Table of Contents
A Message to Our Shareholders
A Long-Term Perspective
Our Senior Management Team
Bank of the Ozarks’ Locations
Selected Consolidated Financial Data
Management’s Discussion and Analysis
Summary of Quarterly Results
Company Performance
Report of Management on the Company’s Internal Control
Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements
1
2
5
8
9
10
62
63
64
65
67
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.
To Our Shareholders
We are very pleased to report excellent results
for 2012. Our net income of $77 million reflects
our commitment to three disciplines which have
become hallmarks of our Company: superb net
interest margin, favorable efficiency and excellent
asset quality. Our 2012 net interest margin was
among the best in the industry and resulted from
a profitable deposit mix, favorable yields on our
legacy loan and lease portfolio, an outstanding
yield on our portfolio of loans covered by FDIC
loss share agreements, and our high quality,
good yielding investment portfolio. Our favorable
efficiency ratio in 2012 continued to place us
among the industry’s most efficient banks.
A longstanding commitment to excellent credit
quality was once again apparent in our asset
quality ratios throughout 2012.
On December 31, 2012 we completed our
acquisition of The Citizens Bank in Geneva,
Alabama in a transaction which was immediately
accretive to our book value and tangible book
value per common share and diluted earnings per
common share. This transaction added one office
in south Alabama, which, along with additional
offices added in 2012, gives us a significant
franchise of 117 offices in seven states.
This franchise, our excellent team of bankers
and strong capital position, along with our solid
credit culture, favorable deposit base, essentially
neutral interest rate risk position, abundant
sources of liquidity and proven revenue
generating capabilities, all position us for
further success in 2013.
As you read this annual report, we hope you
will be pleased with our accomplishments in 2012
and share our enthusiasm for the future.
George Gleason
Chairman and Chief Executive Officer
1
A Long-Term Perspective
The record results we achieved in 2012 reflect 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
enhancing efficiency has produced great results. The following graphs provide
a long-term perspective.
Our Company is focused on both growth and profitability. 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
similar rates.
Net Income (Millions)
Earnings Per
Common Share
(Diluted)
$101.3
$77.0
$64.0
$2.94
$31.5
$31.7
$31.7
$34.5
$36.8
$1.88
$2.21
$25.9
$20.2
$14.4
$0.94 $0.94
$0.94
$1.02 $1.09
$0.78
$0.62
$0.46
2002 2003 2004 2005 2006 2007 2008
2009
2010
2011
2012
$2,692
$2,754
$2,346
Loans and Leases,
including Covered Loans
and Purchased
Non-covered
Loans
(Millions)
$1,677
$1,871
$1,371
$1,135
$2,021
$1,904
$909
$718
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Over the past ten
O
y
y
years, we have
achieved compounded
a
annual growth rates
a
o
of 18.3% in net
income and 17.0%
i
in diluted earnings
i
p
p
per common share.
O
Over the past ten
y
years, our loans and
y
leases, including
l
covered loans and
c
purchased non-covered
p
p
loans, have grown at
l
a compounded annual
a
rate of 14.4%.
r
Deposits (Millions)
$3,101
$2,944
$2,541
$2,341
$2,045
$2,057
$2,029
$1,592
$1,380
$1,062
$790
O
Over the past ten
years, our deposits
y
y
have grown at a
h
compounded annual
c
rate of 14.7%.
r
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2
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)
$174.3
$168.7
$118.3
$123.6
$98.7
$77.6
Net interest income has
grown over the last ten
years at a compounded
annual rate of 15.9%.
$68.6
$70.7
$60.6
$48.8
$39.8
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Service Charge Income (Millions)
$19.4
$18.1
$15.2
$12.2
$12.0
$12.4
$9.5
$9.9
$10.2
$7.8
$6.9
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Trust Income (Millions)
$3.4
$3.2
$3.1
$3.5
$2.6
$2.2
$1.9
$1.7
$1.6
$1.5
$0.7
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Mortgage Lending Income (Millions)
$5.5
$5.6
$2.9
$3.3
$3.0
$2.9
$2.7
$2.2
$3.9
$3.3
$3.3
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
3
Income from service
charges on deposit
accounts has grown at
a compounded annual
rate of 10.8% over the
past ten years.
Over the past ten
years, trust income
has grown at a
compounded annual
rate of 16.9%.
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.
Efficiency Ratios
47.9%
47.5%
46.2%
47.1%
43.4%
46.3%
42.3%
37.8%
42.9%
46.6%
41.6%
Over the past decade we have significantly
O
O
i
i
improved our efficiency ratio and have
become one of the nation’s most efficient
b
b
bank holding companies.
b
b
2002 2003 2004 2005 2006 2007
2008
2009
2010
2011
2012
Charge-Off Ratios
2.52%
2.55%
FDIC Insured Financial Institutions
Bank of the Ozarks, Inc.
1.75%
1.55%
1.29%
1.15%*
0.97%
0.78%
0.56%
0.49%
0.39%
0.59%
0.45%
0.81%
0.69%
0.12% 0.24%
0.22% 0.20%
0.10% 0.11%
2002 2003 2004 2005 2006 2007
2008
2009
2010
2011
2012*
0.30%
We consider the net charge-off ratio as the
W
ultimate measure of asset quality. Our net
u
u
charge-off ratio has consistently compared
c
c
favorably with the ratio for all FDIC insured
f
f
institutions as a group.
i
i
Source: Data from the FDIC Quarterly Banking Profile for 3Q12.
Source: Data from the FDIC Quarterly Banking Profile for 3Q12.
*FDIC data for 2012 is annualized September 30, 2012 data.
*FDIC d t
*FDIC data for 2012 is annualized September 30, 2012 data.
30 2012 d t
li d S t
2012 i
b
f
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 recent challenging economic conditions.
Nonperforming Loans
& Leases/Total Loans
& Leases
1.24%
Nonperforming Assets/
Total Assets
3.06%
Loans & Leases Past Due
30 Days Or More/Total Loans
& Leases
2.68%
0.76%
0.75%†
0.70%†
0.57%
0.47%
0.31%
0.34%
0.35%
0.25%
0.43%†
1.72%†
1.17%†
0.81%
0.75%
0.77%
0.76%
1.99%
2.01%†
1.53%†
1.14%
0.73%†
0.36%
0.39%
0.36%
0.24%
0.24%
0.18%
0.57%†
0.60%
0.39%
2002 2003 2004 2005 2006 2007
2008
2009
2010
2011
2012
2002 2003 2004 2005 2006 2007
2008
2009
2010
2011
2012
2002 2003 2004 2005 2006 2007
2008
2009
2010
2011
2012
† Excludes purchased loans not covered by FDIC loss share agreements and loans and/or foreclosed assets covered by FDIC loss share agreements, except for
their inclusion in total assets.
4
Our Senior Management Team
George Gleason Chairman of the Board and Chief Executive Officer
George Gleason has led the Company and its predecessors for 34 years. Mr. Gleason purchased
Bank of Ozark, which then had approximately $28 million of total assets, in 1979. Since then,
the Company has grown roughly 140 times its 1979 size.
Mark Ross Vice Chairman 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,
facilities, technology, human resources, deposit operations, trust services and mortgage banking.
Greg McKinney Chief Financial Officer and Chief Accounting Officer
Greg McKinney joined the Company in 2003 and oversees all accounting, tax, financial reporting,
regulatory reporting, fund management, mergers and acquisitions, investment portfolio and
loan review functions for the Company. Mr. McKinney has 21 years of accounting and financial
reporting experience and is a Certified Public Accountant.
Tyler Vance Chief Banking Officer
Tyler Vance joined the Company in 2006. Mr. Vance was named Chief Banking Officer in 2011 and
oversees a broad range of duties including retail banking, deposit pricing, treasury management,
marketing and training. In addition, he is responsible for oversight of banking operations in Arkansas
and North Texas. He has 16 years of banking experience and is a Certified Public Accountant.
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 29 years of
experience in banking.
Darrel Russell Chief Credit Officer and Chairman of the Loan Committee
Darrel Russell has 32 years of banking experience and has been with the Company since 1983.
Mr. Russell was named Chief Credit Officer in 2011 and is responsible for the Company’s overall
loan production and credit quality. Mr. Russell is also responsible for oversight of the Company’s
loan production office in Charlotte, North Carolina.
Dan Thomas Chief Lending Officer/President, Real Estate Specialties Group
Dan Thomas has 28 years experience in structuring, financing and managing commercial real estate
transactions. He joined Bank of the Ozarks in 2003 and established the Real Estate Specialties
Group, which handles many of the Company’s larger and more complex real estate transactions.
The Real Estate Specialties Group has offices in Dallas and Austin, Texas and Atlanta, Georgia.
Note: George Gleason, Mark Ross, Greg McKinney, Tyler Vance 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.
5
Duane Bickings President, Central Georgia/Florida Division
Duane Bickings has 33 years of banking experience and joined the Company in 2010. As President
of the Central Georgia/Florida Division, Mr. Bickings oversees banking operations in the Company’s
offices in Valdosta (3), Bainbridge (2), Dawsonville (2), Athens, Cairo, Cumming, Lake Park, Marble
Hill, McDonough, Oakwood, Georgia; Bradenton, Ocala and Palmetto, Florida; and Geneva, Alabama.
Barry Brown President, Manatee/Sarasota, Florida Market
Barry Brown joined Bank of the Ozarks in 2010 and has 30 years of banking experience.
Mr. Brown oversees business operations in Manatee County, which includes offices in
Bradenton (2) and Palmetto, Florida.
John Carter President, Little Rock, Arkansas Market
John Carter joined Bank of the Ozarks in 2009 and has 11 years of banking experience.
Mr. Carter oversees business operations in the Company’s nine Little Rock offices.
John Davis President, Northwest Georgia Division
John Davis has 31 years of banking experience and joined the Company in 2005. Mr. Davis
oversees banking operations in the Company’s offices in Cartersville (2), Adairsville, Calhoun,
Dallas, Douglasville, Newnan, Rome, Senoia and Sharpsburg, Georgia.
Larry Dicks President, River Valley Arkansas Division
Larry Dicks has 35 years of banking experience, 27 of those with Bank of the Ozarks.
As President of the River Valley Arkansas Division, Mr. Dicks leads banking operations in the
Company’s offices in Russellville (3), Clarksville (2), Ozark (2), Altus and Paris.
Scott Hastings President, Leasing Division
Scott Hastings joined the Company in 2003 to establish a Leasing Division. Mr. Hastings has
30 years experience in leasing.
Gene Holman President, Mortgage Division
Gene Holman has 39 years of mortgage banking and real estate experience. He joined the
Company in 2004 as President of the Mortgage Division.
Dennis James Director of Mergers and Acquisitions
Dennis James joined the Company in 2005 and has 40 years of experience in finance and
management. Mr. James is responsible for leading the Company’s merger and acquisition activity.
John Jenkins President, North Little Rock, Arkansas Market
John Jenkins joined Bank of the Ozarks in 2009 and has 12 years of banking experience.
Mr. Jenkins oversees business operations in the Company’s North Little Rock (3), Lonoke,
Maumelle and Sherwood offices.
Alan Jessup President, South Central Arkansas Group Market
Alan Jessup joined Bank of the Ozarks in 2008 and has over 20 years of banking experience.
Mr. Jessup oversees business operations in the Company’s South Central Arkansas market,
which includes offices in Benton (3), Hot Springs (3), Bryant, Hot Springs Village and the
Little Rock Otter Creek office.
Rex Kyle President, Trust and Wealth Management Division
Rex Kyle has 34 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.
6
Ross Mallioux President, Benton County and Washington County, Arkansas
Ross Mallioux joined Bank of the Ozarks in 2011 and has 28 years of banking experience.
Mr. Mallioux oversees business operations in Benton County, which includes offices in Rogers (3),
Bella Vista (2) and Bentonville (2); and Washington County, which includes offices in Fayetteville (2)
and Springdale.
Eddie Melton President, Franklin County, Arkansas
Eddie Melton joined Bank of the Ozarks in 1989 and has 23 years of banking experience.
Mr. Melton oversees business operations in Franklin County, which includes offices in
Ozark (2) and Altus.
Gary Miller President, Johnson County, Arkansas
Gary Miller joined Bank of the Ozarks in 2008 and has 40 years of banking experience.
Mr. Miller oversees business operations in Johnson County, which includes two offices
in Clarksville.
Matt Reddin President, Central Arkansas Division
Matt Reddin has 11 years of banking experience and has been with the Company since 2006.
As President of the Central Arkansas Division, Mr. Reddin oversees banking operations in the
Company’s offices in Little Rock (9), Conway (4), Benton (3), Hot Springs (3), North Little Rock (3),
Cabot (2), Mountain Home (2), Bryant, Hot Springs Village, Lonoke, Maumelle and Sherwood.
Paul Oberkirch President, Mobile, Alabama Area Market
Paul Oberkirch joined Bank of the Ozarks in 2012 and has 17 years of banking experience.
Mr. Oberkirch oversees business operations in the Company’s Mobile market, which includes
two offices in Mobile.
Jerome Parrish President, Geneva, Alabama Market
Jerome Parrish joined Bank of the Ozarks in 2012 and has 20 years of banking experience.
Mr. Parrish oversees business operations in the Company’s Geneva market, which includes one
office in Geneva, Alabama.
Frank Posey President, Southern Region Market
Frank Posey joined Bank of the Ozarks in 2011 and has 26 years of banking experience.
Mr. Posey oversees business operations in the Company’s Southern Region Market, which
includes offices in Valdosta (2), Bainbridge (2), Cairo and Lake Park, Georgia; Ocala, Florida;
and Geneva, Alabama.
Scott Shortes President, Western Arkansas Division
Scott Shortes joined Bank of the Ozarks in 2006 and has 22 years of banking experience.
Mr. Shortes oversees business operations in the Company’s Western Arkansas Division, which
includes offices in Fort Smith (3), Van Buren (2), Mulberry and Alma.
Sarah Shaw President, Conway, Arkansas Market
Sarah Shaw joined the Company in 2002 and has 28 years of banking experience. Mrs. Shaw
oversees business operations in the Company’s four Conway offices.
Chris Stringer President, North Texas Division
Chris Stringer has 16 years of experience in banking and joined the Company in 2011.
