Bank OZK Annual Report 2008

FY2008 Annual Report · Bank OZK

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Little Rock, Arkansas
(501) 978-2265, Fax (501) 978-2224
NASDAQ: OZRK • www.bankozarks.com
For additional information or a copy of the Company’s Form
10-K filed with the Securities and Exchange Commission contact:
Investor Relations, Bank of the Ozarks, Inc.
P.O. Box 8811, Little Rock, AR 72231-8811
Independent Auditors:
Crowe Horwath LLP, Certified Public Accountants
105 Continental Place, Suite 200, Brentwood, Tennessee 37027
Transfer Agent:
Bank of the Ozarks Trust and Wealth Management Division
P.O. Box 8811, Little Rock, AR 72231-8811

Table of Contents

A Message to Our Shareholders 1
A Long-Term Perspective 2
Growth and De Novo Branching 5
Our Senior Management Team 6
Selected Consolidated Financial Data 9
Management’s Discussion and Analysis 10
Summary of Quarterly Results 38
Company Performance 39
Report of Management on the Company’s Internal Control
Over Financial Reporting 40
Reports of Independent Registered Public Accounting Firm 41
Consolidated Financial Statements 43

This report contains forward-looking statements and reflects management’s
current views of future economic circumstances, industry conditions, Company
performance and financial results. These forward-looking statements are subject
to a number of factors and uncertainties which could cause the Company’s
actual results and experience to materially differ from anticipated results and
expectations expressed in such forward-looking statements. A description of
certain factors which may affect operating results may be found in Management’s
Discussion and Analysis of Financial Condition and Results of Operations under
the caption “Forward-Looking Information” contained elsewhere in this report.

All scenic photographs from Bank of the Ozarks’ trade area.

Our Board of Directors’ outstanding

leadership and vision has moved

the Company forward and created

a solid foundation for strong

future growth and profitability.

Board of Directors
Back row, left to right:

James Matthews
Executive Vice President - General Properties, Inc., North Little Rock, Arkansas

Jean Arehart
Retired Banker, Newport, Arkansas

Henry Mariani
Owner, Chairman and Chief Executive Officer - NLC Products, Inc., Little Rock, Arkansas

Ian Arnof
Retired Chief Executive Officer - First Commerce Corporation, New Orleans, Louisiana

Robert Trevino
Commissioner of Arkansas Rehabilitation Services, Little Rock, Arkansas

Robert East
Chairman and Chief Executive Officer - East-Harding, Inc., Little Rock, Arkansas

Kennith Smith
Retired Lumber Company President, Ozark, Arkansas

R.L. Qualls
Retired President and Chief Executive Officer - Baldor Electric Company, Fort Smith, Arkansas

Front row, left to right:
Steven Arnold
Senior Pastor - St. Mark Baptist Church, Little Rock, Arkansas

Richard Cisne
Founding Partner - Hudson, Cisne & Co., LLP, Little Rock, Arkansas

George Gleason
Chairman and Chief Executive Officer - Bank of the Ozarks, Inc., Little Rock, Arkansas

Mark Ross
Vice Chairman, President and Chief Operating Officer - Bank of the Ozarks, Inc., Little Rock, Arkansas

Linda Gleason
Retired Banker, Little Rock, Arkansas

To Our Shareholders

We are very pleased to report record net income of $34.5 million and record diluted earnings
per common share of $2.04 for 2008. This was our eighth consecutive year of record net income.
During 2008 we also achieved record quarterly results, both net income and earnings per common
share, in each of the second, third and fourth quarters. We were encouraged by this favorable
earnings momentum.

Achieving record annual and quarterly results is always satisfying, but our record 2008 results

were particularly gratifying because they were achieved in the midst of a very challenging and
truly extraordinary economic environment. While the tough economic conditions in 2008 posed
many challenges, including higher credit costs, those same economic conditions created many
opportunities, including opportunities for favorable investments and significant improvement in
our net interest margin.

Our success in 2008 was largely due to our ability to capitalize on the opportunities presented

by the year’s economic turbulence, while at the same time effectively addressing the numerous
challenges resulting from those same conditions. Because of our excellent team of bankers, strong
capital position, abundant sources of liquidity and solid credit culture, we were in a position to be
opportunistic and profit from the opportunities in 2008.

As you read this annual report, we hope you will be pleased with our accomplishments for 2008

and share our enthusiasm for the future.

George Gleason
Chairman and Chief Executive Officer

Mark Ross
Vice Chairman, President and Chief Operating Officer

A Long-Term Perspective

The record results we achieved in 2008 refl ect our commitment to excellence and our focus on
long-term goals. For many years, we have worked hard to build and improve our Company. Our
constant pursuit of adding new customers, building relationships, improving performance and
en hanc ing effi ciency has produced great results. The following graphs provide a long-term perspective.

Our Company is focused on both growth and profi t abil i ty. We have achieved excellent long-term
growth in loans, leases and deposits, while our net income and diluted earnings per common share
have grown at similiar rates.

Loans and Leases (Millions)

$2,021

$1,871

$1,677

$1,371

$1,135

$909

$718

$616

$467 $511

$388

1998

1999 2000 2001 2002

2003

2004

2005

2006

2007

2008

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Over the past ten years, our loans and leases
have grown at a compounded annual rate
of 18.0%.

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Over the past ten years, our deposits have
grown at a compounded annual rate of 16.0%.

Over the past ten years, we have achieved
com pound ed annual growth rates of 19.9%
in net in come and 18.6% in diluted earnings
per common share.

$5.6 $9.01999200020012002$6.6$6.0$14.42003$25.9$20.22004$31.520052006$31.7$31.72007$34.5 20081998$0.92$1.56$1.24$1.88$1.89$1.89$2.04 Net Income(Millions)Earnings Per Common Share(Diluted)$0.40$0.59$0.44 $0.37

Net interest income is our largest revenue component, and income from service charges, trust
and mortgage lending have traditionally been our three principal sources of non-interest income.

Net Interest Income (Millions)

$98.7

$77.6

$68.6

$70.7

$60.6

$48.8

$39.8

$22.9 $22.0

$18.4

$28.1

1998

1999 2000 2001 2002

2003

2004

2005

2006

2007

2008

Service Charge Income (Millions)

$12.2

$12.0

$9.9

$10.2

$9.5

$7.8

$6.9

$3.8

$3.4

$2.5

$1.4

1998

1999 2000 2001 2002

2003

2004

2005

2006

2007

2008

Trust Income (Millions)

$2.6

$2.2

$1.9

$1.7

$1.6

$1.5

$0.6

$0.5

$0.7

$0.3

1998

1999 2000 2001 2002

2003

2004

2005

2006

2007

2008

Mortgage Lending Income (Millions)

$5.5

$2.9

$3.3

$3.0

$2.9

$2.7

$2.2

$2.1

$1.9

$1.3

$0.8

1998

1999 2000 2001 2002

2003

2004

2005

2006

2007

2008

We have achieved growth in net interest income
by growing earning assets and maintaining a
favorable net interest margin.

Income from service charges on deposit accounts
has grown at a compounded annual rate of
24.2% over the past ten years.

Over the past ten years, trust income has grown
at a compounded annual rate of 22.7%.

Mortgage lending is a valuable service to our
customers and an important source of non-interest
income, but it is cyclical in nature and varies with
interest rate and housing market conditions.

We have a goal of improving our effi ciency
ratio over time by increasing our total revenue
at a faster rate than non-interest expense.
This has made us one of the na tion’s most
effi cient bank holding companies.

We consider the net charge-off ratio as the
ultimate measure of asset quality. Our net
charge-off ratio has consistently compared
favorably with the ratio for all FDIC insured
institutions as a group.

Maintaining good asset quality has been an important factor in our historically strong growth

in net income, and this has never been more important than in the challenging economic
conditions of 2008.

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58.9%52.5%199920002001200258.2%59.1%2003200420052006200742.3%43.4%47.1%47.5%47.9%46.3%46.2%20081998Efficiency Ratios1999200020012002200320042005200620071.18%*0.39%0.59%0.56%0.49%0.97%0.83%0.59%0.59%0.53%0.78%2008*19980.45%0.12%0.24%0.10%0.11%0.22%0.24%0.33%0.26%0.20%Charge-Off RatiosSource: Data from the FDIC Quarterly Banking Profile for 3Q08. *FDIC data for 2008 is annualized September 30, 2008 data.0.36%FDIC Insured Financial InstitutionsBank of the Ozarks, Inc.

Growth and De Novo Branching

In 1994 we launched our growth and de novo branching strategy by opening the fi rst of our
de novo branches. We have opened new offi ces in each of the last 15 years, and we have grown
from just fi ve original offi ces to 72 offi ces as of year-end 2008, including 65 bank ing offi ces
throughout northern, western and central Arkansas, six Texas banking offi ces
and a loan production offi ce in Char lotte, North Carolina. With the
majority of these offi ces being opened in the last six years,
we have substantial ca pac i ty for growth.

Banking Offi ces

Arkansas

Texas

North Carolina

In recent years the Company’s Texas offi ces and Charlotte, North Carolina loan production offi ce

have contributed signifi cantly to growth.

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Total Loans and Leases —
Texas and North Carolina
Offi ces (Mil lions)

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Total Deposits —
Texas Offi ces (Mil lions)

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199519961997199819992000200119942002 2003 Original2004 2005 2006 2007 2008 Our Senior Management Team

George Gleason Chairman of the Board and Chief Executive Officer
George Gleason has led the Company and its predecessors for 30 years. Mr. Gleason purchased
Bank of Ozark, which then had approximately $28 million of total assets, in 1979. Since then
the Company has grown to roughly 115 times its 1979 size. This has primarily been organic
growth achieved via the Company’s growth and de novo branching strategy.

Mark Ross Vice Chairman, President and Chief Operating Officer
Mark Ross joined the Company in 1980. Mr. Ross is responsible for oversight of a number of
operational and administrative functions of the Company including internal audit, compliance,
loan review, facilities, technology, human resources, training, marketing, treasury management,
branch administration, deposit operations and trust services.

Paul Moore Chief Financial Officer and Chief Accounting Officer
Paul Moore joined the Company as Chief Financial Officer in 1995 and oversees all accounting,
tax, financial reporting and regulatory reporting functions for the Company. He has been a
Certified Public Accountant for 30 years.

Greg McKinney Executive Vice President and Controller
Greg McKinney oversees and manages a wide range of audit, accounting and financial
reporting functions for the Company. Mr. McKinney has 17 years of accounting and financial
reporting experience and joined Bank of the Ozarks in 2003. Mr. McKinney is a Certified
Public Accountant.

Dan Rolett Executive Vice President
Dan Rolett oversees a broad range of duties including the Company’s investment portfolio,
public funds deposits, deposit pricing, funds management and Community Reinvestment Act
initiatives. Mr. Rolett has 27 years of banking experience and joined the Company in 1996.

Ron Kuykendall Chief Information Officer
Ron Kuykendall joined the Company in 1989 and is responsible for the oversight of information
systems, deposit operations, e-banking and item processing. Mr. Kuykendall has 25 years of
experience in banking.

Note: George Gleason, Mark Ross, Paul Moore, Greg McKinney, Dan Rolett and Ron Kuykendall serve in the
same officer capacity for both the Company and its bank subsidiary. All other officers shown in this article
serve as officers only of the bank subsidiary in the capacities indicated.

Ronnie Capelle President, Crawford County
Ronnie Capelle joined Bank of the Ozarks in 1997 and has 27 years of banking experience.
Mr. Capelle oversees business operations in the Crawford County market, which includes offices
in Van Buren (2), Alma and Mulberry.

Keith Cox President, Little Rock
Keith Cox joined Bank of the Ozarks in 2007 and has 27 years of banking experience.
Mr. Cox oversees the Company’s lending activities in the Little Rock market.

John Davis President, Hot Springs Division
John Davis has 27 years of banking experience and joined the Company in 2005 as President
of the Hot Springs Division which consists of three offices in Hot Springs and one in
Hot Springs Village.

Larry Dicks President, Pope County
Larry Dicks was named President of Pope County in 2007. Mr. Dicks has 31 years of banking
experience and oversees business operations in the Company’s three Pope County offices in
Russellville. Mr. Dicks has been with Bank of the Ozarks for 23 years.

C.E. Dougan President, Western Division
C.E. Dougan has 39 years of banking experience and joined the Company as a director in
1997. In 2000 he resigned his directorship and joined the management team as President of the
Western Division. The Western Division consists of 16 offices in Ft. Smith (3), Russellville (3),
Van Buren (2), Alma, Mulberry, Ozark (2), Altus, Clarksville (2) and Paris.

Susan Grobmyer President, Fort Smith
Susan Grobmyer joined Bank of the Ozarks in 1997 and has 32 years of banking experience.
Mrs. Grobmyer oversees all business operations in the Fort Smith market.

Scott Hastings President, Leasing Division
Scott Hastings joined the Company in 2003 to establish a Leasing Division. Mr. Hastings has
26 years experience in leasing.

Gene Holman President, Mortgage Division
Gene Holman has 35 years of mortgage banking and real estate experience. He joined the
Company in 2004 as President of the Mortgage Division.

Rex Kyle President, Trust and Wealth Management Division
Rex Kyle has 30 years experience in banking as a trust professional. Mr. Kyle joined the Company
in 2004 as President of the Trust and Wealth Management Division, which offers a wide array
of asset management and trust services for individuals, businesses and government entities.

Dennis James President, Metro Dallas Division
Dennis James has 36 years of experience in finance and management and joined the Company
in 2005. As President of the Metro Dallas Division, Mr. James oversees retail banking operations
in the metro-Dallas area, which currently consists of three full-service banking offices.

Alan Jessup President, Saline County
Alan Jessup joined Bank of the Ozarks in 2008 and has over 16 years of banking experience.
Mr. Jessup oversees business operations in the Saline County market, which includes offices in
Benton (2) and Bryant, plus the Company’s Little Rock Otter Creek office.

Darrel Russell President, Central Division & Co-Chairman of Loan Committee
Darrel Russell has 28 years of banking experience and has been with the Company since 1983.
In 2001 he was named President of the Central Division which consists of 22 offices in Little
Rock (7), North Little Rock (4), Sherwood, Maumelle, Cabot (2), Lonoke, Benton (2), Bryant,
Mountain Home (2) and Yellville. Mr. Russell is also responsible for oversight of the Company’s
loan production office in Charlotte, North Carolina.

Sarah Shaw President, Conway Division
Sarah Shaw has 24 years of banking experience and joined the Company in 2002. In 2006
she was named President of the Conway Division which consists of four offices in Conway.

Dan Thomas President, Real Estate Specialties Group
Dan Thomas has 24 years experience in structuring, financing and managing commercial
real estate transactions. He joined Bank of the Ozarks in 2003 and opened the Dallas loan
production office in order to establish a commercial lending presence in Texas. The Company
converted the Dallas loan production office to a banking office in 2004.

Shannon White President, Northwest Division
Shannon White has 18 years of banking experience and joined the Company in 2005.
He heads the Company’s Northwest Arkansas Division which consists of ten offices in
Fayetteville (2), Springdale, Rogers (3), Bentonville (2) and Bella Vista (2).

Joe Willis President, Northern Division
Joe Willis joined Bank of the Ozarks in 1989 and has 19 years of banking experience.
In 2008 Mr. Willis was named President of the Northern Division, which consists of seven
offices in Harrison (2), Bellefonte, Western Grove, Jasper, Marshall and Clinton.

Rick Wisdom President, Southwest Division
Rick Wisdom has 27 years of banking experience and joined the Company in 2004 as President
of the Southwest Division, which consists of two offices in Texarkana, Texas and one office in
Texarkana, Arkansas.

Financial Information
Selected Consolidated Financial Data

2008

Year Ended December 31,
2006

2005

2007

2004

Income statement data:

(Dollars in thousands, except per share amounts)

Interest income ...................................................... $ 183,003 $ 176,970 $ 155,198 $ 112,881 $ 85,231
24,608
84,302
Interest expense ....................................................
60,623
98,701
Net interest income ................................................
3,330
19,025
Provision for loan and lease losses .......................
18,225
19,349
Non-interest income ..............................................
37,605
54,398
Non-interest expense .............................................
Preferred stock dividends ......................................
-
227
25,883
34,474
Net income available to common stockholders ......

99,352
77,618
6,150
22,975
48,252
-
31,746

84,478
70,720
2,450
23,231
46,390
-
31,693

44,305
68,576
2,300
19,252
40,080
-
31,489

Common share and per common share data:

Earnings - diluted .................................................. $ 2.04 $ 1.89 $ 1.89 $ 1.88 $ 1.56
7.36
Book value ............................................................
Dividends ..............................................................
0.30
Weighted-average diluted shares
outstanding (thousands) ......................................
End of period shares outstanding (thousands) ........

16,874
16,864

16,834
16,818

16,803
16,747

16,766
16,665

16,635
16,494

10.43
0.40

14.96
0.50

11.35
0.43

8.97
0.37

Balance sheet data at period end:

Total assets ............................................................ $3,233,303 $2,710,875 $2,529,400 $2,134,882 $1,726,840
1,134,591
Total loans and leases ........................................... 2,021,199
16,133
29,512
Allowance for loan and lease losses ......................
434,512
944,783
Total investment securities ....................................
1,379,930
2,341,414
Total deposits ........................................................
33,223
Repurchase agreements with customers ................
46,864
144,065
Other borrowings ................................................... 424,947
44,331
64,950
Subordinated debentures .......................................
71,880
Preferred stock, net of unamortized discount ........
-
Total common stockholders’ equity .......................
121,406
252,302
Loan and lease to deposit ratio ..............................

1,370,723
17,007
574,120
1,591,643
35,671
304,865
44,331
-
149,403

1,871,135
19,557
578,348
2,057,061
46,086
336,533
64,950
-
190,829

1,677,389
17,699
620,132
2,045,092
41,001
194,661
64,950
-
174,633

86.12%

82.02%

90.96%

86.32%

82.22%

Average balance sheet data:

Total average assets .............................................. $3,017,707 $2,601,299 $2,365,316 $1,912,961 $1,547,184
Total average common stockholders’ equity ..........
108,419
213,271
Average common equity to average assets ............

137,185

184,819

158,194

7.10%

6.69%

7.17%

7.07%

7.01%

Performance ratios:

Return on average assets ......................................
Return on average common stockholders’ equity ...
Net interest margin - FTE ......................................
Efficiency ...............................................................
Common stock dividend payout ............................

1.14%

1.22%

1.34%

1.65%

1.67%

16.16
3.96
42.32
24.42

17.18
3.44
46.33
22.75

20.03
3.49
47.07
21.16

22.95
4.18
43.43
19.68

23.87
4.43
46.23
19.23

Asset quality ratios:

Net charge-offs to average loans and leases .........
Nonperforming loans and leases to total
loans and leases .................................................
Nonperforming assets to total assets .....................

Allowance for loan and lease losses as a
percentage of:

0.45%

0.24%

0.12%

0.11%

0.10%

0.76
0.81

0.35
0.36

0.34
0.24

0.25
0.18

0.57
0.39

Total loans and leases ...........................................
Nonperforming loans and leases ...........................

1.46%
192%

1.05%
295%

1.06%
310%

1.24%
502%

1.42%
248%

Capital ratios at period end:

Tier 1 leverage .......................................................
Tier 1 risk-based capital ........................................
Total risk-based capital .........................................

11.64%
14.21
15.36

9.80%

11.79
12.67

9.39%

9.11%

9.41%

11.71
12.76

11.94
13.02

12.34
13.74

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

General

Net income available to common stockholders of Bank of the Ozarks, Inc. (the “Company”) was $34.5

million for the year ended December 31, 2008, an 8.6% increase from net income available to common
stockholders of $31.7 million in 2007. Net income available to common stockholders in 2006 was $31.7
million. Diluted earnings per common share were $2.04 for 2008, a 7.9% increase from diluted earnings
per common share of $1.89 in 2007. Diluted earnings per common share were $1.89 in 2006.

The table below shows total assets, investment securities, loans and leases, deposits, common stockholders’

equity, net income available to common stockholders, diluted earnings per common share and book value
per common share at December 31, 2008, 2007 and 2006 and the percentage of change year over year.

December 31,
2007

2006

2008
(Dollars in thousands, except per share amounts)
Total assets .............................. $3,233,303 $2,710,875 $2,529,400
620,132
Investment securities ...............
1,677,389
Loans and leases .....................
2,045,092
Deposits ...................................
Common stockholders’ equity ..
174,633
Net income available to
common stockholders ...........
Diluted earnings per

944,783
2,021,199
2,341,414
252,302

578,348
1,871,135
2,057,061
190,829

31,746

34,474

31,693

common share .......................

2.04

1.89

Book value per

% Change

2008

2007

from 2007 from 2006

19.3%
63.4
8.0
13.8
32.2

8.6

7.9

7.2%
(6.7)
11.6
0.6
9.3

0.2

8.8

common share .......................

14.96

11.35

10.43

31.8

Two measures used to assess performance by banking institutions are return on average assets (“ROA”)

and return on average common stockholders’ equity (“ROE”). ROA measures net income available to
common stockholders in relation to average total assets. It is calculated by dividing annual net income
available to common stockholders by average total assets and indicates a company’s ability to employ its
resources profitably. For the year ended December 31, 2008, the Company’s ROA was 1.14% compared with
1.22% and 1.34%, respectively, for the years ended December 31, 2007 and 2006. ROE measures net income
available to common stockholders in relation to average common stockholders’ equity. It is calculated by
dividing annual net income available to common stockholders by average common stockholders’ equity
and indicates how effectively a company can generate net income on the capital invested by its common
stockholders. For the year ended December 31, 2008, the Company’s ROE was 16.16% compared with
17.18% and 20.03%, respectively, for the years ended December 31, 2007 and 2006.

Analysis of Results of Operations

The Company is a bank holding company whose primary business is commercial banking conducted

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

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

Net Interest Income

Net interest income and net interest margin are analyzed in this discussion on a fully taxable equivalent
(“FTE”) basis. The adjustment to convert net interest income to a FTE basis consists of dividing tax-exempt
income by one minus the statutory federal income tax rate of 35%. The FTE adjustments to net interest

income were $10.5 million in 2008, $3.6 million in 2007 and $4.6 million in 2006. No adjustments have
been made in this analysis for income exempt from state income taxes or for interest expense deductions
disallowed under the provisions of the Internal Revenue Code as a result of investments in certain
tax-exempt securities.

2008 compared to 2007

Net interest income for 2008 increased 34.5% to $109.2 million compared to $81.2 million for 2007.

Net interest margin was 3.96% in 2008 compared to 3.44% in 2007. The growth in net interest income was
a result of the improvement in the Company’s net interest margin, which increased 52 basis points (“bps”)
from 2007 to 2008, and growth in the Company’s average earnings assets, which increased 16.6% from
2007 to 2008. The Company’s improvement in its net interest margin resulted from a combination of factors
including favorable yields achieved on a large volume of tax-exempt investment securities purchased during
2008 and improvement in the Company’s spread between yields on loans, leases and other investment
securities and rates paid on deposits and other funding sources. The Company’s net interest margin improved
throughout 2008, increasing from 3.47% in the fourth quarter of 2007 to 3.69%, 3.77%, 3.82% and 4.52%,
respectively, in each succeeding quarter of 2008.

Yields on average earning assets decreased 62 bps in 2008 compared to 2007. This decrease was due

primarily to a 113 bps decline in loan and lease yields in 2008, which was partially offset by a 93 bps
increase in the aggregate yield on the Company’s investment securities.

The 113 bps decrease in loan and lease yields was due primarily to the repricing of the Company’s

loan and lease portfolio at lower interest rates during 2008. Beginning in September 2007 and continuing
through December 2008, the Federal Open Market Committee (“FOMC”) decreased its federal funds target
rate a total of 500 bps, resulting in many of the Company’s variable rate loans repricing to lower rates
beginning in the third quarter of 2007 and continuing throughout 2008. Additionally, the Company’s newly
originated and renewed loans and leases generally priced at lower rates beginning in the third quarter of
2007 and continuing throughout 2008 as a result of these FOMC interest rate decreases.

The 93 bps increase in the Company’s aggregate yield on its investment securities in 2008 compared to
2007 was the result of a six bps increase in yield on taxable investment securities, a 101 bps increase in
yield on tax-exempt investment securities and a shift in the composition of the portfolio to include a higher
proportion of tax-exempt investment securities with generally higher FTE yields than the Company’s taxable
investment securities. Beginning in February 2008 and continuing through December, the Company
purchased various tax-exempt investment securities with favorable yields.

The 62 bps decrease in average earning asset yields in 2008 compared to 2007 was more than offset by a
121 bps decrease in the rates on average interest bearing liabilities, resulting in the overall 52 bps increase
in net interest margin in 2008 compared to 2007. The decrease in the rates on interest bearing liabilities
was primarily attributable to a 123 bps decrease in the rates of interest bearing deposits, the largest
component of the Company’s interest bearing liabilities. This decrease in rates on interest bearing deposits
was attributable to (i) the FOMC interest rate decreases through December 2008, which resulted in decreases
in rates paid on both time deposits and savings and interest bearing transaction deposits as such deposits were
renewed or repriced during 2008 and (ii) the decrease in the Company’s time deposits, which generally pay
higher rates than its other interest bearing deposits, to 69.4% of average interest bearing deposits in 2008
compared to 72.7% in 2007.

