Key Financial Measures

                                                                  As of or for the Three Months                        As of or for the Nine Months
                                                                       Ended September 30,                                 Ended September 30,
                                                                 2008                     2007                          2008                       2007
                                                                                      (Dollars in thousands, except per share data)
Total assets                                               $    2,650,590          $       2,267,672            $           2,650,590          $ 2,267,672
Loans receivable                                                1,967,923                  1,560,374                        1,967,923            1,560,374
Total deposits                                                  1,913,071                  1,598,571                        1,913,071            1,598,571
Net income                                                          6,564                      5,228                           19,496               15,050
Basic earnings per share                                             0.32                       0.28                             0.98                 0.81
Diluted earnings per share                                           0.32                       0.28                             0.96                 0.80
Diluted cash earnings per share (1)                                  0.34                       0.29                             1.00                 0.84
Annualized net interest margin - FTE                                 3.82 %                     3.55 %                           3.83 %               3.49 %
Efficiency ratio                                                    59.25                      62.47                            57.95                62.65
Annualized return on average assets                                  1.00                       0.92                             1.01                 0.91
Annualized return on average equity                                  9.02                       8.60                             9.09                 8.48

(1) See Table 16 "Diluted Cash Earnings Per Share" for a reconciliation to GAAP for diluted cash earnings per share.

Overview
Our net income increased 25.6% to $6.6 million for the three-month period ended September 30, 2008, from $5.2 million for the same period in 2007. Our net income increased 29.5% to $19.5 million for the nine-month period ended September 30, 2008, from $15.1 million for the same period in 2007. On a diluted earnings per share basis, our net earnings increased 14.3% to $0.32 for the three-month period ended September 30, 2008, as compared to $0.28 (stock dividend adjusted) for the same period in 2007. On a diluted earnings per share basis, our net earnings increased 20.0% to $0.96 for the nine-month period ended September 30, 2008, as compared to $0.80 (stock dividend adjusted) for the same period in 2007. The third quarter increase in earnings is associated with our acquisition of Centennial Bancshares, Inc., and organic growth of our bank subsidiaries. The year to date increase in earnings is associated with our acquisition of Centennial Bancshares, Inc., a $6.1 million gain on the sale of our investment in White River Bancshares, Inc. and organic growth of our bank subsidiaries offset by the additional provision for loan loss associated with the unfavorable economic conditions, particularly in the Florida market and $458,000 of losses on a foreclosed property of which $380,000 was a owner occupied strip center in Florida, a $2.1 million impairment write down of an investment security and $860,000 of costs associated with an efficiency study.
Our annualized return on average assets was 1.00% and 1.01% for the three and nine months ended September 30, 2008, compared to 0.92% and 0.91% for the same periods in 2007, respectively. Our annualized return on average equity was 9.02% and 9.09% for the three and nine months ended September 30, 2008, compared to 8.60% and 8.48% for the same periods in 2007, respectively. The changes were primarily due to the previously discussed changes in net income for the three and nine months ended September 30, 2008, compared to the same periods in 2007.
Our annualized net interest margin, on a fully taxable equivalent basis, was 3.82% and 3.83% for the three and nine months ended September 30, 2008, compared to 3.55% and 3.49% for the same periods in 2007, respectively. Our strong loan growth which was funded by run off in the investment portfolio and deposit growth combined with our acquisition of Centennial Bancshares, Inc. and improved pricing on our deposits allowed the Company to improve net interest margin.
Our efficiency ratio (calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income) was 59.25% and 57.95% for three and nine months ended September 30, 2008, compared to 62.47% and 62.65% for the same periods in 2007, respectively. These improvements in our efficiency ratio are primarily due to continued improvement of our operations combined with previously discussed changes in net income for the three and nine months ended September 30, 2008, compared to the same periods in 2007.
Our total assets increased $359.0 million, a growth of 15.7%, to $2.65 billion as of September 30, 2008, from $2.29 billion as of December 31, 2007. Our loan portfolio increased $360.9 million, a growth of 22.5%, to $1.97 billion as of September 30, 2008, from $1.61 billion as of December 31, 2007. Shareholders' equity increased $38.0 million, a growth of 15.0%, to $291.0 million as of September 30, 2008, compared to $253.1 million as of December 31, 2007. Asset and loan increases are primarily associated with our acquisition of Centennial Bancshares and organic growth of our bank subsidiaries. During the nine months of 2008 we experienced $214.7 million of organic loan growth. The increase in stockholders' equity was primarily the result of the $24.3 million in additional capital that was issued upon our acquisition of Centennial Bancshares combined with the retained earnings for the nine months.

