.1 million, or 41.8%48.1%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $219.8$181.6 million, or 41.3%42.2%, of our available-for-sale securities as of December 31, 2006.2007. To reduce our income tax burden, $102.2$112.3 million, or 22.8%27.8%, of our available-for-sale securities portfolio as of September 30, 2007,March 31, 2008, was primarily invested in tax-exempt obligations of state and political subdivisions, compared to $103.4$111.3 million, or 19.4%25.9%, of our available-for-sale securities as of December 31, 2006.2007. Also, we had approximately $146.6$86.4 million, or 32.7%21.4%, invested in obligations of U.S. Government-sponsored enterprises as of September 30, 2007,March 31, 2008, compared to $196.2$126.3 million, or 36.9%29.3%, of our available-for-sale securities as of December 31, 2006.2007.
     Certain investment securities are valued at less than their historical cost. These declines primarily resulted from recent increases in market interest rates. Based on evaluation of available evidence, we believe the declines in fair value for these securities are temporary. It is our intent to hold these securities to recovery. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
     Table 11 presents the carrying value and fair value of investment securities as of September 30, 2007March 31, 2008 and December 31, 2006.2007.
Table 11: Investment Securities
                                
 As of September 30, 2007  As of March 31, 2008 
 Gross Gross    Gross Gross   
 Amortized Unrealized Unrealized Estimated  Amortized Unrealized Unrealized Estimated 
 Cost Gains (Losses) Fair Value  Cost Gains (Losses) Fair Value 
   (In thousands)    (In thousands) 
Available-for-Sale
  
U.S. government-sponsored enterprises $148,815 $98 $(2,313) $146,600 
U.S. Government-sponsored enterprises $85,367 $1,042 $(8) $86,401 
Mortgage-backed securities 191,777 50  (4,501) 187,326  194,077 1,555  (1,517) 194,115 
State and political subdivisions 101,803 1,117  (754) 102,166  111,915 1,520  (1,106) 112,329 
Other securities 11,893   (159) 11,734  11,266   (356) 10,910 
                  
Total $454,288 $1,265 $(7,727) $447,826  $402,625 $4,117 $(2,987) $403,755 
                  
                                
 As of December 31, 2006  As of December 31, 2007 
 Gross Gross    Gross Gross   
 Amortized Unrealized Unrealized Estimated  Amortized Unrealized Unrealized Estimated 
 Cost Gains (Losses) Fair Value  Cost Gains (Losses) Fair Value 
   (In thousands)    (In thousands) 
Available-for-Sale
  
U.S. government-sponsored enterprises $199,085 $79 $(2,927) $196,237 
U.S. Government-sponsored enterprises $126,898 $268 $(872) $126,294 
Mortgage-backed securities 225,747 41  (5,988) 219,800  184,949 179  (3,554) 181,574 
State and political subdivisions 102,536 1,360  (496) 103,400  111,014 1,105  (812) 111,307 
Other securities 12,631   (177) 12,454  11,411   (187) 11,224 
                  
Total $539,999 $1,480 $(9,588) $531,891  $434,272 $1,552 $(5,425) $430,399 
                  

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Deposits
     Our deposits averaged $1.40$1.80 billion for the three-month and nine-month periodsperiod ended September 30, 2007.March 31, 2008. Total deposits decreased $8.6increased $262.5 million, or an annualized declineincrease of 0.7%66.3%, to $1.60$1.85 billion as of September 30, 2007,March 31, 2008, from $1.61$1.59 billion as of December 31, 2006.2007. On January 1, 2008, as a result of our acquisition of Centennial Bancshares, deposits increased by $178.8 million. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions. Our policy also permits the acceptance of brokered deposits. As of September 30, 2007March 31, 2008 and December 31, 20062007 brokered deposits were $52.8$47.5 million and $50.2$39.3 million, respectively.
     The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing and do not anticipate a significant change in total deposits unless our liquidity position changes. We believe that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if we experience increased loan demand or other liquidity needs. The increase in interest rates paid from 2006 toDuring 2007, is reflective of the Federal Reserve increasing the Federal Fundsfederal funds rate beginning in 2004 and the associated repricing of deposits during the subsequent years. Onremained constant until September 18, 2007, when the Federal Funds rate was lowered by 50 basis points.points to 4.75%. The Federal Funds rate decreased another 25 basis points on October 31, 2007 and December 11, 2007. Due to thisthese reductions occurring late in the third quarter of 2007, the impact for the quarteryear was minimal. Average interest rates for 2007 reflect the higher interest rate environment that existed until September 18, 2007 when the Federal Funds rate was lowered. Going forward, we will begin to see more of an impact of the decrease in the Federal Funds rate as depositsour interest-bearing liabilities begin to reprice. Average interest rates forDuring 2008, the threerate decreased by 75 basis points on January 22, 2008, 50 basis points on January 30, 2008 and nine months ended September 30, 2007 reflect the higher interest rate environment that existed until September75 basis points on March 18, 2007 when the Federal Funds rate was lowered.2008.
     Table 12 reflects the classification of the average deposits and the average rate paid on each deposit category, which is in excess of 10 percent of average total deposits, for the three-month and nine-month periods ended September 30, 2007March 31, 2008 and 2006.2007.

