The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on March 6, 2009, which includes the audited financial statements for the year ended December 31, 2008. Unless the context requires otherwise, the terms "Company", "us", "we", and "our" refer to Home BancShares, Inc. on a consolidated basis. General
We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly owned bank subsidiary. As of September 30, 2009, we had, on a consolidated basis, total assets of $2.63 billion, loans receivable of $1.97 billion, total deposits of $1.78 billion, and stockholders' equity of $446.5 million.
We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income. Deposits are our primary source of funding. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance by calculating our return on average common equity, return on average assets, and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income.

                             Key Financial Measures

                                                      As of or for the Three Months                As of or for the Nine Months
                                                           Ended September 30,                         Ended September 30,
                                                        2009                  2008                  2009                  2008
                                                                    (Dollars in thousands, except per share data)
Total assets                                      $    2,631,736          $ 2,650,590          $   2,631,736          $ 2,650,590
Loans receivable                                       1,971,039            1,967,923              1,971,039            1,967,923
Total deposits                                         1,780,285            1,913,071              1,780,285            1,913,071
Net income                                                 7,239                6,564                 18,925               19,496
Net income available to common stockholders                6,569                6,564                 17,019               19,496
Basic earnings per common share                             0.32                 0.32                   0.85                 0.98
Diluted earnings per common share                           0.32                 0.32                   0.84                 0.96
Diluted cash earnings per common share (1)                  0.33                 0.34                   0.88                 1.00
Annualized net interest margin - FTE                        4.26 %               3.82 %                 4.09 %               3.83 %
Efficiency ratio                                           51.44                59.25                  58.67                57.95
Annualized return on average assets                         1.12                 1.00                   0.98                 1.01
Annualized return on average common equity                  8.46                 9.02                   7.69                 9.09

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

Overview
Results of Operations for Three Months Ended September 30, 2009 and 2008 Our net income increased 10.3% to $7.2 million for the three-month period ended September 30, 2009, from $6.6 million for the same period in 2008. On a diluted earnings per share basis, our earnings were $0.32 for the three-month periods ended September 30, 2009 and 2008. The $675,000 increase in net income is primarily associated with a 44 basis point increase in net interest margin, reduced salaries and employee benefits, an improvement in service charges on deposits and reduced accounting fees offset by the higher provision for loan losses, recurring FDIC and state assessment fees and lower mortgage lending income.
Our annualized return on average assets was 1.12% for the three months ended September 30, 2009, compared to 1.00% for the same period in 2008. Our annualized return on average common equity was 8.46% for the three months ended September 30, 2009, compared to 9.02% for the same period in 2008, respectively. The improvements in annualized return on average assets were primarily due to the previously discussed changes in earnings for the three months ended September 30, 2009, compared to the same period in 2008. The decline in the annualized return on average common equity was a result of the additional common equity offset by the improvements in net income.
Our annualized net interest margin, on a fully taxable equivalent basis, was 4.26% for the three months ended September 30, 2009, compared to 3.82% for the same period in 2008. Our ability to improve pricing on our deposits and hold down the decline of interest rates on loans allowed the Company to expand net interest margin by 44 basis points.
Our efficiency ratio was 51.44% for the three months ended September 30, 2009, compared to 59.25% for the same period in 2008. This positive progress was primarily due to our ability to raise net interest margin and the continued improvement of our overall operations.
Results of Operations for Nine Months Ended September 30, 2009 and 2008 Our net income decreased 2.9% to $18.9 million for the nine-month period ended September 30, 2009, from $19.5 million for the same period in 2008. On a diluted earnings per share basis, our net earnings decreased 12.5% to $0.84 for the nine-month period ended September 30, 2009, as compared to $0.96 for the same period in 2008.
During the first nine months of 2009, we incurred merger expenses related to the consolidation of our charters and a special assessment from the FDIC. Excluding the $1.7 million after tax or $0.08 diluted earnings per share negative impact of these two non-core items, core net income and core diluted earnings per common share for the nine-month period ended September 30, 2009 were $20.6 million and $0.92, respectively.
During the first nine months of 2008, we sold our investment in White River Bancshares, conducted an efficiency study and incurred an investment security impairment. Excluding the $2.0 million after tax or $0.10 diluted earnings per share positive combined impact of these three non-core items, core net income and core diluted earnings per common share for the nine-month period ended September 30, 2008 were $17.5 million and $0.86, respectively.
The $3.1 increase in core earnings is primarily associated with a 26 basis point increase in net interest margin, reduced salaries and employee benefits and improving fees in non-interest income offset by the higher provision for loan losses and the recurring increase in FDIC and state assessment fees.
Our annualized return on average assets was 0.98% for the nine months ended September 30, 2009, compared to 1.01% for the same period in 2008. Our annualized return on average common equity was 7.69% for the nine months ended September 30, 2009, compared to 9.09% for the same period in 2008.