Mr. Stringer oversees banking operations in the North Texas Division, which includes offices in
Frisco (2), Allen, Carrollton, Keller, Lewisville, Plano, Southlake and The Colony.
Audwin Vaughn President, North Central Arkansas Group Market
Audwin Vaughn joined Bank of the Ozarks in 2009 and has 27 years of banking experience.
Mr. Vaughn oversees business operations in the Company’s Cabot (2) and Mountain Home (2)
offices.
7
Harvey Williams President, Northwest Arkansas Division
Harvey Williams has 33 years of banking experience and joined the Company in 2006. He
leads our Northwest Arkansas Division which consists of offices in Rogers (3), Fayetteville (2),
Bentonville (2), Bella Vista (2), Harrison (2), Bellefonte, Clinton, Jasper, Marshall, Springdale,
Western Grove and Yellville.
Rick Wisdom President, Southwest and Coastal Divisions
Rick Wisdom has 31 years of banking experience and joined the Company in 2004.
Mr. Wisdom oversees banking operations in the Company’s offices in Texarkana, Texas (2);
Mobile, Alabama; Texarkana, Arkansas; Brunswick, Savannah and St. Simons Island, Georgia;
Wilmington, North Carolina and Bluffton, South Carolina.
Cindy V. Wolfe President, Metro Charlotte, North Carolina Market
Cindy Wolfe joined Bank of the Ozarks in 1998 and has 25 years of banking experience.
Mrs. Wolfe has led the Company’s Loan Production Office in Charlotte since 2001 and oversees
business operations in the metro Charlotte market. In 2013, the Company plans to open one
full-service banking office in the Charlotte market.
Bank of the Ozarks’ Locations
At year-end 2012, our franchise included a total of 117 offices in seven states, providing us
substantial capacity and opportunities for growth.
North Carolina
South Carolina
Arkansas
Alabama
Georgia
Texas
Florida
Office Locations
Arkansas
Georgia
Texas
Florida
Alabama
North Carolina
South Carolina
Total
66
28
13
4
3
2
1
117
8
Financial Information
Selected Consolidated Financial Data
2012
Year Ended December 31,
2010
2009
2011
2008
Income statement data:
(Dollars in thousands, except per share amounts)
Interest income ...................................................... $ 195,946 $ 199,169 $ 157,972 $ 165,908 $ 183,003
84,302
21,600
Interest expense .....................................................
98,701
174,346
Net interest income ................................................
19,025
11,745
Provision for loan and lease losses ........................
19,349
62,860
Non-interest income ...............................................
54,398
114,462
Non-interest expense .............................................
227
Preferred stock dividends .......................................
–
34,474
77,044
Net income available to common stockholders .......
30,435
168,734
11,775
117,083
122,531
–
101,321
34,337
123,635
16,000
70,322
87,419
–
64,001
47,585
118,323
44,800
51,051
68,632
6,276
36,826
Common share and per common share data:(1)
Earnings – diluted .................................................. $ 2.21 $ 2.94 $ 1.88 $ 1.09
7.96
Book value .............................................................
Dividends ...............................................................
0.26
Weighted-average diluted shares
outstanding (thousands) ....................................
End of period shares outstanding (thousands) ......
34,090
34,107
34,482
34,464
34,888
35,272
33,800
33,810
12.32
0.37
14.39
0.50
9.39
0.30
$ 1.02
7.48
0.25
33,748
33,728
Balance sheet data at period end:
1,880,483
4,799
806,922
39,169
279,045
Total assets ............................................................ $4,040,207 $3,841,651 $3,273,271 $2,770,811 $3,233,303
2,021,199
2,115,834
Loans and leases ....................................................
–
41,534
Purchased non-covered loans ................................
596,239
Loans covered by FDIC loss share agreements .......
–
29,512
38,738
Allowance for loan and lease losses .......................
FDIC loss share receivable ......................................
–
152,198
Foreclosed assets covered by
FDIC loss share agreements ................................
Investment securities .............................................
Deposits .................................................................
Repurchase agreements with customers .................
Other borrowings ...................................................
Subordinated debentures .......................................
Preferred stock, net of unamortized discount .........
Total common stockholders’ equity ........................
Loan and lease, including covered loans and
purchased non-covered loans, to deposit ratio ....
52,951
494,266
3,101,055
29,550
280,763
64,950
–
507,664
72,907
438,910
2,943,919
32,810
301,847
64,950
–
424,551
31,145
398,698
2,540,753
43,324
282,139
64,950
–
320,355
–
506,678
2,028,994
44,269
342,553
64,950
–
269,028
–
944,783
2,341,414
46,864
424,947
64,950
71,880
252,302
1,851,113
5,316
489,468
40,230
158,137
1,904,104
–
–
39,619
–
92.33%
91.45%
93.84%
88.80%
86.32%
Average balance sheet data:
Total average assets ............................................... $3,779,831 $3,755,291 $2,998,850 $3,002,121 $3,017,707
Total average common stockholders’ equity ...........
213,271
458,595
Average common equity to average assets .............
374,664
296,035
267,768
12.13%
9.98%
8.92%
9.87%
7.07%
Performance ratios:
Return on average assets .......................................
Return on average common stockholders’ equity ....
Net interest margin – FTE ......................................
Efficiency ratio .......................................................
Common stock dividend payout ratio .....................
2.04%
2.70%
2.13%
1.23%
1.14%
16.80
5.91
46.58
22.44
27.04
5.84
41.56
12.50
21.62
5.18
42.86
15.89
13.75
4.80
37.84
23.84
16.16
3.96
42.32
24.42
Asset quality ratios:
Net charge-offs to average loans and leases(2) ........ 0.30%
Nonperforming loans and leases to total
loans and leases(3) ...............................................
Nonperforming assets to total assets(3) ...................
Allowance for loan and lease losses as a percentage of:
Total loans and leases(3) .........................................
Nonperforming loans and leases(3) .........................
1.83%
425%
0.43
0.57
0.69%
0.81%
1.75%
0.45%
0.70
1.17
2.08%
297%
0.75
1.72
2.17%
289%
1.24
3.06
2.08%
168%
0.76
0.81
1.46%
192%
Capital ratios at period end:
Tier 1 leverage .......................................................
Tier 1 risk-based capital .........................................
Total risk-based capital ..........................................
14.40%
18.11
19.36
(1) Adjusted to give effect to 2-for-1 stock split effective August 16, 2011.
(2) Excludes loans covered by FDIC loss share agreements and net charge-offs related to such loans.
(3) Excludes purchased non-covered loans and loans and/or foreclosed assets covered by FDIC loss share agreements, except for their
12.06%
17.67
18.93
11.39%
13.78
15.03
11.88%
16.13
17.39
11.64%
14.21
15.36
inclusion in total assets.
9
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
$77.0 million in 2012, a 24.0% decrease from $101.3 million in 2011. Net income available to common
stockholders in 2010 was $64.0 million. Diluted earnings per common share were $2.21 in 2012, a 24.8%
decrease from $2.94 in 2011. Diluted earnings per common share were $1.88 in 2010.
On August 16, 2011, the Company completed a 2-for-1 stock split in the form of a stock dividend, effected
by issuing one share of common stock for each share of such stock outstanding on August 5, 2011. All share
and per share information in this management’s discussion and analysis of financial condition and results of
operations has been adjusted to give effect to this stock split.
The table below shows total assets, investment securities, loans and leases, purchased loans not covered
by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements (“purchased non-covered loans”),
loans covered by FDIC loss share agreements (“covered loans”), FDIC loss share receivable, deposits, common
stockholders’ equity, net income available to common stockholders, diluted earnings per common share and
book value per common share as of and for the years ended December 31, 2012, 2011 and 2010 and the
percentage of change year over year.
December 31,
2011
(Dollars in thousands, except per share amounts)
2010
2012
494,266
2,115,834
41,534
438,910
1,880,483
4,799
Total assets .......................................... $4,040,207 $3,841,651 $3,273,271
398,698
Investment securities ...........................
1,851,113
Loans and leases ..................................
Purchased non-covered loans ..............
5,316
Loans covered by
FDIC loss share agreements ..............
FDIC loss share receivable ...................
Deposits ...............................................
Common stockholders’ equity ..............
Net income available to
common stockholders .......................
Diluted earnings per common share ....
Book value per common share .............
806,922
279,045
2,943,919
424,551
596,239
152,198
3,101,055
507,664
489,468
158,137
2,540,753
320,355
101,321
2.94
12.32
77,044
2.21
14.39
64,001
1.88
9.39
% Change
2012
2011
from 2011 from 2010
5.2%
12.6
12.5
765.5
(26.1)
(45.5)
5.3
19.6
(24.0)
(24.8)
16.8
17.4%
10.1
1.6
(9.7)
64.9
76.5
15.9
32.5
58.3
56.4
31.2
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, 2012, the Company’s ROA was 2.04% compared with 2.70% in
2011 and 2.13% in 2010. 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, 2012, the Company’s ROE
was 16.80% compared with 27.04% in 2011 and 21.62% in 2010.
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, purchased non-covered loans, covered loans and
investments, and the interest expense incurred on interest bearing liabilities, such as deposits, borrowings
and subordinated debentures. The Company also generates non-interest income, including service charges
on deposit accounts, mortgage lending income, trust income, bank owned life insurance (“BOLI”) income,
accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable, other loss share
income, gains and losses on investment securities and from sales of other assets, and gains on merger and
acquisition transactions.
10
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
this 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 $8.5 million in 2012, $9.0 million in 2011 and $10.0 million in 2010. 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.
2012 compared to 2011
Net interest income for 2012 increased 2.9% to $182.9 million compared to $177.8 million for 2011. Net
interest margin was 5.91% for 2012 compared to 5.84% for 2011. The increase in net interest income was
a result of the improvement in net interest margin, which increased seven basis points (“bps”) for 2012
compared to 2011, and growth in average earning assets which increased 1.7% for 2012 compared to 2011.
The Company’s seven bps increase in net interest margin in 2012 compared to 2011 was primarily due to
a reduction in the ratio of average interest bearing liabilities to average earning assets from 96.4% for 2011
to 89.4% for 2012 and a 26 bps decrease in rates paid on interest bearing liabilities, which were partially
offset by a 23 bps decrease in yield on average earning assets.
The 23 bps decrease in yield on average earning assets for 2012 compared to 2011 was primarily due
to a 32 bps decrease in yield on loans and leases and a 20 bps decrease in yield on tax-exempt investment
securities, partially offset by a 16 bps increase in yield on covered loans and a 28 bps increase in yield on
taxable investment securities. The decrease in yields on the Company’s loan and lease portfolio, the largest
component of the Company’s average earning assets, was primarily attributable to the extremely low interest
rate environment experienced in recent years resulting in new and renewed loans being priced or repriced at
rates below the Company’s yield on its average loan and lease portfolio.
The decline in rates on average interest bearing liabilities was primarily due to the declines in rates on
interest bearing deposits, the largest component of the Company’s interest bearing liabilities. Rates on
interest bearing deposits decreased 32 bps for 2012 compared to 2011. This decrease in the rate on interest
bearing liabilities was principally due to (i) a change in the mix of the Company’s interest bearing deposits
due to growth in the volume of savings and interest bearing transaction accounts resulting in an increase in
the average balance of these deposits to 66.5% of total average interest bearing deposits for 2012 compared
to 60.2% for 2011 and (ii) effectively managing the repricing of both time deposits and savings and interest
bearing transaction deposits which resulted in lower rates paid on deposits as they were renewed or
otherwise repriced.
The Company’s other borrowing sources include (i) repurchase agreements with customers (“repos”),
(ii) other borrowings comprised primarily of Federal Home Loan Bank of Dallas (“FHLB-Dallas”) advances,
and, to a lesser extent, Federal Reserve Bank (“FRB”) borrowings and federal funds purchased, and (iii)
subordinated debentures. The rates on repos decreased 31 bps for 2012 compared to 2011 primarily as a result
of the Company’s efforts to effectively manage the rates on its interest bearing liabilities, including repos.
The rates on the Company’s other borrowings, which consist primarily of fixed rate callable FHLB-Dallas
advances, increased two bps for 2012 compared to 2011. 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, increased 17 bps for 2012 compared to 2011 as a result of an increase in the 90-day LIBOR on
the applicable reset dates during 2012.
The increase in average earning assets of $52 million, or 1.7%, for 2012 compared to 2011 was primarily
due to an increase in the average balance of loans and leases of $135 million, although the year-end balance
increased $235 million, or 12.5%, from $1.88 billion at December 31, 2011 to $2.12 billion at December 31,
2012. This increase in average earnings assets was partially offset by a decrease in the average balance of
covered loans of $63 million for 2012 compared to 2011, although the year-end balance decreased $211
11
million, or 26.1%, from $807 million at December 31, 2011 to $596 million at December 31, 2012. The
Company’s average earning assets were also affected by a decline in the average balance of its investment
securities portfolio which decreased $20 million for 2012 compared to 2011, although the year-end balance
increased $55 million, or 12.6%, from $439 million at December 31, 2011 to $494 million at December 31, 2012.
2011 compared to 2010
Net interest income for 2011 increased 33.0% to $177.8 million compared to $133.6 million for 2010.
Net interest margin was 5.84% for 2011 compared to 5.18% for 2010. The growth in net interest income
was a result of the improvement in net interest margin, which increased 66 bps for 2011 compared to 2010,
and growth in average earning assets which increased 18.0% for 2011 compared to 2010.
The Company’s improvement in net interest margin for 2011 compared to 2010 resulted from a combination
of factors including, among others, an increase in both the volume and yield of the Company’s covered loan
portfolio and reductions in rates paid on all categories of interest bearing liabilities, partially offset by
decreases in yield on the Company’s loan and lease portfolio not covered by FDIC loss share agreements and
the taxable portion of its investment securities portfolio. Even though the yield on the Company’s non-covered
loan and lease portfolio decreased for 2011 compared to 2010, the Company’s spread between yields on such
non-covered loans and leases and rates paid on deposits increased by 25 bps for 2011 compared to 2010.
Yields on earning assets increased 33 bps for 2011 compared to 2010. This increase was primarily the
result of an increase in the yield on covered loans of 77 bps for 2011 compared to 2010, partially offset by a
decrease in yields on non-covered loans and leases of six bps for 2011 compared to 2010 and a decrease in
the yield on the Company’s taxable investment securities portfolio of 176 bps for 2011 compared to 2010.