46


Table 12: Average Deposit Balances and Rates
                                
 Three Months Ended September 30,  Three Months Ended March 31, 
 2007 2006  2008 2007 
 Average Average Average Average  Average Average Average Average 
 Amount Rate Paid Amount Rate Paid  Amount Rate Paid Amount Rate Paid 
 (Dollars in thousands)  (Dollars in thousands) 
Non-interest-bearing transaction accounts $212,298  % $213,682  % $237,028  % $214,461  %
Interest-bearing transaction accounts 531,292 3.12 451,051 2.73  596,526 2.21 534,610 3.14 
Savings deposits 55,418 1.38 65,156 1.55  53,709 1.00 57,491 1.42 
Time deposits:  
$100,000 or more 468,168 5.00 432,207 4.68  525,770 4.39 472,219 5.00 
Other time deposits 345,508 4.76 337,064 4.19  391,578 4.50 348,723 4.62 
          
Total $1,612,684  3.55% $1,499,160  3.18% $1,804,611  3.01% $1,627,504  3.52%
          
                 
  Nine Months Ended September 30, 
  2007  2006 
  Average  Average  Average  Average 
  Amount  Rate Paid  Amount  Rate Paid 
  (Dollars in thousands) 
Non-interest-bearing transaction accounts $215,716   % $216,366   %
Interest-bearing transaction accounts  540,895   3.15   448,234   2.51 
Savings deposits  57,175   1.40   75,609   1.61 
Time deposits:                
$100,000 or more  461,570   4.98   407,398   4.48 
Other time deposits  343,555   4.71   340,384   3.81 
               
Total $1,618,911   3.52% $1,487,991   2.94%
               
FHLB Borrowed Funds
     Our FHLB borrowed funds were $226.0$249.8 million as of September 30, 2007.March 31, 2008. The outstanding balance for September 30, 2007March 31, 2008 consists of $87.0$10.0 million of short-term FHLB advances and $139.0$239.8 million of FHLB long-term advances. Our FHLB borrowings were $151.8$251.8 million as of December 31, 2006.2007. The outstanding balance for December 31, 2006,2007, includes $5.0$116.0 million of short-term advances and $146.8$135.8 million of long-term advances. Our remaining FHLB borrowing capacity was $205.5$223.6 million and $323.6$186.6 million as of September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively.

45


Subordinated Debentures
     Subordinated debentures, which consist of guaranteed payments on trust preferred securities, were $44.6$47.6 million and $44.7$44.6 million as of September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively. As a result of the acquisition of Centennial Bancshares we acquired $3.1 million of additional trust preferred securities.

47


     Table 13 reflects subordinated debentures as of September 30, 2007March 31, 2008 and December 31, 2006,2007, which consisted of guaranteed payments on trust preferred securities with the following components:
Table 13: Subordinated Debentures
         
  As of  As of 
  September 30,  December 31, 
  2007  2006 
  (In thousands) 
Subordinated debentures, issued in 2003, due 2033, fixed at 6.40%, during the first five years and at a floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, thereafter, callable in 2008 without penalty $20,619  $20,619 
Subordinated debentures, issued in 2000, due 2030, fixed at 10.60%, callable beginning in 2010 with a prepayment penalty declining from 5.30% to 0.53% depending on the year of prepayment, callable in 2020 without penalty  3,356   3,424 
Subordinated debentures, issued in 2003, due 2033, floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, callable in 2008 without penalty  5,155   5,155 
Subordinated debentures, issued in 2005, due 2035, fixed rate of 6.81% during the first ten years and at a floating rate of 1.38% above the three-month LIBOR rate, reset quarterly, thereafter, callable in 2010 without penalty  15,465   15,465 
       
Total $44,595  $44,663 
       
     As a result of the acquisition of Marine Bancorp, Inc., the Company has an interest rate swap agreement that effectively converts the floating rate on the $5.2 million trust preferred security noted above into a fixed interest rate of 7.29%, thus reducing the impact of interest rate changes on future interest expense until the call date.
         
  As of  As of 
  March 31,  December 31, 
  2008  2007 
  (In thousands) 
Subordinated debentures, issued in 2003, due 2033, fixed at 6.40%, during the first five years and at a floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, thereafter, currently callable without penalty $20,619  $20,619 
Subordinated debentures, issued in 2000, due 2030, fixed at 10.60%, callable in 2010 with a penalty ranging from 5.30% to 0.53% depending on the year of prepayment, callable in 2020 without penalty  3,311   3,333 
Subordinated debentures, issued in 2003, due 2033, floating rate of 3.15% above the three-month LIBOR rate, reset quarterly, currently callable without penalty  5,155   5,155 
Subordinated debentures, issued in 2005, due 2035, fixed rate of 6.81% during the first ten years and at a floating rate of 1.38% above the three-month LIBOR rate, reset quarterly, thereafter, callable in 2010 without penalty  15,465   15,465 
Subordinated debentures, issued in 2006, due 2036, fixed rate of 6.75% during the first five years and at a floating rate of 1.85% above the three-month LIBOR rate, reset quarterly, thereafter, callable in 2011 without penalty  3,093    
       
Total $47,643  $44,572 
       
     The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in our subordinated debentures, the sole asset of each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. We wholly own the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related subordinated debentures. Our obligations under the subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by us of each respective trust’s obligations under the trust securities issued by each respective trust.
     Presently, the funds raised from the trust preferred offerings will qualify as Tier 1 capital for regulatory purposes, subject to the applicable limit, with the balance qualifying as Tier 2 capital.