Excluding the after tax $1.7 million of non-core expenses in 2009 and the after tax $2.0 million of combined net non-core earnings in 2008, our core return on average assets would have been 1.03% and 0.91% for the nine months ended September 30, 2009 and 2008, respectively. While our core return on average common equity would have been 8.15% and 8.16% for the nine months ended September 30, 2009 and 2008, respectively. The improvements in annualized return on average assets were primarily due to the previously discussed changes in earnings for the three months ended September 30, 2009, compared to the same period in 2008. The decline in the annualized return on average common equity was a result of the additional common equity offset by the improvements in net income.
Our annualized net interest margin, on a fully taxable equivalent basis, was 4.09% for the nine months ended September 30, 2009, compared to 3.83% for the same period in 2008, respectively. Our ability to improve pricing on our deposits and hold down the decline of interest rates on loans allowed the Company to expand net interest margin.
Our efficiency ratio was 58.67% for the nine months ended September 30, 2009, compared to 57.95% for the same period in 2008. Excluding the after tax $1.7 million of non-core expenses in 2009 and the after tax $2.0 million of combined net non-core earnings in 2008, our core efficiency ratio would have been 55.61% and 59.30% for the nine months ended September 30, 2009 and 2008, respectively. This positive progress was primarily due to our ability to raise net interest margin and the continued improvement of our overall operations.
Financial Condition as of and for the Period Ended September 30, 2009 and December 31, 2008
Our total assets as of September 30, 2009 increased $51.6 million, an annualized growth of 2.7%, to $2.63 billion from the $2.58 billion reported as of December 31, 2008. Our loan portfolio increased slightly by $14.8 million, an annualized growth of 1.0%, to $1.97 billion as of September 30, 2009, from $1.96 billion as of December 31, 2008. Stockholders' equity increased $163.5 million to $446.5 million as of September 30, 2009, compared to $283.0 million as of December 31, 2008. The increase in stockholders' equity is primarily associated with the issuance of $50.0 million of preferred stock to the United States Department of Treasury and the net issuance of $93.3 million or 4,950,000 shares of common stock resulting from our recent common stock offering combined with retained earnings for the first nine months of 2009. Excluding the issuance of the $50.0 million of preferred stock and the net issuance of the $93.3 million of common stock, the annualized growth in stockholders equity for the first nine months of 2009 was 9.5%.
As of September 30, 2009, our non-performing loans increased to $34.7 million, or 1.76%, of total loans from $29.9 million, or 1.53%, of total loans as of December 31, 2008. The allowance for loan losses as a percent of non-performing loans decreased to 119% as of September 30, 2009, compared to 135% as of December 31, 2008. The increase in non-performing loans is primarily the result of the continued unfavorable economic conditions, particularly in Florida the market. Non-performing loans in Florida were $24.2 million at September 30, 2009 compared to $17.3 million as of December 31, 2008.
As of September 30, 2009, our non-performing assets increased to $53.9 million, or 2.05%, of total assets from $36.7 million, or 1.42%, of total assets as of December 31, 2008. The increase in non-performing assets is primarily the result of the continued unfavorable economic conditions, particularly in the Florida market. Non-performing assets in Florida were $36.7 million at September 30, 2009 compared to $22.0 million as of December 31, 2008.
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 stockholders' 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. 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 FASB ASC 350, Intangibles - Goodwill and Other 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.
Stock Options. In accordance with FASB ASC 718, Compensation - Stock Compensation and FASB ASC 505-50, Equity-Based Payments to Non-Employees, the fair value of each option award is estimated on the date of grant. The Company recognizes compensation expense for the grant-date fair value of the option award over the vesting period of the award. 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 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. In addition to the consideration given at the time of the merger, the merger agreement provided for additional contingent consideration to Centennial's stockholders of up to a maximum of $4 million, which could be paid in cash or our common stock at the election of the former Centennial accredited stockholders, based upon the 2008 earnings performance. The final contingent consideration was computed and agreed upon in the amount of $3.1 million on March 11, 2009. We paid this amount to the former Centennial stockholders on a pro rata basis on March 12, 2009. All of the former Centennial stockholders elected to receive the contingent consideration in cash. As a result of this transaction, we recorded total goodwill of $15.4 million and a core deposit intangible of $694,000.
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. In the near term, our principal acquisition focus will be to expand our presence in Arkansas and other nearby markets, and in Florida, through pursuing FDIC-assisted acquisition opportunities. 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.
Branches
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 2009, we opened a branch location in the Arkansas community of Heber Springs. Presently, we are evaluating additional opportunities but have no firm commitments for any additional de novo branch locations.
As a result of the evaluation process for cost saving opportunities under the efficiency study, three existing Arkansas branches were closed during the second quarter of 2009. The locations closed were located in New Edinburg, Kingsland and one of our two Heights neighborhood locations in Little Rock.