The rates on the Company’s other funding sources also declined in 2008 compared to 2007 primarily
as a result of decreases in the FOMC federal funds target rate and other interest rate indices in 2008. The
Company’s other borrowings, which are comprised primarily of Federal Home Loan Bank of Dallas (“FHLB”)
advances, and, to a lesser extent, Federal Reserve Bank (“FRB”) borrowings and federal funds purchased,
decreased 89 bps in 2008 compared to 2007. The rates paid on the Company’s subordinated debentures,
which are tied to a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically,
declined 201 bps in 2008 compared to 2007 as a result of the decrease in 90-day LIBOR during 2008.

2007 compared to 2006

Net interest income for 2007 increased 7.8% to $81.2 million compared to $75.3 million for 2006.

Net interest margin was 3.44% in 2007 compared to 3.49% in 2006, a decrease of five bps. The growth in
net interest income was primarily a result of the 9.6% growth in earning assets from 2006 to 2007. The
relatively flat to inverted yield curve between short-term and long-term interest rates and the competitive
environment for pricing loans and deposits during 2007 contributed to the decline in net interest margin

for the full year of 2007 compared to 2006. However, the Company’s net interest margin improved over the
course of 2007, increasing from 3.22% in the fourth quarter of 2006, to 3.35%, 3.46%, 3.45% and 3.47%,
respectively, in each succeeding quarter of 2007.

Yields on earning assets increased 23 bps in 2007 compared to 2006. This increase was due primarily to
an increase in loan and lease yields of 22 bps and an increase in loans and leases as a percentage of earning
assets from 70.4% in 2006 to 74.9% in 2007. The increased loan and lease yields were due in part to the
repricing of a portion of the Company’s fixed rate loans and leases at higher interest rates during 2007.
From June 2004 through June 2006, the FOMC increased its federal funds target rate a total of 425 basis
points, and during 2007 the Company benefited as fixed rate loans and leases originated prior to June 2006
either renewed at current rates or paid off and were replaced with new loans and leases at current rates.
This increased repricing of fixed rate loans and leases was partially offset by declines in yields on variable
rate loans due to the FOMC lowering its federal funds target rate starting in September 2007.

The Company’s aggregate yield on its investment securities decreased 13 bps in 2007 compared to 2006.
This was the result of a 13 basis point decrease in yield on taxable investment securities, an 18 basis point
increase in yield on tax-exempt investment securities and a shift in the composition of the portfolio to
include a higher proportion of taxable investment securities that generally have a lower FTE yield than the
Company’s tax-exempt investment securities. Additionally, the Company’s average balance of investment
securities declined by $45 million for 2007 compared to 2006, resulting in a smaller percentage of its average
earning assets being comprised of investment securities in 2007 compared to 2006.

The 23 bps increase in the yield on average earning assets in 2007 compared to 2006 was more than
offset by a 32 bps increase in the rate on interest bearing liabilities, resulting in the overall five bps decline
in net interest margin. The increase in the rates on interest bearing liabilities was primarily attributable to a
46 bps increase in the rates of interest bearing deposits. This increase in the rates on interest bearing deposits
was attributable to both the increase in the Company’s time deposits, which generally pay higher rates than
its other interest bearing deposits, to 72.7% of average interest bearing deposits in 2007 compared to 68.7%
in 2006 and the increase in rates paid on time deposits as such deposits were renewed at higher rates as a
result of FOMC interest rate increases through June of 2006.

The increase in the rates on interest bearing deposits was partially offset by a decline in rates on the
Company’s other borrowings, which decreased 41 bps in 2007 compared to 2006. This decline in rates on
other borrowings was primarily due to the decline in the FOMC federal funds target rate, to which a portion
of the Company’s other borrowings are tied, starting in September 2007, the increased utilization of lower
cost FHLB advances in 2007 compared to 2006, and the increase in capitalized interest on construction
projects in 2007 compared to 2006.

Analysis of Net Interest Income
(FTE = Fully Taxable Equivalent)

2008

Interest income ......................................................................... $183,003
10,483
FTE adjustment ........................................................................
193,486
Interest income - FTE ...............................................................
Interest expense ........................................................................
84,302
Net interest income - FTE ......................................................... $109,184

Year Ended December 31,

2007
(Dollars in thousands)
$176,970
3,559
180,529
99,352
$ 81,177

2006

$155,198
4,596
159,794
84,478
$ 75,316

Yield on interest earning assets - FTE ......................................
Rate on interest bearing liabilities ............................................
Net interest margin - FTE .........................................................

7.02%
3.24
3.96

7.64%
4.45
3.44

7.41%
4.13
3.49

The following table sets forth certain information relating to the Company’s net interest income for the

years ended December 31, 2008, 2007 and 2006. The yields and rates are derived by dividing interest
income or interest expense by the average balance of the related assets or liabilities, respectively, for the
periods shown except where otherwise noted. Average balances are derived from daily average balances for
such assets and liabilities. The average balance of loans and leases includes loans and leases on which the
Company has discontinued accruing interest. The average balances of investment securities are computed
based on amortized cost adjusted for unrealized gains and losses on investment securities available for sale
(“AFS”) and other-than-temporary impairment writedowns. The yields on loans and leases include late fees
and amortization of certain deferred fees and origination costs, which are considered adjustments to yields.
The yields on investment securities include amortization of premiums and accretion of discounts. Interest
expense and rates on other borrowings are presented net of interest capitalized on construction projects.

Average Consolidated Balance Sheets and Net Interest Analysis

2008

Year Ended December 31,
2007

2006

Average
Balance

Income/ Yield/
Expense Rate

Average
Balance

Income/ Yield/
Expense Rate

Average
Balance

Income/ Yield/
Expense Rate

ASSETS

(Dollars in thousands)

Earning assets:
Interest earning deposits
and federal funds sold ........... $ 470 $ 13 2.77% $ 311 $ 19 6.08% $ 287 $ 10 3.44%
Investment securities:
395,484
Taxable ................................
365,413
Tax-exempt - FTE ................
1,995,231
Loans and leases - FTE ............
2,756,598
Total earning assets - FTE ...
Non-interest earning assets........
261,109
Total assets .................. $3,017,707

452,831
139,724
1,770,283
2,363,149
238,150
$2,601,299

452,943
184,779
1,517,818
2,155,827
209,489
$2,365,316

21,858 5.53
29,856 8.17
141,759 7.10
193,486 7.02

24,775 5.47
10,011 7.16
145,724 8.23
180,529 7.64

25,346 5.60
12,894 6.98
121,544 8.01
159,794 7.41

2,051,144

64,171 3.13

899,666
487,382

906,306
516,655

45,858 5.10
23,567 4.84

35,464 3.91
19,425 3.76

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest
bearing transaction ............ $ 628,183 $ 9,282 1.48% $ 521,875 $ 13,715 2.63% $ 523,324 $ 13,694 2.62%
Time deposits of
$100,000 or more ..............
Other time deposits ...............
Total interest
bearing deposits .............
Repurchase agreements
with customers .......................
Other borrowings .....................
Subordinated debentures..........
Total interest
bearing liabilities ............
Non-interest bearing liabilities:
Non-interest bearing deposits ....
Other non-interest
bearing liabilities ....................
Total liabilities ...................
Preferred stock, net of
unamortized discount ..............
Common stockholders’ equity ....
Total liabilities and
stockholders’ equity ..... $3,017,707

796 1.81
15,574 3.53(1)
3,761 5.79

1,312 3.35
13,953 4.93(1)
3,868 7.79

1,603 3.64
9,543 4.42(1)
5,066 7.80

44,071
215,872
64,950

39,213
282,925
49,641

43,916
441,288
64,950

35,120 4.67
16,531 4.15

8,795
2,207,122

14,477
2,800,338

13,878
2,416,480

-
158,194

-
184,819

4,098
213,271

752,765
398,178

84,302 3.24

99,352 4.45

83,140 4.36

84,478 4.13

65,345 3.90

$2,601,299

$2,365,316

2,601,298

2,046,046

2,233,816

1,908,923

1,674,267

184,563

168,786

152,281

Net interest income - FTE ...........
Net interest margin - FTE ...........

$109,184

$ 81,177

3.96%

3.44%

$ 75,316

3.49%

(1) The interest expense and rates for other borrowings were impacted by interest capitalized on construction projects
in the amount of $1.1 million, $1.3 million and $1.0 million, respectively, for the years ended December 31, 2008,
2007 and 2006. In the absence of this capitalization, these rates would have been 3.78%, 5.03% and 5.28%,
respectively, for the years ended December 31, 2008, 2007 and 2006.

The following table reflects how changes in the volume of interest earning assets and interest bearing
liabilities and changes in interest rates have affected the Company’s interest income, interest expense and
net interest income for the periods indicated. Information is provided in each category with respect to changes
attributable to (1) changes in volume (changes in volume multiplied by prior yield/rate); (2) changes in yield/
rate (changes in yield/rate multiplied by prior volume); and (3) changes in both yield/rate and volume
(changes in yield/rate multiplied by changes in volume). The changes attributable to the combined impact
of volume and yield/rate have all been allocated to the changes due to volume.

Analysis of Changes in Net Interest Income - FTE

2008 over 2007
Yield/
Rate

Net
Change

Volume

2007 over 2006
Yield/
Rate

Net
Change

Volume
(Dollars in thousands)

Increase (decrease) in:
Interest income - FTE:
Interest earning deposits
and federal funds sold ............................ $ 4
Investment securities:
Taxable ...................................................
Tax-exempt - FTE ....................................
Loans and leases - FTE .............................
Total interest income - FTE ...................
Interest expense:
Savings and interest bearing transaction ....
Time deposits of $100,000 or more ............
Other time deposits ...................................
Repurchase agreements with customers .....
Other borrowings ......................................
Subordinated debentures ...........................
Total interest expense ...........................
Increase (decrease) in net interest income - FTE ... $20,591

$ (10) $ (6)

$ 1

$ 8 $ 9

(2,932)
15
1,411
18,434
16,039 (20,004)
31,545 (18,588)

(2,917)
19,845
(3,965)
12,957

(6)
(3,228)
20,782
17,549

(565)
345

(571)
(2,883)
3,398 24,180
3,186 20,735

1,569

(6,002)
312 (10,706)
(5,264)
(806)
(1,921)
(1,305)
10,954 (26,004)

(4,433)
(10,394)
(4,142)
(807)
6,031
(1,305)
(15,050)
$ 7,416 $28,007

1,122
(1)
7,952
-

(37)
7,488
4,313
177
(2,965)
1,194
10,170

21
10,738
7,036
291
(4,410)
1,198
14,874
$ 7,379 $(1,518) $ 5,861

58
3,250
2,723
114
(1,445)
4
4,704

Non-Interest Income

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

2008 compared to 2007

Non-interest income for 2008 decreased 15.8% to $19.3 million compared to $23.0 million in 2007.

Service charges on deposit accounts are the Company’s largest source of non-interest income and decreased

1.5% to $12.0 million in 2008 compared to $12.2 million in 2007. The Company believes this decrease was
primarily due to a generally lower level of economic activity in 2008.

Trust income increased 16.7% to $2.6 million in 2008 compared to $2.2 million in 2007. This increase

was primarily the result of growth in both personal and corporate trust business.

Mortgage lending income declined 17.0% to $2.2 million in 2008 compared to $2.7 million in 2007.
Originations of mortgage loans for sale decreased 20.6% to $128.0 million in 2008 compared to $161.2
million in 2007. Refinancing of existing mortgages accounted for 48% of the Company’s 2008 origination
volume compared to 36% in 2007. Mortgage originations for home purchases were 52% of 2008 origination
volume compared to 64% in 2007.

Bank owned life insurance (“BOLI”) income increased 115.3% to $4.1 million in 2008 compared to $1.9
million in 2007. BOLI income was comprised of increases in the cash surrender value of $2.0 million in 2008
compared to $1.9 million in 2007 and $2.1 million of non-taxable income from BOLI death benefits in 2008
compared to no death benefits in 2007.

Net losses on investment securities, including the impairment charge discussed below, were $3.4 million
in 2008 compared to net gains of $0.5 million in 2007. The Company sold approximately $14 million of its
investment securities in 2008 and approximately $56 million of its investment securities in 2007. During the
fourth quarter of 2008, the Company determined that a bond issued by SLM Corporation (“Sallie Mae”) with
a carrying value of $10.0 million and an estimated fair value of $7.0 million was other-than-temporarily
impaired. As a result, the Company recorded a pretax impairment charge of $3.0 million to write down the
carrying value of the Sallie Mae bond to its estimated fair value.

Net losses on sales of other assets were $0.5 million in 2008 compared to net gains of $0.5 million in
2007. On December 31, 2008, a limited liability company providing low to moderate income housing in
which the Company had an investment completed a planned liquidation. As a result the Company received
its share of the underlying assets, comprised of $3.9 million par value of non-rated tax-exempt investment
securities. Because of the wide credit spreads attributable to such securities on the date of distribution,
the Company determined that its $3.9 million investment should be written down to $3.4 million, which
represented the estimated fair value of the investment securities received from dissolution of the entity.
This writedown accounted for substantially all of the Company’s net losses on sales of other assets in 2008.

Non-interest income from all other sources was $2.4 million in 2008 compared to $3.0 million in 2007.

During the first quarter of 2007, the Company benefited from $0.5 million of other non-interest income
from the settlement of a contested branch application.

2007 compared to 2006

Non-interest income for the year ended December 31, 2007 decreased 1.1% to $23.0 million compared to

$23.2 million in 2006.

Service charges on deposit accounts increased 19.3% to $12.2 million in 2007 compared to $10.2 million
in 2006. This increase was primarily attributable to enhancements made during late 2006 to the Company’s
processes for applying and collecting service charges, the large increase in the number of deposit accounts
from the Company’s 2006 deposit growth initiative and some small adjustments in early 2007 to the
Company’s service charge fee schedule.

Trust income increased 14.2% to $2.2 million in 2007 compared to $1.9 million in 2006. This increase

was primarily the result of growth in both personal trust and investment management business.

Mortgage lending income declined 8.6% to $2.7 million in 2007 compared to $2.9 million in 2006.
Originations of mortgage loans for sale decreased 7.2% to $161.2 million in 2007 compared to $173.7
million in 2006. Refinancing of existing mortgages accounted for 36% of the Company’s 2007 origination
volume compared to 32% in 2006. Mortgage originations for home purchases were 64% of 2007 origination
volume compared to 68% in 2006.

Net gains on investment securities were $0.5 million in 2007 compared to $3.9 million in 2006. The
Company sold approximately $56 million of its investment securities in 2007 and approximately $154
million of its investment securities in 2006. Net gains on sales of other assets were $0.5 million in 2007
compared to net losses of $0.1 million in 2006.

Non-interest income from all other sources was $3.0 million in 2007 compared to $2.5 million in 2006.

The table below shows non-interest income for the years ended December 31, 2008, 2007 and 2006.

Non-Interest Income

Year Ended December 31,

2008
(Dollars in thousands)

2007

2006

Service charges on deposit accounts .....................................................
Mortgage lending income ......................................................................
Trust income .........................................................................................
Bank owned life insurance income .......................................................
Appraisal, credit life commissions and other credit related fees ............
Safe deposit box rental, operating lease income, brokerage fees and
1,218
other miscellaneous fees ...................................................................
(3,433)
(Losses) gains on investment securities ...............................................
(544)
(Losses) gains on sales of other assets .................................................
Other .....................................................................................................
704
Total non-interest income ............................................................... $19,349

$12,007
2,215
2,595
4,131
456

$12,193
2,668
2,223
1,919
498

1,160
520
487
1,307
$22,975

$10,217
2,918
1,947
1,832
521

1,125
3,917
(90)
844
$23,231

Non-Interest Expense

Non-interest expense consists of salaries and employee benefits, net occupancy and equipment expense

and other operating expenses.

2008 compared to 2007

Non-interest expense for the year ended December 31, 2008 increased 12.7% to $54.4 million compared
to $48.3 million in 2007. Salaries and employee benefits, the Company’s largest component of non-interest
expense, increased 5.1% to $30.1 million in 2008 from $28.7 million in 2007. During 2008 the Company
added two new banking offices, including its new corporate headquarters, which opened in Little Rock in
December 2008. Simultaneous with the opening of the new headquarters, which includes a retail banking
office, the Company closed a nearby Wal-Mart Supercenter branch and a nearby loan production office.
At December 31, 2008, the Company had 71 full-service banking offices and one loan production office
compared to 70 full-service banking offices and two loan production offices at December 31, 2007. The
Company had 705 full-time equivalent employees at December 31, 2008, an increase of 2.3% from 689
full-time equivalent employees at December 31, 2007.

The Company’s efficiency ratio for 2008 was 42.3% compared to 46.3% in 2007. This improvement in
the effeciency ratio resulted from the Company’s total revenue (the sum of net interest income — FTE and
non-interest income) increasing at a faster rate than its non-interest expense in 2008.

2007 compared to 2006

Non-interest expense for the year ended December 31, 2007 increased 4.0% to $48.3 million compared to
$46.4 million in 2006 as a result of the Company’s continued growth and expansion. Salaries and employee
benefits increased 4.2% to $28.7 million in 2007 from $27.5 million in 2006. During 2007 the Company
added three new banking offices and replaced one temporary banking office with a new permanent facility.
At December 31, 2007, the Company had 70 full-service banking offices and two loan production offices
compared to 67 full-service banking offices and two loan production offices at December 31, 2006. The
Company had 689 full-time equivalent employees at December 31, 2007, a decrease of 1.4% from 699
full-time equivalent employees at December 31, 2006. The Company’s efficiency ratio for 2007 was 46.3%
compared to 47.1% in 2006.

The following table shows non-interest expense for the years ended December 31, 2008, 2007 and 2006.

Non-Interest Expense

2008

Salaries and employee benefits .................................................. $30,132
Net occupancy and equipment expense ......................................
8,882
Other operating expenses:
1,633
Postage and supplies .............................................................
1,630
Telephone and data lines .......................................................
1,204
Advertising and public relations ............................................
1,537
Professional and outside services ..........................................
1,261
Software expense ...................................................................
664
FDIC and state assessments ...................................................
1,131
FDIC insurance ......................................................................
633
ATM expense .........................................................................
1,728
Other real estate and foreclosure expense ..............................
214
Amortization of intangibles ...................................................
Other .....................................................................................
3,749
Total non-interest expense ............................................... $54,398

Year Ended December 31,

2007
(Dollars in thousands)
$28,661
8,098

2006

$27,506
7,030

1,620
1,415
1,057
1,077
1,201
624
701
674
368
262
2,494
$48,252

1,910
1,651
1,545
1,129
1,068
628
-
598
261
262
2,802
$46,390

Income Taxes

The Company’s provision for income taxes was $9.9 million for the year ended December 31, 2008
compared to $14.4 million in 2007 and $13.4 million in 2006. Its effective income tax rates were 22.2%,
31.3% and 29.7%, respectively, for 2008, 2007 and 2006. The decrease in the effective tax rate of 910
bps in 2008 compared to 2007 was due primarily to (i) the significant increase, both in volume and as a
percentage of earning assets, in investment securities which are exempt from federal and/or state income
taxes and (ii) the $2.1 million of non-taxable income from death benefits on BOLI in 2008 compared to
none in 2007. The increase in the effective tax rate of 160 bps in 2007 compared to 2006 was due primarily
to a decline in tax-exempt investment securities in both volume and as a percentage of earning assets.
The effective tax rates were also affected by various other factors including other non-taxable income
and non-deductible expenses.

Loan and Lease Portfolio

Analysis of Financial Condition

At December 31, 2008 the Company’s loan and lease portfolio was $2.02 billion, an increase of 8.0%
from $1.87 billion at December 31, 2007. As of December 31, 2008, the Company’s loan and lease portfolio
consisted of 82.5% real estate loans, 10.2% commercial and industrial loans, 3.7% consumer loans, 2.5%
direct financing leases and 1.0% agricultural loans (non-real estate). Real estate loans, the Company’s largest
category of loans, include all loans made to finance the development of real property construction projects,
provided such loans are secured by real estate, and all other loans secured by real estate as evidenced by
mortgages or other liens. Real estate loans comprised 82.5% of total loans and leases at December 31, 2008
compared to 81.9% at December 31, 2007 and increased 8.8% from $1.53 billion at December 31, 2007 to
$1.67 billion at December 31, 2008.

The amount and type of loans and leases outstanding are reflected in the following table.

Loan and Lease Portfolio

2008

2007

December 31,
2006
(Dollars in thousands)

2005

2004

Real estate:

Residential 1-4 family ................... $ 275,281
551,821
Non-farm/non-residential .............
694,527
Construction/land development ......
84,432
Agricultural ...................................
61,668
Multifamily residential ..................
Total real estate .......................... 1,667,729
206,058
75,015
50,250
19,460
2,687
Total loans and leases ................ $2,021,199

Commercial and industrial ................
Consumer ..........................................
Direct financing leases ......................
Agricultural (non-real estate) ...........
Other .................................................

$ 279,375
445,303
684,775
91,810
31,414
1,532,677
173,128
87,867
53,446
22,439
1,578
$1,871,135

$ 281,400
433,998
514,899
88,021
50,202
1,368,520
148,853
86,048
49,705
22,298
1,965
$1,677,389

$ 271,989
375,628
366,827
74,644
31,142
1,120,230
109,459
78,916
38,060
20,605
3,453
$1,370,723

$ 248,435
330,442
244,898
66,061
29,300
919,136
100,642
73,420
19,320
18,520
3,553
$1,134,591

The amount and percentage of the Company’s loan and lease portfolio by state of originating office are

reflected in the following table.

Loan and Lease Portfolio by State of Originating Office

Loans and Leases
Attributable to Offices In

2008

Amount

Arkansas ......................................... $1,333,420
588,875
Texas ...............................................
North Carolina .................................
98,904
Total ......................................... $2,021,199 100.0%

66.0%
29.1
4.9

December 31,
2007

Amount
(Dollars in thousands)

$1,461,657
315,960
93,518

78.1%
16.9
5.0

2006

Amount

$1,478,471
126,458
72,460

88.2%
7.5
4.3

$1,871,135 100.0%

$1,677,389 100.0%

The amount and type of the Company’s real estate loans at December 31, 2008 based on the metropolitan

statistical area (“MSA”) and other geographic areas in which the principal collateral is located are reflected
in the following table.

Geographic Distribution of Real Estate Loans

Residential Non-Farm/ Construction/

1-4
Family

Non-

Multifamily
Residential Development Agricultural Residential

Land

Total

(Dollars in thousands)

Arkansas:
Little Rock - North Little
Rock, AR MSA ....................... $ 60,227 $191,278
Fayetteville - Springdale -
13,283
Rogers, AR MSA ....................
38,599
Fort Smith, AR MSA .................
5,304
Hot Springs, AR MSA ...............
Western Arkansas(1) ..................
33,392
Northern Arkansas(2) ................
90,927
All other Arkansas(3) .................
10,387
Total Arkansas.................... 252,119

25,338
50,973
10,151
46,338
42,643
14,715
381,436

$117,541

$ 5,664

$ 4,869

$ 379,579

64,452
17,696
9,119
14,748
18,136
3,220
244,912

6,042
7,417
-
16,325
42,092
5,214
82,754

3,282
4,178
1,778
1,713
633
-
16,453

112,397
118,863
26,352
112,516
194,431
33,536
977,674

Texas:
Dallas - Fort Worth -
Arlington, TX MSA ................
Houston - Baytown -
Sugar Land, TX MSA .............
Texarkana, TX -
Texarkana, AR MSA ..............
All other Texas(3) .......................
Total Texas ..........................

North Carolina/South Carolina:
Charlotte - Gastonia -
Concord, NC/SC MSA .............
All other North Carolina(3) .........
All other South Carolina(3) .........
Total North Carolina/
South Carolina .................

California ..................................

Virginia .....................................

Oklahoma(4) ..............................

2,066

48,506

241,128

3,385

42,209

10,652
476
13,194

10,161
15,338
77,390

4,022
9,752
297,111

608
72
6,286

31,053
9,441
7,683

6,966

48,177

2,738

1,075

3,522

41,741
31,487
7,636

80,864

31,757

16,566

11,944

571
-
571

-
126
-

126

37,715

329,425

45,594

4,213
-
41,938

29,619
25,566
430,204

3,277
-
-

76,679
41,126
21,605

3,277

139,410

34,495

17,641

15,466

All other states(3)(5) ....................
37,483
Total real estate loans ......... $275,281 $551,821

3,002

11,373
$694,527

981
$84,432

-
$61,668

52,839
$1,667,729

(1) This geographic area includes the following counties in Western Arkansas: Conway, Johnson, Logan, Pope and

Yell counties.

(2) This geographic area includes the following counties in Northern Arkansas: Baxter, Boone, Carroll, Fulton, Marion,

Newton, Searcy and Van Buren counties.