As of September 30, 2008, our non-performing loans increased to $16.1 million, or 0.82%, of total loans from $3.3 million, or 0.20%, of total loans as of December 31, 2007. The allowance for loan losses as a percent of non-performing loans decreased to 226% as of September 30, 2008, compared to 904% from December 31, 2007. Unfavorable economic conditions in the Florida market increased our non-performing loans by $9.2 million. The remaining increase in non-performing loans is associated with our Arkansas market which includes an increase of $620,000 from our acquisition of Centennial Bancshares, Inc.
As of September 30, 2008, our non-performing assets increased to $29.3 million, or 1.11%, of total assets from $8.4 million, or 0.36%, of total assets as of December 31, 2007. The increase in non-performing assets is primarily the result of the $12.8 million increase in non-performing loans combined with two investment securities with a remaining balance of $3.9 million which were put on non-accrual in the second quarter of 2008 and a $4.3 million increase in foreclosed assets held for sale. Critical Accounting Policies
Overview. We prepare our consolidated financial statements based on the selection of certain accounting policies, generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. Our accounting policies are described in detail in the notes to our consolidated financial statements in Note 1 of the audited consolidated financial statements included in our Form 10-K, filed with the Securities and Exchange Commission.
We consider a policy critical if (i) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate; and (ii) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that the accounting policies most critical to us are those associated with our lending practices, including the accounting for the allowance for loan losses, investments, intangible assets, income taxes and stock options.
Investments. Securities available for sale are reported at fair value with unrealized holding gains and losses reported as a separate component of shareholders' equity and other comprehensive income (loss). Securities that are held as available for sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available for sale.
Loans Receivable and Allowance for Loan Losses. Substantially all of our loans receivable are reported at their outstanding principal balance adjusted for any charge-offs, as it is management's intent to hold them for the foreseeable future or until maturity or payoff, except for mortgage loans held for sale. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding.
The allowance for loan losses is established through a provision for loan losses charged against income. The allowance represents an amount that, in management's judgment, will be adequate to absorb probable credit losses on identifiable loans that may become uncollectible and probable credit losses inherent in the remainder of the loan portfolio. The amounts of provisions for loan losses are based on management's analysis and evaluation of the loan portfolio for identification of problem credits, internal and external factors that may affect collectability, relevant credit exposure, particular risks inherent in different kinds of lending, current collateral values and other relevant factors.

We consider a loan to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms thereof. We apply this policy even if delays or shortfalls in payments are expected to be insignificant. All non-accrual loans and all loans that have been restructured from their original contractual terms are considered impaired loans. The aggregate amount of impaired loans is used in evaluating the adequacy of the allowance for loan losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for loan losses when in the process of collection it appears likely that losses will be realized. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When accrual of interest is discontinued, all unpaid accrued interest is reversed.
Loans are placed on non-accrual status when management believes that the borrower's financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for loan losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.
Intangible Assets. Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles are being amortized over 84 to 114 months on a straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual impairment test of goodwill and core deposit intangibles as required by SFAS No. 142, Goodwill and Other Intangible Assets, in the fourth quarter.
Income Taxes. We use the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Any estimated tax exposure items identified would be considered in a tax contingency reserve. Changes in any tax contingency reserve would be based on specific development, events, or transactions.
We and our subsidiaries file consolidated tax returns. Our subsidiaries provide for income taxes on a separate return basis, and remit to us amounts determined to be currently payable.
Stock Options. Prior to 2006, we elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for employee stock options using the fair value method. Under APB 25, because the exercise price of the options equals the estimated market price of the stock on the issuance date, no compensation expense is recorded. On January 1, 2006, we adopted SFAS No. 123, Share-Based Payment (Revised 2004) which establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods and services, or (ii) incurs liabilities in exchange for goods and services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant.