46


Shareholders’ Equity
     Stockholders’ equity was $246.6$286.4 million at September 30, 2007March 31, 2008 compared to $231.4$253.1 million at December 31, 2006,2007, an annualized increase of 8.8%53.0%. As of September 30, 2007March 31, 2008 our equity to asset ratio was 10.9%11.1%, compared to 10.6%11.0% as of December 31, 2006.2007. Book value per common share was $14.30$15.62 at September 30, 2007March 31, 2008 compared to $13.45$14.67 at December 31, 2006, an 8.4%2007, a 26.0% annualized increase. The increases in stockholders’ equity and book value per share were primarily the result of our acquisition of Centennial Bancshares and retained earnings during the prior ninethree months.
Initial Public Offering. We priced our initial public offering of 2.5 million shares of common stock at $18.00 per share. We received net proceeds of approximately $40.9 million from its sale of shares after deducting sales commissions and expenses. The underwriters of the Company’s initial public offering exercised and completed their option to purchase an additional 375,000 shares of common stock to cover over-allotments effective July 26, 2006. We received net proceeds of approximately $6.3 million from this sale of shares after deducting sales commissions. We have used $16.0 million of the initial public offering proceeds to provide capital contributions to our bank subsidiaries, $2.6 million as an additional investment in White River Bancshares to maintain our 20% ownership and $2.0 million to purchase a long-term investment.

48


Preferred Stock Conversion. During the third quarter of 2006, the Company’s Board of Directors authorized the redemption and conversion of the issued and outstanding shares of Home BancShares Class A Preferred Stock and Class B Preferred Stock into Home BancShares Common Stock, effective as of August 1, 2006.
     The holder’s of shares of Class A Preferred Stock, received 0.789474 of Home BancShares Common Stock for each share of Class A Preferred Stock owned, plus a check for the pro rata amount of the third quarter Class A Preferred Stock dividend accrued through July 31, 2006. The Class A Preferred shareholder’s did not receive fractional shares, instead they received cash at a rate of $12.67 times the fraction of a share they otherwise would be entitled to.
     The holder’s of shares of Class B Preferred Stock, received three shares of Home BancShares Common Stock for each share of Class B Preferred Stock owned, plus a check for the pro rata amount of the third quarter Class B Preferred Stock dividend accrued through July 31, 2006.
     After the exercise of the over-allotment and the conversion of the preferred stock, Home BancShares outstanding common stock increased by approximately 2.5 million shares.
     Cash Dividends.We declared cash dividends on our common stock of $0.04$0.05 and $0.025 per share for the three-month periods ended September 30,March 31, 2008 and 2007, and 2006, respectively, and $0.10 and $0.065 per sharerespectively.
     On January 18, 2008, we announced the adoption by our Board of Directors of a stock repurchase program. The program authorizes us to repurchase up to one million shares of our common stock. Under the repurchase program, there is no time limit for the nine-month periods ended September 30, 2007stock repurchases, nor is there a minimum number of shares that we intend to repurchase. The repurchase program may be suspended or discontinued at any time without prior notices. The timing and 2006, respectively. We declaredamount of any repurchases will be determined by management, based on its evaluation of current market conditions and other factors. The stock repurchase program will be funded using our cash dividends onbalances, which we believe are adequate to support the stock repurchase program and our Class A preferred stock and Class B preferred stock of $0.0208 and $0.0475 per share, respectively, for the three-month period ended September 30, 2006 and $0.14583 and $0.3325 per share, respectively, for the nine-month period ended September 30, 2006.normal operations.
Liquidity and Capital Adequacy Requirements
     Risk-Based Capital.We as well as our bank subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Furthermore, we are deemed by federal regulators to be a source of financial strength for White River Bancshares, despite owning only 20% of its equity. Failure to meet minimum capital requirements can initiate certain mandatory and other discretionary actions by regulators that, if enforced, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings and other factors.

49


     Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of September 30, 2007March 31, 2008 and December 31, 2006,2007, we met all regulatory capital adequacy requirements to which we were subject.

47


     Table 14 presents our risk-based capital ratios as of September 30, 2007March 31, 2008 and December 31, 2006.2007.
Table 14: Risk-Based Capital
                
 As of As of  As of As of 
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
 (Dollars in thousands)  (Dollars in thousands) 
Tier 1 capital  
Shareholders’ equity $246,577 $231,419  $286,391 $253,056 
Qualifying trust preferred securities 43,000 43,000  46,000 43,000 
Goodwill and core deposit intangibles, net  (42,607)  (43,433)  (54,780)  (42,332)
Unrealized loss on available-for-sale securities 3,895 4,892 
Unrealized (gain) loss on available-for-sale securities  (581) 2,255 
Other  (233)  
          
Total Tier 1 capital 250,865 235,878  276,797 255,979 
          
  
Tier 2 capital  
Qualifying allowance for loan losses 23,403 20,308  26,642 23,861 
          
Total Tier 2 capital 23,403 20,308  26,642 23,861 
          
Total risk-based capital $274,268 $256,186  $303,439 $279,840 
          
Average total assets for leverage ratio $2,200,626 $2,089,130  $2,495,518 $2,236,776 
          