(3) These geographic areas include all MSA and non-MSA areas that are not separately reported.
(4) This geographic area includes all loans in Oklahoma except loans in Le Flore and Sequoyah counties which are

included in the Fort Smith, Arkansas MSA above.

(5) Data for individual states is separately presented when aggregate real estate loans in that state exceed $10 million.

The amount and type of non-farm/non-residential loans at December 31, 2008 and 2007, and their

respective percentage of the total non-farm/non-residential loan portfolio are reflected in the following table.

Non-Farm/Non-Residential Loans

December 31,

2008

2007

Amount

(Dollars in thousands)

Retail, including shopping centers
and strip centers ................................................... $143,565
75,371
Churches and schools ..............................................
62,644
Office, including medical offices ..............................
41,253
Office warehouse, warehouse and mini-storage ......
15,938
Gasoline stations and convenience stores ................
24,046
Hotels and motels ....................................................
47,489
Restaurants and bars ...............................................
25,933
Manufacturing and industrial facilities ....................
22,516
Nursing homes and assisted living centers ..............
52,715
Hospitals, surgery centers and other medical ..........
Golf courses, entertainment and
12,873
recreational facilities .............................................
Other non-farm/non-residential ..............................
27,478
Total .................................................................. $551,821

26.0%
13.7
11.3
7.5
2.9
4.4
8.6
4.7
4.1
9.5

2.3
5.0
100.0%

$160,615
78,989
63,920
44,015
19,297
12,679
13,902
9,942
5,282
2,977

2,992
30,693
$445,303

36.1%
17.7
14.4
9.9
4.3
2.8
3.1
2.2
1.2
0.7

0.7
6.9
100.0%

The amount and type of construction/land development loans at December 31, 2008 and 2007, and
their respective percentage of the total construction/land development loan portfolio are reflected in the
following table.

Construction/Land Development Loans

2008

Amount

219,174
102,598

Unimproved land ..................................................... $ 92,118
Land development and lots:
1-4 family residential and multifamily .................
Non-residential .....................................................
Construction:
1-4 family residential:
Owner occupied .................................................
Non-owner occupied:
14,791
Pre-sold ..........................................................
75,233
Speculative .....................................................
17,830
Multifamily ...........................................................
Industrial, commercial and other ..........................
153,246
Total .................................................................. $694,527

19,537

December 31,

2007

Amount

(Dollars in thousands)

13.3%

$113,526

31.6
14.8

185,703
58,100

16.6%

27.1
8.5

2.8

24,416

3.6

2.1
10.8
2.6
22.0
100.0%

7,175
97,710
63,224
134,921
$684,775

1.0
14.3
9.2
19.7
100.0%

Loan and Lease Maturities

The following table reflects loans and leases grouped by remaining maturities at December 31, 2008 by

type and by fixed or floating interest rates. This table is based on actual maturities and does not reflect
amortizations, projected paydowns or the earliest repricing for floating rate loans. Many loans have principal
paydowns scheduled in periods prior to the period in which they mature. In addition many variable rate
loans are subject to repricing in periods prior to the period in which they mature.

Loan and Lease Maturities

1 Year
or Less

Over 1
Through
5 Years

Over
5 Years
(Dollars in thousands)

Real estate ............................................................... $737,935
118,697
Commercial, industrial and agricultural ...................
18,044
Consumer .................................................................
2,907
Direct financing leases .............................................
Other ........................................................................
2,189
Total ................................................................. $879,772

Fixed rate ................................................................. $307,866
140,608
Floating rate (not at a floor or ceiling rate) ..............
431,298
Floating rate (at floor rate) ......................................
Floating rate (at ceiling rate) ...................................
-
Total ................................................................. $879,772

$ 832,549
102,293
53,090
46,277
451
$1,034,660

$ 561,280
133,946
339,434
-
$1,034,660

$ 97,245
4,528
3,881
1,066
47
$106,767

$ 64,554
22,014
20,066
133
$106,767

Total

$1,667,729
225,518
75,015
50,250
2,687
$2,021,199

$ 933,700
296,568
790,798
133
$2,021,199

The following table reflects loans and leases as of December 31, 2008 grouped by expected amortizations,

expected paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing
schedule approximates the Company’s ability to reprice the outstanding principal of loans and leases either
by adjusting rates on existing loans and leases or reinvesting principal cash flow in new loans and leases.

Loan and Lease Cash Flows or Repricing

1 Year
or Less

Over 1
Through
2 Years

Over 2
Through
3 Years

Over 3
Through
5 Years
(Dollars in thousands)

Over
5 Years

Total

Fixed rate ................................... $ 374,847 $199,001
Floating rate (not at a floor
344
or ceiling rate) ........................
-
Floating rate (at floor rate) .........
Floating rate (at ceiling rate) ......
-
Total .................................... $1,460,073 $199,345

295,151
789,942
133

$166,385 $150,878 $42,589 $ 933,700

775
-
-

296,568
790,798
133
$167,160 $152,032 $42,589 $2,021,199

298
856
-

-
-
-

Percentage of total .....................
Cumulative percentage of total ...

72.2%
72.2

9.9%

82.1

8.3%

90.4

7.5%

97.9

2.1%

100.0

100.0%

Nonperforming Assets

Nonperforming assets consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days
or more past due, (3) certain restructured loans and leases providing for a reduction or deferral of interest or
principal because of a deterioration in the financial position of the borrower or lessee and (4) real estate or
other assets that have been acquired in partial or full satisfaction of loan or lease obligations or upon foreclosure.

The Company generally places a loan or lease on nonaccrual status when payments are contractually
past due 90 days, or earlier when doubt exists as to the ultimate collection of payments. The Company may
continue to accrue interest on certain loans or leases contractually past due 90 days or more if such loans
or leases are both well secured and in the process of collection. At the time a loan or lease is placed on
nonaccrual status, interest previously accrued but uncollected is generally reversed and charged against
interest income. Nonaccrual loans and leases are generally returned to accrual status when payments are
less than 90 days past due and the Company reasonably expects to collect all payments. If a loan or lease
is determined to be uncollectible, the portion of the principal determined to be uncollectible will be charged
against the allowance for loan and lease losses. Income on nonaccrual loans or leases is recognized on a
cash basis when and if actually collected.

The following table presents information concerning nonperforming assets including nonaccrual and

restructured loans and leases, foreclosed assets held for sale and repossessions.

Nonperforming Assets

2008

2007

December 31,
2006
(Dollars in thousands)

2005

Nonaccrual loans and leases ........................................ $15,382
-
Accruing loans and leases 90 days or more past due ...
Restructured loans and leases(1) ...................................
-
Total nonperforming loans and leases .................. 15,382
Foreclosed assets held for sale and repossessions(2) ......... 10,758
Total nonperforming assets .................................. $26,140

$6,610
26
-
6,636
3,112
$9,748

$5,713
-
-
5,713
407
$6,120

$3,385
-
-
3,385
356
$3,741

2004

$6,497
-
-
6,497
157
$6,654

Nonperforming loans and leases
to total loans and leases ...........................................
Nonperforming assets to total assets ...........................

0.76%
0.81

0.35%
0.36

0.34%
0.24

0.25%
0.18

0.57%
0.39

(1) All restructured loans and leases as of the dates shown were on nonaccrual status and are included as nonaccrual

loans and leases in this table.

(2) Foreclosed assets held for sale and repossessions are written down to estimated market value net of estimated selling
costs at the time of transfer from the loan and lease portfolio. The values of such assets are reviewed from time to
time throughout the holding period with the value adjusted through non-interest expense to the then estimated
market value net of estimated selling costs, if lower, until disposition.

The increases in the above ratios at December 31, 2008 were not due to a specific customer or a specific

market, but were a result of a number of loans and leases spread across the Company’s market area.
While the Company’s markets in Arkansas, Texas and the Carolinas appear to have been less significantly
impacted by weaker economic conditions nationally than some other markets, the Company has not been
immune to the effects of the slower economic conditions and the slow down in housing activity. As a result,
its ratios of nonperforming loans and leases and nonperforming assets were higher at December 31, 2008
compared to previous years.

The Company’s credit practices dictate that the larger the loan or lease, the more stringent are the credit

standards applied. Weaker economic conditions therefore typically affect the Company’s smaller loans or
leases more quickly and adversely than its larger loans or leases, as these smaller loans or leases are not
typically underwritten to the more rigorous standards applied progressively to larger loans or leases.

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 114,
at December 31, 2008, the Company has reduced the carrying value of its impaired loans and leases (all
of which were included in nonaccrual loans and leases) by $4.0 million to the estimated fair value of such
loans and leases of $12.4 million. The $4.0 million adjustment to reduce the carrying value of impaired
loans and leases to estimated fair value consisted of $3.7 million of partial charge-offs and $0.3 million
of specific loan and lease loss allocations.

The following table presents information concerning the geographic location of nonperforming assets at

December 31, 2008. For the Company’s nonaccrual loans and leases, the location reported is the physical
location of the principal collateral. Other real estate owned of $10.6 million is reported in the physical
location of the asset. Repossessions of $0.1 million are reported at the physical location where the borrower
resided at the time of repossession.

Geographic Distribution of Nonperforming Assets

Nonaccrual
Loans and
Leases

Arkansas ............................................................................
Texas ..................................................................................
North Carolina ....................................................................
South Carolina ....................................................................
All other ..............................................................................
Total .............................................................................

$11,611
1,511
1,274
611
375
$15,382

Other
Real Estate
Owned and
Repossessions
(Dollars in thousands)
$ 6,883
1,636
669
1,477
93
$10,758

Total
Nonperforming
Assets

$18,494
3,147
1,943
2,088
468
$26,140

Allowance and Provision for Loan and Lease Losses

The Company’s allowance for loan and lease losses was $29.5 million at December 31, 2008, or 1.46% of
total loans and leases, compared with $19.6 million, or 1.05% of total loans and leases, at December 31, 2007.
The allowance for loan and lease losses was $17.7 million, or 1.06% of loans and leases, at December 31, 2006.
The increase in the allowance for loan and lease losses is due to a number of factors including growth in the
Company’s loan and lease portfolio, changes in loss estimates for individual loans and leases and certain
categories of loans and leases and slower economic and housing market conditions. While the Company
believes the current allowance is adequate, changing economic and other conditions may require future
adjustments to the allowance for loan and lease losses.

The amounts of provision to the allowance for loan and lease losses are based on the Company’s analysis
of the adequacy of the allowance for loan and lease losses utilizing the criteria discussed below. The provision
for loan and lease losses for 2008 was $19.0 million compared to $6.2 million in 2007 and $2.5 million in
2006. The Company’s increase in its provision for loan and lease losses and its net charge-offs for 2008
compared to 2007 were significantly impacted by slower economic conditions, including a slowdown in
commercial real estate activity, continued deterioration in the residential housing and mortgage markets
and other factors.

An analysis of the allowance for loan and lease losses for the periods indicated is shown in the

following table.

Analysis of the Allowance for Loan and Lease Losses

Year Ended December 31,

2008

2007

2006
(Dollars in thousands)

2005

2004

Balance, beginning of period ....................................... $19,557 $17,699 $17,007 $16,133 $13,820
Loans and leases charged off:
Real estate:
Residential 1-4 family .......................................
Non-farm/non-residential ..................................
Construction/land development .........................
Agricultural .......................................................
Multifamily/residential ......................................
Total real estate ............................................
Commercial and industrial ......................................
Consumer ...............................................................
Direct financing leases ............................................
Agricultural (non-real estate) .................................
Total loans and leases charged off ................

1,079
552
3,059
645
250
5,585
1,259
1,783
734
270
9,631

215
182
796
37
-
1,230
1,798
1,046
367
203
4,644

124
132
58
-
-
314
872
709
63
107
2,065

196
47
-
-
-
243
706
785
-
50
1,784

167
201
29
-
-
397
346
503
-
31
1,277

Recoveries of loans and leases previously charged off:
Real estate:
32
Residential 1-4 family .......................................
48
Non-farm/non-residential ..................................
1
Construction/land development .........................
-
Agricultural .......................................................
81
Total real estate ............................................
35
Commercial and industrial ......................................
142
Consumer ...............................................................
-
Direct financing leases ............................................
2
Agricultural (non-real estate) .................................
260
Total recoveries .............................................
1,017
Net loans and leases charged off .................................
Provision charged to operating expense ......................
3,330
Balance, end of period ................................................. $29,512 $19,557 $17,699 $17,007 $16,133

55
76
29
-
160
51
317
21
12
561
9,070
19,025

25
3
-
19
47
62
209
27
7
352
4,292
6,150

5
4
4
-
13
47
234
13
-
307
1,758
2,450

53
17
23
-
93
102
152
-
11
358
1,426
2,300

Net charge-offs to average loans and leases ................
Allowance for loan and lease losses to total
loans and leases .......................................................
Allowance for loan and lease losses to
nonperforming loans and leases ...............................

0.45%

0.24%

0.12% 0.11%

0.10%

1.46%

1.05%

1.06% 1.24%

1.42%

192%

295%

310%

502%

248%

Provisions to and the adequacy of the allowance for loan and lease losses are determined in accordance
with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 5, “Accounting for
Contingencies,” and are based on the Company’s judgment and evaluation of the loan and lease portfolio
utilizing objective and subjective criteria. The objective criteria utilized by the Company to assess the
adequacy of its allowance for loan and lease losses and required additions to such allowance consists
primarily of an internal grading system and specific allowances determined in accordance with SFAS No.
114. The Company also utilizes a peer group analysis and an historical analysis in an effort to validate
the overall adequacy of its allowance for loan and lease losses. In addition to these objective criteria, the
Company subjectively assesses the adequacy of the allowance for loan and lease losses and the need for
additions thereto, with consideration given to the nature, mix and volume of the portfolio, overall portfolio
quality, review of specific problem loans and leases, national, regional and local business and economic
conditions that may affect borrowers’ or lessees’ ability to pay, the value of collateral securing the loans
and leases, and other relevant factors.

The Company’s internal grading system analysis assigns grades to all loans and leases except residential

1-4 family loans and consumer loans. Graded loans and leases are assigned to one of seven risk grades,
with each grade being assigned a specific allowance allocation percentage. The grade for each individual
loan or lease is determined by the account officer and other approving officers at the time the loan or lease
is made and changed from time to time to reflect an ongoing assessment of loan or lease risk. Grades are
reviewed on specific loans and leases from time to time by senior management and as part of the Company’s
internal loan review process. Residential 1-4 family and consumer loans are assigned an allowance allocation
percentage based on past due status. Allowance allocation percentages for the various risk grades and past
due categories are determined by management and are adjusted periodically. In determining these allowance
allocation percentages, management considers, among other factors, historical loss percentages for risk-rated
loans and leases, consumer loans and residential 1-4 family loans. Additionally, management considers a
variety of subjective criteria in determining the allowance allocation percentages.

All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan
or lease to be impaired when based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms thereof. Most of the Company’s
nonaccrual loans and leases and all loans and leases that have been restructured from their original
contractual terms are considered impaired. Many of the Company’s impaired loans and leases are dependent
upon collateral for repayment. For such loans and leases, impairment is measured by comparing collateral
value, net of holding and selling costs, to the current investment in the loan or lease. For all other impaired
loans and leases, the Company compares estimated discounted cash flows to the current investment in the
loan or lease. To the extent that the Company’s current investment in a particular loan or lease exceeds its
estimated net collateral value or its estimated discounted cash flows, the impaired amount is specifically
considered in the determination of the allowance for loan and lease losses, or is immediately charged off
as a reduction of the allowance for loan and lease losses.

The Company maintains specific reserves for certain loans and leases not considered impaired where (i)
the customer is continuing to make regular payments, although payments may be past due, (ii) there is a
reasonable basis to believe the customer may continue to make regular payments, although there is also
an elevated risk that the customer may default, and (iii) the collateral or other repayment sources are likely
to be insufficient to recover the current investment in the loan or lease if a default occurs. The Company
evaluates such loans and leases to determine whether a specific reserve is needed for the loan or lease. For
the purpose of calculating the amount of the specific reserve appropriate for any such loan or lease, management
uses substantially the same methodology as used to calculate the impaired amount of loans and leases in
accordance with SFAS No. 114 and assumes that (i) no further regular payments occur and (ii) all sums
recovered will come from liquidation of collateral and collection efforts from other payment sources. To the
extent that the Company’s current investment in a particular loan or lease evaluated for the need for a
specific reserve exceeds its net collateral value or its estimated discounted cash flows, such excess is
allocated as a specific reserve for purposes of the determination of the allowance for loan and lease losses.

The sum of all allowance amounts derived as described above, combined with a reasonable unallocated

allowance determined by management that reflects inherent but undetected losses in the portfolio and
imprecision in the allowance methodology, is utilized as the primary indicator of the appropriate level of
allowance for loan and lease losses. The portion of the allowance that is not derived by the allowance
allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses

including factors and conditions that may not be fully reflected in the determination and application of the
allowance allocation percentages. The factors and conditions evaluated in determining the unallocated
portion of the allowance may include the following: (1) general economic and business conditions affecting
key lending areas, (2) credit quality trends (including trends in nonperforming loans and leases expected to
result from existing conditions), (3) trends that could affect collateral values, (4) seasoning of the loan and
lease portfolio, (5) specific industry conditions affecting portfolio segments, (6) recent loss experience in
particular segments of the portfolio, (7) concentrations of credit to single borrowers or related borrowers or
to specific industries, or in specific collateral types in the loan and lease portfolio, including concentrations
of credit in commercial real estate loans, (8) the Company’s expansion into new markets, (9) the offering of
new loan and lease products, (10) expectations regarding the current business cycle, (11) bank regulatory
examination results and (12) findings of the internal loan review department. At December 31, 2008
management believed it was appropriate to maintain an unallocated portion of the allowance not derived
by the allowance allocation percentages that ranges from 15% to 25% of the total allowance for loan and
lease losses.

In addition to the internal grading system, specific impairment analysis and specific reserve analysis,
the Company compares the allowance for loan and lease losses (as a percentage of total loans and leases)
maintained by the Bank to the peer group average percentage as shown on the most recently available
Federal Deposit Insurance Corporation’s (“FDIC”) Uniform Bank Performance Report and the FRB’s Bank
Holding Company Performance Report. The Company also compares the allowance for loan and lease losses
to its historical cumulative net charge-offs for the five preceding calendar years.

The Company’s allowance for loan and lease losses exceeds its cumulative historical net charge-off experience

for the last five years. However, the allowance is considered reasonable given the growth in the loan and
lease portfolio during recent years, key allowance and nonperforming loan and lease ratios, comparisons to
industry averages, slower economic conditions in the Company’s market area and other factors.

Although the Company does not determine the overall allowance based upon the amount of loans or
leases in a particular type or category (except in the case of residential 1-4 family and consumer loans),
risk elements attributable to particular loan or lease types or categories are considered in assigning loan
and lease grades to individual loans and leases. These risk elements include the following: (1) for non-
farm/non-residential, multifamily residential, and agricultural real estate loans, the debt service coverage
ratio (income from the property in excess of operating expenses compared to loan repayment requirements),
operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age,
condition, value, nature and marketability of the collateral and the specific risks and volatility of income,
property value and operating results typical of properties of that type; (2) for construction and land
development loans, the perceived feasibility of the project including the ability to sell developed lots or
improvements constructed for resale or ability to lease property constructed for lease, the quality and nature
of contracts for presale or preleasing, if any, experience and ability of the developer and loan-to-value ratios;
(3) for commercial and industrial loans and leases, the operating results of the commercial, industrial or
professional enterprise, the borrower’s or lessee’s business, professional and financial ability and expertise,
the specific risks and volatility of income and operating results typical for businesses in the applicable
industry and the age, condition, value, nature and marketability of collateral; and (4) for non-real estate
agricultural loans and leases, the operating results, experience and ability of the borrower or lessee,
historical and expected market conditions and the age, condition, value, nature and marketability of
collateral. In addition, for each category the Company considers secondary sources of income and the
financial strength of the borrower or lessee and any guarantors.

The Board of Directors reviews the analysis of the adequacy of the allowance for loan and lease losses
on a quarterly basis, or more frequently as needed, to determine whether the amount of monthly provisions
are adequate or whether additional provisions should be made to the allowance. While the allowance is
determined by (i) management’s assessment and grading of individual loans and leases in the case of loans
and leases other than residential 1-4 family loans and consumer loans, (ii) the past due status of residential
1-4 family loans and consumer loans and (iii) allowances made for specific loans and leases, the total
allowance amount is available to absorb losses across the Company’s entire loan and lease portfolio.

The following table sets forth the sum of the amounts of the allowance for loan and lease losses

attributable to individual loans and leases within each category, or loan and lease categories in general,
and the unallocated allowance. The table also reflects the percentage of loans and leases in each category to
the total portfolio of loans and leases for each of the periods indicated. These allowance amounts have been
computed using the Company’s internal grading system, specific impairment analyses and specific special
reserve analyses. The amounts shown are not necessarily indicative of the actual future losses that may
occur within particular categories.

Allocation of the Allowance for Loan and Lease Losses

2008

2007

% of
Loans
and

December 31,

2006

% of
Loans
and

2005

2004

% of
Loans
and

Allowance Leases Allowance Leases

Allowance Leases Allowance Leases Allowance Leases

Real estate:
Residential 1-4 family ................. $ 2,170
4,396
Non-farm/non-residential ...........
8,560
Construction/land development ...
745
Agricultural ................................
1,658
Multifamily residential ................
2,421
Commercial and industrial ............
1,894
Consumer .....................................
808
Direct financing leases ..................
137
Agricultural (non-real estate) ........
72
Other ............................................
Unallocated allowance ..................
6,651
Total ...................................... $29,512

(Dollars in thousands)

13.6% $ 2,217
3,470
27.3
5,192
34.4
791
4.2
198
3.0
1,439
10.2
2,280
3.7
335
2.5
142
1.0
65
0.1
3,428
$19,557

14.9% $ 3,052
3,085
23.8
3,381
36.6
765
4.9
272
1.7
1,373
9.3
2,179
4.7
305
2.8
150
1.2
77
0.1
3,060
$17,699

16.8% $ 3,423
3,368
25.9
2,820
30.7
562
5.2
235
3.0
1,111
8.9
2,062
5.1
286
3.0
200
1.3
41
0.1
2,899
$17,007

19.8% $ 3,427
3,107
27.4
1,881
26.8
510
5.5
226
2.2
1,004
8.0
1,752
5.8
170
2.8
164
1.5
25
0.2
3,867
$16,133

21.9%
29.1
21.6
5.8
2.6
8.9
6.5
1.7
1.6
0.3

The Company maintains an internally classified loan and lease list that, along with the list of nonaccrual
loans and leases, the list of impaired loans and leases and the list of loans and leases with specific reserves,
helps management assess the overall quality of the loan and lease portfolio and the adequacy of the allowance.
Loans and leases classified as “substandard” have clear and defined weaknesses such as highly leveraged
positions, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may
jeopardize collectability of the loan or lease. Loans and leases classified as “doubtful” have characteristics
similar to substandard loans and leases, but also have an increased risk that a loss may occur or at least a
portion of the loan or lease may require a charge-off if liquidated. Although loans and leases classified as
substandard do not duplicate loans and leases classified as doubtful, both substandard and doubtful loans
and leases may include some that are past due at least 90 days, are on nonaccrual status or have been
restructured. Loans and leases classified as “loss” are charged off. At December 31, 2008 substandard loans
and leases not designated as nonaccrual or 90 days past due totaled $41.6 million compared to $10.0 million
at December 31, 2007. No loans or leases were designated as doubtful or loss at December 31, 2008 or 2007.

Administration of the Bank’s lending function is the responsibility of the Chief Executive Officer and

certain senior lenders. Such officers perform their lending duties subject to the oversight and policy direction
of the Board of Directors and the loan committee. Loan or lease authority is granted to the Chief Executive
Officer and certain other senior officers as determined by the Board of Directors. Loan or lease authorities
of other lending officers are assigned by the Chief Executive Officer.

Loans or leases and aggregate loan and lease relationships exceeding $3.0 million up to the legal lending

limit of the Bank are authorized by the loan committee, which during 2008 consisted of any five or more
directors and three of the Bank’s senior officers. At least quarterly, the Company’s loan committee reviews
various reports of loan and lease concentrations, loan and lease originations and commitments over
$100,000, internally classified and watch list loans and leases and various other loan and lease reports.
At least quarterly the Board of Directors reviews summary reports of past due loans and leases and activity
in the Company’s allowance for loan and lease losses and various other loan and lease reports.

The Company’s compliance and loan review officers are responsible for the Bank’s compliance and loan
review areas. Periodic reviews are scheduled for the purpose of evaluating asset quality and effectiveness
of loan and lease administration. The compliance and loan review officers prepare reports which identify
deficiencies, establish recommendations for improvement and outline management’s proposed action plan
for curing the identified deficiencies. These reports are provided to and reviewed by the Company’s audit
committee. Additionally, the reports issued by the Company’s loan review function are provided to and
reviewed by the Company’s loan committee.