Acquisitions and Equity Investments
On January 1, 2008, we acquired Centennial Bancshares, Inc., an Arkansas bank holding company. Centennial Bancshares, Inc. owned Centennial Bank, located in Little Rock, Arkansas which had total assets of $234.1 million, loans of $192.8 million and total deposits of $178.8 million on the date of acquisition. The consideration for the merger was $25.4 million, which was paid approximately 4.6%, or $1.2 million in cash and 95.4%, or $24.3 million, in shares of our common stock. In connection with the acquisition, $3.0 million of the purchase price, consisting of $139,000 in cash and 140,456 shares (stock dividend adjusted) of our common stock, was placed in escrow related to possible losses from identified loans and an IRS examination. In the first quarter of 2008, the IRS examination was completed which resulted in $1.0 million of the escrow proceeds being released. The merger further provides for an earn out based upon 2008 earnings of up to a maximum of $4,000,000 which can be paid in cash or our stock at the election of the accredited shareholders. As a result of this transaction, we recorded goodwill of $12.3 million and a core deposit intangible of $694,000.
In January 2005, we purchased 20% of the common stock during the formation of White River Bancshares, Inc. of Fayetteville, Arkansas for $9.1 million. White River Bancshares owns all of the stock of Signature Bank of Arkansas, with branch locations in northwest Arkansas. In January 2006, White River Bancshares issued an additional $15.0 million of common stock. To maintain our 20% ownership, we made an additional investment of $3.0 million in January 2006. During April 2007, White River Bancshares acquired 100% of the stock of Brinkley Bancshares, Inc. in Brinkley, Arkansas. As a result, we made a $2.6 million additional investment in White River Bancshares on June 29, 2007 to maintain our 20% ownership. On March 3, 2008, White River Bancshares repurchased our 20% investment in their company which resulted in a one-time gain of $6.1 million.
In our continuing evaluation of our growth plans for the Company, we believe properly priced bank acquisitions can complement our organic growth and de novo branching growth strategies. The Company's acquisition focus will be to expand in its primary market areas of Arkansas and Florida. We are continually evaluating potential bank acquisitions to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.
De Novo Branching
We intend to continue to open new (commonly referred to de novo) branches in our current markets and in other attractive market areas if opportunities arise. During 2008, we opened branch locations in the Arkansas communities of Morrilton and Cabot. Presently, we are evaluating additional opportunities but have no firm commitments for any additional de novo branch locations. Charter Consolidation
In July 2008, management of Home BancShares, Inc. approved the combining of all six of the Company's individually charted banks into one charter. The six banks will adopt Centennial Bank as their common name.
Assuming regulatory approvals are received; we are projecting name changes to Centennial Bank and charter consolidations will be phased in beginning in late 2008 when First State Bank and Marine Bank will be the first to consolidate and adopt the new name. Community Bank and Bank of Mountain View will follow suit in the first quarter of 2009, and Twin City Bank and the current Centennial Bank will complete the process in the summer of 2009. All of the banks will, at that time, have the same name, logo and charter allowing for a more customer-friendly banking experience and seamless transactions across all of our banks.