Rates on interest bearing liabilities decreased 38 bps for 2011 compared to 2010. This decrease was
primarily due to the declines in rates on interest bearing deposits, the largest component of the Company’s
interest bearing liabilities, which decreased 31 bps for 2011 compared to 2010. This decrease in the rate
on interest bearing deposits was principally due to (i) a change in mix of the Company’s interest bearing
deposits as a result of growth in the volume of savings and interest bearing transaction accounts resulting
in an increase in these deposits, which generally pay lower rates than time deposits, to 60.2% of total
interest bearing deposits for 2011 compared to 56.3% for 2010 and (ii) effectively managing the repricing
of both time deposits and savings and interest bearing transaction deposits which resulted in lower rates
paid on deposits as they were renewed or otherwise repriced.
The Company’s other borrowing sources include (i) repos, (ii) other borrowings and (iii) subordinated
debentures. The rates on repos decreased 32 bps for 2011 compared to 2010 primarily as a result of the
Company’s efforts to effectively manage the rates on its interest bearing liabilities, including repos. The rates
on the Company’s other borrowings, which consist primarily of fixed rate callable FHLB-Dallas advances,
decreased 16 bps for 2011 compared to 2010. This decrease in rates for other borrowings was due primarily
to the repayment of $60.0 million of fixed rate, callable FHLB-Dallas advances with a weighted-average
interest rate of 6.25% that were repaid on their maturity dates in May 2010. The rates paid on the Company’s
subordinated debentures, which are tied to a spread over the 90-day LIBOR and reset periodically, decreased
four bps for 2011 compared to 2010.
The increase in average earning assets was due primarily to increases in the Company’s average balance
of covered loans from $218 million for 2010 to $767 million for 2011. The Company made seven FDIC-
assisted acquisitions during 2010 and 2011, resulting in significant increases in its covered loan portfolio.
This increase was partially offset by a decrease in the Company’s average balance of non-covered loans and
leases of $60 million for 2011 compared to 2010. This decrease was due primarily to paydowns and payoffs
of existing loans and leases exceeding originations of non-covered loans and leases in the first half of 2011,
although originations of non-covered loans and leases during the second half of 2011 exceeded paydowns
and payoffs of existing loans and leases. As a result, the Company’s non-covered loans and leases at
December 31, 2011 increased 1.6% compared to December 31, 2010. The Company’s average earning assets
were also affected by changes in its average investment securities portfolio, which decreased $25 million for
2011 compared to 2010, although the Company’s aggregate investment securities portfolio increased 10.1%
from December 31, 2010 to December 31, 2011. In recent years, the Company has generally been a net seller
of investment securities as a result of ongoing evaluations of interest rate risk and to free up capital for
FDIC-assisted acquisitions.
12
The following table sets forth certain information relating to the Company’s net interest income for the
years ended December 31, 2012, 2011 and 2010. 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. The yields
on covered loans consist of accretion of the net present value of expected future cash flows using the effective
yield method over the term of the loans and include late fees. Interest expense and rates on other borrowings
are presented net of interest capitalized on construction projects.
Average Consolidated Balance Sheets and Net Interest Analysis
2012
Average Income/ Yield/
Balance Expense Rate
Year Ended December 31,
2011
Average Income/ Yield/
Balance Expense Rate
(Dollars in thousands)
2010
Average
Income/ Yield/
Balance Expense Rate
ASSETS
Earning assets:
Interest earning deposits
and federal funds sold ............ $ 1,078 $ 8 0.74% $ 1,609 $ 36 2.24% $ 1,230 $ 18 1.50%
Investment securities:
88,182
Taxable .................................
335,784
Tax-exempt – FTE .................
1,965,612
Loans and leases – FTE .............
704,283
Covered loans ...........................
3,094,939
Total earning assets – FTE ...
684,892
Non-interest earning assets ........
Total assets ..................... $3,779,831
98,270
345,454
1,830,779
767,079
3,043,191
712,100
$3,755,291
85,554
383,433
1,890,357
218,274
2,578,848
420,002
$2,998,850
2,950 3.35
24,318 7.24
115,386 5.87
61,820 8.78
204,482 6.61
3,013 3.07
25,695 7.44
113,308 6.19
66,135 8.62
208,187 6.84
4,130 4.83
28,512 7.44
118,162 6.25
17,141 7.85
167,963 6.51
2,375,362
8,982 0.38
438,030
569,428
476,748
392,671
351,002
444,451
4,032 0.92
5,357 0.94
1,867 0.53
2,536 0.57
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest
bearing transaction ............ $1,579,909 $ 4,579 0.29% $1,524,082 $ 8,297 0.54% $1,121,528 $ 8,735 0.78%
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 ...................
Common stockholders’ equity .....
Noncontrolling interest ...............
Total liabilities and
stockholders’ equity ..... $3,779,831
Net interest income – FTE ...........
Net interest margin – FTE ...........
174 0.44
10,835 3.66(1)
1,740 2.68
380 0.76
12,146 3.82(1)
1,764 2.72
58,746
3,317,811
458,595
3,425
18,940
2,699,378
296,035
3,437
52,102
3,377,205
374,664
3,422
10,723 3.68(1)
1,848 2.85
39,638
296,195
64,950
49,835
317,796
64,950
34,776
291,678
64,950
5,829 1.22
5,483 1.40
21,600 0.78
30,435 1.04
17,686 0.70
34,337 1.42
20,047 1.01
$3,755,291
$2,998,850
2,531,540
2,766,766
1,990,947
2,423,528
2,932,323
$177,752
$182,882
$133,626
47 0.13
392,780
256,910
492,299
5.91%
5.84%
5.18%
(1) The interest expense and rates for other borrowings were impacted by interest capitalized on construction projects in
the amount of $0.1 million during each of the years of 2012, 2011 and 2010. In the absence of this capitalization,
these rates would have been 3.70%, 3.68% and 3.87% for 2012, 2011 and 2010, respectively.
13
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 – FTE, interest expense
and net interest income – FTE 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
2012 over 2011
Yield/
Rate
Net
Change
Volume
2011 over 2010
Yield/
Rate
Net
Change
Volume
(Dollars in thousands)
Increase (decrease) in:
Interest income – FTE:
Interest earning deposits
and federal funds sold ............................
Investment securities:
Taxable ...................................................
Tax-exempt – FTE ....................................
Loans and leases – FTE ..............................
Covered loans ...........................................
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 in net interest income – FTE ...............
Non-Interest Income
$ (4) $ (24) $ (28)
$ 9
$ 9
$ 18
(337)
(701)
7,915
(5,512)
1,361
162
(463)
(713)
(7)
(166)
–
(1,187)
$2,548
274
(63)
(676) (1,377)
2,078
(5,837)
1,197
(4,315)
(5,066) (3,705)
390
(2,825)
(3,687)
47,316
41,203
(1,507)
8
(1,167)
1,678
(979)
(1,117)
(2,817)
(4,854)
48,994
40,224
(3,880) (3,718)
(1,702) (2,165)
(2,108) (2,821)
(127)
(112)
108
(7,648) (8,835)
$ 2,582 $5,130
(120)
54
108
2,192
(356)
1,663
(45)
(790)
–
2,664
$38,539
(438)
(2,630)
(1,797)
(1,441)
(126)
(1,789)
(206)
(161)
(1,311)
(521)
(24)
(24)
(6,566)
(3,902)
$5,587 $44,126
The Company’s non-interest income consists primarily of service charges on deposit accounts, mortgage
lending income, trust income, BOLI income, accretion of FDIC loss share receivable, net of amortization of
FDIC clawback payable, other loss share income, net gains on investment securities, gains on sales of other
assets and gains on merger and acquisition transactions.
2012 compared to 2011
Non-interest income for 2012 decreased 46.3% to $62.9 million compared to $117.1 million for 2011.
Non-interest income for 2012 included $2.4 million of bargain purchase gain on the Company’s acquisition
of Genala Banc, Inc. (“Genala”). Non-interest income for 2011 included $65.7 million of bargain purchase
gains recorded on three FDIC-assisted acquisitions.
Service charges on deposit accounts increased 7.2% to $19.4 million in 2012 compared to $18.1 million in
2011. This increase was due to a number of factors including growth in the number of transaction accounts,
the addition of deposit customers from the Company’s FDIC-assisted acquisitions and increased customer
utilization of fee-based services. The Company’s non-CD account deposits increased from 68.8% of total
deposits at December 31, 2011 to 74.8% of total deposits at December 31, 2012.
Mortgage lending income increased 70.4% to $5.6 million in 2012 compared to $3.3 million in 2011.
This increase was due primarily to increased volume and was primarily attributable to historically low
mortgage rates and the expansion of mortgage services into certain of the Company’s newer offices and
markets. Originations of mortgage loans for sale, including both originations for home purchases and
refinancings of existing mortgages, increased 64.1% to $253.0 million in 2012 compared to $154.2 million
in 2011. Mortgage originations for home purchases were 37% of 2012 origination volume compared to
44% in 2011. Refinancing of existing mortgages accounted for 63% of 2012 origination volume compared
to 56% in 2011.
14
Trust income increased 7.8% to $3.5 million in 2012 compared to $3.2 million in 2011. This increase was
primarily due to increases in employee benefit and personal trust business.
BOLI income increased 19.9% to $2.8 million in 2012 compared to $2.3 million in 2011 primarily due to
$59 million of additional BOLI purchased during October and November of 2012.
Net gains on investment securities were $0.5 million in 2012, which included gains of $3.1 million from the
sale of approximately $40 million of investment securities and an impairment charge of $2.6 million, compared
to net gains of $0.9 million from the sale of approximately $94 million of its investment securities in 2011.
The Company owns three different maturities of bonds totaling an aggregate of $2.6 million issued by the
Northwest Arkansas Regional Solid Waste Management District (“District”). The District owns and operates
a landfill for the benefit of the residents of certain counties located in north Arkansas, with the landfill, the
revenues therefrom and certain personal property serving as collateral under the bond indenture. On October
9, 2012, a special election was held where an additional 3/8-cent sales tax proposal to be used to support
the purchase of the landfill by a third party from the District was defeated. On October 23, 2012, the
management board governing the District voted to place the District into receivership, and on November 30,
2012 the landfill ceased operations. As a result, during the fourth quarter of 2012, the Company recorded a
$2.6 million impairment charge to reduce the carrying value of the bonds to zero. This impairment charge
is included in “Net gains on investment securities,” in the accompanying consolidated statements of income.
Gains on sales of other assets were $6.8 million in 2012 compared to $3.7 million in 2011. The gains
on sales of other assets for both 2012 and 2011 were primarily due to gains on sales of foreclosed assets
covered by FDIC loss share agreements, or covered foreclosed assets. Because the estimated fair value of
acquired covered foreclosed assets includes a net present value component, which is not accreted into income
over the expected holding period of the covered foreclosed assets, the sale of covered foreclosed assets has
typically resulted in gains on such sales.
The Company recognized $7.4 million of income from the accretion of the FDIC loss share receivable,
net of amortization of the FDIC clawback payable, during 2012 compared to $10.1 million during 2011.
The FDIC loss share receivable reflects the indemnification provided by the FDIC in FDIC-assisted acquisitions.
The FDIC clawback payable represents the obligation of the Company to reimburse the FDIC should actual
losses be less than certain thresholds established in each loss share agreement. The FDIC loss share
receivable and the FDIC clawback payable are both carried at net present value.
As the Company collects payments in future periods from the FDIC under the loss share agreements, the
balance of the FDIC loss share receivable, absent any significant revisions of the amounts expected to be
collected under the loss share agreements, will decline, resulting in a corresponding decrease in the accretion
of the FDIC loss share receivable. Because any amounts due under the FDIC clawback payable are due at the
conclusion of the loss share agreements, absent any significant revision of the amounts expected to be paid
to the FDIC under the clawback provisions of the loss share agreements, the amortization of this liability is
not expected to change significantly over the next several years.
Other loss share income, net, was $10.6 million in 2012 compared to $6.4 million in 2011. Other loss
share income, net, consists primarily of income recognized on covered loan prepayments and payoffs that
are not considered yield adjustments, net of any adjustment to the related FDIC loss share receivable.
On December 31, 2012, the Company completed its acquisition of Genala whereby Genala merged with
and into the Company in a transaction valued at approximately $27.5 million. The Company paid $13.4
million of cash and issued 423,616 shares of its common stock valued at approximately $14.1 million in
exchange for all outstanding shares of Genala common stock. Genala was the holding company for The
Citizens Bank, which operated one banking office in Geneva, Alabama. This acquisition resulted in the
Company recognizing a bargain purchase gain of $2.4 million during the fourth quarter of 2012.
Management has up to 12 months following the date of the acquisition to finalize the fair values of
acquired assets and assumed liabilities. Once management has finalized the fair values of acquired assets
and assumed liabilities within this 12-month period, management considers such values to be the day 1
fair values (“Day 1 Fair Values”). An analysis of the assets acquired and liabilities assumed and a detailed
discussion of the Day 1 Fair Values adjustments, as well as the key factors and methodologies utilized to
determine the estimated Day 1 Fair Values of assets acquired and liabilities assumed and the resulting
bargain purchase gain for the Genala acquisition completed in 2012 and for each of the Company’s three
FDIC–assisted acquisitions completed in 2011 is included in footnote 2 to the Notes to the Consolidated
Financial Statements.
15
2011 compared to 2010
Non-interest income for 2011 increased 66.5% to $117.1 million compared to $70.3 million for 2010.
The increase in non-interest income for 2011 compared to 2010 is due primarily to $65.7 million of bargain
purchase gains recorded on three FDIC-assisted acquisitions during 2011 compared to $35.0 million of
bargain purchase gains recorded on four FDIC-assisted acquisitions during 2010.
Service charges on deposit accounts increased 19.4% to $18.1 million in 2011 compared to $15.2 million in
2010. This increase was due to a number of factors including growth in the number of transaction accounts,
including the addition of deposit customers from the Company’s seven FDIC-assisted acquisitions during
2011 and 2010, increased customer utilization of fee-based services and increases in certain fees. The
Company’s non-CD account deposits increased from 62.9% of total deposits at December 31, 2010 to 68.8%
of total deposits at December 31, 2011.