Investment Securities

The Company’s investment securities portfolio provides a significant source of revenue for the Company.
At December 31, 2008, 2007 and 2006, the Company classified all of its investment securities portfolio as
available for sale. Accordingly, its investment securities are stated at estimated fair value in the consolidated
financial statements with the unrealized gains and losses, net of tax, reported as a separate component of
stockholders’ equity and included in other comprehensive income (loss). At December 31, 2007 and 2006,
the Company owned stock in the FHLB and the Arkansas Banker’s Bancorporation, Inc. (“ABB”). Effective
November 30, 2008 the ABB was acquired by and merged into the First National Banker’s Bankshares, Inc.
(“FNBB”) via a tax-free exchange of stock. Accordingly, at December 31, 2008, the Company owned stock in
FHLB and FNBB. The FHLB, ABB and FNBB shares do not have readily determinable fair values and are
carried at cost.

The following table presents the amortized cost and the fair value of investment securities as of the dates

indicated.

Investment Securities

2008

December 31,
2007

2006

Amortized
Cost

Fair
Value(1)

Amortized
Cost

Fair
Value(1)

Amortized
Cost

Fair
Value(1)

(Dollars in thousands)

Obligations of states and political

subdivisions ....................................... $517,166 $542,740 $163,339 $166,467 $133,255 $135,149

U.S. Government agency mortgage-
397,964
backed securities (taxable) ..................
Securities of U.S. Government agencies ..
65,252
9,278
Corporate obligations ..............................
11,489
FHLB and FNBB/ABB stock ......................
Other securities .......................................
1,000
Total ............................................ $919,075 $944,783 $603,179 $578,348 $628,230 $620,132

370,061
42,029
9,953
16,753
1,044

344,346
42,092
7,646
16,753
1,044

406,611
65,935
9,940
11,489
1,000

371,561
-
6,953
22,846
683

371,110
-
6,953
22,846
1,000

(1) The Company utilizes an independent third party as its principal pricing source for determining fair value. For

investment securities traded in an active market, the fair values are based on quoted market prices if available.
If quoted market prices are not available, fair values are based on market prices for comparable securities, broker
quotes or comprehensive interest rate tables and pricing matrices. For investment securities traded in a market that
is not active, fair value is determined using unobservable inputs or value drivers.

The following table presents the unaccreted discount and unamortized premium of the Company’s

investment securities for the dates indicated.

Unaccreted Discount and Unamortized Premium

Unaccreted Unamortized

Discount

Premium
(Dollars in thousands)

Net Unaccreted
Discount

December 31, 2008:
Obligations of states and political subdivisions .....................
U.S. Government agency mortgage-backed securities ............
Corporate obligations .............................................................
FHLB and FNBB stock ............................................................
Other securities ......................................................................
Total ................................................................................

December 31, 2007:
Obligations of states and political subdivisions .....................
U.S. Government agency mortgage-backed securities ............
Securities of U.S. Government agencies .................................
Corporate obligations .............................................................
FHLB and ABB stock ..............................................................
Other securities ......................................................................
Total ................................................................................

$28,779
8,252
-
-
-
$37,031

$ 825
9,067
56
47
-
-
$ 9,995

$ (19)
(139)
-
-
-

$(158)

$ (25)
(173)
-
-
-
-

$(198)

$28,760
8,113
-
-
-
$36,873

$ 800
8,894
56
47
-
-
$ 9,797

During 2008, 2007 and 2006, the Company recognized discount accretion, net of premium amortization,
of $1.0 million, $0.9 million and $1.2 million, respectively, which is considered an adjustment to yield of its
investment securities.

The Company’s investment securities portfolio is reported at amortized cost adjusted for unrealized gains

and losses and for any impairment charges. At December 31, 2008, unrealized net gains totaled $25.7
million and at December 31, 2007 and 2006, respectively, unrealized net losses were $24.8 million and
$8.1 million. Management believes that all of its unrealized losses on individual investment securities at
December 31, 2008 are the result of fluctuations in interest rates and do not reflect deterioration in the
credit quality of its investments. Accordingly management considers these unrealized losses to be temporary
in nature. The Company has both the ability and the intent to hold these investment securities until maturity
or such time as fair value recovers to amortized cost.

At December 31, 2008, the Company’s investment securities portfolio included a bond issued by Sallie
Mae with an amortized cost of $10.0 million and an estimated fair value of $7.0 million. During the fourth
quarter of 2008, the Company concluded that the Sallie Mae bond was other-than-temporarily impaired and
recorded a pretax charge of $3.0 million to reduce the carrying value of this bond to its estimated fair value.
In estimating the fair value of this Sallie Mae bond, the Company relied significantly on inputs and value
drivers that are unobservable, resulting in Level 3 classification under the provisions of SFAS No. 157,
“Fair Value Measurements”. The use of unobservable inputs and value drivers was deemed necessary by
management given the trading market for this security was determined to be “not active” based on the
limited number of trades, small block sizes, and the significant spreads between the bid and ask price.
Accordingly, the Company developed an internal model for pricing the security based on the present value
of expected cash flows at an appropriate risk-adjusted discount rate. In developing the appropriate risk-
adjusted discount rate, the Company considered the change in interest rate spreads between comparable
maturities of similarly rated bonds and U.S. Treasuries between the date of purchase and the measurement
date, which spreads increased 690 bps during such period. Additionally, the Company reviewed other
information such as historical and current performance of the bond, cash flow projections, liquidity and
credit premiums required by market participants, financial trend analysis of Sallie Mae and other factors in
determining the appropriate risk-adjusted discount rate and expected cash flows. Management determined
that the increase in spreads of 690 bps added together with the current coupon rate on the Sallie Mae bond
was the appropriate risk-adjusted discount rate to apply to the estimated future cash flows, resulting in an
estimated fair value of $7.0 million.

The Company had net losses of $0.4 million from the sale of $14 million of investment securities in

2008 compared with net gains of $0.5 million from the sale of $56 million of investment securities in 2007.
During 2008 and 2007, respectively, investment securities totaling $1.642 billion and $40 million, matured
or were called by the issuer. The Company purchased $1.959 billion and $70 million, respectively, of
investment securities during 2008 and 2007.

From February through December of 2008, the Company purchased a large volume of tax-exempt

investment securities which the Company expected to be relatively temporary investments. The opportunity
to acquire these securities at unusually favorable yields was due to unusual market conditions. The interest
rates on the majority of these securities reset weekly, resulting in the securities being repurchased or called
on a weekly basis. As expected, the Company’s volume of these investments declined during 2008 from
$290 million at March 31, 2008, to $170 million at June 30, $119 million at September 30 and $85 million
at December 31. The Company expects the remainder of these securities will be called or otherwise paid off
in the first or second quarter of 2009.

In addition, during 2008 the Company purchased other investment securities which appeared to offer

relatively good value at the time of purchase and which the Company considers to be long term investments.
Total purchases of such investment securities were $15.9 million during the first quarter of 2008, $35.4
million in the second quarter, $20.5 million in the third quarter and $202.6 million in the fourth quarter.
Such purchases, during the fourth quarter of 2008, included $187.3 million of tax-exempt mortgage-backed
securities issued by housing authorities of states and political subdivisions (“Municipal Housing Authority
Bonds”). These Municipal Housing Authority Bonds are primarily backed by single family or multi-family
residential mortgages, the repayment of which is guaranteed by the Government National Mortgage Association
(“GNMA”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation
(“FHLMC”), U.S. Department of Veterans’ Affairs (“VA”), Federal Housing Agency (“FHA”) or U.S.
Department of Agriculture Rural Development (“RD”).

The Company invests in securities it believes offer good relative value at the time of purchase, and it will,

from time to time reposition its investment securities portfolio. In making its decisions to sell or purchase
securities, the Company considers credit ratings, call features, maturity dates, relative yields, current market
factors and other relevant factors.

The following table presents the types and estimated fair values of the Company’s investment securities
at December 31, 2008 based on credit ratings by one or more nationally-recognized credit rating agencies.

Credit Ratings of Investment Securities

AAA

BBB Non-Rated Total

(Dollars in thousands)

Obligations of states and

political subdivisions:

Arkansas ............................................. $ 1,010 $ 1,557 $25,872
66,155
Non-Arkansas .....................................

221,309

48,331

$10,171 $144,723 $183,333
359,407
13,235

10,377

U.S. Government agency

mortgage-backed securities ....................
Corporate obligations ................................
FHLB and FNBB stock ................................
Other securities .........................................

371,561
-
22,463
-

-
-
-
-

-
6,953
-
683

-
-
383
-

371,561
6,953
22,846
683

Total ................................................ $616,343 $49,888 $92,027

$28,184 $158,341 $944,783

Percentage of total ...........................

65.2%

5.3%

9.7%

3.0%

16.8% 100.0%

The following table reflects the expected maturity distribution of the Company’s investment securities, at
fair value, as of December 31, 2008 and weighted-average yields (for tax-exempt obligations on a FTE basis)
of such securities. The maturity for all investment securities is shown based on each security’s contractual
maturity date, except (1) equity securities with no contractual maturity date which are shown in the longest
maturity category, (2) U.S. Government agency mortgage-backed securities are allocated among various
maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds based
on interest rate levels at December 31, 2008, (3) mortgage-backed securities issued by housing authorities
of state and political subdivisions are allocated among various maturities based on an estimated repayment
schedule projected by management as of December 31, 2008, and (4) callable investment securities when
the Company has received notification of call are included in the maturity category in which the call occurs
or is expected to occur. Actual maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. The weighted-average yields -
FTE are calculated based on the coupon rate and amortized cost for such securities and do not include any
projected discount accretion or premium amortization.

Expected Maturity Distribution of Investment Securities

1 Year
or
Less

Over 1
Through
5 Years

Over 5
Through
10 Years

Over
10
Years

(Dollars in thousands)

Total

Obligations of states and political subdivisions ... $ 101,577 $ 74,464
U.S. Government agency
138,328
mortgage-backed securities .............................
-
Corporate obligations .........................................
FHLB and FNBB stock(1) .....................................
-
Other securities ................................................
-
Total ......................................................... $326,092 $212,792

224,515
-
-
-

$83,773

$282,926

$542,740

8,718
6,953
-
-
$99,444

-
-
22,846
683
$306,455

371,561
6,953
22,846
683
$944,783

Percentage of total ...........................................
Cumulative percentage of total ..........................

Weighted-average yield - FTE(2) ........................

34.8%
34.8%

6.54%

22.6%
57.4%

10.5%
67.9%

32.1%
100.0%

100.0%

5.71%

5.29%

6.09%

6.08%

(1) Includes approximately $22.5 million of FHLB stock which has historically paid quarterly dividends at a variable

rate approximating the federal funds rate.

(2) The weighted-average yields - FTE are calculated based on the coupon rate and amortized cost for such securities

and do not include any projected discount accretion or premium amortization.

Deposits

The Company’s lending and investing activities are funded primarily by deposits. The Company’s total
deposits increased 13.8% to $2.34 billion at December 31, 2008, compared to $2.06 billion at December 31,
2007. These deposit totals included brokered deposits of $384.8 million at December 31, 2008 and $381.3
million at December 31, 2007.

Total deposits at December 31, 2008 consisted of 55.7% time deposits and 44.3% demand and savings

deposits. Total deposits at December 31, 2007 consisted of 67.0% time deposits and 33.0% demand and
savings deposits. Interest bearing deposits other than time deposits consist of transaction, savings and
money market accounts, which comprised 36.4% of total deposits at December 31, 2008 and 25.1% at
December 31, 2007. Non-interest bearing demand deposits constituted 7.9% of total deposits at both
December 31, 2008 and 2007.

The following table reflects the average balance and average rate paid for each deposit category shown

for the years ended December 31, 2008, 2007 and 2006.

Average Deposit Balances and Rates

2008
Average Average
Balance Rate Paid

Year Ended December 31,
2007
Average Average
Balance Rate Paid
(Dollars in thousands)

2006
Average Average
Balance Rate Paid

Non-interest bearing accounts .......... $ 184,563
Interest bearing accounts:
400,145
Transaction (NOW) ........................
28,437
Savings ..........................................
199,601
Money market ................................
516,655
Time deposits less than $100,000 ..
Time deposits $100,000 or more ...
906,306
Total deposits ............................. $2,235,707

$ 168,786

$ 152,281

1.18%
0.11
2.27
3.76
3.91

403,288
25,746
92,841
487,382
899,666
$2,077,709

2.48%
0.22
3.95
4.84
5.10

404,433
27,107
91,784
398,178
752,765
$1,826,548

2.55%
0.20
3.65
4.15
4.67

The following table sets forth, by time remaining to maturity, time deposits in amounts of $100,000 and

over at December 31, 2008.

Maturity Distribution of Time Deposits of $100,000 and Over

December 31, 2008
(Dollars in thousands)

3 months or less ................................................... $382,341
227,254
Over 3 to 6 months ...............................................
177,009
Over 6 to 12 months .............................................
9,761
Over 12 months ....................................................
$796,365

The amount and percentage of the Company’s deposits by state of originating office are reflected in the

following table.

Deposits by State of Originating Office

Deposits Attributable
to Offices In

2008

Amount

December 31,
2007

Amount
(Dollars in thousands)

2006

Amount

Arkansas ......................................... $2,032,335
309,079
Texas ...............................................
Total .......................................... $2,341,414 100.0%

86.8%
13.2

$1,922,746
134,315

93.5%
6.5

$1,943,638
101,454

95.0%
5.0

$2,057,061 100.0%

$2,045,092 100.0%

Other Interest Bearing Liabilities

The Company also relies on other interest bearing liabilities to fund its lending and investing activities.
Such liabilities consist of repurchase agreements with customers, other borrowings (primarily FHLB advances
and, to a lesser extent, FRB borrowings and federal funds purchased) and subordinated debentures.

Total other interest bearing liabilities were $536.8 million at December 31, 2008, an increase of $89.2
million from $447.6 million at December 31, 2007. Repurchase agreements with customers increased to
$46.9 million at December 31, 2008 from $46.1 million at December 31, 2007. Subordinated debentures

totaled $64.9 million at both December 31, 2008 and 2007. Other borrowings, including FHLB advances,
FRB borrowings and federal funds purchased, increased to $424.9 million at December 31, 2008 from $336.5
million at December 31, 2007. During 2008 the Company utilized these other borrowings to fund a portion
of its growth in earning assets because it considered these other borrowings to be more cost-effective than
raising additional deposits.

Interest Rate Risk

Interest rate risk results from timing differences in the repricing of assets and liabilities or from changes

in relationships between interest rate indexes. The Company’s interest rate risk management is the
responsibility of the ALCO and Investments Committee (“ALCO”) which reports to the Board of Directors.
The ALCO oversees the asset/liability (interest rate risk) position, liquidity and funds management, and
investment portfolio functions of the Company.

The Company regularly reviews its exposure to changes in interest rates. Among the factors considered
are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and
repricing periods. Typically, the ALCO reviews on at least a quarterly basis the Company’s relative ratio of
rate sensitive assets (“RSA”) to rate sensitive liabilities (“RSL”) and the related cumulative gap for different
time periods. However, the primary tool used by ALCO to analyze the Company’s interest rate risk and interest
rate sensitivity is an earnings simulation model.

This earnings simulation modeling process projects a baseline net interest income (assuming no changes
in interest rate levels) and estimates changes to that baseline net interest income resulting from changes in
interest rate levels. The Company relies primarily on the results of this model in evaluating its interest rate
risk. This model incorporates a number of factors including: (1) the expected exercise of call features on
various assets and liabilities, (2) the expected rates at which various RSA and RSL will reprice, (3) the
expected growth in various interest earning assets and interest bearing liabilities and the expected interest
rates on such new assets and liabilities, (4) the expected relative movements in different interest rate indexes
which are used as the basis for pricing or repricing various assets and liabilities, (5) existing and expected
contractual cap and floor rates on various assets and liabilities, (6) expected changes in administered rates
on interest bearing transaction, savings, money market and time deposit accounts and the expected impact
of competition on the pricing or repricing of such accounts and (7) other relevant factors. Inclusion of these
factors in the model is intended to more accurately project the Company’s expected changes in net interest
income resulting from interest rate changes. The Company models its change in net interest income assuming
interest rates go up 100 bps, up 200 bps, down 100 bps and down 200 bps. For purposes of this model,
the Company has assumed that the change in interest rates phases in over a 12-month period. While the
Company believes this model provides a reasonably accurate projection of its interest rate risk, the model
includes a number of assumptions and predictions which may or may not be correct and may impact the
model results. These assumptions and predictions include inputs to compute baseline net interest income,
growth rates, expected changes in administered rates on interest bearing deposit accounts, competition and
a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the
earnings simulation model will accurately reflect future results.

The following table presents the earnings simulation model’s projected impact of a change in interest rates

on the projected baseline net interest income for the 12-month period commencing January 1, 2009. This
change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in
the slope of the yield curve.

Earnings Simulation Model Results

Change in
Interest Rates
(in bps)
+200
+100
-100
-200

% Change in
Projected Baseline
Net Interest Income
(1.2)%
(0.6)
Not meaningful
Not meaningful

In the event of a shift in interest rates, the Company may take certain actions intended to mitigate the

negative impact to net interest income or to maximize the positive impact to net interest income. These
actions may include, but are not limited to, restructuring of interest earning assets and interest bearing
liabilities, seeking alternative funding sources or investment opportunities and modifying the pricing or
terms of loans and leases and deposits.

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes presented elsewhere in the report have been

prepared in accordance with accounting principles generally accepted in the United States. This requires the
measurement of financial position and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a
greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Capital Compliance

Bank regulatory authorities in the United States impose certain capital standards on all bank holding

companies and banks. These capital standards require compliance with certain minimum “risk-based capital
ratios” and a minimum “leverage ratio.” The risk-based capital ratios consist of (1) Tier 1 capital (common
stockholders’ equity excluding goodwill, certain intangibles and net unrealized gains and losses on available-
for-sale investment securities, but including, subject to limitations, trust preferred securities, certain types of
preferred stock and other qualifying items) to risk-weighted assets and (2) total capital (Tier 1 capital plus
Tier 2 capital which includes the qualifying portion of the allowance for loan and lease losses and the portion
of trust preferred securities not counted as Tier 1 capital) to risk-weighted assets. The Tier 1 leverage ratio is
measured as Tier 1 capital to adjusted quarterly average assets.

The Company’s consolidated risk-based capital and leverage ratios exceeded these minimum requirements
at December 31, 2008 and 2007 and are presented in the following table, followed by the capital ratios of the
Bank at December 31, 2008 and 2007.

Tier 1 capital:

Consolidated Capital Ratios

December 31,

2008

2007
(Dollars in thousands)

Common stockholders’ equity ..................................................................... $ 252,302
71,880
Preferred stock, net of unamorized discount ...............................................
63,000
Allowed amount of trust preferred securities ..............................................
(15,624)
Net unrealized (gains) losses on investment securities AFS .......................
(5,664)
Less goodwill and certain intangible assets ................................................
365,894
Total Tier 1 capital ...................................................................................

$ 190,829
-
63,000
15,091
(5,877)
263,043

Tier 2 capital:

Qualifying allowance for loan and lease losses ...........................................
19,557
Total risk-based capital ........................................................................... $ 395,406 $ 282,600
Risk-weighted assets ....................................................................................... $2,574,881 $2,230,309
Adjusted quarterly average assets - fourth quarter .......................................... $3,143,959 $2,683,323
Ratios at end of period:

29,512

Tier 1 leverage ............................................................................................
Tier 1 risk-based capital ..............................................................................
Total risk-based capital ...............................................................................

Minimum ratio guidelines:

Tier 1 leverage(1) ..........................................................................................
Tier 1 risk-based capital ..............................................................................
Total risk-based capital ...............................................................................

Minimum ratio guidelines to be “well capitalized”:

11.64%
14.21
15.36

3.00%
4.00
8.00

5.00%
6.00
10.00

9.80%

11.79
12.67

3.00%
4.00
8.00

5.00%
6.00
10.00

(1) Regulatory authorities require institutions to operate at varying levels (ranging from 100-200 bps) above a

minimum Tier 1 leverage ratio of 3% depending upon capitalization classification.

Bank Capital Ratios

Stockholders’ equity - Tier 1 capital .................................................................
Tier 1 leverage ratio .........................................................................................
Tier 1 risk-based capital ratio ..........................................................................
Total risk-based capital ratio ............................................................................

December 31,

2007
2008
(Dollars in thousands)

$346,941

$236,122

11.09%
13.48
14.63

8.82%

10.63
11.51

Capital Resources and Liquidity

Capital Resources

Subordinated Debentures. At December 31, 2008, the Company had an aggregate of $64.9 million of
subordinated debentures and related trust preferred securities outstanding consisting of $20.6 million of
subordinated debentures and securities issued in 2006 that bear interest, adjustable quarterly, at LIBOR plus
1.60%; $15.4 million of subordinated debentures and securities issued in 2004 that bear interest, adjustable
quarterly, at LIBOR plus 2.22%; and $28.9 million of subordinated debentures and securities issued in 2003
that bear interest, adjustable quarterly, at a weighted-average rate of LIBOR plus 2.925%. These subordinated
debentures and securities generally mature 30 years after issuance and may be prepaid at par, subject to
regulatory approval, on or after approximately five years from the date of issuance, or at an earlier date upon
certain changes in tax laws, investment company laws or regulatory capital requirements. These subordinated
debentures and the related trust preferred securities provide the Company additional regulatory capital to
support its expected future growth and expansion.

Issuance of Preferred Stock and Common Stock Warrant. On December 12, 2008, as part of the United
States Department of the Treasury’s (the “Treasury”) Capital Purchase Program made available to certain
financial institutions in the U.S. pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”),
the Company and the Treasury entered into a Letter Agreement including the Securities Purchase Agreement
— Standard Terms incorporated therein (the “Purchase Agreement”) pursuant to which the Company issued
to the Treasury, in exchange for aggregate consideration of $75.0 million, (i) 75,000 shares of the Company’s
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 and liquidation preference $1,000
per share (the “Series A Preferred Stock”), and (ii) a warrant (the “Warrant”) to purchase up to 379,811
shares (the “Warrant Common Stock”) of the Company’s common stock, par value $0.01 per share, at an
exercise price of $29.62 per share.

The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative quarterly cash dividends at
a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock
is non-voting, other than class voting rights on certain matters that could adversely affect the Series A
Preferred Stock. The Series A Preferred Stock may be redeemed by the Company at par on or after February
15, 2012. Prior to this date, the Series A Preferred Stock may not be redeemed unless the Company has
received aggregate gross proceeds from one or more qualified equity offerings of any Tier 1 perpetual
preferred or common stock of the Company (a “Qualified Equity Offering”) equal to $18.75 million. Subject
to certain limited exceptions, until December 12, 2011, or such earlier time as all Series A Preferred Stock
has been redeemed or transferred by Treasury, the Company will not, without Treasury’s consent, be able
to increase its dividend rate per share of common stock or repurchase its common stock.

The Warrant is immediately exercisable and has a 10-year term. The Treasury may not exercise voting
power with respect to any shares of Warrant Common Stock until the Warrant has been exercised. If the
Company receives aggregate gross cash proceeds of not less than $75,000,000 from one or more Qualified
Equity Offerings on or prior to December 31, 2009, the number of shares of Warrant Common Stock
underlying the Warrant then held by Treasury will be reduced by one half of the original number of shares
underlying the Warrant.

Upon receipt of the aggregate consideration from the Treasury on December 12, 2008, the Company
allocated the $75.0 million proceeds on a pro rata basis to the Series A Preferred Stock and the Warrant
based on relative fair values. In estimating the fair value of the Warrant, the Company utilized the Black-
Scholes model which includes assumptions regarding the Company’s common stock prices, stock price
volatility, dividend yield, the risk free interest rate and the estimated life of the Warrant. The fair value of
the Series A Preferred Stock was determined using a discounted cash flow methodology and a discount rate
of 12%. As a result, the Company assigned $3.1 million of the aggregate proceeds to the Warrant and $71.9
million to the Series A Preferred Stock. The value assigned to the Series A Preferred Stock will be amortized
up to the $75.0 million liquidation value of such preferred stock, with the cost of such amortization being
reported as additional preferred stock dividends. This results in a total dividend with a constant effective
yield of 5.98% over a five-year period, which is the expected life of the Series A Preferred Stock.

In addition, the Purchase Agreement (i) grants the holders of the Series A Preferred Stock, the Warrant

and the Warrant Common Stock certain registration rights, (ii) subjects the Company to certain of the
executive compensation limitations included in the EESA (which are discussed below) and (iii) allows the
Treasury to unilaterally amend any of the terms of the Purchase Agreement to the extent required to comply
with any changes after December 12, 2008 in applicable federal statutes.

On January 9, 2009 the Company filed a “shelf” registration statement with the Securities and Exchange

Commission (the “Commission”) for the purpose of registering the Series A Preferred Stock, the Warrant
and the Warrant Common Stock in order to permit the sale of such securities by the U.S. Treasury at any
time after effectiveness of the registration statement. On January 23, 2009, the Company was notified by
the Commission that the “shelf” registration statement was deemed effective.