Charter Consolidation
We have recently combined the charters of our subsidiary banks into a single charter and adopted Centennial Bank as the common name. In the fourth quarter of 2008, First State Bank and Marine Bank consolidated and adopted Centennial Bank as its new name. Community Bank and Bank of Mountain View were completed in the first quarter of 2009, and Twin City Bank and the original Centennial Bank finished the process in June of 2009.
All of our banks now have the same name, logo and charter, allowing for a more customer-friendly banking experience and seamless transactions across our entire banking network. We remain committed, however, to our community banking philosophy and will continue to rely on local community bank boards and management built around experienced bankers with strong local relationships. 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
For Three Months Ended September 30, 2009 and 2008 Our net income increased 10.3% to $7.2 million for the three-month period ended September 30, 2009, from $6.6 million for the same period in 2008. On a diluted earnings per share basis, our earnings were $0.32 for the three-month periods ended September 30, 2009 and 2008. The $675,000 increase in net income is primarily associated with a 44 basis point increase in net interest margin, reduced salaries and employee benefits, an improvement in service charges on deposits and reduced accounting fees offset by the higher provision for loan losses, recurring FDIC and state assessment fees and lower mortgage lending income.
For Nine Months Ended September 30, 2009 and 2008 Our net income decreased 2.9% to $18.9 million for the nine-month period ended September 30, 2009, from $19.5 million for the same period in 2008. On a diluted earnings per share basis, our net earnings decreased 12.5% to $0.84 for the nine-month period ended September 30, 2009, as compared to $0.96 for the same period in 2008.
During the first nine months of 2009, we incurred merger expenses related to the consolidation of our charters and a special assessment from the FDIC. Excluding the $1.7 million after tax or $0.08 diluted earnings per share negative impact of these two non-core items, core net income and core diluted earnings per common share for the nine-month period ended September 30, 2009 were $20.6 million and $0.92, respectively.
During the first nine months of 2008, we sold our investment in White River Bancshares, conducted an efficiency study and incurred an investment security impairment. Excluding the $2.0 million after tax or $0.10 diluted earnings per share positive combined impact of these three non-core items, core net income and core diluted earnings per common share for the nine-month period ended September 30, 2008 were $17.5 million and $0.86, respectively.
The $3.1 increase in core earnings is primarily associated with, a 26 basis point increase in net interest margin, reduced salaries and employee benefits and improving fees in non-interest income offset by the higher provision for loan losses and the recurring increase in FDIC and state assessment fees.

Net Interest Income
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate.
The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Funds rate, which is the cost to banks of immediately available overnight funds, began in 2008 at 4.25%. 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. The rate continued to fall 50 basis points on October 29, 2008 and 75 to 100 basis points to a low of 0.25% to 0% on December 16, 2008.
Net interest income on a fully taxable equivalent basis increased $2.1 million, or 9.2%, to $24.7 million for the three-month period ended September 30, 2009, from $22.6 million for the same period in 2008. This increase in net interest income was the result of a $2.5 million decrease in interest income combined with a $4.6 million decrease in interest expense. The $2.5 million decrease in interest income was primarily the result of the repricing of our earning assets in the declining interest rate environment combined with the lower level of earning assets. The repricing of our earning assets in the declining interest rate environment resulted in a $2.2 million decrease in interest income while the lower level of earning assets resulted in a decrease in interest income of $306,000, for the three-month period ended September 30, 2009. The $4.6 million decrease in interest expense for the three-month period ended September 30, 2009, is primarily the result of our interest bearing liabilities repricing in the declining interest rate environment combined with a reduction in our interest bearing liabilities. The repricing of our interest bearing liabilities in the declining interest rate environment resulted in a $3.9 million decrease in interest expense. The reduction of our interest bearing liabilities resulted in lower interest expense of $760,000.
Net interest income on a fully taxable equivalent basis increased $4.4 million, or 6.5%, to $71.0 million for the nine-month period ended September 30, 2009, from $66.7 million for the same period in 2008. This increase in net interest income was the result of an $11.0 million decrease in interest income combined with a $15.4 million decrease in interest expense. The $11.0 million decrease in interest income was primarily the result of the repricing of our earning assets in the declining interest rate environment offset by a higher level of earning assets. The repricing of our earning assets in the declining interest rate environment resulted in a $12.5 million decrease . . .