Mortgage lending income decreased 15.2% to $3.3 million in 2011 compared to $3.9 million in 2010.
This decrease was due primarily to decreased volume. Originations of mortgage loans for sale, including both
originations for home purchases and refinancings of existing mortgages, decreased 18.0% to $154.2 million
in 2011 compared to $188.1 million in 2010. Mortgage originations for home purchases were 44% of 2011
origination volume compared to 38% in 2010. Refinancing of existing mortgages accounted for 56% of 2011
origination volume compared to 62% in 2010.
Trust income decreased 5.9% to $3.2 million in 2011 compared to $3.4 million in 2010. This decrease
was primarily due to a decline in corporate trust income earned for services provided in connection with new
municipal bond issues, partially offset by increases in employee benefit and personal trust business.
BOLI income increased 7.3% to $2.3 million in 2011 compared to $2.2 million in 2010 primarily due to
$10.2 million of additional BOLI purchased during May 2010.
Net gains on investment securities were $0.9 million in 2011 compared to $4.5 million in 2010. The
Company sold approximately $94 million of its investment securities in 2011 and approximately $251
million of its investment securities in 2010.
Net gains on sales of other assets were $3.7 million in 2011 compared to $0.8 million in 2010. The
increases in net gains on sales of other assets was primarily due to net gains on sales of foreclosed assets
covered by FDIC loss share agreements, or covered foreclosed assets.
The Company recognized $10.1 million of income from the accretion of the FDIC loss share receivable,
net of amortization of the FDIC clawback payable, during 2011 compared to $2.4 million during 2010. The
accretion of the FDIC loss share receivable, net of amortization of the FDIC clawback payable, increased in
2011 compared to 2010 primarily due to the Company having entered into seven FDIC-assisted acquisitions
as of December 31, 2011 compared to four FDIC-assisted acquisitions as of December 31, 2010, resulting in
the significant increase in the FDIC loss share receivable.
Other loss share income, net, was $6.4 million in 2011 compared to $0.6 million in 2010.
During 2011, the Company made three FDIC-assisted acquisitions which resulted in bargain purchase
gains totaling $65.7 million. Specifically, on January 14, 2011 the Company, through the Bank, entered
into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which
it acquired substantially all of the assets and assumed substantially all of the deposits and certain other
liabilities of the former Oglethorpe Bank (“Oglethorpe”). This FDIC-assisted acquisition resulted in the
Company recognizing a pre-tax bargain purchase gain of $3.0 million in the first quarter of 2011. On
April 29, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with
loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and
assumed substantially all of the deposits and certain other liabilities of the former First Choice Community
Bank (“First Choice”). This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain
purchase gain of $2.9 million in the second quarter of 2011. On April 29, 2011 the Company, through the
Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC
pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and
certain other liabilities of the former The Park Avenue Bank (“Park Avenue”). This FDIC-assisted acquisition
resulted in the Company recognizing a pre-tax bargain purchase gain of $59.8 million in the second quarter
of 2011.
16
The following table presents non-interest income for the years ended December 31, 2012, 2011 and 2010.
Non-Interest Income
Year Ended December 31,
Service charges on deposit accounts ...................................................
Mortgage lending income ....................................................................
Trust income .......................................................................................
Bank owned life insurance income .....................................................
Accretion of FDIC loss share receivable,
net of amortization of FDIC clawback payable .................................
Other loss share income, net ...............................................................
Net gains on investment securities .....................................................
Gains on sales of other assets .............................................................
Gains on merger and acquisition transactions ....................................
Other ...................................................................................................
Total non-interest income .............................................................
Non-Interest Expense
2012
2011
(Dollars in thousands)
$ 18,094
3,277
3,206
2,307
$19,400
5,584
3,455
2,767
7,375
10,645
457
6,809
2,403
3,965
$62,860
10,141
6,432
933
3,738
65,708
3,247
$117,083
2010
$15,156
3,863
3,406
2,151
2,429
599
4,544
802
35,019
2,353
$70,322
Non-interest expense consists of salaries and employee benefits, net occupancy and equipment expense
and other operating expenses.
2012 compared to 2011
Non-interest expense for 2012 decreased 6.6% to $114.5 million compared to $122.5 million for 2011.
The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income FTE and
non-interest income) for 2012 was 46.6% compared to 41.6% for 2011.
Salaries and employee benefits, the Company’s largest component of non-interest expense, increased 4.9%
to $59.0 million in 2012 from $56.3 million in 2011. The Company had 1,120 full-time equivalent employees
at December 31, 2012, an increase of 3.3% from 1,084 full-time equivalent employees at December 31, 2011.
Net occupancy and equipment expense for 2012 increased 7.4% to $15.8 million in 2012 compared to
$14.7 million in 2011. At December 31, 2012, the Company had 117 offices, including 66 in Arkansas, 28 in
Georgia, 13 in Texas, four in Florida, three in Alabama, two in North Carolina, and one in South Carolina.
At December 31, 2011, the Company had 111 offices, including 66 in Arkansas, 27 in Georgia, ten in Texas,
four in Florida, two in North Carolina, and one each in South Carolina and Alabama.
Other operating expenses for 2012 decreased 23.1% to $39.6 million in 2012 compared to $51.6 million
in 2011, primarily as a result of the items described in the following paragraph.
The decrease in non-interest expense in 2012 was primarily attributable to (i) $0.6 million of expenses
related to acquisition and conversion costs incurred in 2012 for the Genala acquisition compared to $6.3
million of acquisition and conversion costs incurred in 2011 related to the Company’s FDIC-assisted
acquisitions, (ii) $1.7 million of writedowns of foreclosed assets not covered by FDIC loss share agreements
in 2012 compared to $9.5 million in 2011, (iii) $6.1 million of loan collection and repossession expenses in
2012 compared to $7.9 million in 2011, (iv) $2.7 million of expenses for travel and meals in 2012 compared
to $3.5 million in 2011, and (v) a $1.25 million impairment charge on the Company’s only equity investment
in a real estate development project during the second quarter of 2011. There was no impairment charge
related to this investment in 2012.
2011 compared to 2010
Non-interest expense for 2011 increased 40.2% to $122.5 million compared to $87.4 million for 2010.
The Company’s efficiency ratio for 2011 was 41.6% compared to 42.9% for 2010.
Salaries and employee benefits increased 40.1% to $56.3 million in 2011 from $40.2 million in 2010.
The Company had 1,084 full-time equivalent employees at December 31, 2011, an increase of 23.0% from
881 full-time equivalent employees at December 31, 2010. This increase in full-time equivalent employees
was due primarily to the Company’s three FDIC-assisted acquisitions during 2011.
17
Net occupancy and equipment expense increased 38.5% to $14.7 million in 2011 compared to $10.6
million in 2010. At December 31, 2011, the Company had 111 offices, including 66 in Arkansas, 27 in
Georgia, ten in Texas, four in Florida, two in North Carolina, and one each in South Carolina and Alabama.
At December 31, 2010, the Company had 90 offices, including 66 in Arkansas, ten in Georgia, seven in
Texas, three in Florida, two in North Carolina, and one each in South Carolina and Alabama.
Other operating expenses for 2011 increased 40.7% to $51.6 million compared to $36.6 million in 2010,
primarily as a result of the items described in the following paragraph.
The increase in non-interest expense in 2011 was primarily attributable to (i) $6.3 million of acquisition
and conversion costs related to the Company’s FDIC-assisted acquisitions compared to $3.8 million of such
costs in 2010, (ii) $7.9 million of loan collection and repossession expenses in 2011 compared to $4.0 million
in 2010, (iii) $3.5 million of expenses for travel and meals in 2011 compared to $1.7 million in 2010, (iv)
increased operating expenses associated with having more offices in 2011 compared to 2010 and (v) a $1.25
million impairment charge on the Company’s equity investment in a real estate development project during
the second quarter of 2011. There was no impairment charge related to this investment in 2010.
The following table presents non-interest expense for the years ended December 31, 2012, 2011 and 2010.
Non-Interest Expense
2012
Year Ended December 31,
2011
(Dollars in thousands)
$ 56,262
14,705
2010
$40,161
10,618
Salaries and employee benefits ............................................... $ 59,028
Net occupancy and equipment expense ...................................
15,793
Other operating expenses:
Postage and supplies ..........................................................
Telephone and data lines ....................................................
Advertising and public relations .........................................
Professional and outside services .......................................
Software expense ................................................................
Travel and meals .................................................................
FDIC and state assessments ................................................
FDIC insurance ...................................................................
ATM expense ......................................................................
Loan collection and repossession expense ..........................
Writedowns of foreclosed assets not covered by
1,713
FDIC loss share agreements .............................................
2,037
Amortization of intangibles ................................................
Other ..................................................................................
5,648
Total non-interest expense ............................................ $114,462
3,195
3,374
4,089
4,401
3,265
2,705
703
1,505
871
6,135
3,091
3,049
3,571
4,822
3,082
3,488
719
2,155
1,022
7,873
1,981
2,110
2,076
3,024
2,657
1,726
678
3,238
881
4,001
9,525
1,677
7,490
$122,531
8,960
431
4,877
$87,419
Income Taxes
The Company’s provision for income taxes was $33.9 million in 2012 compared to $50.2 million in 2011
and $26.6 million in 2010. Its effective income tax rates were 30.57%, 33.14% and 29.40%, respectively,
for 2012, 2011 and 2010. The decrease in the Company’s effective tax rate of 256 bps in 2012 compared
to 2011 was due primarily to the decrease in taxable income, both in volume and as a percentage of total
income, resulting in a higher percentage of the Company’s total income comprised of tax-exempt income.
The increase in the Company’s effective tax rate of 374 bps for 2011 compared to 2010 was due primarily
to the increase in taxable income and the decrease, both in volume and as a percentage of total income, of
tax-exempt income. The effective tax rates for all periods were also affected by various other factors
including other non-taxable income and non-deductible expenses.
18
Analysis of Financial Condition
Loan and Lease Portfolio
At December 31, 2012, the Company’s loan and lease portfolio, excluding purchased non-covered loans
and covered loans, was $2.12 billion, an increase of 12.5% from $1.88 billion at December 31, 2011.
As of December 31, 2012, the Company’s loan and lease portfolio, excluding purchased non-covered loans
and covered loans, consisted of 87.5% real estate loans, 7.6% commercial and industrial loans, 1.4% consumer
loans, 3.2% direct financing leases and 0.3% other loans. 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.
The amount and type of loans and leases outstanding, excluding purchased non-covered loans and
covered loans, are reflected in the following table.
Loan and Lease Portfolio
2012
2011
December 31,
2010
(Dollars in thousands)
2009
2008
Real estate:
Residential 1- 4 family .................. $ 272,052
807,906
Non-farm/non-residential .............
578,776
Construction/land development .....
Agricultural ...................................
50,619
141,243
Multifamily residential ..................
Total real estate .......................... 1,850,596
159,804
29,781
68,022
7,631
Total loans and leases ................ $2,115,834
Commercial and industrial ................
Consumer ..........................................
Direct financing leases ......................
Other .................................................
$ 260,402
708,766
478,106
71,158
142,131
1,660,563
120,048
36,161
54,745
8,966
$1,880,483
$ 266,014
678,465
496,737
81,736
103,875
1,626,827
120,038
49,085
42,754
12,409
$1,851,113
$ 282,733
606,880
600,342
86,237
55,860
1,632,052
150,208
63,561
40,353
17,930
$1,904,104
$ 275,281
551,821
694,527
84,432
61,668
1,667,729
206,058
75,015
50,250
22,147
$2,021,199
The amount and percentage of the Company’s loan and lease portfolio, excluding purchased non-covered
loans and covered loans, 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
2012
Amount
%
Arkansas ....................................... $1,048,102
935,593
Texas .............................................
87,859
North Carolina ...............................
40,391
Georgia ..........................................
3,337
Alabama ........................................
461
Florida ...........................................
South Carolina ...............................
91
Total ....................................... $2,115,834 100.0%
49.5%
44.2
4.2
1.9
0.2
–
–
December 31,
2011
Amount
(Dollars in thousands)
%
$1,018,885
788,570
65,733
6,680
371
244
–
$1,880,483 100.0%
54.2%
41.9
3.5
0.4
–
–
–
2010
Amount
%
$1,065,030
685,317
100,766
–
–
–
–
$1,851,113 100.0%
57.5%
37.0
5.5
–
–
–
–
19
The amount and type of the Company’s real estate loans, excluding purchased non-covered loans and
covered loans, at December 31, 2012 based on the metropolitan statistical area (“MSA”) and other
geographic areas in which the principal collateral is located are reflected in the following table. Data for
individual states or MSAs is separately presented when aggregate real estate loans, excluding purchased
non-covered loans and covered loans, in that state or MSA exceed $10 million.
Geographic Distribution of Real Estate Loans
Residential Non–Farm/ Construction/
Non-
Land
1-4
Family
Multifamily
Residential Development Agricultural Residential
(Dollars in thousands)
Total
–
307
16,878
9,254
146
–
1,693
28,278
11,654
5,447
24,315
50,628
7,948
235,406
Arkansas:
Little Rock – North Little Rock –
Conway, AR MSA .......................... $106,037
Fort Smith, AR – OK MSA ................
29,377
Fayetteville – Springdale –
Rogers, AR – MO MSA ..................
Hot Springs, AR MSA ......................
Western Arkansas(1) ........................
Northern Arkansas(2) .......................
All other Arkansas(3) .......................
Total Arkansas ..........................
Texas:
Dallas – Fort Worth –
Arlington, TX MSA .......................
Houston – Sugar Land –
Baytown, TX MSA ........................
San Antonio – New Braunfels,
TX MSA ........................................
Texarkana, TX –
Texarkana, AR MSA .....................
Beaumont – Port Arthur, TX MSA ....
College Station – Bryan, TX 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 ........................
Georgia:
Atlanta – Sandy Springs –
Marietta, GA MSA .........................
All other Georgia(3) ..........................
Total Georgia .............................
Virginia:
Washington – Arlington –
Alexandria, DC – VA – MD –
WV MSA .......................................
All other Virginia(3) ..........................
Total Virginia .............................
California ............................................
Mississippi ..........................................
Boston – Cambridge – Quincy,
MA – MSA ....................................