Immediately prior to the execution of the Purchase Agreement, the Company amended its compensation,
bonus, incentive and other benefit plans, arrangements and agreements to the extent necessary to comply
with the executive compensation and corporate governance requirements of Section 111(b) of the EESA and
applicable guidance or regulations issued by the Treasury on or prior to December 12, 2008. The applicable
executive compensation requirements apply to the compensation of the Company’s chief executive officer,
chief financial officer and four other most highly compensated executive officers (collectively, the “senior
executive officers”). In addition, in connection with the closing of the Treasury’s purchase of the Series A
Preferred Stock, each of the senior executive officers was required to execute a waiver of any claim against the
United States or the Company for any changes to his compensation or benefits that are required in order to
comply with the regulation issued by the Treasury as published in the Federal Register on October 20, 2008.

In anticipation of participation in the Capital Purchase Program and the eventual receipt of proceeds
from the Treasury, the Company began purchases of various investment securities starting in October and
continuing throughout the fourth quarter of 2008. These purchases of investment securities, excluding
purchases which were expected to be relatively temporary investments, totaled $202.6 million in the fourth
quarter of 2008 and included the $187.3 million of Municipal Housing Authority Bonds previously discussed.
These Municipal Housing Authority Bonds are primarily backed by single family or multi-family residential
mortgages, the repayment of which is guaranteed by GNMA, FNMA, FHLMC, VA, FHA or RD. Such bonds
represent a direct investment in the United States housing market and, along with purchases by other
investors, contributed to increased liquidity for mortgage-backed securities and thus lower mortgage
interest rates.

The Company also continued to originate a significant volume of new and renewed loans in the fourth
quarter of 2008 in anticipation of the additional lending capacity which would result from its participation
in the Capital Purchase Program. The Company originated $102.2 million of new and renewed loans in the
fourth quarter for portfolio, and it originated an additional $24.3 million of residential mortgage loans for
resale in the secondary market in the fourth quarter of 2008.

Common Stock Dividend Policy. In 2008 the Company paid dividends of $0.50 per share. In 2007 and
2006 the Company paid dividends of $0.43 per share and $0.40 per share, respectively. In 2006 the per
share dividend was $0.10 in each quarter. In 2007 the per share dividend was $0.10 per quarter in the
first and second quarters, $0.11 in the third quarter and $0.12 in the fourth quarter. In 2008, the per share
dividend was $0.12 per quarter in the first and second quarters and $0.13 per quarter in the third and fourth
quarters. The determination of future dividends on the Company’s common stock will depend on conditions
existing at that time. Subject to certain limitations, until December 12, 2011, or such earlier time as the
Series A Preferred Stock has been redeemed or transferred by the Treasury, the Company will not, without
the Treasury’s consent, be able to increase its quarterly dividend rate above $0.13 per share.

Preferred Stock Dividend. The Series A Preferred Stock pays cumulative quarterly dividends on February

15, May 15, August 15 and November 15 at a rate of 5% per annum for the first five years and 9% per
annum thereafter. In 2008 the Company accrued $198,000 for the quarterly dividend payable on February
15, 2009 (or the next business day thereafter) in the amount of $656,000. Additionally, the Company
recorded amortization of the discount on the Series A Preferred Stock in the amount of $29,000 during 2008
as additional preferred stock dividend. Future amortization of the Series A Preferred Stock discount will
result in a total dividend with a constant effective rate of 5.98% over a five-year period, which is the
expected life of the Series A Preferred Stock.

Liquidity

Bank Liquidity. Liquidity represents an institution’s ability to provide funds to satisfy demands from

depositors, borrowers and lessees by either converting assets into cash or accessing new or existing sources
of incremental funds. Liquidity risk arises from the possibility the Company may be unable to satisfy current
or future financial commitments. The ALCO has primary oversight for the Company’s liquidity and funds
management.

The objective of managing liquidity risk is to ensure the cash flow requirements resulting from depositor,

borrower and lessee demands, as well as operating cash needs of the Company, are met, and the cost of
funding such requirements and needs is reasonable. The Company maintains a liquidity risk management
policy and a contingency funding plan that include policies and procedures for managing liquidity risk.

Generally the Company relies on deposits, loan and lease repayments and repayments of its investment
securities as its primary sources of funds. The principal deposit sources utilized by the Company include
consumer, commercial and public funds customers in the Company’s markets and brokered deposits. The
Company has used these funds, together with FHLB advances, FRB borrowings and other borrowings, to
make loans and leases, acquire investment securities and other assets and to fund continuing operations.
Deposit levels may be affected by a number of factors, including rates paid by competitors, general
interest rate levels, returns available to customers on alternative investments and general economic and
market conditions. Loan and lease repayments are a relatively stable source of funds but are subject to the
borrowers’ and lessees’ ability to repay the loans and leases, which can be adversely affected by a number
of factors including changes in general economic conditions, adverse trends or events affecting business
industry groups or specific businesses, declines in real estate values or markets, business closings or
lay-offs, inclement weather, natural disasters and other factors. Furthermore, loans and leases generally
are not readily convertible to cash. Accordingly, the Company may be required from time to time to rely
on secondary sources of liquidity to meet loan, lease and deposit withdrawal demands or otherwise fund
operations. Such secondary sources include FHLB advances, secured and unsecured federal funds lines of
credit from correspondent banks and FRB borrowings.

At December 31, 2008 the Company had substantial unused borrowing availability. This availability was
primarily comprised of the following four options: (1) $244 million of available blanket borrowing capacity
with the FHLB, (2) $293 million of investment securities available to pledge for federal funds or other
borrowings, (3) $17 million of available unsecured federal funds borrowing lines and (4) up to $190 million
of available borrowing capacity from borrowing programs of the FRB.

The Company anticipates it will continue to rely primarily on deposits, loan and lease repayments and
repayments of its investment securities to provide liquidity. Additionally, where necessary, the sources of
borrowed funds described above will be used to augment the Company’s primary funding sources.

Emergency Economic Stabilization Act of 2008 and FDIC Temporary Liquidity Guaranty Program.

On October 3, 2008, Congress passed, and the President signed into law, the EESA. The EESA, among other
things, included a provision for an increase in the amount of deposits insured by the FDIC from $100,000 to
$250,000 until December 2009.

On October 14, 2008, the FDIC announced a new program – the Temporary Liquidity Guaranty Program

(“TLGP”) that both provides unlimited deposit insurance on certain transaction accounts and provides a
guarantee of newly issued senior unsecured debt. The Bank has elected to participate in both aspects of
the TLGP.

The unlimited deposit insurance covers funds to the extent such funds are not otherwise covered by the

existing deposit insurance limit of $250,000 in (i) non-interest bearing transaction deposit accounts and
(ii) certain interest bearing transaction deposit accounts where the participating institution agrees to pay
interest on such deposits at a rate not to exceed 50 bps. Such covered transaction accounts are insured
through December 31, 2009 at a 10 bps fee on deposit amounts in excess of $250,000.

The guarantee of newly issued senior unsecured debt covers such debt issued by the Bank on or before
June 30, 2009. Debt guaranteed under the program covers all newly issued senior unsecured debt, including:
promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt, but
specifically excludes 30-day or less federal funds purchased. The aggregate coverage for an institution
may not exceed the greater of (i) 125% of the debt outstanding on September 30, 2008 that was scheduled
to mature before June 30, 2009 or (ii) 2% of total consolidated liabilities as of September 30, 2008. The
guarantee of any newly issued senior unsecured debt expires on June 30, 2012, even if the maturity of
the debt is after that date. Such unsecured debt is guaranteed at a fee ranging from 50 bps to 100 bps
determined by the maturity date of such debt. The Bank’s debt guarantee limit is approximately $56 million
under the senior unsecured debt portion of the TLGP. At December 31, 2008, the Bank had issued no
guaranteed debt under this program and has no current plan to issue any such guaranteed debt.

Sources And Uses of Funds. Net cash provided by operating activities totaled $46.3 million, $42.7 million

and $22.6 million, respectively, for 2008, 2007 and 2006. Net cash provided by operating activities is
comprised primarily of net income, adjusted for certain non-cash items and for changes in operating assets
and liabilities.

Net cash used by investing activities was $493.4 million in 2008, $190.6 million in 2007 and $384.7

million in 2006. The Company’s primary uses of cash for investing activities include net loan and lease
fundings, which used $174.0 million, $207.0 million and $306.6 million, respectively, in 2008, 2007 and
2006, purchases of premises and equipment in conjunction with its growth and de novo branching strategy,
which used $27.9 million, $18.8 million and $31.0 million, respectively, in 2008, 2007 and 2006 and net

activity in its investment securities portfolio, which used $303.4 million in 2008, provided $26.5 million in
2007 and used $47.0 million in 2006.

Net cash provided by financing activities totaled $440.6 million, $152.7 million and $364.2 million,
respectively, for 2008, 2007 and 2006. The Company’s primary financing activities include net increases in
deposit accounts, which provided $284.4 million, $12.0 million and $453.5 million, respectively, in 2008,
2007 and 2006, and net proceeds from or repayments of other borrowings and repurchase agreements with
customers, which provided $89.2 million in 2008, provided $147.0 million in 2007 and used $104.9 million
in 2006. In addition the Company paid common stock cash dividends of $8.4 million, $7.2 million and $6.7
million, respectively, in 2008, 2007 and 2006. The Company’s financing activities for 2008 were impacted by
$75.0 million of proceeds received from the issuance of Series A Preferred Stock and the Warrant in connection
with the Company’s participation in the Treasury’s Capital Purchase Program. Financing activities for 2006
were impacted by $20.6 million of proceeds received from the issuance of subordinated debentures.

Contractual Obligations. The following table presents, as of December 31, 2008, significant fixed and
determinable contractual obligations to third parties by contractual date with no consideration given to
earlier call or prepayment features. Other obligations consist primarily of contractual obligations for capital
expenditures and various other contractual obligations.

Contractual Obligations

1 Year
or
Less

Over 3
Over 1
Through Through
5 Years
3 Years

Over
5
Years

(Dollars in thousands)

Total

Time deposits(1) .................................................. $1,330,518 $ 27,971 $ 2,131 $ 28 $1,360,648
Deposits without a stated maturity(2) ................. 1,038,425
- 1,038,425
Repurchase agreements with customers(1) .........
46,864
46,864
Other borrowings(1) ............................................
500,958
75,014
Subordinated debentures(1) ................................
139,778
3,665
3,392
395
Lease obligations ...............................................
Other obligations ...............................................
22,449
22,449
Total contractual obligations ......................... $2,517,330 $118,350 $30,697 $446,137 $3,112,514

-
-
83,428
6,424
527
-

-
-
21,693
6,433
440
-

-
320,823
123,256
2,030
-

(1) Includes unpaid interest through the contractual maturity on both fixed and variable rate obligations. The interest

associated with variable rate obligations is based upon interest rates in effect at December 31, 2008. The contractual
amounts to be paid on variable rate obligations are affected by changes in market rates. Future changes in market
interest rates could materially affect the contractual amounts to be paid.

(2) Includes interest accrued and unpaid through December 31, 2008.

Off-Balance Sheet Commitments. The following table details the amounts and expected maturities of
significant off-balance sheet commitments as of December 31, 2008. Commitments to extend credit do not
necessarily represent future cash requirements as these commitments may expire without being drawn.

Off-Balance Sheet Commitments
1 Year
or
Less

Over 1
Through
3 Years

Over 3
Through
5 Years

Commitments to extend credit(1) ... $126,539
10,009
Standby letters of credit ...............
Total commitments ............... $136,548

$219,571
283
$219,854

$3,939
9
$3,948

(Dollars in thousands)

Over
5
Years

$4,106
-
$4,106

Total

$354,155
10,301
$364,456

(1) Includes commitments to extend credit under mortgage interest rate locks of $15.0 million that expire in one year or less.

Growth and Expansion

During 2008 the Company added a new banking office in Lewisville, Texas, opened its new corporate

headquarters in Little Rock, Arkansas, closed a Little Rock banking office in a Wal-Mart Supercenter located
near its new corporate headquarters, and consolidated its Little Rock loan production office into its new
corporate headquarters. During 2007 the Company added three new Arkansas banking offices, including
offices in Hot Springs, Fayetteville and Rogers, and replaced a temporary office in Frisco, Texas with a new
permanent facility. At December 31, 2008, the Company conducted banking operations through 72 offices

including 65 Arkansas banking offices, six Texas banking offices and a loan production office in Charlotte,
North Carolina.

The Company expects to continue its growth and de novo branching strategy. During 2009 the Company

expects to add approximately two new banking offices and its new operations facility in Ozark, Arkansas.
Opening new offices is subject to availability of suitable sites, hiring qualified personnel, obtaining
regulatory and other approvals and many other conditions and contingencies that the Company cannot
predict with certainty. The Company may increase or decrease its expected number of new offices as a
result of a variety of factors including the Company’s financial results, changes in economic or competitive
conditions, strategic opportunities or other factors.

During 2008 the Company spent $27.9 million on capital expenditures for premises and equipment.

The Company’s capital expenditures for 2009 are expected to be in the range of $7 to $13 million, including
progress payments on construction projects expected to be completed in 2009 or 2010, furniture and
equipment costs, and acquisition of sites for future development. Actual expenditures may vary significantly
from those expected, depending on the number and cost of additional branch offices constructed and sites
acquired for future development, progress or delays encountered on ongoing and new construction projects,
delays in or inability to obtain required approvals and other factors.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates, assumptions and judgments that affect the amounts
reported in the consolidated financial statements. The Company’s determination of the adequacy of the
allowance for loan and lease losses and determination of the fair value of its investment securities portfolio
involve a higher degree of judgment and complexity than its other significant accounting policies discussed
in Note 1 to the Company’s Consolidated Financial Statements. Accordingly, the Company considers the
determination of the adequancy of the allowance for loan and lease losses and the determination of the fair
value of its investment securities portfolio to be critical accounting policies.

Provisions to and the adequacy of the allowance for loan and lease losses are determined in accordance

with SFAS No. 114 and SFAS No. 5, and are based on the Company’s evaluation of the loan and lease
portfolio utilizing objective and subjective criteria as described in this report. See the “Analysis of Financial
Condition” section of Management’s Discussion and Analysis for a detailed discussion of the Company’s
allowance for loan and lease losses. Changes in the criteria used in this evaluation or the availability of
new information could cause the allowance to be increased or decreased in future periods. In addition bank
regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan
and lease losses based on their judgments and estimates.

The Company has classified all of its investment securities as AFS. Accordingly, its investment securities
are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses,
net of related income taxes, reported as a separate component of stockholders’ equity and any related
changes are included in accumulated other comprehensive income (loss).

The Company utilizes an independent third party as its principal pricing source for determining fair value

of its investment securities. For investment securities traded in an active market, the fair values are based
on quoted market prices if available. If quoted market prices are not available, fair values are based on market
prices for comparable securities, broker quotes or comprehensive interest rate tables and pricing matrices.
For investment securities traded in a market that is not active, fair value is determined using unobservable
inputs or value drivers and is generally determined using expected cash flows and appropriate risk-adjusted
discount rates. Expected cash flows are based primarily on the contractual cash flows of the instrument. The
risk-adjusted discount rate is typically the contractual coupon rate of the instrument on the measurement
date, adjusted for changes in interest rate spreads of the yields on comparable corporate or municipal bonds
and the yields on U.S. Treasuries between the date of purchase and the measurement date.

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

See Note 1 to the Consolidated Financial Statements for a discussion of certain recently issued accounting

pronouncements.

Recently Issued Accounting Standards

Forward-Looking Information

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, other
filings made by the Company with the Securities and Exchange Commission and other oral and written
statements or reports by the Company and its management include certain forward-looking statements
including, without limitation, statements about economic, housing market, competitive and interest rate
conditions, plans, goals, beliefs, expectations and outlook for revenue growth, net income and earnings per
share, net interest margin, net interest income, non-interest income, including service charges on deposit
accounts, mortgage lending and trust income, gains (losses) on investment securities and sales of other
assets, non-interest expense, including the cost of opening new offices, achieving positive operating leverage
by growing revenue at a faster rate than non-interest expense, efficiency ratio, anticipated future operating
results and financial performance, asset quality, including the effects of current economic and housing
market conditions, nonperforming loans and leases, nonperforming assets, net charge-offs, past due loans
and leases, interest rate sensitivity, including the effects of possible interest rate changes, future growth and
expansion opportunities including plans for opening new offices, opportunities and goals for future market
share growth, expected capital expenditures, loan, lease and deposit growth, changes in the volume, yield
and value of the Company’s investment securities portfolio, availability of unused borrowings and other
similar forecasts and statements of expectation. Words such as “anticipate,” “believe,” “estimate,” “expect,”
“intend,” “plan,” “look,” “seek,” “may,” “will,” “trend,” “target,” “goal,” and similar expressions, as they
relate to the Company or its management, identify forward-looking statements. Forward-looking statements
made by the Company and its management are based on estimates, projections, beliefs, plans and assumptions
of management at the time of such statements and are not guarantees of future performance. The Company
disclaims any obligation to update or revise any forward-looking statement based on the occurrence of
future events, the receipt of new information or otherwise.

Actual future performance, outcomes and results may differ materially from those expressed in forward-

looking statements made by the Company and its management due to certain risks, uncertainties and
assumptions. Certain factors that may affect operating results of the Company include, but are not limited
to, potential delays or other problems in implementing the Company’s growth and expansion strategy
including delays in identifying satisfactory sites, hiring qualified personnel, obtaining regulatory or other
approvals, obtaining permits and designing, constructing and opening new offices; the ability to attract new
deposits, loans and leases; the ability to generate future revenue growth or to control future growth in non-
interest expense; interest rate fluctuations, including continued interest rate changes and/or changes in the
yield curve between short-term and long-term interest rates; competitive factors and pricing pressures,
including their effect on the Company’s net interest margin; general economic, unemployment, credit market
and housing market conditions, including their effect on the creditworthiness of borrowers and lessees,
collateral values and the value of investment securities; changes in legal and regulatory requirements;
recently enacted and potential legislation including legislation intended to stabilize economic conditions
and credit markets and legislation intended to protect homeowners; adoption of new accounting standards
or changes in existing standards; and adverse results in future litigation as well as other factors described
in this and other Company reports and statements. Should one or more of the foregoing risks materialize,
or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from
those described in the forward-looking statements.

Summary of Quarterly Results of
Operations, Market Prices of Common Stock and Dividends
Unaudited

2008 - Three Months Ended

Mar. 31

June 30

Sept. 30

Dec. 31

(Dollars in thousands, except per share amounts)

Total interest income ........................................... $44,820
23,069
Total interest expense .........................................
21,751
Net interest income ......................................
3,325
Provision for loan and lease losses .....................
5,125
Non-interest income ............................................
12,881
Non-interest expense ..........................................
Income taxes .......................................................
2,905
Preferred stock dividends and amortization
of preferred stock discount ...............................
Net income available to
common stockholders ............................... $ 7,765

$45,672
22,069
23,603
4,000
5,557
13,442
3,111

$45,030
20,414
24,616
3,400
4,871
13,821
3,255

$47,481
18,750
28,731
8,300
3,796
14,254
655

227

$ 8,607

$ 9,011

$ 9,091

Per common share:

Earnings - diluted ........................................ $ 0.46
0.12
Cash dividends .............................................

$ 0.51
0.12

$ 0.53
0.13

$ 0.54
0.13

Bid price per common share:

Low .............................................................. $ 19.61
26.18
High .............................................................

$ 14.86
26.33

$ 14.14
30.94

$ 20.85
32.36

2007 - Three Months Ended

Mar. 31

June 30

Sept. 30

Dec. 31

(Dollars in thousands, except per share amounts)

Total interest income ........................................... $42,828
24,579
Total interest expense .........................................
18,249
Net interest income ......................................
1,100
Provision for loan and lease losses .....................
5,959
Non-interest income ............................................
12,138
Non-interest expense ..........................................
Income taxes .......................................................
3,449
Net income available to
common stockholders ............................... $ 7,521

$44,128
24,837
19,291
1,250
5,623
11,876
3,702

$44,917
25,246
19,671
1,100
5,419
11,732
3,856

$45,096
24,690
20,406
2,700
5,975
12,507
3,437

$ 8,086

$ 8,402

$ 7,737

Per common share:

Earnings - diluted ........................................ $ 0.45
0.10
Cash dividends .............................................

$ 0.48
0.10

$ 0.50
0.11

$ 0.46
0.12

Bid price per common share:

Low .............................................................. $ 28.55
32.67
High .............................................................

$ 27.53
30.68

$ 26.79
33.48

$ 26.11
33.00

See Note 15 to Consolidated Financial Statements for discussion of dividend restrictions.

Company Performance
The graph below shows a comparison for the period commencing December 31, 2003 through December
31, 2008 of the cumulative total stockholder returns (assuming reinvestment of dividends) for the common
stock of the Company, the S&P Smallcap Index and the NASDAQ Financial Index, assuming a $100
investment on December 31, 2003.

Cumulative Return Comparison

$200

$175

$150

$125

$100

$75

$50

12/31/2003

12/31/2004

12/31/2005

12/31/2006

12/31/2007

12/31/2008

OZRK (Bank of the Ozarks, Inc.)

SML (S&P Smallcap Index)

NDF (NASDAQ Financial Index)

12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008

OZRK (Bank of the Ozarks, Inc.)

SML (S&P Smallcap Index)

NDF (NASDAQ Financial Index)

$100

$153

$123

$115

$168

$132

$118

$152

$135

$122

$152

$125

$141

$104

$ 89

Report of Management on the Company’s
Internal Control Over Financial Reporting

February 20, 2009

Management of Bank of the Ozarks, Inc. is responsible for establishing and

maintaining adequate internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in
the United States. Internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States, and that receipts and expenditures are
made only in accordance with authorizations of management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, have been detected. Also,
projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies and procedures may deteriorate.

Management of Bank of the Ozarks, Inc., including the Chief Executive Officer

and the Chief Financial Officer and Chief Accounting Officer, has assessed the
Company’s internal control over financial reporting as of December 31, 2008,
based on criteria for effective internal control over financial reporting described in
“Internal Control - Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
has concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2008, based on the specified criteria.

The effectiveness of Bank of the Ozarks, Inc.’s internal control over financial

reporting has been audited by Crowe Horwath LLP, an independent registered
public accounting firm, as stated in their report which is included herein.

George Gleason
Chairman and Chief Executive Officer

Paul Moore
Chief Financial Officer and Chief Accounting Officer

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Bank of the Ozarks, Inc.

We have audited Bank of the Ozarks, Inc.’s internal control over financial reporting as of

December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Bank of the Ozarks, Inc.’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report of Management on the Company’s
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Bank of the Ozarks, Inc. maintained, in all material respects, effective internal

control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Bank of the Ozarks, Inc. as of
December 31, 2008, and the related consolidated statements of income, stockholders’ equity and
cash flows for the year ended December 31, 2008, and our report dated February 20, 2009,
expressed an unqualified opinion thereon.

Brentwood, Tennessee
February 20, 2009

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Bank of the Ozarks, Inc.

We have audited the accompanying consolidated balance sheets of Bank
of the Ozarks, Inc. (the “Company”) as of December 31, 2008 and 2007 and
the related consolidated statements of income, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2008. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public

Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bank of the
Ozarks, Inc. at December 31, 2008 and 2007 and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 2008, in conformity with accounting principles generally accepted in the
United States.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness
of Bank of the Ozarks, Inc.’s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 20, 2009,
expressed an unqualified opinion thereon.

Brentwood, Tennessee
February 20, 2009

Bank of the Ozarks, Inc.
CONSOLIDATED BALANCE SHEETS

ASSETS

Cash and due from banks
Interest earning deposits
Cash and cash equivalents
Investment securities - available for sale (“AFS”)
Loans and leases
Allowance for loan and lease losses
Net loans and leases
Premises and equipment, net
Foreclosed assets held for sale, net
Accrued interest receivable
Bank owned life insurance
Intangible assets, net
Other, net
Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:
Demand non-interest bearing
Savings and interest bearing transaction
Time
Total deposits
Repurchase agreements with customers
Other borrowings
Subordinated debentures
Accrued interest payable and other liabilities
Total liabilities

December 31,

2008

2007

(Dollars in thousands, except per share amounts)

$ 40,665
317
40,982
944,783
2,021,199
(29,512)
1,991,687
152,586
10,758
18,877
46,384
5,664
21,582
$3,233,303

$ 185,613
852,656
1,303,145
2,341,414
46,864
424,947
64,950
27,525
2,905,700

$ 47,192
329
47,521
578,348
1,871,135
(19,557)
1,851,578
130,048
3,112
17,420
46,148
5,877
30,823
$2,710,875

$ 162,995
516,312
1,377,754
2,057,061
46,086
336,533
64,950
11,984
2,516,614

Minority interest

3,421

3,432

Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized:
Series A fixed rate cumulative perpetual; liquidation preference of $1,000
per share; 75,000 shares issued and outstanding at December 31, 2008;
no shares issued and outstanding at December 31, 2007
Common stock; $0.01 par value; 50,000,000 shares authorized;
16,864,140 and 16,818,240 shares issued and outstanding at
December 31, 2008 and 2007, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity

See accompanying notes to the consolidated financial statements.