This decision is based in part on our continuing efforts to improve efficiency and the results of a study conducted for us by a third party. This structure will improve product and service offerings by the combined banks, plus provide a greater value to customers in pricing and delivery systems across the company. We remain committed to our community banking philosophy and will continue to rely on local management and boards of directors. Holding Company Status
During the second quarter of 2008, we changed from a financial holding company to a bank holding company. Since, we were not utilizing any of the additional permitted activities allowed to our financial holding company status; this will not change any of our current business practices. Results of Operations
Our net income increased 25.6% to $6.6 million for the three-month period ended September 30, 2008, from $5.2 million for the same period in 2007. Our net income increased 29.5% to $19.5 million for the nine-month period ended September 30, 2008, from $15.1 million for the same period in 2007. On a diluted earnings per share basis, our net earnings increased 14.3% to $0.32 for the three-month period ended September 30, 2008, as compared to $0.28 (stock dividend adjusted) for the same period in 2007. On a diluted earnings per share basis, our net earnings increased 20.0% to $0.96 for the nine-month period ended September 30, 2008, as compared to $0.80 (stock dividend adjusted) for the same period in 2007. The third quarter increase in earnings is associated with our acquisition of Centennial Bancshares, Inc., and organic growth of our bank subsidiaries. The year to date increase in earnings is associated with our acquisition of Centennial Bancshares, Inc., a $6.1 million gain on the sale of our investment in White River Bancshares, Inc. and organic growth of our bank subsidiaries offset by the additional provision for loan loss associated with the unfavorable economic conditions, particularly in the Florida market and $458,000 of losses on a foreclosed property of which $380,000 was a owner occupied strip center in Florida, a $2.1 million impairment write down of an investment security and $860,000 of costs associated with an efficiency study.
Net Interest Income
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate.
The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. During 2007, the federal funds rate remained constant 5.25% until September 18, 2007, when the Federal Funds rate was lowered by 50 basis points to 4.75%. The Federal Funds rate decreased another 25 basis points on October 31, 2007 and December 11, 2007. Due to these reductions occurring late in 2007, the impact for the year was minimal. Average interest rates for 2007 reflect the higher interest rate environment that existed until September 18, 2007 when the Federal Funds rate was lowered. Going forward, we will begin to see more of an impact of the decrease in the Federal Funds rate as our earning assets and interest-bearing liabilities begin to reprice. During 2008, the rate decreased by 75 basis points on January 22, 2008, 50 basis points on January 30, 2008, 75 basis points on March 18, 2008, 25 basis points on April 30, 2008 and 50 basis points to a rate of 1.50% as of October 8, 2008.

Net interest income on a fully taxable equivalent basis increased $4.7 million, or 26.0%, to $22.6 million for the three-month period ended September 30, 2008, from $18.0 million for the same period in 2007. This increase in net interest income was the result of a $159,000 decrease in interest income combined with a $4.8 million decrease in interest expense. The $159,000 decrease in interest income was primarily the result of our acquisition of Centennial Bancshares, Inc. and organic growth of our bank subsidiaries offset by the repricing of our earning assets in the declining interest rate environment. The higher level of earning assets resulted in an improvement in interest income of $6.8 million, and our earning assets repricing in the declining interest rate environment resulted in a $7.0 million decrease in interest income for the three-month period ended September 30, 2008. The $4.8 million decrease in interest expense for the three-month period ended September 30, 2008, is primarily the result of our acquisition of Centennial Bancshares, Inc. and organic growth of our bank subsidiaries offset by our interest bearing liabilities repricing in the declining interest rate environment. The higher level of interest-bearing liabilities resulted in additional interest expense of $2.7 million. The repricing of our interest bearing liabilities in the declining interest rate environment resulted in a $7.5 million decrease in interest expense for the three-month period ended September 30, 2008.
Net interest income on a fully taxable equivalent basis increased $14.7 million, or 28.2%, to $66.7 million for the nine-month period ended September 30, 2008, from $52.0 million for the same period in 2007. This increase in net interest income was the result of a $5.7 million increase in interest income combined with a $9.0 million decrease in interest expense. The $5.7 million increase in interest income was primarily the result of our acquisition of Centennial Bancshares, Inc. and organic growth of our bank subsidiaries offset by the repricing of our earning assets in the declining interest rate environment. The higher level of earning assets resulted in an improvement in interest income of $19.7 million, and our earning assets repricing in the declining interest rate environment resulted in a $14.0 million decrease in interest income for the nine-month period ended September 30, 2008. The $9.0 million decrease in interest expense for the nine-month period ended September 30, 2008, is primarily the result of our acquisition of Centennial Bancshares, Inc. and organic growth of our bank subsidiaries offset by our interest bearing liabilities repricing in the declining interest rate environment. The higher level of interest-bearing liabilities resulted in additional interest expense of $8.1 million. The repricing of our interest bearing liabilities in the declining interest rate environment resulted in a $17.1 million decrease in interest expense for the nine-month period ended September 30, 2008.
Net interest margin, on a fully taxable equivalent basis, was 3.82% and 3.83% for the three and nine months ended September 30, 2008 compared to 3.55% and . . .