Tennessee ...........................................
Hartford – West Hartford –
–
East Hartford, CT MSA .................
432
Florida ................................................
–
Baltimore – Townson, MD MSA ..........
613
Missouri .............................................
Oklahoma(4) ........................................
808
All other states(3)(5) .............................
639
Total real estate loans ................ $272,052
–
57
57
232
–
1,147
1,343
2,490
1,010
549
997
–
541
2,556
$206,247
37,325
$111,739
5,524
$ 9,067
3,162
$ 10,058
3,517
$ 443,148
78,905
17,675
10,895
30,703
17,800
11,798
332,443
16,421
7,960
3,532
8,480
2,684
156,340
5,144
–
7,425
20,920
2,762
48,480
3,096
955
1,292
559
162
19,639
53,990
25,257
67,267
98,387
25,354
792,308
151,001
153,463
42,827
41,652
3,273
17,450
6,804
–
–
18,050
221,955
38,087
26,458
10,371
6,201
–
–
34,747
253,513
14,655
34,834
5,494
74,916
54,983
19,715
10,161
29,876
2,268
1,915
4,183
8,190
14,339
21,898
16,236
3,865
898
4,763
25,419
8,639
34,058
40,357
157
–
1,329
–
–
–
616
–
–
–
616
484
–
–
484
–
632
632
–
–
–
–
–
–
–
37,254
358,596
–
15,657
1,441
16,577
18,330
3,770
93,029
4,856
–
6,180
84,479
36,687
24,316
16,723
18,330
58,260
597,391
59,092
61,841
23,042
11,036
143,975
5,516
148
5,664
–
–
–
–
7,935
–
–
30,243
13,182
43,425
27,687
10,611
38,298
48,779
22,431
21,898
18,106
14,693
7,490
9,598
2,992
2,840
46,257
$807,906
–
3,448
1,853
6,502
6,696
14,777
$578,776
–
–
–
407
–
–
$50,619
–
–
–
–
–
3,940
$141,243
14,693
11,370
11,451
10,514
10,344
65,613
$1,850,596
(1) This geographic area includes the following counties in Western Arkansas: Johnson, Logan, Pope and Yell.
(2) This geographic area includes the following counties in Northern Arkansas: Baxter, Boone, Marion, Newton, Searcy and Van Buren.
(3) These geographic areas include all MSA and non-MSA areas that are not separately reported.
(4) This geographic area includes all real estate loans in Oklahoma except loans in Le Flore and Sequoyah counties which are
included in the Fort Smith, AR – OK MSA above.
(5) Includes all states not separately presented above.
20
Excluding purchased non-covered loans and covered loans, the amount and type of non-farm/non-
residential loans, at December 31, 2012 and 2011, and their respective percentage of the total non-farm/
non-residential loan portfolio are reflected in the following table.
Non-Farm/Non-Residential Loans
2012
Amount
December 31,
2011
%
Amount
(Dollars in thousands)
Retail, including shopping centers
and strip centers ................................................... $323,017
42,270
Churches and schools ..............................................
123,534
Office, including medical offices ..............................
38,355
Office warehouse, warehouse and mini-storage ......
8,752
Gasoline stations and convenience stores ................
92,298
Hotels and motels ....................................................
33,421
Restaurants and bars ...............................................
32,950
Manufacturing and industrial facilities ....................
29,501
Nursing homes and assisted living centers ..............
Hospitals, surgery centers and other medical ..........
49,797
Golf courses, entertainment and
recreational facilities .............................................
10,022
23,989
Other non-farm/non-residential ..............................
Total ............................................................ $807,906
40.0%
5.2
15.3
4.7
1.1
11.4
4.1
4.1
3.7
6.2
$274,777
40,929
101,724
60,173
9,627
67,598
33,452
9,362
28,733
48,129
%
38.8%
5.8
14.3
8.5
1.4
9.5
4.7
1.3
4.0
6.8
1.2
3.0
100.0%
12,542
21,720
$708,766
1.8
3.1
100.0%
Excluding purchased non-covered loans and covered loans, the amount and type of construction/land
development loans at December 31, 2012 and 2011, and their respective percentage of the total
construction/land development loan portfolio are reflected in the following table.
Construction/Land Development Loans
2012
Amount
175,929
70,861
Unimproved land ..................................................... $ 89,379
Land development and lots:
1-4 family residential and multifamily .................
Non-residential .....................................................
Construction:
1-4 family residential:
Owner occupied .................................................
Non-owner occupied:
6,218
Pre-sold ..........................................................
32,554
Speculative .....................................................
89,770
Multifamily ...........................................................
Industrial, commercial and other ..........................
100,280
Total ............................................................ $578,776
13,785
December 31,
2011
%
Amount
(Dollars in thousands)
%
15.5%
$ 92,288
19.3%
30.4
12.2
144,550
90,797
30.2
19.0
2.4
10,751
2.2
1.1
5.6
15.5
17.3
100.0%
3,777
34,523
15,605
85,815
$478,106
0.8
7.2
3.3
18.0
100.0%
21
Many of the Company’s construction and development loans provide for the use of interest reserves.
When the Company underwrites construction and development loans, it considers the expected total project
costs, including hard costs such as land, site work and construction costs and soft costs such as architectural
and engineering fees, closing costs, leasing commissions and construction period interest. Based on the total
project costs and other factors, the Company determines the required borrower cash equity contribution and
the maximum amount the Company is willing to loan. In the vast majority of cases, the Company requires
that all of the borrower’s cash equity contribution be contributed prior to any significant loan advances. This
ensures that the borrower’s cash equity required to complete the project will be available for such purposes.
As a result of this practice, the borrower’s cash equity typically goes toward the purchase of the land and
early stage hard costs and soft costs. This results in the Company funding the loan later as the project
progresses, and accordingly, the Company typically funds the majority of the construction period interest
through loan advances. However, when the Company initially determines the borrower’s cash equity
requirement, the Company typically requires the borrower’s cash equity to cover a majority, or all, of the
soft costs, including an amount equal to construction period interest, and an appropriate portion of the hard
costs. During 2012, the Company advanced construction period interest totaling approximately $6.2 million
on construction and development loans. While the Company advanced these sums as part of the funding
process, the Company believes that the borrowers in effect had in most cases already provided for these
sums as part of their initial equity contribution. Specifically, the maximum committed balance of all
construction and development loans which provide for the use of interest reserves at December 31, 2012
was $825 million, of which $401 million was outstanding at December 31, 2012 and $424 million remained
to be advanced. The weighted average loan to cost on such loans, assuming such loans are ultimately fully
advanced, will be approximately 59%, which means that the weighted average cash equity contributed on
such loans, assuming such loans are ultimately fully advanced, will be approximately 41%. The weighted
average final loan to value ratio on such loans, based on the most recent appraisals and assuming such
loans are ultimately fully advanced, is expected to be approximately 53%.
The following table reflects loans and leases, excluding purchased non-covered loans and covered loans,
grouped by remaining maturities at December 31, 2012 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 ............................................................ $456,691
45,936
Commercial and industrial.....................................
8,422
Consumer ..............................................................
3,408
Direct financing leases ..........................................
Other .....................................................................
3,682
Total ............................................................... $518,139
Fixed rate .............................................................. $211,673
2,334
Floating rate (not at a floor or ceiling rate) ............
Floating rate (at floor rate) ....................................
304,132
–
Floating rate (at ceiling rate) .................................
Total ............................................................... $518,139
$1,226,508
111,962
20,059
64,614
3,949
$1,427,092
$ 539,688
67,170
820,234
–
$1,427,092
$167,397
1,906
1,300
–
–
$170,603
$132,250
4,614
33,739
–
$170,603
Total
$1,850,596
159,804
29,781
68,022
7,631
$2,115,834
$ 883,611
74,118
1,158,105
–
$2,115,834
22
The following table reflects loans and leases, excluding purchased non-covered loans and covered loans,
as of December 31, 2012 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
Over 3
Through Through
5 Years
3 Years
(Dollars in thousands)
Over
5 Years
Total
Fixed rate ................................... $ 276,754 $180,614 $118,516 $204,628 $103,099
Floating rate (not at a floor
223
or ceiling rate) .........................
Floating rate (at floor rate)(1) ......
–
–
Floating rate (at ceiling rate) ......
Total ..................................... $1,507,272 $181,494 $118,615 $205,131 $103,322
Percentage of total .....................
Cumulative percentage of total ...
73,419
1,157,099
–
71.2%
71.2
83
420
–
294
586
–
99
–
–
100.0
8.6%
9.7%
5.6%
95.1
79.8
85.4
4.9%
$ 883,611
74,118
1,158,105
–
$2,115,834
100.0%
(1) The Company has included a floor rate in many of its loans and leases. As a result of such floor rates, many loans
and leases will not immediately reprice in a rising rate environment if the interest rate index and margin on such
loans and leases continue to result in a computed interest rate less than the applicable floor rate. The earnings
simulation model results included in the interest rate risk section of this Management’s Discussion and Analysis
include consideration of the impact of all interest rate floors and ceilings in loans and leases.
Purchased Non-Covered Loans
The amount and type of purchased non-covered loans outstanding are reflected in the following table.
Purchased Non-Covered Loan Portfolio
2012
Real estate .................................................................................. $29,283
5,333
Commercial and industrial ..........................................................
4,168
Consumer ....................................................................................
Other ...........................................................................................
2,750
Total ..................................................................................... $41,534
December 31,
2011
(Dollars in thousands)
$ 71
631
4,001
96
$4,799
2010
$ –
–
5,316
–
$5,316
The amount and percentage of the Company’s purchased non-covered loans, by state of originating office,
are reflected in the following table.
Purchased Non-Covered Loans by State of Originating Office
Purchased Non-Covered Loans
Attributable to Offices In
2012
Amount
%
Alabama ........................................
Georgia ..........................................
Florida ...........................................
North Carolina ...............................
South Carolina ...............................
Total ........................................
$39,845
1,231
226
200
32
$41,534
95.9%
3.0
0.5
0.5
0.1
100.0%
December 31,
2011
Amount
(Dollars in thousands)
%
$ 219
3,812
564
175
29
$4,799
4.6%
79.4
11.8
3.6
0.6
100.0%
2010
Amount
%
$ 513
3,472
890
399
42
$5,316
9.7%
65.3
16.7
7.5
0.8
100.0%
Purchased non-covered loans include a small volume of non-covered loans acquired in FDIC-assisted
acquisitions and loans acquired in the Genala acquisition and are initially recorded at fair value on the
date of purchase. Purchased non-covered loans that contain evidence of credit deterioration on the date of
purchase are carried at the net present value of expected future proceeds. All other purchased non-covered
loans are recorded at their initial fair value, adjusted for subsequent advances, pay downs, amortization or
accretion of any premium or discount on purchase, charge-offs and any other adjustment to carrying value.
23
At the time of acquisition of purchased non-covered loans, management individually evaluates substantially
all loans acquired in the transaction. For those purchased loans without evidence of credit deterioration,
management evaluates each reviewed loan using an internal grading system with a grade assigned to each
loan at the date of acquisition. The grade for each purchased non-covered loan is reviewed subsequent to the
date of acquisition any time a loan is renewed or extended or at any time information becomes available to
the Company that provides material insight regarding the loan’s performance, the borrower or the underlying
collateral. To the extent that a loan is performing in accordance with management’s initial expectations, such
loan is not considered impaired and is not considered in the determination of the required allowance for loan
and lease losses. To the extent that current information indicates it is possible that the Company will not be
able to collect all amounts according to the contractual terms thereof, such loan is considered impaired and
is considered in the determination of the required level of allowance for loan and lease losses.
The following grades are used for purchased non-covered loans without evidence of credit deterioration at
the date of purchase.
FV 33 – Loans in this category are considered to be satisfactory with minimal credit risk and are generally
considered collectible.
FV 44 – Loans in this category are considered to be marginally satisfactory with minimal to moderate
credit risk and are generally considered collectible.
FV 55 – Loans in this category exhibit weakness and are considered to have elevated credit risk and
elevated risk of repayment.
FV 36 – Loans in this category were not individually reviewed at the date of purchase and are assumed
to have characteristics similar to the characteristics of the aggregate acquired portfolio.
FV 77 – Loans in this category have deteriorated since the date of purchase and are considered impaired.
In determining the Day 1 Fair Values of purchased non-covered loans without evidence of credit
deterioration at the date of acquisition, management includes (i) no carry over of any previously recorded
allowance for loan losses and (ii) an adjustment of the unpaid principal balance to reflect an appropriate
market rate of interest, given the risk profile and grade assigned to each loan. This adjustment will be
accreted into earnings as an adjustment to the yield on purchased non-covered loans, using the effective
yield method, over the remaining life of each loan.
Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are
accounted for in accordance with the provisions of generally accepted accounting principles (“GAAP”)
applicable to loans acquired with deteriorated credit quality. At the time such purchased non-covered loans
with evidence of credit deterioration are acquired, management individually evaluates each loan to determine
the estimated fair value of each loan. This evaluation includes no carryover of any previously recorded
allowance for loan and lease losses. In determining the estimated fair value of purchased non-covered loans
with evidence of credit deterioration, management considers a number of factors including, among other
things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated
value of the underlying collateral, estimated holding periods, and net present value of cash flows expected
to be received.
In determining the Day 1 Fair Values of purchased non-covered loans with evidence of credit deterioration,
management calculates a non-accretable difference (the credit component of the purchased loans) and an
accretable difference (the yield component of the purchased loans). The non-accretable difference is the
difference between the contractually required payments and the cash flows expected to be collected in
accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected
cash flows will generally result in a provision for loan and lease losses. Subsequent increases in cash flows
will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an
adjustment to accretable yield, which would have a positive impact on interest income.
The accretable difference on purchased non-covered loans with evidence of credit deterioration is the
difference between the expected cash flows and the net present value of expected cash flows. Such difference
is accreted into earnings using the effective yield method over the term of the loans. In determining the net
present value of the expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per
annum depending on the risk characteristics of each individual loan.