Risk weighted assets $1,867,012 $1,618,849  $2,120,915 $1,903,364 
          
  
Ratios at end of period  
Leverage ratio  11.40%  11.29%  11.09%  11.44%
Tier 1 risk-based capital 13.44 14.57  13.05 13.45 
Total risk-based capital 14.69 15.83  14.31 14.70 
Minimum guidelines  
Leverage ratio  4.00%  4.00%  4.00%  4.00%
Tier 1 risk-based capital 4.00 4.00  4.00 4.00 
Total risk-based capital 8.00 8.00  8.00 8.00 
     As of the most recent notification from regulatory agencies, our bank subsidiaries were “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, our banking subsidiaries and we must maintain minimum leverage, Tier 1 risk-based capital, and total risk-based capital ratios as set forth in the table. There are no conditions or events since that notification that we believe have changed the bank subsidiaries’ categories.
     Table 15 presents actual capital amounts and ratios as of September 30, 2007March 31, 2008 and December 31, 2006,2007, for our bank subsidiaries and us.

5048


Table 15: Capital and Ratios
                                                    
   To Be Well To Be Well 
   Capitalized Under Capitalized Under 
For Capital AdequacyPrompt Corrective For Capital Prompt Corrective 
 Actual Purposes Action Provision Actual Adequacy Purposes Action Provision 
 AmountRatio Amount Ratio AmountRatio Amount Ratio Amount Ratio Amount Ratio 
     (Dollars in thousands)     (Dollars in thousands) 
As of September 30, 2007 
As of March 31, 2008 
Leverage ratios: 
Home BancShares $276,797  11.09% $99,837  4.00% $N/A  N/A% 
First State Bank 56,835 9.27 24,524 4.00 30,655 5.00 
Community Bank 34,835 8.89 15,674 4.00 19,592 5.00 
Twin City Bank 62,940 9.10 27,666 4.00 34,582 5.00 
Marine Bank 33,554 8.71 15,409 4.00 19,262 5.00 
Bank of Mountain View 16,440 9.05 7,266 4.00 9,083 5.00 
Centennial Bank 19,975 8.23 9,708 4.00 12,135 5.00 
Tier 1 capital ratios: 
Home BancShares $276,797  13.05% $84,842  4.00% $N/A  N/A% 
First State Bank 56,835 10.53 21,590 4.00 32,385 6.00 
Community Bank 34,835 10.91 12,772 4.00 19,158 6.00 
Twin City Bank 62,940 10.17 24,755 4.00 37,133 6.00 
Marine Bank 33,554 10.06 13,342 4.00 20,012 6.00 
Bank of Mountain View 16,440 14.70 4,473 4.00 6,710 6.00 
Centennial Bank 19,975 10.48 7,624 4.00 11,436 6.00 
Total risk-based capital ratios: 
Home BancShares $303,439  14.31% $169,637  8.00% $N/A  N/A% 
First State Bank 63,605 11.79 43,159 8.00 53,948 10.00 
Community Bank 38,864 12.17 25,547 8.00 31,934 10.00 
Twin City Bank 70,681 11.42 49,514 8.00 61,892 10.00 
Marine Bank 37,771 11.33 26,670 8.00 33,337 10.00 
Bank of Mountain View 17,710 15.83 8,950 8.00 11,188 10.00 
Centennial Bank 22,372 11.74 15,245 8.00 19,056 10.00 
 
As of December 31, 2007 
Leverage ratios:  
Home BancShares $250,865  11.40% $88,023  4.00% $N/A  N/A% $255,979  11.44% $89,503  4.00% $N/A N/A%  
First State Bank 52,306 8.97 23,325 4.00 29,156 5.00  54,537 9.18 23,763 4.00 29,704 5.00 
Community Bank 32,376 9.20 14,077 4.00 17,596 5.00  34,189 8.90 15,366 4.00 19,207 5.00 
Twin City Bank 59,193 8.66 27,341 4.00 34,176 5.00  61,178 8.87 27,589 4.00 34,486 5.00 
Marine Bank 33,783 9.29 14,546 4.00 18,182 5.00  33,332 8.91 14,964 4.00 18,705 5.00 
Bank of Mountain View 15,962 7.98 8,001 4.00 10,001 5.00  16,174 8.26 7,832 4.00 9,791 5.00 
Tier 1 capital ratios:  
Home BancShares $250,865  13.44% $74,662  4.00% $N/A  N/A% $255,979  13.45% $76,128  4.00% $N/A  N/A% 
First State Bank 52,306 9.96 21,006 4.00 31,510 6.00  54,537 10.29 21,200 4.00 31,800 6.00 
Community Bank 32,376 11.02 11,752 4.00 17,628 6.00  34,189 11.21 12,199 4.00 18,299 6.00 
Twin City Bank 59,193 10.09 23,466 4.00 35,199 6.00  61,178 10.10 24,229 4.00 36,343 6.00 
Marine Bank 33,783 10.55 12,809 4.00 19,213 6.00  33,332 10.20 13,071 4.00 19,607 6.00 
Bank of Mountain View 15,962 13.42 4,758 4.00 7,137 6.00  16,174 13.84 4,675 4.00 7,012 6.00 
Total risk-based capital ratios:  
Home BancShares $274,268  14.69% $149,363  8.00% $N/A  N/A% $279,840  14.70% $152,294  8.00% $N/A  N/A% 
First State Bank 58,893 11.21 42,029 8.00 52,536 10.00  61,188 11.54 42,418 8.00 53,023 10.00 
Community Bank 36,104 12.29 23,501 8.00 29,377 10.00  38,036 12.47 24,402 8.00 30,502 10.00 
Twin City Bank 66,525 11.34 46,931 8.00 58,664 10.00  68,754 11.35 48,461 8.00 60,576 10.00 
Marine Bank 37,294 11.64 25,632 8.00 32,040 10.00  37,429 11.45 26,151 8.00 32,689 10.00 
Bank of Mountain View 17,213 14.47 9,517 8.00 11,896 10.00  17,442 14.92 9,352 8.00 11,690 10.00 
 