71,880

169
43,314
193,195
15,624
324,182
$3,233,303

168
38,613
167,139
(15,091)
190,829
$2,710,875

Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF INCOME

2008

Year Ended December 31,
2007
(Dollars in thousands, except per share amounts)

2006

$141,726

$145,669

$121,462

Interest income:
Loans and leases
Investment securities:
Taxable
Tax-exempt
Deposits with banks and federal funds sold
Total interest income

Interest expense:
Deposits
Repurchase agreements with customers
Other borrowings
Subordinated debentures
Total interest expense

Net interest income
Provision for loan and lease losses
Net interest income after provision
for loan and lease losses

Non-interest income:
Service charges on deposit accounts
Mortgage lending income
Trust income
Bank owned life insurance income
(Losses) gains on investment securities
(Losses) gains on sales of other assets
Other
Total non-interest income

Non-interest expense:
Salaries and employee benefits
Net occupancy and equipment
Other operating expenses
Total non-interest expense

Income before taxes
Provision for income taxes
Net income
Preferred stock dividends and amortization of
preferred stock discount
Net income available to common stockholders

21,858
19,406
13
183,003

64,171
796
15,574
3,761
84,302

98,701
19,025

79,676

12,007
2,215
2,595
4,131
(3,433)
(544)
2,378
19,349

30,132
8,882
15,384
54,398

44,627
9,926
34,701

227
$ 34,474

24,775
6,507
19
176,970

25,346
8,380
10
155,198

83,140
1,603
9,543
5,066
99,352

77,618
6,150

71,468

12,193
2,668
2,223
1,919
520
487
2,965
22,975

28,661
8,098
11,493
48,252

46,191
14,445
31,746

-
$ 31,746

$ 1.89

65,345
1,312
13,953
3,868
84,478

70,720
2,450

68,270

10,217
2,918
1,947
1,832
3,917
(90)
2,490
23,231

27,506
7,030
11,854
46,390

45,111
13,418
31,693

-
$ 31,693

$ 1.90

$ 1.89

Basic earnings per common share

Diluted earnings per common share

$ 2.05

$ 2.04

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Bank of the Ozarks, Inc.

Balances - January 1, 2006
Comprehensive income:

$ -

Preferred
Stock— Common
Series A

Additional

Accumulated
Other

Paid-In Retained Comprehensive
Income (Loss)
Capital

Stock
(Dollars in thousands, except per share amounts)
$ (2,574)
$167

$34,210 $117,600

Earnings

Total

$149,403

31,693

Net income
Other comprehensive income (loss):
Unrealized gains/losses on investment
securities AFS, net of $21 tax effect
Reclassification adjustment for gains/losses
included in income, net of $1,537 tax effect

Total comprehensive income
Dividends paid, $0.40 per common share
Issuance of 81,900 shares of common

stock on exercise of stock options

Tax benefit on exercise of stock options
Compensation expense under stock-based

compensation plans

Balances - December 31, 2006
Comprehensive income:

Net income
Other comprehensive income (loss):
Unrealized gains/losses on investment
securities AFS, net of $6,359 tax effect
Reclassification adjustment for gains/losses
included in income, net of $204 tax effect

Total comprehensive income
Dividends paid, $0.43 per common share
Issuance of 71,700 shares of common

stock on exercise of stock options

Tax benefit on exercise of stock options
Compensation expense under stock-based

compensation plans
Balances - December 31, 2007

Comprehensive income:

Net income
Other comprehensive income (loss):
Unrealized gains/losses on investment
securities AFS, net of $18,478 tax effect
Reclassification adjustment for gains/losses
included in income, net of $1,346 tax effect

Total comprehensive income
Dividends paid, $0.50 per common share
Issuance of 75,000 shares of preferred stock and
a warrant for 379,811 shares of common stock

Preferred stock dividends
Amortization of preferred stock discount
Issuance of 45,900 shares of common

stock on exercise of stock options

Tax benefit on exercise of stock options
Compensation expense under stock-based

compensation plans
Balances - December 31, 2008

-
-

71,851
-
29

-
-

1
-

824
880

-
-

-
167

865
36,779

-
142,609

31,746

(6,684)

(7,216)

(2,380)

-
-

(4,922)

(2,380)
29,345
(6,684)

824
880

865
174,633

(9,853)

(316)

-
-

(15,091)

(316)
21,577
(7,216)

546
420

869
190,829

545
420

-
-

-
168

869
38,613

-
167,139

-
-
-

1
-

3,149
-
-

407
283

34,701

(8,418)

(198)
(29)

-
-

28,628

2,087

-
-
-

-
-

2,087
65,416
(8,418)

75,000
(198)

408
283

-
$71,880

-
$169

862

-
$43,314 $193,195

-
$15,624

862
$324,182

See accompanying notes to the consolidated financial statements.

Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flows from operating activities:

Net income
Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation
Amortization
Provision for loan and lease losses
Provision for losses on foreclosed assets
Net accretion of investment securities
Losses (gains) on investment securities
Originations of mortgage loans for sale
Proceeds from sales of mortgage loans for sale
Losses (gains) on dispositions of premises and
equipment and other assets
Deferred income tax benefit
Increase in cash surrender value of bank owned

life insurance (“BOLI”)

Tax benefits on exercise of stock options
Compensation expense under stock-based compensation plans
BOLI death benefits in excess of cash surrender value
Changes in other assets and liabilities:

Accrued interest receivable
Other assets, net
Accrued interest payable and other liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Proceeds from sales of investment securities AFS
Proceeds from maturities of investment securities AFS
Purchases of investment securities AFS
Net increase in loans and leases
Purchases of premises and equipment
Proceeds from disposition of premises and equipment

and other assets

Proceeds from BOLI death benefits
Cash (paid for) received from interests

in unconsolidated investments
Net cash used by investing activities

Cash flows from financing activities:

Net increase in deposits
Net proceeds from (repayments of) other borrowings
Net increase in repurchase agreements with customers
Proceeds from issuance of subordinated debentures
Proceeds from exercise of stock options
Proceeds from issuance of preferred stock
and common stock warrant
Tax benefits on exercise of stock options
Cash dividends paid on common stock
Preferred stock dividends

Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year

See accompanying notes to the consolidated financial statements.

2008

Year Ended December 31,
2007
(Dollars in thousands)

2006

$ 34,701

$ 31,746

$ 31,693

3,552
214
19,025
1,042
(1,008)
3,433

(127,822)
127,873

544
(6,146)

(1,984)
(283)
862
(2,147)

(1,392)
(3,473)
(711)

46,280

13,588
1,642,437
(1,959,464)
(173,987)
(27,901)

8,186
3,894

3,286
262
6,150
122
(900)
(520)
(161,223)
163,296

(487)
(1,057)

(1,919)
(420)
869
-

(36)
88
3,413
42,670

56,240
40,383
(70,153)
(206,969 )
(18,848)

6,949
-

3,024
262
2,450
75
(1,159)
(3,917)
(173,689)
170,485

90
(352)

(1,832)
(880)
865
-

(3,583)
(3,014)
2,098
22,616

157,954
51,469
(256,389 )
(306,556 )
(31,017)

1,561
-

(192)
(493,439 )

1,839
(190,559 )

(1,704)
(384,682)

284,353
88,414
778
-
408

75,000
283
(8,418)
(198)

440,620
(6,539)
47,521
$ 40,982

11,969
141,872
5,085
-
546

-
420
(7,216)

-
152,676
4,787
42,734
$ 47,521

453,450
(110,205 )

5,330
20,619
824

-
880
(6,684)

-
364,214
2,148
40,586
$ 42,734

Bank of the Ozarks, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006

1. Summary of Significant Accounting Policies

Organization - Bank of the Ozarks, Inc. (the “Company”) is a bank holding company headquartered in

Little Rock, Arkansas, which operates under the rules and regulations of the Board of Governors of the
Federal Reserve System. The Company owns a wholly-owned state chartered bank subsidiary - Bank of the
Ozarks (the “Bank”), four 100%-owned finance subsidiary business trusts - Ozark Capital Statutory Trust II
(“Ozark II”), Ozark Capital Statutory Trust III (“Ozark III”), Ozark Capital Statutory Trust IV (“Ozark IV”) and
Ozark Capital Statutory Trust V (“Ozark V”) (collectively, the “Trusts”) and, indirectly through the Bank, a
subsidiary engaged in the development of real estate. The Bank is subject to the regulation of certain federal
and state agencies and undergoes periodic examinations by those regulatory authorities. The Bank has
banking offices located in northern, western, and central Arkansas, Frisco, Lewisville, Dallas and Texarkana,
Texas and a loan production office in Charlotte, North Carolina.

Basis of presentation, use of estimates and principles of consolidation - The preparation of financial

statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ materially from those estimates. The consolidated
financial statements include the accounts of the Company, the Bank and the real estate investment subsidiary.
Significant intercompany transactions and amounts have been eliminated.

Subsidiaries in which the Company has majority voting interest (principally defined as owning a voting or
economic interest greater than 50%) or where the Company exercises control over the operating and financial
policies of the subsidiary through an operating agreement or other means are consolidated. Investments in
companies in which the Company has significant influence over voting and financing decisions (principally
defined as owning a voting or economic interest of 20% to 50%) and investments in limited partnerships and
limited liability companies where the Company does not exercise control over the operating and financial
policies are generally accounted for by the equity method of accounting. Investments in limited partnerships
and limited liability companies in which the Company’s interest is so minor such that it has virtually no
influence over operating and financial policies are generally accounted for by the cost method of accounting.

The voting interest approach is not applicable for entities that are not controlled through voting interests or
in which the equity investors do not bear the residual economic risk. In such instances, Financial Accounting
Standards Board (“FASB”) Interpretation No. 46 (Revised) (“FIN 46R”), “Consolidation of Variable Interest
Entities,” provides guidance on when the assets, liabilities and activities of a variable interest entity (“VIE”)
should be included in the Company’s consolidated financial statements. The provisions of FIN 46R require
a VIE to be consolidated by a company if that company is considered the primary beneficiary of the VIE’s
activities. The Company has determined that the 100%-owned finance subsidiary Trusts are VIEs, but that
the Company is not the primary beneficiary of the Trusts. Accordingly, the Company does not consolidate the
activities of the Trusts into its financial statements, but instead reports its ownership interests in the Trusts
as other assets and reports the subordinated debentures as a liability in the consolidated balance sheets.
The distributions on the subordinated debentures are reported as interest expense in the accompanying
consolidated statements of income.

Cash and cash equivalents - For cash flow purposes, cash and cash equivalents include cash on hand,

amounts due from banks and interest bearing deposits with banks.

Investment securities - Management determines the appropriate classification of investment securities at
the time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 2008
and 2007, the Company has classified all of its investment securities as available for sale (“AFS”).
AFS investment securities are stated at estimated fair value, with the unrealized gains and losses

determined on a specific identification basis. Such unrealized gains and losses, net of tax, are reported as a
separate component of stockholders’ equity and included in other comprehensive income (loss). The Company
utilizes an independent third party as its principal pricing source for determining fair value. For investment
securities traded in an active market, fair values are measured on a recurring basis obtained from an
independent pricing service and based on quoted market prices if available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable securities, broker quotes or
comprehensive interest rate tables and pricing matrices. For investment securities traded in a market that is
not active, fair value is determined using unobservable inputs or value drivers and is generally determined
using expected cash flows and appropriate risk-adjusted discount rates. Expected cash flows are based

primarily on the contractual cash flows of the instrument, and the risk-adjusted discount rate is typically
the contractual coupon rate of the instrument on the measurement date, adjusted for changes in interest rate
spreads of the yields on comparable corporate or municipal bonds and the yields on U.S. Treasuries between
the date of purchase and the measurement date.

The Company owned stock in the Federal Home Loan Bank of Dallas (“FHLB”) and the Arkansas Bankers’
Bancorporation, Inc. (“ABB”) at December 31, 2007. Effective November 30, 2008 the ABB was acquired by
and merged into the First National Banker’s Bankshares, Inc. (“FNBB”) via a tax-free exchange of stock.
Accordingly, at December 31, 2008, the Company owned stock in FHLB and FNBB. The FHLB, ABB and
FNBB shares do not have readily determinable fair values and are carried at cost.

Declines in the fair value of investment securities below their cost are reviewed by the Company for other-

than-temporary impairment. Factors considered during such review include the length of time and extent
that fair value has been less than cost, the financial condition and near term prospects of the issuer, and
the Company’s ability and intent to hold the investment security for a period sufficient to allow for any
anticipated recovery in fair value.

Interest and dividends on investment securities, including the amortization of premiums and accretion
of discounts through maturity, or in the case of mortgage-backed securities, over the estimated life of the
security, are included in interest income. Realized gains or losses on the sale of investment securities are
recognized on the specific identification method at the time of sale and are included in non-interest income.
Purchases and sales of investment securities are recognized on a trade-date basis.

Loans and leases - Loans that management has the intent and ability to hold for the foreseeable future or until

maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, deferred fees
or costs on originated loans, and unamortized premiums or discounts on purchased loans. Interest on loans is
recognized on an accrual basis and is calculated using the simple interest method on daily balances of the principal
amount outstanding. Loan origination fees and costs are generally deferred and recognized as an adjustment to
yield on the related loan.

Leases are classified as either direct financing leases or operating leases, based on the terms of the

agreement. Direct financing leases are reported as the sum of (i) total future lease payments to be received,
net of unearned income, and (ii) estimated residual value of the leased property. Operating leases are
recorded at the cost of the leased property, net of accumulated depreciation. Income on direct financing leases
is included in interest income and is recognized on a basis that achieves a constant periodic rate of return
on the outstanding investment. Income on operating leases is recognized as non-interest income on a
straight-line basis over the lease term.

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments
consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in
the financial statements when they are funded. Related fees are generally recognized when collected.

Mortgage loans held for sale are included in the Company’s loans and leases and totaled $5.7 million and

$5.4 million, respectively, at December 31, 2008 and 2007. Mortgage loans held for sale are carried at the
lower of cost or fair value. Gains and losses from the sales of mortgage loans are the difference between the
selling price of the loan and its carrying value, net of discounts and points, and are recognized as mortgage
lending income when the loan is sold to investors and servicing rights are released.

As part of its standard mortgage lending practice, the Company issues a written put option, in the form
of an interest rate lock commitment (“IRLC”), such that the interest rate on the mortgage loan is established
prior to funding. In addition to the IRLC, the Company also enters into a forward sale commitment (“FSC”)
for the sale of its mortgage loans originations to reduce its market risk on such originations in process. The
IRLC on mortgage loans held for sale and the FSC have been determined to be derivatives as defined by
Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” as amended. Accordingly, the fair values of derivative assets and liabilities for the
Company’s IRLC and FSC are based primarily on the fluctuation of interest rates between the date on which
the IRLC and FSC were entered and year-end. At December 31, 2008 and 2007, the Company had recorded
IRLC and FSC derivative assets of $477,000 and $80,000, respectively, and had recorded corresponding
derivative liabilities of $477,000 and $80,000, respectively. The notional amounts of loan commitments under
both the IRLC and FSC were $15.0 million and $8.4 million, respectively, at December 31, 2008 and 2007.
Allowance for loan and lease losses (“ALLL”) - The ALLL is established through a provision for such
losses charged against income. All or portions of loans or leases deemed to be uncollectible are charged
against the ALLL when management believes that collectibility of all or some portion of outstanding principal
is unlikely. Subsequent recoveries, if any, of loans or leases previously charged off are credited to the ALLL.

The ALLL is maintained at a level management believes will be adequate to absorb losses inherent in
existing loans and leases. Provision to and the adequacy of the ALLL are determined in accordance with
SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 5, “Accounting for
Contingencies,” and are based on evaluations of the loan and lease portfolio utilizing objective and subjective
criteria. The objective criteria primarily include an internal grading system and specific allowances determined
in accordance with SFAS No. 114. The Company also utilizes a peer group analysis and an historical analysis
in an effort to validate the overall adequacy of its ALLL. The subjective criteria take into consideration such
factors as the nature, mix and volume of the portfolio, overall portfolio quality, review of specific problem
loans and leases, national, regional and local business and economic conditions that may affect the borrowers’
or lessees’ ability to pay, the value of collateral securing the loans and leases and other relevant factors.
Changes in any of these criteria or the availability of new information could require adjustment of the ALLL
in future periods. While a specific allowance has been calculated under SFAS No. 114 for impaired loans and
leases and loans and leases where the Company has otherwise determined a specific reserve is appropriate,
no portion of the Company’s ALLL is restricted to any individual loan or lease or group of loans or leases,
and the entire ALLL is available to absorb losses from any and all loans and leases.

The Company’s policy generally is to place a loan or lease on nonaccrual status when payment of principal

or interest is contractually past due 90 days, or earlier when concern exists as to the ultimate collection of
principal and interest. Nonaccrual loans or leases are generally returned to accrual status when principal and
interest payments are less than 90 days past due and the Company reasonably expects to collect all principal
and interest. The Company may continue to accrue interest on certain loans and leases contractually past due
90 days if such loans or leases are both well secured and in the process of collection.

All loans and leases deemed to be impaired are evaluated individually in accordance with SFAS No. 114.

The Company considers a loan or lease to be impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according to the contractual terms
thereof. Many of the Company’s nonaccrual loans or leases and all loans or leases that have been restructured
from their original contractual terms are considered impaired. The majority of the Company’s impaired loans
and leases are dependent upon collateral for repayment. Accordingly, impairment is generally measured by
comparing collateral value, net of holding and selling costs, to the current investment in the loan or lease.
For all other impaired loans and leases, the Company compares estimated discounted cash flows to the
current investment in the loan or lease. To the extent that the Company’s current investment in a particular
loan or lease exceeds its estimated net collateral value or its estimated discounted cash flows, the impaired
amount is specifically considered in the determination of the allowance for loan and lease losses, or is
immediately charged off as a reduction of the allowance for loan and lease losses.

For certain loans and leases not considered impaired where (i) the customer is continuing to make
regular payments, although payments may be past due, (ii) there is a reasonable basis to believe the
customer may continue to make regular payments, although there is also an elevated risk that the customer
may default, and (iii) the collateral or other repayment sources are likely to be insufficient to recover the
current investment in the loan if a default occurs, the Company evaluates such loans and leases to determine
whether a specific reserve is needed for the loan or lease. For the purpose of calculating the amount of the
specific reserve appropriate for any loan or lease, management uses the methodology that is substantially the
same as the methodology used to calculate the impaired amount of loans and leases in accordance with SFAS
No. 114 and assumes that (i) no further regular payments occur and (ii) all sums recovered will come from
liquidation of collateral and collection efforts from other payment sources. To the extent that the Company’s
current investment in a particular loan or lease evaluated for the need for a specific reserve exceeds its net
collateral value or its estimated discounted cash flows, such excess is considered a specific reserve for
purposes of the determination of the allowance for loan and lease losses.

The accrual of interest on loans and leases is discontinued when, in management’s opinion, the borrower

or lessee may be unable to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash
payments are received

Premises and equipment - Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful
lives of the related assets. Depreciable lives for the major classes of assets are generally 45 years for buildings
and 3 to 25 years for furniture, fixtures, equipment and certain building improvements. Leasehold
improvements are amortized over the shorter of the asset’s estimated useful life or the term of the lease.
Accelerated depreciation methods are used for income tax purposes. Maintenance and repair charges are
expensed as incurred.

Foreclosed assets held for sale - Repossessed personal properties and real estate acquired through or
in lieu of foreclosure are initially recorded at the lesser of current principal investment or fair value less
estimated cost to sell at the date of repossession or foreclosure. Valuations of these assets are periodically
reviewed by management with the carrying value of such assets adjusted through non-interest expense to
the then estimated fair value net of estimated selling costs, if lower, until disposition. Gains and losses from
the sale of repossessions, foreclosed assets and other real estate are recorded in non-interest income, and
expenses to maintain the properties are included in non-interest expense.

Income taxes - The Company utilizes the asset and 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 or years 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.

The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes,” as of
January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being presumed to occur. The
amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company files consolidated tax returns. The Bank and the other consolidated entities provide for
income taxes on a separate return basis and remit to the Company amounts determined to be currently
payable. The Company recognizes interest and/or penalties related to income tax matters in income
tax expense.

Bank owned life insurance (“BOLI”) - BOLI consists of life insurance purchased by the Company on a

qualifying group of officers with the Company designated as owner and beneficiary of the policies. The
earnings on BOLI policies are used to offset a portion of employee benefit costs. BOLI is carried at the
policies’ realizable cash surrender values with changes in cash surrender values and death benefits
received in excess of cash surrender value reported in non-interest income.

Intangible assets - Intangible assets consist of goodwill, bank charter costs and core deposit intangibles.

Goodwill represents the excess purchase price over the fair value of net assets acquired in business
acquisitions. The Company had goodwill of $5.2 million at both December 31, 2008 and 2007. As required
by SFAS No. 142, the Company performed its annual impairment test of goodwill as of October 1, 2008.
This test indicated no impairment of the Company’s goodwill.

Bank charter costs represent costs paid to acquire a Texas bank charter and are being amortized over
20 years. Bank charter costs totaled $239,000 at both December 31, 2008 and 2007, less accumulated
amortization of $58,000 and $46,000 at December 31, 2008 and 2007, respectively.

Core deposit intangibles represent premiums paid for deposits acquired via acquisition and are being
amortized over 8 to 10 years. Core deposit intangibles totaled $2.3 million at both December 31, 2008
and 2007, less accumulated amortization of $2.1 million and $1.9 million at December 31, 2008 and
2007, respectively.

The aggregate amount of amortization expense for the Company’s core deposit and bank charter
intangibles is expected to be $110,000 per year in years 2009 – 2010; $56,000 in 2011; and $12,000
per year in 2012 and 2013.

Earnings per common share - Basic earnings per common share is computed by dividing reported earnings

available to common stockholders by the weighted-average number of common shares outstanding. Diluted
earnings per common share is computed by dividing reported earnings available to common stockholders by
the weighted-average number of common shares outstanding after consideration of the dilutive effect, if any,
of the Company’s common stock options and common stock warrant using the treasury stock method.
Stock-based compensation - The Company has an employee stock option plan and a non-employee
director stock option plan, which are described more fully in Note 12. The Company accounts for these
stock option plans in accordance with the provisions of SFAS No. 123 (Revised 2004) (“SFAS No. 123R”)
“Share-Based Payment.”

SFAS No. 123R requires entities to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. Such cost is to be recognized
over the vesting period of the award. For the years ended December 31, 2008, 2007 and 2006, the Company
recognized $862,000, $869,000 and $865,000, respectively, of non-interest expense as a result of applying
the provisions of SFAS No. 123R to its stock option plans.

Segment disclosures - SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” establishes standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers. As the Company operates
in only one segment – community banking – SFAS No. 131 has no impact on the Company’s financial
statements or its disclosure of segment information. No revenues are derived from foreign countries and
no single external customer comprises more than 10% of the Company’s revenues.

Recent accounting pronouncements - In March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”. SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities.
SFAS No. 161 requires qualitative disclosure about objectives and strategies for using derivative and
hedging instruments, quantitative disclosure about fair value amounts of the instruments and gains and
losses on such instruments, as well as disclosures about credit-risk features in derivative agreements.
SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The adoption of this standard is not expected to
have a material effect on the Company’s financial position, results of operations or liquidity.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51.” SFAS No. 160 was issued to improve the relevance, comparability,
and transparency of consolidated financial information relative to noncontrolling, or minority, interest. The
provisions of SFAS No. 160 establish accounting and reporting standards that clearly identify and distinguish
between the interests of the parent and the noncontrolling owners. SFAS No. 160 is effective for fiscal years,
and interim periods within the fiscal years, beginning on or after December 15, 2008. Management does not
expect SFAS No. 160 will have a material impact on the Company’s financial position, results of operations
or liquidity.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R”), “Business
Combinations.” SFAS No. 141R replaces SFAS No. 141 and was issued to improve the comparability of
the information that a reporting entity provides in its financial reports about business combinations. The
provisions of SFAS No. 141R apply prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Management has determined the provisions of SFAS No. 141R could impact the Company’s accounting for
a merger or acquisition in the event an acquisition is made by the Company on or after its effective date.

In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin
(“SAB”) No. 110. SAB No. 110 amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based
Payments,” as amended, and expresses the views of the SEC staff regarding the use of a “simplified”
method in developing an estimate of expected term of “plain vanilla” share options in accordance with
SFAS No. 123R. In particular, SAB No. 110 states that the SEC staff will continue to accept the use of a
“simplified” method beyond December 31, 2007 in situations where a company does not have sufficient
data to provide a reasonable basis upon which to estimate share option expected term. Management expects
to continue to use a “simplified” method, as allowed by SAB No. 110, in developing an estimate of expected
term of its options to purchase shares of the Company’s common stock until such time as sufficient historical
data is available to appropriately measure such expected share option term.