24
Management separately monitors purchased non-covered loans with evidence of credit deterioration on
the date of purchase and periodically reviews such loans contained within this portfolio against the factors
and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed
or extended, (ii) at any other time additional information becomes available to the Company that provides
material additional insight regarding the loan’s performance, the status of the borrower, or the quality or
value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows
of each acquired portfolio. Management separately reviews, on an annual basis, the performance of the
portfolio of purchased non-covered loans with evidence of credit deterioration, or more frequently to the
extent that material information becomes available regarding the performance of an individual loan, to
make determinations of the constituent loans’ performance and to consider whether there has been any
significant change in performance since management’s initial expectations established in conjunction with
the determination of the Day 1 Fair Values. To the extent that a loan is performing in accordance with or
exceeding management’s performance expectation established in conjunction with the determination of
the Day 1 Fair Values, such loan is rated FV 66, is not included in any of the credit quality ratios, is not
considered to be a nonaccrual or impaired loan, and is not considered in the determination of the required
allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated from
management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such
loan is rated FV 88, is included in certain of the Company’s credit quality metrics, is generally considered
an impaired loan, and is considered in the determination of the required level of allowance for loan and
lease losses. Any improvement in the expected performance of such loan would result in a reversal of the
provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield,
which would have a positive impact on interest income.
The amount of unpaid principal balance, the valuation discount and the carrying value of purchased non-
covered loans at December 31, 2012, 2011 and 2010 are reflected in the following table.
Purchased Non-Covered Loans
Loans without evidence of credit deterioration
at date of purchase:
Unpaid principal balance ..................................................
Valuation discount ............................................................
Carrying value ..............................................................
Loans with evidence of credit deterioration
at date of purchase:
Unpaid principal balance ..................................................
Valuation discount ............................................................
Carrying value ..............................................................
Total carrying value ..................................................
2012
December 31,
2011
(Dollars in thousands)
$35,800
(1,021)
34,779
$ –
–
–
2010
$ –
–
–
12,171
(5,416)
6,755
$41,534
9,515
(4,716)
4,799
$4,799
7,689
(2,373)
5,316
$5,316
25
The following table presents purchased non-covered loans grouped by remaining maturities at December 31,
2012 by type and by fixed or floating interest rates. This table is based on contractual maturities and does
not reflect amortizations, projected paydowns, the earliest repricing for floating rate loans, accretion or
management’s estimate of projected cash flows. Many loans have principal paydowns scheduled in periods
prior to the period in which they mature, and many variable rate loans are subject to repricing in periods prior
to the period in which they mature. Additionally, because income on purchased non-covered loans with evidence
of credit deterioration on the date of purchase is recognized by accretion of the discount of estimated cash
flows, such loans are not considered to be floating or adjustable rate loans and are reported below as fixed
rate loans.
Purchased Non-Covered Loan Maturities
Real estate ............................................................
Commercial and industrial.....................................
Consumer ..............................................................
Other .....................................................................
Total ...............................................................
Fixed rate ..............................................................
Floating rate ..........................................................
Total ...............................................................
1 Year
or Less
$ 5,817
2,186
2,461
474
$10,938
$ 7,026
3,912
$10,938
Over 1
Through
5 Years
Over
5 Years
(Dollars in thousands)
$14,350
2,489
1,591
2,245
$20,675
$13,703
6,972
$20,675
$9,116
658
116
31
$9,921
$9,591
330
$9,921
Total
$29,283
5,333
4,168
2,750
$41,534
$30,320
11,214
$41,534
On December 31, 2012, the Company completed its acquisition of Genala. On the date of acquisition, Genala’s
outstanding loans were categorized into loans without evidence of credit deterioration and loans with evidence
of credit deterioration. The following table presents the unpaid principal balance, fair value adjustment, Day
1 Fair Value and the weighted-average fair value adjustment applied to the purchased non-covered loans
without evidence of credit deterioration in the Genala transaction, by risk rating, at December 31, 2012.
Fair Value Adjustments for Purchased Non-Covered Loans
Without Evidence of Credit Deterioration in Genala Acquisition
Unpaid
Principal
Balance
Fair
Value
Adjustment
Day 1
Fair
Value
(Dollars in thousands)
Weighted
Average
Fair Value
Adjustment
(in bps)
FV 33 ....................................................................
FV 44 ....................................................................
FV 55 ....................................................................
FV 36 ....................................................................
Total ...............................................................
$ 6,783
12,583
10,650
5,784
$35,800
$ (85)
(222)
(219)
(495)
$(1,021)
$ 6,698
12,361
10,431
5,289
$34,779
126
177
205
855
285
The following table is a summary of the loans acquired in the Genala acquisition with evidence of credit
deterioration.
Fair Value Adjustments for Purchased Non-Covered Loans
With Evidence of Credit Deterioration in Genala Acquistion
Contractually required principal and interest ........
Nonaccretable difference .......................................
Cash flows expected to be collected ......................
Accretable difference ............................................
Day 1 Fair Value ..............................................
December 31, 2012
(Dollars in thousands)
$8,769
(3,263)
5,506
(669)
$4,837
26
Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable
On March 26, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of the former Unity National Bank (“Unity”) in a
FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and are subject to loss share
agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans
and covered foreclosed assets.
On July 16, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of the former Woodlands Bank (“Woodlands”)
in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but a small amount
of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified
against a portion of the losses on covered loans and covered foreclosed assets.
On September 10, 2010, the Company, through the Bank, acquired substantially all of the assets and
assumed substantially all of the deposits and certain other liabilities of the former Horizon Bank (“Horizon”)
in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but a small amount
of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified
against a portion of the losses on covered loans and covered foreclosed assets.
On December 17, 2010, the Company, through the Bank, acquired substantially all of the assets and
assumed substantially all of the deposits and certain other liabilities of the former Chestatee State Bank
(“Chestatee”) in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but
a small amount of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is
indemnified against a portion of the losses on covered loans and covered foreclosed assets.
On January 14, 2011, the Company, through the Bank, acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of Oglethorpe in a FDIC-assisted acquisition. Loans
comprise the majority of the assets acquired and all but a small amount of consumer loans are subject to loss
share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered
loans and covered foreclosed assets.
On April 29, 2011, the Company, through the Bank, acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of First Choice in a FDIC-assisted acquisition.
Loans comprise the majority of the assets acquired and all but a small amount of consumer loans are subject
to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on
covered loans and covered foreclosed assets.
On April 29, 2011, the Company, through the Bank, acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of Park Avenue in a FDIC-assisted acquisition.
Loans comprise the majority of the assets acquired and all but a small amount of consumer loans are subject
to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on
covered loans and covered foreclosed assets.
In conjunction with each of these acquisitions, the Bank entered into loss share agreements with the FDIC
such that the Bank and the FDIC will share in the losses on assets covered under the loss share agreements.
Pursuant to the terms of the loss share agreements for the Unity acquisition, on losses up to $65 million,
the FDIC will reimburse the Bank for 80% of losses. On losses exceeding $65 million, the FDIC will reimburse
the Bank for 95% of losses. Pursuant to the terms of the loss share agreements for the Woodlands, Chestatee,
Oglethorpe and First Choice acquisitions, the FDIC will reimburse the Bank for 80% of losses. Pursuant to the
terms of the loss share agreements for the Horizon acquisition, the FDIC will reimburse the Bank on single
family residential loans and related foreclosed assets for (i) 80% of losses up to $11.8 million, (ii) 30% of
losses between $11.8 million and $17.9 million and (iii) 80% of losses in excess of $17.9 million. For non-
single family residential loans and related foreclosed assets, the FDIC will reimburse the Bank for (i) 80% of
losses up to $32.3 million, (ii) 0% of losses between $32.3 million and $42.8 million and (iii) 80% of losses in
excess of $42.8 million. Pursuant to the terms of the loss share agreements for the Park Avenue acquisition,
the FDIC will reimburse the Bank for (i) 80% of losses up to $218.2 million, (ii) 0% of losses between $218.2
million and $267.5 million and (iii) 80% of losses in excess of $267.5 million.
The loss share agreements applicable to single family residential mortgage loans and related foreclosed
assets provide for FDIC loss sharing and the Bank’s reimbursement to the FDIC for recoveries of covered
losses for ten years from the date on which each applicable loss share agreement was entered. The loss share
27
agreements applicable to commercial loans and related foreclosed assets provide for FDIC loss sharing for
five years from the date on which each applicable loss share agreement was entered and the Bank’s
reimbursement to the FDIC for recoveries of covered losses for an additional three years thereafter.
To the extent that actual losses incurred by the Bank are less than (i) $65 million on the Unity assets
covered under the loss share agreements, (ii) $107 million on the Woodlands assets covered under the loss
share agreements, (iii) $60 million on the Horizon assets covered under the loss share agreements, (iv) $66
million on the Chestatee assets covered under the loss share agreements, (v) $66 million on the Oglethorpe
assets covered under the loss share agreements, (vi) $87 million on the First Choice assets covered under
the loss share agreements and (vii) $269 million on the Park Avenue assets covered under loss share
agreements, the Bank may be required to reimburse the FDIC under the clawback provisions of the loss
share agreements.
The covered loans and covered foreclosed assets and the related FDIC loss share receivable and the FDIC
clawback payable are reported at the net present value of expected future amounts to be paid or received.
A summary of the covered assets, the FDIC loss share receivable and the FDIC clawback payable is as follows:
Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable
December 31,
2012
2011
(Dollars in thousands)
Covered loans .............................................. $596,239
152,198
FDIC loss share receivable ............................
Covered foreclosed assets ............................
52,951
Total ........................................................ $801,388
FDIC clawback payable ................................ $ 25,169
$ 806,922
279,045
72,907
$1,158,874
$ 24,645
Covered Loans
Loans covered by FDIC loss share agreements, or covered loans, are accounted for in accordance with
the provisions of GAAP applicable to loans acquired with deteriorated credit quality and pursuant to the
American Institute of Certified Public Accountants’ (“AICPA”) December 18, 2009 letter in which the AICPA
summarized the Securities and Exchange Commission’s (“SEC”) view regarding the accounting in subsequent
periods for discount accretion associated with non-credit impaired loans acquired in a business combination
or asset purchase. Considering, among other factors, the general lack of adequate underwriting, proper
documentation, appropriate loan structure and insufficient equity contributions for a large number of these
acquired loans, and the uncertainty of the borrowers’ and/or guarantors’ ability or willingness to make
contractually required (or any) principal and interest payments, management has determined that a significant
portion of the loans acquired in FDIC-assisted acquisitions has evidence of credit deterioration since origination.
Accordingly, management has elected to apply the provisions of GAAP applicable to loans acquired with
deteriorated credit quality, as provided by the AICPA’s December 18, 2009 letter, to all loans acquired in its
FDIC-assisted acquisitions.
At the time covered loans are acquired, management individually evaluates substantially all loans acquired
in the transaction. This evaluation allows management to determine the estimated fair value of the covered
loans (not considering any FDIC loss sharing agreements) and includes no carryover of any previously
recorded allowance for loan and lease losses. In determining the estimated fair value of covered loans,
management considers a number of factors including, among other things, the remaining life of the acquired
loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated
holding periods, and net present value of cash flows expected to be received. To the extent that any covered
loan is not specifically reviewed, management applies a loss estimate to that loan based on the average
expected loss rates for the covered loans that were individually reviewed in that loan portfolio.
In determining the Day 1 Fair Values of covered loans, management calculates a non-accretable difference
(the credit component of the covered loans) and an accretable difference (the yield component of the covered
loans). The non-accretable difference is the difference between the contractually required payments and the
cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values.
Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses.
Subsequent increases in cash flows will result in a reversal of the provision for loan and lease losses to the
extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on
28
interest income. Any such increase or decrease in expected cash flows will result in a corresponding decrease
or increase, respectively, of the FDIC loss share receivable for the portion of such reduced or additional loss
expected to be collected from the FDIC.
The accretable difference on covered loans is the difference between the expected cash flows and the
net present value of expected cash flows. Such difference is accreted into earnings using the effective yield
method over the term of the loans. In determining the net present value of the expected cash flows, the
Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics
of each individual loan. At December 31, 2012, the weighted average period during which management
expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment
under the FDIC loss share agreements) is 2.2 years.
Management separately monitors the covered loan portfolio and periodically reviews loans contained
within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan
is typically reviewed (i) when it is modified or extended, (ii) when material information becomes available
to the Company that provides additional insight regarding the loan’s performance, the status of the borrower,
or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected
cash flows which include a substantial portion of each acquired covered loan portfolio. To the extent that
a loan is performing in accordance with management’s expectation established in conjunction with the
determination of the Day 1 Fair Values, such loan is rated FV 1, is not included in any of the Company’s
credit quality ratios, is not considered to be an impaired loan, and is not considered in the determination
of the required allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated
from management’s expectation established in conjunction with the determination of the Day 1 Fair Values,
such loan is rated FV 2, is generally included in certain of the Company’s credit quality metrics, may be
considered an impaired loan, and is considered in the determination of the required level of allowance for
loan and lease losses.
The following table presents a summary, by acquisition, of covered loans acquired as of the dates of
acquisition and activity within covered loans during the periods indicated.
Covered Loans
First
Unity Woodlands Horizon Chestatee Oglethorpe Choice
Park
Avenue
Total
(52,526)
(83,933)
(47,538)
(67,300)
1,255,963
–
7,662
(Dollars in thousands)
(86,876) (124,899)
231,170
(44,692)
155,884
(21,432)
133,985
(22,604)
327,759
(63,462)
173,302
(24,790)
106,810
(25,376)
At acquisition date:
Contractually required
principal and interest ........... $208,410 $315,103 $179,441 $181,523 $174,110 $260,178 $452,658 $1,771,423
Nonaccretable difference ........
(515,460)
(52,388)
Cash flows expected
127,053
to be collected ......................
Accretable difference ..............
(237,601)
(35,245)
Fair value at acquisition date ... $134,452 $186,478 $ 91,808 $111,381 $ 81,434 $148,512 $264,297 $1,018,362
Carrying value
at January 1, 2011 ................... $114,983 $175,720 $ 87,714 $111,051 $ – $ – $ – $ 489,468
494,243
Covered loans acquired ..........
Accretion ...............................
66,135
Transfers to covered
foreclosed assets ..................
Payments received .................
Other activity, net ...................
Carrying value
at December 31, 2011 .............
Accretion ...............................
Transfers to covered
foreclosed assets ..................
Payments received .................