As of December 31, 2006 
Leverage ratios: 
Home BancShares $235,878  11.29% $83,571  4.00% $N/A  N/A%
First State Bank 46,811 8.69 21,547 4.00 26,934 5.00 
Community Bank 26,235 7.94 13,217 4.00 16,521 5.00 
Twin City Bank 50,375 7.51 26,831 4.00 33,539 5.00 
Marine Bank 27,317 8.08 13,523 4.00 16,904 5.00 
Bank of Mountain View 15,230 7.73 7,881 4.00 9,851 5.00 
Tier 1 capital ratios: 
Home BancShares $235,878  14.57% $64,757  4.00% $N/A  N/A%
First State Bank 46,811 10.29 18,197 4.00 27,295 6.00 
Community Bank 26,235 10.31 10,178 4.00 15,268 6.00 
Twin City Bank 50,375 10.15 19,852 4.00 29,778 6.00 
Marine Bank 27,317 9.59 11,394 4.00 17,091 6.00 
Bank of Mountain View 15,230 14.09 4,324 4.00 6,485 6.00 
Total risk-based capital ratios: 
Home BancShares $256,186  15.83% $129,469  8.00% $N/A  N/A%
First State Bank 52,519 11.54 36,408 8.00 45,510 10.00 
Community Bank 29,471 11.58 20,360 8.00 25,450 10.00 
Twin City Bank 56,586 11.40 39,709 8.00 49,637 10.00 
Marine Bank 30,582 10.74 22,780 8.00 28,475 10.00 
Bank of Mountain View 16,316 15.09 8,650 8.00 10,812 10.00 

5149


Non-GAAP Financial Measurements
     We had $45.7$57.8 million, $47.0$45.2 million, and $47.4$46.5 million total goodwill, core deposit intangibles and other intangible assets as of September 30, 2007,March 31, 2008, December 31, 20062007 and September 30, 2006,March 31, 2007, respectively. Because of our level of intangible assets and related amortization expenses, management believes diluted cash earnings per share, tangible book value per common share, cash return on average assets, cash return on average tangible equity and tangible equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculation of diluted earnings per share, book value, return on average assets, return on average shareholders’ equity, and equity to assets, are presented in Tables 16 through 20, respectively.
Table 16: Diluted Cash Earnings Per Share
                
 Three Months Ended Nine Months Ended         
 September 30, September 30,  Three Months Ended March 31, 
 2007 2006 2007 2006  2008 2007 
 (In thousands, except per share data)  (In thousands, except per share data) 
GAAP net income $5,228 $4,288 $15,050 $11,440  $7,278 $4,761 
Intangible amortization after-tax 267 267 801 792  282 267 
              
Cash earnings $5,495 $4,555 $15,851 $12,232  $7,560 $5,028 
              
  
GAAP diluted earnings per share $0.30 $0.25 $0.86 $0.74  $0.39 $0.27 
Intangible amortization after-tax 0.01 0.01 0.04 0.05  0.01 0.02 
              
Diluted cash earnings per share $0.31 $0.26 $0.90 $0.79  $0.40 $0.29 
              
Table 17: Tangible Book Value Per Common Share
                
 As of As of As of As of
 September 30, December 31, March 31, December 31,
 2007 2006 2008 2007
 (Dollars in thousands, except (Dollars in thousands, except per share data)
 per share data)
Book value per common share: A/B $14.30 $13.45 
Book value per common share: (A/B) $15.62 $14.67 
Tangible book value per common share: (A-C-D)/B 11.65 10.72  12.47 12.05 
  
(A) Total shareholders’ equity $246,577 $231,419  $286,391 $253,056 
(B) Common shares outstanding 17,243 17,206  18,337 17,250 
(C) Goodwill 37,527 37,527  49,849 37,527 
(D) Core deposit and other intangibles 8,141 9,458  7,934 7,702 

52


Table 18: Cash Return on Average Assets
                
 Three Months Ended Nine Months Ended        
 September 30, September 30, Three Months Ended March 31,
 2007 2006 2007 2006 2008 2007
 (Dollars in thousands) (Dollars in thousands)
Return on average assets: A/C  0.92%  0.83%  0.91%  0.77%  1.15%  0.88%
Cash return on average assets: B/(C-D) 0.99 0.90 0.98 0.84  1.22 0.95 
(A) Net income $5,228 $4,288 $15,050 $11,440 
 
(A) Net Income $7,278 $4,761 
(B) Cash earnings 5,495 4,555 15,851 12,232  7,560 5,028 
(C) Average assets 2,243,233 2,059,931 2,217,923 1,996,121  2,550,531 2,197,695 
(D) Average goodwill, core deposits and other intangible assets 45,887 47,647 46,323 48,095  58,098 46,765 