In November 2007, the SEC issued SAB No. 109, which amends and replaces Section DD of Topic 5,
“Miscellaneous Accounting.” SAB No. 109 expresses the views of the SEC staff regarding written loan
commitments that are accounted for at fair value through earnings in accordance with SAB No. 105 and
SFAS No. 133, as amended. SAB No. 109 requires the expected net future cash flows related to the associated
servicing of the loan be included in the measurement of such written loan commitments. The provisions of
SAB No. 109 were effective on a prospective basis to derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007. The adoption of SAB No. 109 did not have a material
impact on the Company’s financial position, results of operations or liquidity.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and

Financial Liabilities - Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at fair value with the objective of
improving financial reporting. The provisions of SFAS No. 159 provide entities the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 did not have a material
impact on the Company’s financial position, results of operations or liquidity.

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurement. According to SFAS No. 157, fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Company measures certain of its
financial assets and liabilities on a fair value basis using various valuation techniques and assumptions,
depending on the nature of the financial asset or liability. Additionally, fair value is used either annually or
on a non-recurring basis to evaluate certain financial assets and liabilities for impairment or for disclosure
purposes. With respect to the disclosure provisions for its nonfinancial assets and liabilities, the Company
elected the one-year deferral provision as allowed by FASB Staff Position No. FAS 157-2, “Effective Date
of FASB Statement No. 157.”

Effective October 10, 2008, the FASB issued Staff Position No. FAS 157-3 (“FSP 157-3”), “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP 157-3 clarifies the
application of SFAS No. 157 in a market that is not active and addresses specific application issues of SFAS
No. 157 including (i) how the reporting entity’s own assumptions (expected cash flows and appropriate
risk-adjusted discount rates) should be considered when measuring fair value when relevant observable
inputs do not exist, (ii) how available observable inputs in a market that is not active should be considered
when measuring fair value, and (iii) how the use of market quotes (broker quotes, or pricing services for
the same or similar financial assets) should be considered when assessing the relevance of observable and
unobservable inputs or value drivers available to measure fair value. The provisions of FSP 157-3 were
effective upon its issuance, including prior periods for which financial statements had not been issued.

Reclassifications - Certain reclassifications of 2007 and 2006 amounts have been made to conform with

the 2008 financial statements presentation. These reclassifications had no impact on prior years’ net
income, as previously reported.

2. Investment Securities

The following is a summary of the amortized cost and estimated fair values of investment securities, all

of which are classified as AFS:

Gross
Amortized Unrealized Unrealized
Gains

Losses

Gross

Cost

Estimated
Fair
Value

December 31, 2008:
Obligations of states and political subdivisions ....... $517,166
U.S. Government agency
371,110
mortgage-backed securities ..................................
6,953
Corporate obligations ...............................................
FHLB and FNBB(1) stock ...........................................
22,846
Other securities ........................................................
1,000
Total investment securities AFS ......................... $919,075

December 31, 2007:
Obligations of states and political subdivisions ....... $163,339
U.S. Government agency
370,061
mortgage-backed securities ..................................
42,029
Securities of U.S. Government agencies ...................
9,953
Corporate obligations ...............................................
FHLB and ABB(1) stock ............................................
16,753
1,044
Other securities ........................................................
Total investment securities AFS ......................... $603,179

(Dollars in thousands)

$31,753

$ (6,179)

$542,740

3,187
-
-
-
$34,940

(2,736)
-
-
(317)
$ (9,232)

371,561
6,953
22,846
683
$944,783

$ 3,695

$ (567)

$166,467

-
67
-
-
-
$ 3,762

(25,715)
(4)
(2,307)
-
-
$(28,593)

344,346
42,092
7,646
16,753
1,044
$578,348

(1) Effective November 30, 2008 the ABB was acquired by and merged into the FNBB.

The following shows gross unrealized losses and estimated fair value of investment securities AFS,
aggregated by investment category and length of time that individual investment securities have been in
a continuous unrealized loss position:

Less than 12 Months
Estimated Unrealized
Fair Value

Losses

12 Months or More
Estimated Unrealized
Fair Value

Losses
(Dollars in thousands)

Total
Estimated Unrealized
Fair Value

Losses

December 31, 2008:
Obligations of states and
political subdivisions ......... $117,686
U.S. Government agency
mortgage-backed
securities ...........................
Other securities ......................
Total temporarily
impaired securities ......... $188,134

69,765
683

December 31, 2007:
Obligations of states and
political subdivisions ......... $ 16,676
U.S. Government agency
mortgage-backed
securities ...........................
Securities of U.S. Government
agencies .............................
Corporate obligations .............
Total temporarily
impaired securities ......... $188,105

3,972
-

167,457

$ 6,154

$ 2,309

$ 25

$119,995

$ 6,179

1,781
317

80,512
-

955
-

150,277
683

2,736
317

$ 8,252

$ 82,821

$ 980

$270,955

$ 9,232

$ 308

$ 15,497

$ 259

$32,173

$ 567

10,418

176,830

15,297

344,287

25,715

4
-

-
7,646

-
2,307

3,972
7,646

4
2,307

$10,730

$199,973

$17,863

$388,078

$28,593

At December 31, 2008, the Company’s investment securities portfolio included a bond issued by SLM

Corporation (“Sallie Mae”) with an amortized cost of $10.0 million and an estimated fair value of $7.0
million. During the fourth quarter of 2008, the Company concluded that the Sallie Mae bond was other-
than-temporarily impaired and recorded a pretax charge of $3.0 million to reduce the carrying value of this
bond to its estimated fair value. In estimating the fair value of this Sallie Mae bond, the Company relied
significantly on inputs and value drivers that are unobservable, resulting in Level 3 classification under
the provisions of SFAS No. 157, “Fair Value Measurements”. The use of unobservable inputs and value
drivers was deemed necessary by management given the trading market for this investment securities was
determined to be “not active” based on the limited number of trades, small block sizes, and the significant
spreads between the bid and ask price. Accordingly, the Company developed an internal model for pricing
the security based on the present value of expected cash flows of the instrument at an appropriate risk-
adjusted discount rate. In developing the appropriate risk-adjusted discount rate, the Company considered
the change in interest rate spreads between comparable maturities of similarly rated bonds and U.S.
Treasuries between the date of purchase and the measurement date, which spreads increased 690 bps
during such period. Additionally, the Company reviewed other information such as historical and current
performance of the bond, cash flow projections, liquidity and credit premiums required by market
participants, financial trend analysis of Sallie Mae and other factors in determining the appropriate risk-
adjusted discount rate and expected cash flows. Management determined that the increase in spreads of 690
bps added together with the current coupon rate on the Sallie Mae bond was the appropriate risk-adjusted
discount rate to apply to the estimated future cash flows, resulting in an estimated fair value of $7.0 million.

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment for the

remainder of the investment securities portfolio, management considers the credit quality of the issuer, the
nature and cause of the unrealized loss, the severity and duration of the impairments and other factors. At
December 31, 2008 and 2007, management determined the unrealized losses were the result of fluctuations
in interest rates and did not reflect deteriorations of the credit quality of the investments. Accordingly,
management believes that all of its unrealized losses on investment securities are temporary in nature, and
the Company has both the ability and intent to hold these investments until maturity or until such time as
fair value recovers to amortized cost.

A maturity distribution of investment securities AFS reported at amortized cost and estimated fair value as

of December 31, 2008 is as follows:

Amortized
Cost
(Dollars in thousands)

Estimated
Fair Value

Due in one year or less .........................................
Due after one year to five years ...........................
Due after five years to ten years ..........................
Due after ten years ..............................................
Total .................................................................

$324,200
205,345
92,262
297,268
$919,075

$326,092
212,792
99,444
306,455
$944,783

For purposes of this maturity distribution, all investment securities are shown based on their contractual
maturity date, except (i) FHLB and FNBB stock with no contractual maturity date are shown in the longest
maturity category, (ii) U.S. Government agency mortgage-backed securities are allocated among various
maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds and
interest rate levels at December 31, 2008 and (iii) mortgage-backed securities issued by housing authorities
of states and political subdivisions are allocated among various maturities based on an estimated repayment
schedule projected by management as of December 31, 2008. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.

Sales activities and other-than-temporary impairment charge of the Company’s investment securities AFS

are summarized as follows:

2008

Year Ended December 31,
2007
(Dollars in thousands)

2006

Sales proceeds ................................. $13,588

Gross realized gains ......................... $ 360
Gross realized losses ........................
(777)
Other-than-temporary
impairment charge .....................
Net (losses) gains on
investment securities ................. $ (3,433)

(3,016)

$56,240

$ 530
(10)

$157,954

$ 3,924
(7)

$ 520

$ 3,917

Investment securities with carrying values of $596.4 million and $502.8 million at December 31, 2008 and
2007, respectively, were pledged to secure public funds and trust deposits and for other purposes required or
permitted by law.

3. Loans and Leases

The Company maintains a diversified loan and lease portfolio. The following is a summary of the loan

and lease portfolio by principal category:

Real estate:
Residential 1-4 family .....................................
Non-farm/non-residential ...............................
Construction/land development .........................
Agricultural ....................................................
Multifamily residential ....................................
Commercial and industrial .................................
Consumer ...........................................................
Direct financing leases .......................................
Agricultural (non-real estate) ............................
Other ..................................................................
Total loans and leases ..................................

December 31,

2008

2007

(Dollars in thousands)

$ 275,281
551,821
694,527
84,432
61,668
206,058
75,015
50,250
19,460
2,687
$2,021,199

$ 279,375
445,303
684,775
91,810
31,414
173,128
87,867
53,446
22,439
1,578
$1,871,135

The Company’s direct financing leases include estimated residual values of $1.4 million at December 31,
2008 and $1.8 million at December 31, 2007, and are presented net of unearned income totaling $7.0 million
and $8.2 million at December 31, 2008 and 2007, respectively. The above table includes deferred costs, net
of deferred fees, that totaled $0.6 million and $1.8 million at December 31, 2008 and 2007, respectively.
Loans and leases on which the accrual of interest has been discontinued aggregated $15.4 million and $6.6

million at December 31, 2008 and 2007, respectively. Interest income recorded during 2008, 2007 and
2006 for non-accrual loans and leases at December 31, 2008, 2007 and 2006 was $0.6 million, $0.3
million and $0.3 million, respectively. Under the original terms, these loans and leases would have reported
$1.1 million, $0.6 million and $0.5 million of interest income during 2008, 2007 and 2006, respectively.

4. Allowance for Loan and Lease Losses (“ALLL”)

The following is a summary of activity within the ALLL:

Balance - beginning of year ...........................................
Loans and leases charged off .........................................
Recoveries of loans and leases previously charged off...
Net loans and leases charged off ...................................
Provision charged to operating expense ........................
Balance - end of year .....................................................

2008

2006

Year Ended December 31,
2007
(Dollars in thousands)
$17,699
(4,644)
352
(4,292)
6,150
$19,557

$19,557
(9,631)
561
(9,070)
19,025
$29,512

$17,007
(2,065)
307
(1,758)
2,450
$17,699

The following is a summary of the Company’s impaired loans and leases:

Impaired loans and leases with an allocated allowance ....................
Impaired loans and leases without an allocated allowance ...............
Total impaired loans and leases(1) .....................................................
Total allowance allocated to impaired loans and
leases under SFAS No. 114 calculations ........................................

December 31,
2007
2008
(Dollars in thousands)

$ 3,068
9,380
$12,448

$6,726
87
$6,813

$ 343

$1,066

(1) At December 31, 2008, $2.9 million of nonaccrual loans and leases were not deemed impaired. At December 31,
2007, all nonaccrual loans and leases were deemed impaired.

The average carrying value of all impaired loans and leases during the years ended December 31, 2008

and 2007 was $11.9 million and $4.8 million, respectively.

Real estate and other collateral securing loans having a carrying value of $17.3 million, $8.3 million
and $1.5 million were transferred to foreclosed assets held for sale in 2008, 2007 and 2006, respectively.
The Company is not committed to lend additional funds to debtors whose loans have been transferred to
foreclosed assets.

5. Premises and Equipment

The following is a summary of premises and equipment:

Land .....................................................................
Construction in process .........................................
Buildings and improvements ................................
Leasehold improvements ......................................
Equipment ............................................................

Accumulated depreciation .....................................
Premises and equipment, net .............................

December 31,

2008

2007

(Dollars in thousands)

$ 55,586
7,372
84,579
4,928
22,045
174,510
(21,924)
$152,586

$ 55,722
6,124
62,376
5,786
18,963
148,971
(18,923)
$130,048

The Company capitalized $1.1 million, $1.3 million and $1.0 million of interest on construction projects

during the years ended December 31, 2008, 2007 and 2006, respectively.

Included in occupancy expense is rent of $605,000, $657,000 and $696,000 incurred under noncancelable

operating leases in 2008, 2007 and 2006, respectively, for leases of real estate in connection with buildings
and premises. These leases contain certain renewal and purchase options according to the terms of the
agreements. Future amounts due under noncancelable operating leases at December 31, 2008 are as follows:
$395,000 in 2009, $307,000 in 2010, $220,000 in 2011, $220,000 in 2012, $220,000 in 2013 and
$2,030,000 thereafter. Rental income recognized during 2008, 2007 and 2006 for leases of buildings and
premises and for equipment leased under operating leases was $566,000, $517,000 and $638,000, respectively.

6. Deposits

The aggregate amount of time deposits with a minimum denomination of $100,000 was $796.4 million

and $906.7 million at December 31, 2008 and 2007, respectively.

The following is a summary of the scheduled maturities of all time deposits:

December 31,

2008

2007

(Dollars in thousands)

Up to one year ................................................. $1,275,112
23,805
Over one to two years ......................................
2,394
Over two to three years ....................................
1,574
Over three to four years ...................................
241
Over four to five years .....................................
Thereafter ........................................................
19
Total time deposits ........................................ $1,303,145

$1,284,475
89,860
1,694
651
1,015
59
$1,377,754

7. Borrowings

Short-term borrowings with original maturities less than one year include FHLB advances, Federal Reserve

Bank (“FRB”) borrowings, treasury, tax and loan note accounts and federal funds purchased. The following
is a summary of information relating to these short-term borrowings:

December 31,

2008

2007

(Dollars in thousands)

Average annual balance ...................................... $ 100,594
84,104
December 31 balance ..........................................
Maximum month-end balance during year ..........
201,329
Interest rate:
Weighted-average - year ..................................
Weighted-average - December 31 .....................

2.01%
0.51

$ 74,192
15,461
122,427

5.06%
3.58

At December 31, 2008 and 2007, the Company had FHLB advances with original maturities exceeding one

year of $340.8 million and $321.1 million, respectively. These advances bear interest at rates ranging from
2.53% to 6.43% at December 31, 2008 and are collateralized by a blanket lien on a substantial portion of
the Company’s real estate loans. At December 31, 2008, the Bank had $243.7 million of unused FHLB
borrowing availability.

At December 31, 2008, aggregate annual maturities and weighted-average rates of FHLB advances with

an original maturity of over one year were as follows:

Maturity

2009
2010
2011
2012
2013
Thereafter

Amount
(Dollars in thousands)
$ 33
60,034
31
21
18
280,706
$340,843

Weighted-Average Rate

4.81%
6.27
4.80
4.63
4.54
3.84
4.27

Included in the above table are $340.0 million of FHLB advances that contain quarterly call features and

are callable as follows:

Weighted-
Average
Interest
Rate
(Dollars in thousands)

Amount

Callable quarterly ........................... $ 60,000
260,000
Callable quarterly ...........................
20,000
Callable quarterly ...........................
$340,000

6.27%
3.90
2.53
4.24

Maturity

2010
2017
2018

8. Subordinated Debentures

At December 31, 2008 the Company had the following issues of trust preferred securities outstanding and

subordinated debentures owed to the Trusts:

Description

Ozark III
Ozark II
Ozark IV
Ozark V

Subordinated
Debentures
Owed to Trusts

Trust Preferred
Securities
of the Trusts

Interest Rate
at
December 31, 2008

$14,434
14,433
15,464
20,619
$64,950

(Dollars in thousands)
$14,000
14,000
15,000
20,000
$63,000

4.36%
7.77
4.37
3.60

Final Maturity Date

September 25, 2033
September 29, 2033
September 28, 2034
December 15, 2036

On September 25, 2003, Ozark III sold to investors in a private placement offering $14 million of adjustable

rate trust preferred securities, and on September 29, 2003, Ozark II sold to investors in a private placement
offering $14 million of adjustable rate trust preferred securities (collectively, “2003 Securities”). The 2003
Securities bear interest, adjustable quarterly, at 90-day London Interbank Offered Rate (“LIBOR”) plus 2.95%
for Ozark III and 90-day LIBOR plus 2.90% for Ozark II. The aggregate proceeds of $28 million from the 2003
Securities were used to purchase an equal principal amount of adjustable rate subordinated debentures of the
Company that bear interest, adjustable quarterly, at 90-day LIBOR plus 2.95% for Ozark III and 90-day LIBOR
plus 2.90% for Ozark II (collectively,“2003 Debentures”).

On September 28, 2004, Ozark IV sold to investors in a private placement offering $15 million of adjustable

rate trust preferred securities (“2004 Securities”). The 2004 Securities bear interest, adjustable quarterly, at
90-day LIBOR plus 2.22%. The $15 million proceeds from the 2004 Securities were used to purchase an equal
principal amount of adjustable rate subordinated debentures of the Company that bear interest, adjustable
quarterly, at 90-day LIBOR plus 2.22% (“2004 Debentures”).

On September 29, 2006 Ozark V sold to investors in a private placement offering $20 million of adjustable
rate trust preferred securities (“2006 Securities”). The Securities bear interest, adjustable quarterly, at 90-day
LIBOR plus 1.60%. The $20 million proceeds from the 2006 Securities were used to purchase an equal principal
amount of adjustable rate subordinated debentures of the Company that bear interest, adjustable quarterly, at
90-day LIBOR plus 1.60% (“2006 Debentures”).

In addition to the issuance of these adjustable rate securities, Ozark II and Ozark III collectively sold $0.9

million, Ozark IV sold $0.4 million and Ozark V sold $0.6 million of trust common equity to the Company.
The proceeds from the sales of the trust common equity were used, respectively, to purchase $0.9 million of
2003 Debentures, $0.4 million of 2004 Debentures and $0.6 million of 2006 Debentures issued by the Company.

At both December 31, 2008 and 2007, the Company had an aggregate of $64.9 million of subordinated
debentures outstanding and had an asset of $1.9 million representing its investment in the common equity
issued by the Trusts. At both December 31, 2008 and 2007, the sole assets of the Trusts are the respective
adjustable rate debentures and the liabilities of the respective Trusts are the 2003 Securities, the 2004
Securities and the 2006 Securities. The Trusts had aggregate common equity of $1.9 million and did not have
any restricted net assets at both December 31, 2008 and 2007. The Company has, through various contractual
arrangements, fully and unconditionally guaranteed all obligations of the Trusts with respect to the 2003
Securities, the 2004 Securities and the 2006 Securities. Additionally, there are no restrictions on the ability
of the Trusts to transfer funds to the Company in the form of cash dividends, loans or advances.

These securities generally mature at or near the thirtieth anniversary date of each issuance. However, these

securities and debentures may be prepaid at par, subject to regulatory approval, prior to maturity at any time
on or after September 25 and 29, 2008 for the two issues of 2003 Securities and 2003 Debentures, on or after
September 28, 2009 for the 2004 Securities and 2004 Debentures, and on or after December 15, 2011 for the
2006 Securities and 2006 Debentures, or at an earlier date upon certain changes in tax laws, investment
company laws or regulatory capital requirements.

9. Income Taxes

The following is a summary of the components of the provision (benefit) for income taxes:

Current:
Federal .....................................................................
State .........................................................................
Total current .................................................................
Deferred:
Federal .....................................................................
State .........................................................................
Total deferred ...............................................................
Provision for income taxes ...........................................

Year Ended December 31,
2007
(Dollars in thousands)

2006

2008

$13,400
2,672
16,072

$13,332
2,170
15,502

$12,100
1,670
13,770

(5,161)
(985)
(6,146)
$ 9,926

(938)
(119)
(1,057)
$14,445

(412)
60
(352)
$13,418

The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows:

Statutory federal income tax rate .................................
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit .................
Effect of non-taxable interest income .......................
Effect of BOLI and other non-taxable income ...........
Other, net .................................................................
Effective income tax rate ......................................

Year Ended December 31,
2007
35.0%

2008
35.0%

2006
35.0%

2.5
(10.8)
(3.4)
(1.1)
22.2%

2.9
(4.2)
(1.6)
(0.8)
31.3%

2.5
(5.6)
(1.6)
(0.6)
29.7%

Income tax benefits from the exercise of stock options in the amount of $0.3 million, $0.4 million and

$0.9 million in 2008, 2007 and 2006, respectively, were recorded as an increase to additional paid-in capital.

At December 31, 2008 and 2007, income taxes refundable of $0.6 million and $0.7 million, respectively,

were included in other assets.

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:

December 31,

Deferred tax assets:

2008
2007
(Dollars in thousands)

Allowance for loan and lease losses ................................................ $11,772
1,270
Stock-based compensation under the fair value method .................
746
Deferred compensation ...................................................................
-
Investment securities AFS ...............................................................
Gross deferred tax assets ....................................................................
13,788
Deferred tax liabilities:

5,447
Accelerated depreciation on premises and equipment .....................
8,901
Investment securities AFS ...............................................................
439
Direct financing leases ....................................................................
538
FHLB stock dividends .....................................................................
470
Other, net ........................................................................................
15,795
Gross deferred tax liabilities ...............................................................
Net deferred tax (liabilities) assets ..................................................... $ (2,007)

$ 7,671
940
565
9,740
18,916

4,415
-
736
875
1,220
7,246
$11,670

10. Preferred Stock

On December 12, 2008, as part of the United States Department of the Treasury’s (the “Treasury”)
Capital Purchase Program made available to certain financial institutions in the U.S. pursuant to the
Emergency Economic Stabilization Act of 2008 (“EESA”), the Company and the Treasury entered into a
Letter Agreement including the Securities Purchase Agreement – Standard Terms incorporated therein (the
“Purchase Agreement”) pursuant to which the Company issued to the Treasury, in exchange for aggregate
consideration of $75.0 million, (i) 75,000 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, par value $0.01 and liquidation preference $1,000 per share (the “Series A
Preferred Stock”), and (ii) a warrant (the “Warrant”) to purchase up to 379,811 shares (the “Warrant
Common Stock”) of the Company’s common stock, par value $0.01 per share, at an exercise price of
$29.62 per share.

The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative cash dividends quarterly at
a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock
is non-voting, other than class voting rights on certain matters that could adversely affect the Series A
Preferred Stock. The Series A Preferred Stock may be redeemed by the Company at par on or after February
15, 2012. Prior to this date, the Series A Preferred Stock may not be redeemed unless the Company has
received aggregate gross proceeds from one or more qualified equity offerings of any Tier 1 perpetual
preferred or common stock of the Company (a “Qualified Equity Offering”) equal to $18.75 million. Subject
to certain limited exceptions, until December 12, 2011, or such earlier time as all Series A Preferred Stock
has been redeemed or transferred by Treasury, the Company will not, without Treasury’s consent, be able
to increase its dividend rate per share of common stock or repurchase its common stock.

Upon receipt of the aggregate consideration from the Treasury on December 12, 2008, the Company
allocated the $75.0 million proceeds on a pro rata basis to the Series A Preferred Stock and the Warrant
based on relative fair values. In estimating the fair value of the Warrant, the Company utilized the Black-
Scholes model which includes assumptions regarding the Company’s common stock prices, stock price
volatility, dividend yield, the risk free interest rate and the estimated life of the Warrant. The fair value
of the Series A Preferred Stock was determined using a discounted cash flow methodology and a discount
rate of 12%. As a result, the Company assigned $3.1 million of the aggregate proceeds to the Warrant
and $71.9 million to the Series A Preferred Stock. The value assigned to the Series A Preferred Stock
will be amortized up to the $75.0 million liquidation value of such preferred stock, with the cost of such
amortization being reported as additional preferred stock dividends. This results in a total dividend with
a consistent effective yield of 5.98% over a five-year period, which is the expected life of the Series A
Preferred Stock.

In addition, the Purchase Agreement (i) grants the holders of the Series A Preferred Stock, the Warrant

On January 9, 2009 the Company filed a “shelf” registration statement with the Securities and Exchange

with the executive compensation and corporate governance requirements of Section 111(b) of the EESA and
applicable guidance or regulations issued by the Treasury on or prior to December 12, 2008. The applicable
executive compensation requirements apply to the compensation of the Company’s chief executive officer,
chief financial officer and four other most highly compensated executive officers (collectively, the “senior
executive officers”). In addition, in connection with the closing of the Treasury’s purchase of the Series A
Preferred Stock each of the senior executive officers was required to execute a waiver of any claim against
the United States or the Company for any changes to his compensation or benefits that are required in
order to comply with the regulation issued by the Treasury as published in the Federal Register on
October 20, 2008.