Charge-offs ............................
Other activity, net ...................
Carrying value
at December 31, 2012 ............. $ 72,849 $ 99,734 $ 63,193 $ 56,668 $ 48,093 $ 91,081 $164,621 $ 596,239
(33,020)
(211,787)
(26,092)
(1,604)
(4,077)
(21,144)
(4,422)
(228)
(4,742)
(41,756)
(4,008)
(251)
(8,563)
(71,592)
(1,410)
(161)
(4,065)
(15,425)
(2,117)
(356)
(3,299)
(18,205)
(2,089)
(148)
(4,543)
(28,777)
(8,332)
(420)
(3,731)
(14,888)
(3,714)
(40)
(29,014)
(205,788)
(8,122)
(2,381)
(40,814)
(1,348)
(1,218)
(22,061)
(225)
(858)
(22,514)
(1,015)
(2,432)
(48,249)
(1,231)
(1,990)
(11,598)
(1,044)
(5,197)
(20,296)
(792)
(14,938)
(40,256)
(2,467)
806,922
61,820
264,297
15,589
148,512
7,798
74,701
5,708
64,391
5,665
79,798
5,768
96,360
6,360
227,974
18,373
131,923
9,915
131,775
10,031
–
13,716
81,434
6,461
–
8,193
–
6,716
29
The following table presents a summary of the carrying value and type of covered loans at the dates
indicated.
Covered Loan Portfolio
December 31,
2012
2011
2010
(Dollars in thousands)
Real estate:
Residential 1-4 family ..............................................................
Non-farm/non-residential ........................................................
Construction/land development ................................................
Agricultural ..............................................................................
Multifamily residential .............................................................
Total real estate .....................................................................
Commercial and industrial...........................................................
Consumer ....................................................................................
Other ...........................................................................................
Total covered loans ...............................................................
$152,348
288,104
105,087
19,690
10,701
575,930
18,496
176
1,637
$596,239
$202,620
369,756
160,872
24,104
15,894
773,246
29,749
958
2,969
$806,922
$132,108
214,435
102,099
9,643
10,709
468,994
17,999
1,248
1,227
$489,468
The following table presents covered loans grouped by remaining maturities and by type at December 31,
2012. This table is based on contractual maturities and does not reflect accretion of the accretable difference
or management’s estimate of projected cash flows. Most covered loans have scheduled accretion and/or cash
flows projected by management to occur in periods prior to maturity. In addition, because income on covered
loans is recognized by accretion of the accretable difference, none of the covered loans are considered to be
floating or adjustable rate loans.
Covered Loan Maturities
1 Year
or Less
Over 1
Through
5 Years
Over
5 Years
(Dollars in thousands)
Real estate:
Residential 1-4 family ....................................... $ 71,101
162,642
Non-farm/non-residential ..................................
93,488
Construction/land development .........................
14,136
Agricultural .......................................................
5,381
Multifamily residential .......................................
346,748
Total real estate ..............................................
9,877
Commercial and industrial ....................................
89
Consumer ..............................................................
Other .....................................................................
864
Total covered loans ........................................ $357,578
$ 43,104
92,877
9,881
4,047
3,662
153,571
4,150
87
13
$157,821
$38,143
32,585
1,718
1,507
1,658
75,611
4,469
–
760
$80,840
Total
$152,348
288,104
105,087
19,690
10,701
575,930
18,496
176
1,637
$596,239
30
The following table presents a summary, by acquisition, of changes in the accretable difference on covered
loans during the periods indicated.
Accretable Difference on Covered Loans
First
Unity Woodlands Horizon Chestatee Oglethorpe Choice
Park
Avenue
Total
Accretable difference
at January 1, 2011 ............. $15,279 $ 37,182 $ 32,165 $ 22,265 $ – $ – $ – $ 106,891
(Dollars in thousands)
Accretable difference
acquired ..........................
–
–
–
–
25,376
24,790
63,462
113,628
Accretion ..........................
(7,662) (13,716)
(6,716)
(8,193)
(6,461)
(7,798) (15,589)
(66,135)
Adjustments to accretable
difference related to:
Covered loans
transferred to covered
foreclosed assets ...........
(384)
(1,611)
(191)
(503)
(315)
(91)
(327)
(3,422)
Covered loans paid off ....
(273)
(2,146)
(934)
(4,564)
(2,811)
(1,435)
(3,167)
(15,330)
Cash flow revisions as
a result of renewals
and/or modifications
of covered loans ...........
3,514
4,691
Other, net ........................
140
155
10
98
1,481
1,446
1,269
2,097
14,508
177
103
165
671
1,509
Accretable difference
at December 31, 2011 ........ 10,614
24,555
24,432
10,663
17,338
16,900
47,147
151,649
Accretion ..........................
(6,360) (10,031)
(5,768)
(5,708)
(5,665)
(9,915) (18,373)
(61,820)
Adjustments to accretable
difference due to:
Covered loans
transferred to covered
foreclosed assets ...........
(159)
(364)
(190)
(448)
(700)
(455)
(1,679)
(3,995)
Covered loans paid off ....
(719)
(1,220)
(1,418)
(811)
(1,291)
(1,529)
(3,507)
(10,495)
Cash flow revisions as
a result of renewals
and/or modifications
of covered loans ...........
5,196
4,396
(618)
1,835
1,567
4,791
4,164
21,331
Other, net ........................
2
116
86
181
123
127
190
825
Accretable difference
at December 31, 2012 ........ $ 8,574 $17,452 $16,524 $ 5,712 $11,372 $ 9,919 $27,942 $ 97,495
FDIC Loss Share Receivable
In connection with the Company’s FDIC-assisted acquisitions, the Company has recorded a FDIC loss
share receivable to reflect the indemnification provided by the FDIC. Currently, the expected losses on covered
assets for each of the Company’s loss share agreements would result in expected recovery of approximately
80% of incurred losses. Since the indemnified items are covered loans and covered foreclosed assets, which
are measured at Day 1 Fair Values, the FDIC loss share receivable is also measured and recorded at Day 1
Fair Values, and is calculated by discounting the cash flows expected to be received from the FDIC. A discount
rate of 5.0% per annum was used to determine the net present value of the FDIC loss share receivable. These
cash flows are estimated by multiplying estimated losses by the reimbursement rates as set forth in the loss
share agreements. The balance of the FDIC loss share receivable is adjusted periodically to reflect changes
in expectations of discounted cash flows, expense reimbursements under the loss share agreements and
other factors.
31
The following table presents a summary, by acquisition, of the FDIC loss share receivable as of the dates
of acquisition and the activity within the FDIC loss share receivable during the periods indicated.
FDIC Loss Share Receivable
Unity Woodlands Horizon Chestatee Oglethorpe Choice Avenue
Total
First
Park
80%
628
80%
80%
80%
80%
80%
80%
80%
9,979
5,897
7,907
82,840
56,638
66,272
60,333
62,829
70,797
63,294
50,263
48,266
35,372
44,215
79,117
49,850
15,960
(6,268)
(5,535)
(4,119)
(6,283)
(4,204)
(7,428)
451,083
563,853
130,978
163,722
–
741
(48,561)
(14,724)
(Dollars in thousands)
–
1,807
(5,069) (23,001)
At acquisition date:
Expected principal loss
on covered assets:
Covered loans ..................... $50,354 $73,220 $40,537 $46,869 $62,890 $82,212 $113,872 $469,954
Covered foreclosed assets ....
93,899
3,678
Total expected
principal losses ...................
Estimated loss sharing
percentage(1) ........................
Estimated recovery from FDIC
loss share agreements .........
Discount for net present
value on FDIC loss share
receivable ............................
Net present value of FDIC
loss share receivable
at acquisition date ............... $44,147 $55,866 $29,089 $46,059 $51,103 $60,004 $116,254 $402,522
Carrying value
at January 1, 2011 ............... $31,120 $51,776 $29,182 $46,059 $ – $ – $ – $158,137
FDIC loss share receivable
recorded at acquisition ........
Accretion income ..................
Cash received from FDIC .......
Reductions of FDIC loss share
receivable for payments on
covered loans in excess of
Day 1 Fair Values ................
Expenses on covered assets
reimbursable by FDIC ..........
Other activity, net ..................
Carrying value
at December 31, 2011 ..........
Accretion income ..................
Cash received from FDIC .......
Reductions of FDIC loss share
receivable for payments on
covered loans in excess of
Day 1 Fair Values .................
Increases in FDIC loss share
receivable for:
Charge-offs
on covered loans ..............
Write downs of covered
foreclosed assets ...............
Expenses on covered assets
reimbursable by FDIC ..........
Other activity, net ..................
Carrying value
at December 31, 2012 ........... $19,818 $22,373 $16,859 $11,162 $23,996 $17,918 $ 40,072 $152,198
60,004
1,814
(9,505) (18,466) (11,942) (12,372)
48,442
1,485
(8,948) (22,301) (13,062) (29,870)
29,177
1,108
(12,945) (14,433)
116,254
2,427
11,378
2,085
27,575
793
21,757
680
84,992
2,473
29,382
725
51,103
1,997
37,720
1,310
1,097
(457)
1,318
(293)
1,276
755
1,360
598
1,726
562
1,537
491
1,183
918
1,606
579
1,376
282
1,330
1,988
3,064
429
8,647
4,511
1,943
218
–
1,363
227,361
11,076
(28,646) (109,001)
279,045
8,574
(42,438) (143,997)
(33,011)
(21,686)
(12,657)
737
390
472
136
–
927
(2,892)
(3,590)
(3,377)
(2,122)
(1,335)
(2,394)
(4,565)
(1,612)
(4,918)
(7,204)
(6,208)
19,279
1,858
1,193
1,591
8,845
3,181
1,028
1,627
3,151
1,589
6,417
2,297
3,170
(948)
(875)
450
294
278
(1) Certain of the Company’s loss share agreements contain tranches whereby the FDIC’s loss sharing percentage is
more than or less than 80%. However, management’s current expectation of most of the principal losses on covered
assets under each of the loss share agreements falls in the tranches whereby the FDIC would reimburse the
Company for approximately 80% of such losses.
32
Foreclosed Assets Covered by FDIC Loss Share Agreements
Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are recorded at Day
1 Fair Values. In estimating the fair value of covered foreclosed assets, management considers a number of
factors including, among others, appraised value, estimated selling prices, estimated selling costs, estimated
holding periods and net present value of cash flows expected to be received. Discount rates ranging from
8.0% to 9.5% per annum were used to determine the net present value of covered foreclosed assets.
The following table presents a summary, by acquisition, of foreclosed assets covered by FDIC loss share
agreements, or covered foreclosed assets, as of the dates of acquisition and activity within covered foreclosed
assets during the periods indicated.
Foreclosed Assets Covered by FDIC Loss Share Agreements
First
Park
Unity Woodlands Horizon Chestatee Oglethorpe Choice Avenue
Total
–
(9,979)
(7,907)
(1,562)
(1,466)
(2,281)
(Dollars in thousands)
(628) (49,850)
(474) (10,412)
(1,332) (1,030)
(5,897) (3,678) (15,960)
At acquisition date:
Balance on acquired
bank’s books ....................... $20,304 $12,258 $8,391 $31,647 $16,554 $2,773 $91,442 $183,369
Total expected losses ..............
(93,899)
Discount for net present value
(18,557)
of expected cash flows .........
Fair value at acquisition date .... $ 8,859 $ 5,029 $3,683 $13,406 $ 7,085 $1,671 $31,180 $ 70,913
Carrying value
at January 1, 2011 .................. $ 8,060 $ 5,996 $ 3,683 $13,406 $ – $ – $ – $ 31,145
Covered foreclosed
assets acquired ....................
Transferred from
covered loans .......................
Sales of covered
foreclosed assets ..................
Carrying value
at December 31, 2011 ............. 10,272
Transferred from
covered loans .......................
Sales of covered
foreclosed assets ..................
Write downs of covered
foreclosed assets included in
other loss share income .......
Carrying value
at December 31, 2012 ............. $ 8,187 $ 8,050 $2,538 $ 4,211 $ 6,797 $3,584 $19,584 $ 52,951
(4,063) (3,038) (11,719)
(9,304) (4,285)
(6,499) (1,996)
(27,188)
(43,987)
(2,750)
(1,654)
(1,624)
(1,695)
(7,111)
(4,467)
(8,122)
(1,171)
(6,110)
(2,985)
(8,989)
72,907
14,435
25,490
33,020
29,014
14,938
39,936
31,180
7,132
2,224
9,677
3,677
4,543
1,990
8,563
4,742
3,299
4,077
3,731
1,218
5,197
2,381
2,432
4,065
1,671
7,085
(344)
(337)
(585)
(305)
858
–
–
–
The following table presents a summary of the carrying value and type of foreclosed assets covered by
FDIC loss share agreements, or covered foreclosed assets, at the dates indicated.
Foreclosed Assets Covered by FDIC Loss Share Agreements
Real estate:
Residential 1-4 family .....................................................................
Non-farm/non-residential ..............................................................
Construction/land development ......................................................
Agricultural ....................................................................................
Multifamily residential ...................................................................
Total real estate ........................................................................
Repossessions ...................................................................................
Total covered foreclosed assets .................................................
December 31,
2012
2011
(Dollars in thousands)
$12,279
9,570
30,602
449
51
52,951
–
$52,951
$15,945
11,624
43,323
–
2,014
72,906
1
$72,907
33
FDIC Clawback Payable
Pursuant to the clawback provisions of the loss share agreements for the Company’s FDIC-assisted
acquisitions, the Company may be required to reimburse the FDIC should actual losses be less than certain
thresholds established in each loss share agreement. The amount of the clawback provision for each
acquisition is measured and recorded at Day 1 Fair Values. It is calculated as the difference between
management’s estimated losses on covered loans and covered foreclosed assets and the loss threshold
contained in each loss share agreement, multiplied by the applicable clawback provisions contained in each
loss share agreement. This clawback amount, which is payable to the FDIC upon termination of the applicable
loss share agreement, is then discounted back to net present value using a discount rate of 5.0% per annum.
To the extent that actual losses on covered loans and covered foreclosed assets are less than estimated losses,
the applicable clawback payable to the FDIC upon termination of the loss share agreements will increase. To
the extent that actual losses on covered loans and covered foreclosed assets are more than estimated losses,
the applicable clawback payable to the FDIC upon termination of the loss share agreements will decrease.