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Table 19: Cash Return on Average Tangible Equity
                
 Three Months Ended Nine Months Ended        
 September 30, September 30, Three Months Ended March 31,
 2007 2006 2007 2006 2008 2007
 (Dollars in thousands)  (Dollars in thousands)
Return on average shareholders’ equity: A/C  8.60%  7.81%  8.48%  8.25%  10.35%  8.30%
Return on average tangible equity: B/(C-D) 11.16 10.61 11.09 11.90  13.53 10.96 
(A) Net income $5,228 $4,288 $15,050 $11,440 
 
(A) Net Income $7,278 $4,761 
(B) Cash earnings 5,495 4,555 15,851 12,232  7,560 5,028 
(C) Average shareholders’ equity 241,153 217,944 237,391 185,492 
(C) Average equity 282,748 232,771 
(D) Average goodwill, core deposits and other intangible assets 45,887 47,647 46,323 48,095  58,098 46,765 
Table 20: Tangible Equity to Tangible Assets
                
 As of As of As of As of
 September 30, December 31, March 31, December 31,
 2007 2006 2008 2007
 (Dollars in thousands) (Dollars in thousands)
Equity to assets: B/A  10.87%  10.56%  11.14%  11.04%
Tangible equity to tangible assets: (B-C-D)/(A-C-D) 9.04 8.60  9.10 9.25 
  
(A) Total assets $2,267,672 $2,190,648  $2,571,145 $2,291,630 
(B) Total shareholders’ equity 246,577 231,419  286,391 253,056 
(C) Goodwill 37,527 37,527  49,849 37,527 
(D) Core deposit and other intangibles 8,141 9,458  7,934 7,702 
Adoption of Recent Accounting Pronouncements
FAS 157
     Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements(FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the period.

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Recent Accounting Pronouncements     FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1Quoted prices in active markets for identical assets or liabilities
Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
     In February 2007,Available-for-sale securities are the only material instruments valued on a recurring basis which are held by the Company at fair value. The Company does not have any Level 1 securities. Primarily all of the Company’s securities are considered to be Level 2 securities. These Level 2 securities consist of U.S. government-sponsored enterprises, mortgage-backed securities plus state and political subdivisions. Level 3 securities were immaterial.
     Impaired loans are the only material instruments valued on a non-recurring basis which are held by the Company at fair value. Impaired loans are considered a Level 3 valuation.
     Compared to prior years, the adoption of SFAS 157 did not have any impact on our 2008 consolidated financial statements.
FAS 159
     Statement of Financial Accounting Standards Board (FASB) issued SFAS No. 159, “TheThe Fair Value Option for Financial Assets and Financial Liabilities” to provideLiabilities(FAS 159) became effective for the Company on January 1, 2008. FAS 159 allows companies with an option to report selected financial assets and liabilities at fair value. Because we did not elect the fair value measurement provision for any of our financial assets or liabilities, the adoption of SFAS 159 did not have any impact on our 2008 consolidated financial statements. Presently, we have not determined whether we will elect the fair value measurement provisions for future transactions.

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EITF 06-4 and 06-10
     Effective January 1, 2008, the Company adopted EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements and EITF 06-10, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements. As a result of the adoption of EITF 06-4, the Company recognized the effect of applying the EITF with a change in accounting principle through a cumulative-effect adjustment to retained earnings for $276,000. Additionally, this change will result in an increase of approximately $100,000 in annual non-interest expense as a result of the mortality cost for 2008 and beyond. The objectiveadoption of EITF 06-10 did not have any impact on our 2008 consolidated financial statements.
Recent Accounting Pronouncements
     In December 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(revised 2007), Business Combinations, (“SFAS 141(R)”). SFAS 141(R), which replaces SFAS 141, Business Combinations, establishes accounting standards for all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree) including mergers and combinations achieved without the transfer of consideration. SFAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Goodwill is measured as the excess of consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the identifiable net assets acquired. In the event that the fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest (referred to improve financial reporting by providing entities withas a “bargain purchase”), SFAS 141(R) requires the opportunityacquirer to mitigate volatilityrecognize that excess in reported earnings caused by measuring relatedas a gain attributable to the acquirer. In addition, SFAS 141(R) requires costs incurred to effect an acquisition to be recognized separately from the acquisition and requires the recognition of assets andor liabilities differently without having to apply complex hedge accounting provisions. This statement shall be effectivearising from noncontractual contingencies as of the acquisition date only if it is more likely than not that they meet the definition of an asset or liability in FASB Concepts Statement No. 6, Elements of Financial Statements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of eachthe first annual reporting entity’s firstperiod beginning on or after December 15, 2008, which for us is the fiscal year that begins after November 15, 2007.beginning January 1, 2009. The Company is currently evaluating the impact of the adoption of this standard, but does not expect it to have a material effect on the Company’s financial position or results of operations.
     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this standard, but does not expect it to have a material effect on the Company’s financial position or results of operations.
     In September 2006, the FASB Emerging Issue Task Force (EITF) issued EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The EITF determined that for an endorsement split-dollar life insurance arrangement within the scope of the Issue, the employer should recognize a liability for future benefits in accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, or APB Opinion 12, Omnibus Opinion-1967, based on the substantive agreement with the employee.  In March 2007, the FASB Emerging Issue Task Force (EITF) issued EITF 06-10, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements. The EITF determined that an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either Statement 106 (if, in substance, a postretirement benefit plan exists) or Opinion 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee.  These Issues are effective for fiscal years beginning after December 15, 2007, with earlier application permitted. Entities should recognize the effects of applying EITF 06-4 through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. As of September 30, 2007, the Company has split-dollar life insurance arrangements with two executives of the Company that have death benefits.  The Company is currently evaluating the impact that the adoption of EITF 06-4 and EITF 06-10, but does not expect it to have a material effect on the Company’s financial position or results of operations.
     In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which provides clarification for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 31, 2006. The Company adopted the Interpretation during the first quarter of 2007 without material effect on the Company’s financial position or results of operations.
     Presently, the Company is not aware of any other changes from the Financial Accounting Standards Board that will have a material impact on the Company’s present or future financial statements.operation.