11. Employee Benefit Plans

The Company maintains a qualified retirement plan (the “401(k) Plan”) with a salary deferral feature
designed to qualify under Section 401 of the Internal Revenue Code (the “Code"). The 401(k) Plan permits
the employees of the Company to defer a portion of their compensation in accordance with the provisions of
Section 401(k) of the Code. Matching contributions may be made in amounts and at times determined by
the Company. Certain other statutory limitations with respect to the Company's contribution under the 401(k)
Plan also apply. Amounts contributed by the Company for a participant will vest over six years and will be
held in trust until distributed pursuant to the terms of the 401(k) Plan.

Contributions to the 401(k) Plan are invested in accordance with participant elections among certain
investment options. Distributions from participant accounts are not permitted before age 65, except in the
event of death, permanent disability, certain financial hardships or termination of employment. The Company
made matching cash contributions to the 401(k) Plan during 2008, 2007 and 2006 of $409,000, $311,000
and $483,000, respectively.

Prior to January 1, 2005, all full-time employees of the Company were eligible to participate in the 401(k)

Plan. Beginning January 1, 2005, certain key employees of the Company have been excluded from further
salary deferrals to the 401(k) Plan, but may make salary deferrals through participation in the Bank of
the Ozarks, Inc. Deferred Compensation Plan (the “Plan”). The Plan, an unfunded deferred compensation
arrangement for the group of employees designated as key employees, including certain of the Company’s
executive officers, was adopted by the Company’s board of directors on December 14, 2004 and became
effective January 1, 2005. Under the terms of the Plan, eligible participants may elect to defer a portion of
their compensation. Such deferred compensation will be distributable in lump sum or specified installments
upon separation from service with the Company or upon other specified events as defined in the Plan. The
Company has the ability to make a contribution to each participant’s account, limited to one half of the first
6% of compensation deferred by the participant and subject to certain other limitations. Amounts deferred
under the Plan are to be invested in certain approved investments (excluding securities of the Company or
its affiliates). Company contributions to the Plan in 2008, 2007 and 2006 totaled $104,000, $103,000 and
$84,000, respectively. At December 31, 2008 and 2007, the Company had Plan assets, along with an equal
amount of liabilities, totaling $1.8 million and $1.4 million, respectively, recorded on the accompanying
consolidated balance sheet.

12. Stock-Based Compensation

The Company has a nonqualified stock option plan for certain key employees and officers of the Company.

This plan provides for the granting of nonqualified options to purchase up to 1.5 million shares of common
stock in the Company. No option may be granted under this plan for less than the fair market value of the
common stock, defined by the plan as the average of the highest reported asked price and the lowest reported
bid price, on the date of the grant. While the vesting period and the termination date for the employee plan
options is determined when options are granted, all such employee options outstanding at December 31,
2008 were issued with a vesting period of three years and an expiration of seven years after issuance. The
Company also has a nonqualified stock option plan for non-employee directors. The non-employee director
plan calls for options to purchase 1,000 shares of common stock to be granted to each non-employee director
the day after the annual stockholders’ meeting. Additionally, a non-employee director elected or appointed
for the first time as a director on a date other than an annual meeting shall be granted an option to purchase

1,000 shares of common stock. These options are exercisable immediately and expire ten years after
issuance. All shares issued in connection with options exercised under both the employee and non-
employee director stock option plans are in the form of newly-issued shares.

The following table summarizes stock option activity for the year ended December 31, 2008:

Outstanding - January 1, 2008 ........
Granted ............................................
Exercised .........................................
Forfeited ..........................................
Outstanding - December 31, 2008 ...

Options

520,650
117,950
(45,900)
(39,700)
553,000

Exercisable - December 31, 2008 ....

266,100

Weighted-Average
Exercise
Price/Share

Weighted-Average
Remaining
Contractual Life
(in years)

Aggregate
Intrinsic Value
(in thousands)

$27.22
26.96
8.89
31.33
$28.39

$26.80

4.8

3.7

$1,612(1)

$1,339(1)

(1) Based on average trade value of $29.64 per share on December 31, 2008.

Intrinsic value for stock options is defined as the difference between the current market value and the
exercise price. The total intrinsic value of options exercised during 2008, 2007 and 2006 was $1.0 million,
$1.6 million and $2.0 million, respectively.

Options to purchase 117,950 shares, 122,600 shares and 111,800 shares, respectively, were granted
during 2008, 2007 and 2006 with a weighted-average fair value of $7.33, $7.37 and $9.10, respectively.
The fair value for each option grant is estimated on the date of grant using the Black-Scholes option pricing
model that uses the assumptions shown below. The Company uses the U.S. Treasury yield curve in effect at
the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using
the current annual dividend level and recent stock price of the Company’s common stock at the date of grant.
Expected stock volatility is based on historical volatilities of the Company’s common stock. The expected
life of the options is calculated based on the “simplified” method as provided for under SAB No. 110 as
management continues to gather sufficient historical experience data to appropriately estimate the expected
term of options outstanding.

The weighted-average assumptions used in the Black-Scholes option pricing model for the years indicated

were as follows:

Risk-free interest rate ..........................
Expected dividend yield .......................
Expected stock volatility ......................
Expected life (years) ............................

2008
2.61%
1.88%
32.8%
5.0

2007
4.40%
1.54%
22.4%
5.0

2006
4.76%
1.23%
26.2%
5.0

The total fair value of options to purchase shares of the Company’s common stock that vested during

the years ended 2008, 2007 and 2006 was $1.1 million, $0.6 million and $0.6 million, respectively.
Total unrecognized compensation cost related to nonvested stock-based compensation was $1.3 million
at December 31, 2008 and is expected to be recognized over a weighted-average period of 2.1 years.

13. Commitments and Contingencies

The Company is a party to financial instruments with off-balance sheet risk in the normal course of

business to meet the financing needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual amount of those instruments.
The Company has the same credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of

any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since these commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit
evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and other real or personal property.

The Company had outstanding commitments to extend credit, excluding mortgage IRLCs, of $339.2
million and $412.7 million at December 31, 2008 and 2007, respectively. The commitments extend over
varying periods of time with the majority to be disbursed or to expire within a one-year period.

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 letters
of credit are generally for a period of one year. The maximum amount of future payments the Company
could be required to make under these letters of credit at December 31, 2008 and 2007 is $10.3 million
and $7.6 million, respectively. The Company holds collateral to support letters of credit when deemed
necessary. The total of collateralized commitments at December 31, 2008 and 2007 was $8.3 million
and $5.2 million, respectively.

14. Related Party Transactions

The Company has had, in the ordinary course of business, lending transactions with certain of its officers,
directors, director nominees and their related and affiliated parties (related parties). The aggregate amount of
loans to such related parties at December 31, 2008 and 2007 was $4.4 million and $17.8 million, respectively.
New loans and advances on prior commitments made to such related parties were $0.9 million, $3.3 million
and $22.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. Repayments of loans
made by such related parties were $5.4 million, $25.3 million and $7.6 million for the years ended December
31, 2008, 2007 and 2006, respectively. Also, during 2008 advances totaling $8.9 million were removed from
and during 2006 advances totaling $0.8 million were added to the Company’s related party loans as a result
of changes in the composition of such related parties.

Wiring and cabling installation for certain of the Company’s facilities were performed by an entity whose

ownership includes a member of the Company’s board of directors. Total payments to this entity were
$224,000 in 2008, none in 2007 and $4,000 in 2006 for such installation work.

15. Regulatory Matters

The Company is subject to various regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary
actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial
condition and results of operations. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines that involve quantitative
measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company’s capital amounts and classification are also subject to
qualitative judgments by the regulators about component risk weightings and other factors.

Federal regulatory agencies generally require the Company and the Bank to maintain minimum Tier 1

and total capital to risk-weighted assets of 4.0% and 8.0%, respectively, and Tier 1 capital to average
quarterly assets (Tier 1 leverage ratio) of at least 3.0%. Tier 1 capital generally consists of common equity,
retained earnings, certain types of preferred stock, qualifying minority interest and trust preferred securities,
subject to limitations, and excludes goodwill and various intangible assets. Total capital includes Tier 1 capital,
any amounts of trust preferred securities excluded from Tier 1 capital, and the lesser of the ALLL or 1.25% of
risk-weighted assets. At December 31, 2008 the Company’s and the Bank’s Tier 1 and total capital ratios
and their Tier 1 leverage ratios exceeded minimum requirements.

The actual and required capital amounts and ratios of the Company and the Bank at December 31, 2008

and 2007 were as follows:

Required

To Be Well

Actual

For Capital
Adequacy
Purposes

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount

376,453 14.63

365,894 14.21
346,941 13.48

December 31, 2008:
Total capital (to risk-weighted assets):
Company ........................................... $395,406 15.36% $205,990
Bank .................................................
205,840
Tier 1 capital (to risk-weighted assets):
Company ...........................................
Bank .................................................
Tier 1 leverage (to average assets):
Company ...........................................
Bank .................................................
December 31, 2007:
Total capital (to risk-weighted assets):
Company ........................................... $282,600 12.67% $178,425
Bank .................................................
177,683
Tier 1 capital (to risk-weighted assets):
Company ...........................................
Bank .................................................
Tier 1 leverage (to average assets):
Company ...........................................
Bank .................................................

365,894 11.64
346,941 11.09

263,043 11.79
236,122 10.63

102,995
102,920

263,043
236,122

255,679 11.51

94,319
93,813

89,212
88,841

80,500
80,280

9.80
8.82

8.00% $257,488 10.00%
8.00

257,300 10.00

4.00
4.00

3.00
3.00

154,493
154,380

157,198
156,355

6.00
6.00

5.00
5.00

8.00% $223,031 10.00%
8.00

222,104 10.00

4.00
4.00

3.00
3.00

133,819
133,262

134,166
133,800

6.00
6.00

5.00
5.00

As of December 31, 2008 and 2007, the most recent notification from the regulators categorized the
Company and the Bank as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management believes have changed the
Company’s or the Bank’s category.

Subject to certain limitations, until December 12, 2011, or such earlier time as the Series A Preferred Stock

has been redeemed or transferred by the Treasury, the Company will not, without the Treasury’s consent, be
able to increase its quarterly dividend rate above $0.13 per common share or repurchase its common stock.

As of December 31, 2008, the state bank commissioner's approval was required before the Bank could

declare and pay any dividend of 75% or more of the net profits of the Bank after all taxes for the current year
plus 75% of the retained net profits for the immediately preceding year. At December 31,2008 and 2007,
$34.5 million and $38.1 million, respectively, was available for payment of dividends by the Bank without
the approval of regulatory authorities.

Under FRB regulation, the Bank is also limited as to the amount it may loan to its affiliates, including the
Company, and such loans must be collateralized by specific obligations. The maximum amount available for
loan from the Bank to the Company is limited to 10% of the Bank’s capital and surplus or approximately
$36.7 million and $22.6 million, respectively, at December 31, 2008 and 2007.

The Bank is required by bank regulatory agencies to maintain certain minimum balances of cash or non-
interest bearing deposits primarily with the FRB. At December 31, 2008 and 2007, these required balances
aggregated $4.4 million and $3.3 million, respectively.

16. Fair Value Measurements

In accordance with SFAS No. 157, the Company applied the following fair value hierarchy in the

measurement of certain of its financial assets and liabilities on a fair value basis.

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

Level 3 - Instruments whose inputs or value drivers are unobservable.

The following table sets forth the Company’s financial assets and liabilities at December 31, 2008 that are

accounted for at fair value.

Level 1

Level 2

Level 3

Total

Assets:
Investment securities AFS(1) ....................................... $85,275
-
Impaired loans and leases ...........................................
-
Investments in tax credit investments ........................
Derivative assets - interest rate lock commitments

(“IRLC”) and forward sales commitments (“FSC”) ....

Liabilities:
Derivative liabilities - IRLC and FSC ...........................

(Dollars in thousands)

$806,642
-
-

$30,020
12,448
2,860

$921,937
12,448
2,860

477

(477)

(1) Does not include $22.8 million of shares of FHLB and FNBB stock that do not have readily determinable fair values

and are carried at cost.

The following methods and assumptions are used to estimate the fair value of the Company’s financial

assets and liabilities that were accounted for at fair value.

Investment securities - The Company utilizes an independent third party as its principal pricing source for

During 2008 the Company determined that certain of its investment securities had a limited to non-existent

trading market. As a result, the Company transferred investments having a fair value of $31.8 million into
the Level 3 fair value hierarchy. The following is a description of those investment securities and the fair
value methodology used for such securities.

Corporate and Other Bonds - The trading markets for two of its investment securities with a combined
fair value at December 31, 2008 of $7.6 million were determined to be “not active” based on the limited
number of trades, small block sizes, and the significant spreads between the bid and ask price. Accordingly,
the Company developed an internal model for pricing these securities based on the present value of
expected cash flows of the instruments at an appropriate risk-adjusted discount rate. In developing the
appropriate risk-adjusted discount rate, the Company considers the change in interest rate spreads between
comparable maturities of similarly rated bonds and U.S. Treasuries between the date of purchase and the
measurement date. Additionally, the Company reviews other information such as historical and current
performance of the bond, performances of underlying collateral, if any, deferral or default rates, if any,
cash flow projections, liquidity and credit premiums required by market participants, financial trend
analysis with respect to the individual issuing entities and other factors in determining the appropriate
risk-adjusted discount rates and expected cash flows. Due to current market conditions, the estimated fair
values of these investment securities are highly sensitive to assumption changes and market volatility.

Municipal Bonds - The fair values of certain municipal bonds in the amount of $22.4 million at

December 31, 2008 were calculated using Level 3 hierarchy inputs and assumptions as the trading market
for such securities was determined to be “not active”. This determination was based on the limited number
of trades or, in certain cases, the existence of no reported trades for the bonds, a lack of credit rating for
most of the bonds, and the unique “project” underlying the bond. As a result, management concluded that
pricing these bonds with the pricing matrix for municipal securities utilized by its third party pricing service
did not provide a fair value estimate that incorporated such unique characteristics of these bonds. Accordingly,
management utilized a variety of factors in determining the estimated fair values of the municipal securities.
Among such factors were historical and current performances of the bond and the underlying “project” or
collateral, interest rate spreads between these bonds and other “rated” bonds, liquidity and premium
requirements required by market participants, broker quotes and other factors. Due to current market
conditions, the estimated fair values are subject to significant fluctuations and market volatility.

Impaired loans and leases - Fair values are measured on a nonrecurring basis and are based on the
underlying collateral value of the impaired loan or lease, net of holding and selling costs, or the estimated
discounted cash flows for such loan or lease. In accordance with the provisions of SFAS No. 114, the
Company reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual
loans and leases) by $4.0 million to the estimated fair value of $12.4 million for such loans and leases at
December 31, 2008. The $4.0 million adjustment to reduce the carrying value of impaired loans and leases
to estimated fair value consisted of $3.7 million of partial charge-offs and $0.3 million of specific loan and
lease loss allocations.

Investments in tax credit investments - Fair values are measured on a recurring basis and are based upon
total credits and deductions remaining to be allocated and total estimated credits and deductions to be allocated.

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

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

Investment
Securities
AFS

Investments Derivative Derivative
Liabilities-
IRLC
and FSC

in Tax
Credit
Investments

Assets-
IRLC
and FSC

Balances - January 1, 2008 ...........................................
Total realized gains/(losses) included in earnings ........
Total unrealized gains/(losses) included in other

$ -
(3,016)

1,271
comprehensive income ...........................................
-
Purchases, sales, issuances and settlements, net ..........
Transfers in and/or out of Level 3 ................................
31,765
Balances - December 31, 2008 ..................................... $30,020

(Dollars in thousands)
$ 80
$6,425
397
(735)

-
540
(3,370)
$2,860

-
-
-
$477

$ (80)
(397)

-
-
-
$(477)

17. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of financial instruments.
Cash and due from banks - For these short-term instruments, the carrying amount is a reasonable

estimate of fair value.

Investment securities - The Company utilizes an independent third party as its principal pricing source for

determining fair value. For investment securities traded in an active market, fair values are measured on a
recurring basis and based on quoted market prices if available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest
rate tables and pricing matrices. For investment securities traded in a market that is not active, fair value is
determined using unobservable inputs or value drivers. The Company’s investments in the common stock
of the FHLB and FNBB of $22.8 million at December 31, 2008 and its investments in the common stock of
FHLB and ABB of $16.8 million at December 31, 2007 do not have readily determinable fair values and
are carried at cost.

Loans and leases - The fair value of loans and leases is estimated by discounting the future cash flows
using the current rate at which similar loans or leases would be made to borrowers or lessees with similar
credit ratings and for the same remaining maturities.

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

Repurchase Agreements - For these short-term instruments, the carrying amount is a reasonable estimate

of fair value.

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

Subordinated debentures - The fair values of these instruments are based primarily on the fluctuation

of 90-day LIBOR from the most recent rate set date and year-end.

Derivative assets and liabilities - The fair values of IRLC and FSC derivative assets and liabilities are

based primarily on the fluctuation of interest rates between the date on which the IRLC and FSC were
entered and year-end.

Off-balance sheet instruments - The fair values of commercial loan commitments and letters of credit are

based on fees currently charged to enter into similar agreements, taking into account the remaining terms
of the agreements and were not material at December 31, 2008 and 2007.

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

The following table presents the estimated fair values of the Company’s financial instruments:

2008

2007

Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair Value

(Dollars in thousands)

Financial assets:
Cash and cash equivalents .................................... $ 40,982 $ 40,982
944,783
Investment securities AFS .....................................
944,783
1,982,418
Loans and leases, net of ALLL .............................. 1,991,687
Derivative assets - IRLC and FSC ..........................
477
477
Financial liabilities:
Demand, NOW, savings and money market
account deposits ................................................ $1,038,269 $1,038,269
1,313,996
Time deposits ........................................................ 1,303,145
46,864
46,864
Repurchase agreements with customers ...............
519,517
424,947
Other borrowings ..................................................
64,950
64,950
Subordinated debentures ......................................
477
477
Derivative liabilities - IRLC and FSC .....................

$ 47,521 $ 47,521
578,348
1,841,815
80

578,348
1,851,578
80

$ 679,307 $ 679,307
1,377,836
1,377,754
46,086
46,086
321,514
336,533
64,908
64,950
80
80

18. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:

Cash paid during the period for:

Interest .......................................................................................... $86,591
Income taxes ..................................................................................
15,045
Supplemental schedule of non-cash investing and financing activities:
Loans transfered to foreclosed assets held for sale ........................
Loans advanced for sales of foreclosed assets ...............................
Net change in unrealized gains and losses on
investment securities AFS ........................................................

17,259
2,457

50,539

Year Ended December 31,
2008

2007

2006

(Dollars in thousands)
$97,867
12,917

$82,653
15,415

8,345
1,487

1,504
168

(16,733)

(3,863)

Unsettled AFS investment security trades:

Purchases ...................................................................................
Sales/calls ...................................................................................
Securities received on dissolution of unconsolidated investments ..

14,038
2,525
3,370

-
-
-

19. Other Operating Expenses

The following is a summary of other operating expenses:

Postage and supplies ...................................................... $ 1,633
1,630
Telephone and data lines ................................................
1,204
Advertising and public relations .....................................
1,537
Professional and outside services ...................................
1,261
Software .........................................................................
Other ..............................................................................
8,119
Total other operating expenses .................................. $15,384

2008

2006

Year Ended December 31,
2007
(Dollars in thousands)
$ 1,620
1,415
1,057
1,077
1,201
5,123
$11,493

$ 1,910
1,651
1,545
1,129
1,068
4,551
$11,854

20. Earnings Per Common Share (“EPS”)

The following table sets forth the computation of basic and diluted EPS:

2008

Year Ended December 31,
2007
(In thousands, except per share amounts)
$31,693
$31,746

2006

Numerator:
Net income available to common stockholders ............ $34,474
Denominator:
Denominator for basic EPS—
weighted-average common shares .............................
Effect of dilutive securities—stock options ..................
Denominator for diluted EPS—weighted-average
common shares and assumed conversions ............
16,874
Basic EPS ....................................................................... $ 2.05
Diluted EPS .................................................................... $ 2.04

16,849
25

16,789
45

16,723
80

16,834
$ 1.89
$ 1.89

16,803
$ 1.90
$ 1.89

Options to purchase 464,200 shares, 340,150 shares and 120,750 shares, respectively, of the Company’s

common stock at a weighted-average exercise price of $30.86 per share, $32.62 per share and $34.86 per
share, respectively, were outstanding during 2008, 2007 and 2006, but were not included in the computation
of diluted EPS because the options’ exercise price was greater than the average market price of the common
shares and inclusion would have been antidilutive. Additionally, a warrant for the purchase of 379,811
shares of the Company’s common stock at an exercise price of $29.62 was outstanding at December 31,
2008 (none at December 31, 2007 and 2006) but was not included in the diluted EPS computation as
inclusion would have been antidilutive.

21. Parent Company Financial Information

The following condensed balance sheets, income statements and statements of cash flows reflect the

financial position, results of operations and cash flows for the parent company:

Assets

Condensed Balance Sheets

December 31,

2008
2007
(Dollars in thousands)

$ 20,081
225,816
1,950
-
2,143
2,438
1,855
1,092
1,073
$256,448

Cash .............................................................................................. $ 10,247
367,137
Investment in consolidated bank subsidiary .................................
1,950
Investment in unconsolidated Trusts .............................................
1,724
Investments securities AFS ...........................................................
102
Other investments, net ..................................................................
4,888
Loans ............................................................................................
1,875
Land for future branch site ...........................................................
1,092
Excess cost over fair value of net assets acquired .........................
Other, net ......................................................................................
1,435
Total assets .............................................................................. $390,450
Liabilities and Stockholders’ Equity
Accounts payable and other liabilities ........................................... $ 129 $ 29
453
Accrued interest payable ...............................................................
-
Preferred stock dividends payable .................................................
Income taxes payable ....................................................................
187
64,950
Subordinated debentures ..............................................................
Total liabilities ..........................................................................
65,619
Stockholders’ equity:
71,880
Preferred stock, net of unamortized discount .............................
169
Common stock ............................................................................
43,314
Additional paid-in capital ...........................................................
193,195
Retained earnings ......................................................................
15,624
Accumulated other comprehensive income (loss) ......................
Total stockholders’ equity ........................................................
324,182
Total liabilities and stockholders’ equity ................................ $390,450

-
168
38,613
167,139
(15,091)
190,829
$256,448

374
198
617
64,950
66,268

Condensed Statements of Income

2008

Year Ended December 31,
2007
(Dollars in thousands)

2006

Income:
Dividends from Bank ................................................................
Dividends from Trusts ..............................................................
Interest .....................................................................................
Other ........................................................................................
Total income ...............................................................................
Expenses:
Interest .....................................................................................
Other operating expenses .........................................................
Total expenses ............................................................................
Net income before income tax benefit and
equity in undistributed earnings of Bank .................................
Income tax benefit ......................................................................
Equity in undistributed earnings of Bank ...................................
Net income ..................................................................................
Preferred stock dividends and amortization of
preferred stock discount ...........................................................
Net income available to common stockholders ............................

$14,400
113
183
137
14,833

3,760
2,411
6,171

8,662
2,432
23,607
34,701

$12,600
152
94
180
13,026

5,066
2,072
7,138

5,888
2,814
23,044
31,746

$ 8,300
116
-
374
8,790

3,867
2,108
5,975

2,815
2,296
26,582
31,693

(227)
$34,474

-
$31,746

-
$31,693

Condensed Statements of Cash Flows

Cash flows from operating activities:

Net income ...........................................................................
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Bank ......................
Deferred income tax benefit ...........................................
Compensation expense under stock-based
compensation plans ....................................................
Tax benefits on exercise of stock options .......................
Changes in other assets and other liabilities ..................
Net cash provided by operating activities ...................................
Cash flows from investing activities:

Net increase in loans ............................................................
Proceeds from sales of other investments ............................
Purchase of other investments .............................................
Cash paid for interest in unconsolidated Trusts ...................
Equity contributed to Bank ..................................................
Net cash used by investing activities ..........................................
Cash flows from financing activities:

Proceeds from exercise of stock options ...............................
Proceeds from issuance of subordinated debentures............
Tax benefits on exercise of stock options .............................
Proceeds from issuance of preferred stock
and common stock warrant ...............................................
Preferred stock dividends.....................................................
Common stock dividends .....................................................
Net cash provided (used) by financing activities ........................
Net (decrease) increase in cash ..................................................
Cash - beginning of year .............................................................
Cash - end of year .......................................................................

Year Ended December 31,

2008

2007
(Dollars in thousands)

2006

$34,701

$31,746

$31,693

(23,607)
(330)

(23,044)
(341)

(26,582)
(353)

862
(283)
1,197
12,540

(2,449)
-
-
-
(87,000)
(89,449)

408
-
283

75,000
(198)
(8,418)
67,075
(9,834)
20,081
$10,247

869
(420)
2,013
10,823

(2,438)
2,269
-
-
(16,000)
(16,169)

546
-
420

-
-
(7,216)
(6,250)
(11,596)
31,677
$20,081

865
(880)
(2,522)
2,221

-
-
(1,000)
(619)
(10,000)
(11,619)

824
20,619
880

-
-
(6,684)
15,639
6,241
25,436
$31,677