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Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Liquidity and Market Risk Management
     Liquidity Management.Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows us to have sufficient funds available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. Our primary source of liquidity at our holding company is dividends paid by our bank subsidiaries. Applicable statutes and regulations impose restrictions on the amount of dividends that may be declared by our bank subsidiaries. Further, any dividend payments are subject to the continuing ability of the bank subsidiary to maintain compliance with minimum federal regulatory capital requirements and to retain its characterization under federal regulations as a “well-capitalized” institution.
     Each of our bank subsidiaries has potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers. Many of these obligations and commitments to fund future borrowings to our loan customers are expected to expire without being drawn upon, therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.
     Liquidity needs can be met from either assets or liabilities. On the asset side, our primary sources of liquidity include cash and due from banks, federal funds sold, available-for-sale investment securities and scheduled repayments and maturities of loans. We maintain adequate levels of cash and cash equivalents to meet our day-to-day needs. As of September 30, 2007,March 31, 2008, our cash and cash equivalents were $49.0$59.7 million, or 2.2%2.3% of total assets, compared to $59.7$55.0 million, or 2.7%2.4% of total assets, as of December 31, 2006.2007. Our investment securities and federal funds sold were $459.0$441.1 million, or 20.2%17.2% of total assets, as of September 30, 2007March 31, 2008 and $540.9$430.5 million, or 24.7%18.8% of total assets, as of December 31, 2006.2007.
     We may occasionally use our federal funds lines of credit in order to temporarily satisfy short-term liquidity needs. We have federal funds lines with three other financial institutions pursuant to which we could have borrowed up to $88.2$99.7 million and $62.1$88.2 million on an unsecured basis as of September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively. These lines may be terminated by the respective lending institutions at any time.
     We also maintain lines of credit with the Federal Home Loan Bank. Our FHLB borrowings were $226.0$249.9 million as of September 30, 2007March 31, 2008 and $151.8$251.8 million as of December 31, 2006.2007. The outstanding balance for September 30, 2007March 31, 2008 included $87.0$10.0 million of short-term advances and $139.0$239.9 million of FHLB long-term advances. The outstanding balance for December 31, 2006,2007, included $5.0$116.0 million of short-term advances and $146.8$135.8 million of FHLB long-term advances. Our FHLB borrowing capacity was $205.5$223.6 million and $323.6$186.6 million as of September 30, 2007March 31, 2008 and December 31, 2006.2007.
     We believe that we have sufficient liquidity to satisfy our current operations.
     Market Risk Management. Our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. We do not hold market risk sensitive instruments for trading purposes. The information provided should be read in connection with our audited consolidated financial statements.
     Asset/Liability Management. Our management actively measures and manages interest rate risk. The asset/liability committees of the boards of directors of our holding company and bank subsidiaries are also responsible for approving our asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing our interest rate sensitivity position.

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     One of the tools that our management uses to measure short-term interest rate risk is a net interest income simulation model. This analysis calculates the difference between net interest income forecasted using base market rates and using a rising and a falling interest rate scenario. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and proportional to the change in market rates, depending on their contracted index. Some loans and investments include the opportunity of prepayment (embedded options), and accordingly the simulation model uses indexes to estimate these prepayments and reinvest their proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.
     This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet remains static and that its structure does not change over the course of the year. It does not account for all factors that impact this analysis, including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.
     Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.
     Interest Rate Sensitivity.Our primary business is banking and the resulting earnings, primarily net interest income, are susceptible to changes in market interest rates. It is management’s goal to maximize net interest income within acceptable levels of interest rate and liquidity risks.
     A key element in the financial performance of financial institutions is the level and type of interest rate risk assumed. The single most significant measure of interest rate risk is the relationship of the repricing periods of earning assets and interest-bearing liabilities. The more closely the repricing periods are correlated, the less interest rate risk we assume. We use repricing gap and simulation modeling as the primary methods in analyzing and managing interest rate risk.
     Gap analysis attempts to capture the amounts and timing of balances exposed to changes in interest rates at a given point in time. As of September 30, 2007,March 31, 2008, our gap position was relatively neutral with a one-year cumulative repricing gap of -5.2%1.4%, compared to -1.1%-5.2% as of December 31, 2006.2007. During these periods, the amount of change our asset base realizes in relation to the total change in market interest rates is approximately that of the liability base. As a result, our net interest income should not have a material positive or negative affect in the current rate environment.
     We have a portion of our securities portfolio invested in mortgage-backed securities. Mortgage-backed securities are included based on their final maturity date. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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     Table 21 presents a summary of the repricing schedule of our interest-earning assets and interest-bearing liabilities (gap) as of September 30, 2007.March 31, 2008.
Table 21: Interest Rate Sensitivity
                                                 
 Interest Rate Sensitivity Period  Interest Rate Sensitivity Period
 0-30 31-90 91-180 181-365 1-2 2-5 Over 5    0-30 31-90 91-180 181-365 1-2 2-5 Over 5  
 Days Days Days Days Years Years Years Total  Days Days Days Days Years Years Years Total
 (Dollars in thousands)  (Dollars in thousands)
Earning assets  
Interest-bearing deposits due from banks $2,573 $ $ $ $ $ $ $2,573  $5,828 $ $ $ $ $ $ $5,828 
Federal funds sold 11,145       11,145  37,331       37,331 
Investment securities 12,752 40,707 43,822 50,226 96,251 93,645 110,423 447,826  41,468 28,458 32,895 60,928 49,551 94,640 95,815 403,755 
Loans receivable 538,054 127,932 139,990 247,918 234,259 245,476 26,745 1,560,374  737,776 133,449 147,767 224,324 291,694 306,723 25,236 1,866,969 
                   
Total earning assets 564,524 168,639 183,812 298,144 330,510 339,121 137,168 2,021,918  822,403 161,907 180,662 285,252 341,245 401,363 121,051 2,313,883 
                   
 
Interest-bearing liabilities  
Interest-bearing transaction and savings deposits 32,572 47,240 70,853 141,689 38,228 101,243 137,972 569,797  30,637 61,274 91,911 183,823 43,885 116,493 159,229 687,252 
Time deposits 97,345 189,816 223,190 217,802 46,783 35,944 228 811,108  137,229 164,365 228,731 286,420 58,581 36,270 358 911,954 
Federal funds purchased 8,690       8,690          
Securities sold under repurchase agreements 103,365    3,839 11,518 12,285 131,007  91,370    3,225 9,675 10,319 114,589 
FHLB and other borrowed funds 87,175 6,080 41,367 26,531 5,516 57,783 1,576 226,028 
FHLB borrowed funds 93,598 6,092 5,299 10,392 38,042 84,996 11,429 249,848 
Subordinated debentures 1 5,158 4 20,627 17 65 18,723 44,595  25,775 2 4 8 16 61 21,777 47,643 
                   
Total interest-bearing liabilities 329,148 248,294 335,414 406,649 94,383 206,553 170,784 1,791,225 
Total interest- bearing liabilities 378,609 231,733 325,945 480,643 143,749 247,495 203,112 2,011,286 
                   
Interest rate sensitivity gap $235,376 $(79,655) $(151,602) $(108,505) $236,127 $132,568 $(33,616) $230,693  $443,794 $(69,826) $(145,283) $(195,391) $197,496 $153,868 $(82,061) $302,597 
                   
Cumulative interest rate sensitivity gap $235,376 $155,721 $4,119 $(104,386) $131,741 $264,309 $230,693  $443,794 $373,968 $228,685 $33,294 $230,790 $384,658 $302,597 
Cumulative rate sensitive assets to rate sensitive liabilities  171.5%  127.0%  100.5%  92.1%  109.3%  116.3%  112.9%   217.2%  161.3%  124.4%  102.3%  114.8%  121.3%  115.0% 
Cumulative gap as a % of total earning assets 11.6 7.7 0.2  (5.2) 6.5 13.1 11.4  19.2 16.2 9.9 1.4 10.0 16.6 13.1 

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Item 4: CONTROLS AND PROCEDURES
Article I.Evaluation of Disclosure Controls
     Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and procedures were also effective in ensuring that information required to be disclosed in our Exchange Act report is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosures.
Article II.Changes in Internal Control Over Financial Reporting
     There have not been any changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2007,March 31, 2008, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
     There are no material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which Home BancShares, Inc. or any of its subsidiaries is a party or of which any of their property is the subject.
Item 1A. Risk Factors
     There were no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2006.2007. See the discussion of our risk factors in the Form 10-K, as filed with the SEC. The risks described are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
     Not applicable.
Item 3: Defaults Upon Senior Securities
     Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders
     Not applicable.
Item 5: Other Information
     Not applicable.
Item 6: Exhibits
 
Item 6:Exhibits
15 Awareness of Independent Registered Public Accounting Firm
 
 
31.1 CEO Certification Pursuant Rule 13a-14(a)/15d-14(a)
 
 
31.2 CFO Certification Pursuant Rule 13a-14(a)/15d-14(a)
 
 
32.1 CEO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002
 
 
32.2 CFO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002

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(i) SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HOME BANCSHARES, INC.
(Registrant)
Date: April 29, 2008/s/ John W. Allison
     
 HOME BANCSHARES, INC.
(Registrant)
   John W. Allison, Chief Executive Officer
     
Date:October 31, 2007 April 29, 2008   /s/ John W. AllisonRandy E. Mayor
  
    
John W. Allison, Chief Executive Officer
Date:October 31, 2007/s/ Randy E. Mayor
Randy E. Mayor, Chief Financial Officer

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