The following table presents a summary, by acquisition, of the FDIC clawback payable as of the dates of
acquisition and activity within the FDIC clawback payable during the periods indicated.
FDIC Clawback Payable
First
Unity Woodlands Horizon Chestatee Oglethorpe Choice
Park
Avenue
Total
At acquisition date:
Estimated FDIC
clawback payable ................ $2,612
Discount for net present
value on FDIC
clawback payable ................ (1,046)
Net present value of FDIC
clawback payable at
acquisition date .................. $1,566
Carrying value
at January 1, 2011 ................ $1,629
FDIC clawback payable
recorded at acquisition ........
Amortization expense ...........
Changes in FDIC clawback
payable related to changes
in expected losses on
covered assets ....................
Carrying value at
December 31, 2011 ............... 1,709
Amortization expense ...........
79
Changes in FDIC clawback
payable related to changes
in expected losses on
covered assets ....................
Carrying value at
December 31, 2012 ............... $1,644
–
80
(144)
–
(Dollars in thousands)
$4,846
$2,380 $1,291
$1,721 $1,452
$24,344
$38,646
(1,905)
(919)
(499)
(664)
(560)
(9,399)
(14,992)
$2,941
$1,461 $ 792
$1,057 $ 892
$14,945
$23,654
$3,004
$1,479 $ 792
$ – $ –
$ –
$ 6,904
–
149
–
73
–
55
1,057
42
892
31
14,945
505
16,894
935
–
–
(88)
–
–
–
(88)
3,153
138
1,552
73
759
35
1,099
53
923
45
15,450
776
24,645
1,199
(305)
(157)
–
(69)
–
–
(675)
$2,986
$1,468 $ 794
$1,083 $ 968
$16,226
$25,169
Nonperforming Assets
Nonperforming assets consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days
or more past due, (3) certain troubled and restructured loans for which a concession has been granted by
the Company to the borrower because of a deterioration in the financial position of the borrower (“TDRs”)
and (4) real estate or other assets that have been acquired in partial or full satisfaction of loan or lease
obligations or upon foreclosure. Purchased non-covered loans, covered loans and covered foreclosed assets
are not considered to be nonperforming by the Company for purposes of calculation of the nonperforming
loans and leases to total loans and leases ratio and the nonperforming assets to total assets ratio, except for
34
their inclusion in total assets. Because purchased non-covered loans, covered loans and covered foreclosed
assets are not included in the calculations of the Company’s nonperforming loans and leases ratio and
nonperforming assets ratio, the Company’s nonperforming loans and leases ratio and nonperforming assets
ratio may not be comparable from period to period or with such ratios of other financial institutions,
including institutions that have made FDIC-assisted or traditional acquisitions.
The Company generally places a loan or lease on nonaccrual status when such loan or lease is (i) deemed
impaired or (ii) 90 days or more past due, or earlier when doubt exists as to the ultimate collection of
payments. The Company may continue to accrue interest on certain loans or leases contractually past due 90
days or more if such loans or leases are both well secured and in the process of collection. At the time a loan
or lease is placed on nonaccrual status, interest previously accrued but uncollected is generally reversed and
charged against interest income. Nonaccrual loans and leases are generally returned to accrual status when
payments are less than 90 days past due and the Company reasonably expects to collect all 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, including
impaired loans and leases but excluding certain TDRs which continue to accrue interest, is recognized on a
cash basis when and if actually collected.
The following table presents information, excluding purchased non-covered loans and loans and foreclosed
assets covered by FDIC loss share agreements, concerning nonperforming assets, including nonaccrual loans
and leases, TDRs, and foreclosed assets as of the dates indicated.
Nonperforming Assets
2012
2011
December 31,
2010
(Dollars in thousands)
2009
2008
Nonaccrual loans and leases ........................................ $ 9,109 $12,206
Accruing loans and leases 90 days or more past due...
–
1,000
TDRs ............................................................................
13,206
Total nonperforming loans and leases ..................
–
–
9,109
$13,939 $23,604 $15,382
–
–
15,382
–
–
23,604
–
–
13,939
Foreclosed assets not covered by
FDIC loss share agreements(1) ......................................
31,762
Total nonperforming assets(2) ............................... $23,033 $44,968
13,924
42,216
10,758
61,148
$56,155 $84,752 $26,140
Nonperforming loans and leases
to total loans and leases(2) .........................................
Nonperforming assets to total assets(2) ........................
0.43%
0.57
0.70%
1.17
0.75%
1.72
1.24%
3.06
0.76%
0.81
(1) Repossessed personal properties and real estate acquired through or in lieu of foreclosure are initially recorded at the
lesser of current principal investment or estimated market 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 market value net of estimated selling costs, if
lower, until disposition.
(2) Excludes purchased non-covered loans and loans and/or foreclosed assets covered by FDIC loss share agreements,
except for their inclusion in total assets.
As of December 31, 2012 and 2011, the Company had identified covered loans where the expected
performance of such loans had deteriorated from management’s performance expectations established in
conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial
charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling
$6.2 million during 2012 and $0.3 million during 2011 for such loans. The Company also recorded $6.2
million during 2012 and $0.3 million during 2011 of provision for loan and lease losses to cover these
charge-offs. In addition to these charge-offs, the Company transferred certain of these covered loans to
covered foreclosed assets. As a result of these actions, the Company had $38.5 million of impaired covered
loans at December 31, 2012 and $1.9 million of impaired covered loans at December 31, 2011.
If an adequate current determination of collateral value has not been performed, once a loan or lease is
considered impaired, management seeks to establish an appropriate value for the collateral. This assessment
may include (i) obtaining an updated appraisal, (ii) obtaining one or more broker price opinions or
comprehensive market analyses, (iii) internal evaluations or (iv) other methods deemed appropriate
considering the size and complexity of the loan and the underlying collateral. On an ongoing basis, typically
35
at least quarterly, the Company evaluates the underlying collateral on all impaired loans and leases and,
if needed, due to changes in market or property conditions, the underlying collateral is reassessed and the
estimated fair value is revised. The determination of collateral value includes any adjustments considered
necessary related to estimated holding period and estimated selling costs.
At December 31, 2012 the Company had reduced the carrying value of its loans and leases deemed
impaired (all of which were included in nonaccrual loans and leases) by $7.1 million to the estimated fair
value of such loans and leases of $6.7 million. The adjustment to reduce the carrying value of impaired loans
and leases to estimated fair value consisted of $5.6 million of partial charge-offs and $1.5 million of specific
loan and lease loss allocations. These amounts do not include the Company’s $38.5 million of impaired
covered loans at December 31, 2012.
At December 31, 2012 and 2011, the Company has no purchased non-covered loans whose performance
had deteriorated subsequent to the determination of the Day 1 Fair Values resulting in such loans being
deemed impaired.
The following table presents information concerning the geographic location of nonperforming assets,
excluding purchased non-covered loans and loans and/or foreclosed assets covered by FDIC loss share
agreements, at December 31, 2012. Nonaccrual loans and leases are reported in the physical location of the
principal collateral. Foreclosed assets are reported in the physical location of the asset. Repossessions are
reported at the physical location where the borrower resided or had its principal place of business at the time
of repossession.
Geographic Distribution of Nonperforming Assets
Nonperforming
Loans and
Leases
Arkansas .......................................................................
Texas .............................................................................
North Carolina ...............................................................
South Carolina ...............................................................
Georgia ..........................................................................
Florida ...........................................................................
Alabama ........................................................................
All other.........................................................................
Total ........................................................................
$8,102
14
1
986
6
–
–
–
$9,109
Allowance and Provision for Loan and Lease Losses
Foreclosed
Assets
(Dollars in thousands)
$ 9,681
700
1,132
1,242
187
35
323
624
$13,924
Total
Nonperforming
Assets
$17,783
714
1,133
2,228
193
35
323
624
$23,033
The Company’s allowance for loan and lease losses was $38.7 million at December 31, 2012, compared
with $39.2 million at December 31, 2011, and $40.2 million at December 31, 2010. The Company had no
allowance for covered loans or purchased non-covered loans at December 31, 2012, 2011 or 2010. The
Company’s allowance for loan and lease losses as a percentage of nonperforming loans and leases, excluding
covered loans and purchased non-covered loans, was 425% at December 31, 2012 compared to 297% at
December 31, 2011 and 289% at December 31, 2010. While the Company believes the current allowance is
appropriate, changing economic and other conditions may require future adjustments to the allowance for
loan and lease losses.
The amount of provision to the allowance for loan and lease losses is 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 2012 was $11.7 million, including $5.5 million for non-covered loans and leases
and $6.2 million for covered loans, compared to $11.5 million for non-covered loans and leases and $0.3
million for covered loans in 2011. The Company’s provision for loan and lease losses was $16.0 million in
2010, all of which was for non-covered loans and leases. The Company’s decrease in its provision for non-
covered loan and lease losses for 2012 compared to 2011 and for 2011 compared to 2010 was primarily due
to the reduction of net charge-offs in 2012 compared to 2011 and in 2011 compared to 2010 as the real
estate market and unemployment levels in many of the Company’s markets have shown some improvement
in the last couple of years. The Company’s increase in its provision for covered loans for 2012 compared to
2011 was due to the increase of net charge-offs of covered loans as more covered loans experienced
decreases in their expected cash flows that resulted in partial charge-offs of the carrying value of such
covered loans in 2012 compared to 2011.
36
The following table is an analysis of the allowance for loan and lease losses for the periods indicated.
Analysis of the Allowance for Loan and Lease Losses
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
2009
2008
6,636
9,631
35,885
12,988
16,764
1,312
1,226
466
997
-
4,001
1,323
732
361
219
872
1,702
4,037
301
133
7,045
6,937
1,196
478
1,108
1,079
552
3,059
645
250
5,585
1,259
1,783
734
270
2,743
1,033
5,651
771
-
10,198
1,465
825
413
87
1,619
3,182
20,188
844
4,355
30,188
3,347
1,303
648
399
Balance, beginning of period ....................................... $39,169 $40,230 $39,619 $29,512 $19,557
Non-covered 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 ............................................
Other ......................................................................
Total non-covered loans and leases
charged off ................................................
Recoveries of non-covered loans and leases
previously 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 ............................................
Other ......................................................................
Total recoveries .............................................
Net non-covered loans and leases charged off .............
Covered loans charged off ............................................
Net charge-offs – total loans and leases .......................
Provision for loan and lease losses:
19,025
Non-covered loans and leases ................................
–
Covered loans .........................................................
Total provision ..............................................
19,025
Balance, end of period ................................................. $38,738 $39,169 $40,230 $39,619 $29,512
Net charge-offs of non-covered loans and leases
to average non-covered loans and leases(1) ...............
Net charge-offs of total loans and leases, including
covered loans and purchased non-covered loans,
to total average loans and leases ..............................
Allowance for loan and lease losses to
total loans and leases(2) ............................................
Allowance for loan and lease losses to
nonperforming loans and leases(2) ............................
99
87
253
45
1
485
656
212
20
2
1,375
15,389
–
15,389
107
18
106
141
–
372
35
238
2
8
655
5,981
6,195
12,176
64
16
30
–
–
110
142
166
5
4
427
12,561
275
12,836
99
147
82
–
1
329
566
183
67
47
1,192
34,693
–
34,693
55
76
29
–
–
160
51
317
21
12
561
9,070
–
9,070
11,500
275
11,775
16,000
–
16,000
44,800
–
44,800
5,550
6,195
11,745
0.73% 1.75%
0.81% 1.75%
2.17% 2.08%
0.49%
0.46%
0.30%
0.69%
2.08%
1.83%
168%
289%
425%
297%
0.45%
0.45%
1.46%
192%
(1) Excludes loans covered by FDIC loss share agreements and net charge-offs related to such loans.
(2) Excludes purchased non-covered loans and loans covered by FDIC loss share agreements.
37
Provisions to and the adequacy of the allowance for loan and lease losses (“ALLL”) are based on
evaluations of the loan and lease portfolio utilizing objective and subjective criteria. The objective criteria
primarily include an internal grading system and specific allowances. In addition to these objective criteria,
the Company subjectively assesses the adequacy of the allowance for loan and lease losses and the need for
additions thereto, with consideration given to the nature and mix of the portfolio, including concentrations
of credit; general economic and business conditions, including national, regional and local business and
economic conditions that may affect borrowers’ or lessees’ ability to pay; expectations regarding the current
business cycle; trends that could affect collateral values and other relevant factors. The Company also utilizes
a peer group analysis and a historical analysis to validate the overall adequacy of its allowance for loan and
lease losses. Changes in any of these criteria or the availability of new information could require adjustment
of the ALLL in future periods. While a specific allowance has been calculated for impaired loans and leases
and for loans and leases where the Company has otherwise determined a specific reserve is appropriate, no
portion of the Company’s ALLL is restricted to any individual loan or lease or group of loans or leases, and
the entire ALLL is available to absorb losses from any and all loans and leases.
The Company’s internal grading system assigns one of nine grades to all loans and leases, with each grade
being assigned a specific allowance allocation percentage, except residential 1-4 family loans, consumer loans,
purchased non-covered loans, and covered loans.
The grade for each graded individual loan or lease is determined by the account officer and other
approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing
assessment of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by senior
management and as part of the Company’s internal loan review process. These risk elements include, among
others, the following: (1) for non-farm/non-residential, multifamily residential, and agricultural real estate
loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to
loan repayment requirements), operating results of the owner in the case of owner-occupied properties, the
loan-to-value ratio, the age, condition, value, nature and marketability of the collateral and the specific risks
and volatility of income, property value and operating results typical of properties of that type; (2) for
construction and land development loans, the perceived feasibility of the project including the ability to sell
developed lots or improvements constructed for resale or ability to lease property constructed for lease, the
quality and nature of contracts for presale or preleasing, if any, experience and ability of the developer and
loan-to-cost and loan-to-value ratios; (3) for commercial and industrial loans and leases, the operating
results of the commercial, industrial or professional enterprise, the borrower’s or lessee’s business,
professional and financial ability and expertise, the specific risks and volatility of income and operating
results typical for businesses in the applicable industry and the age, condition, value, nature and
marketability of collateral; and (4) for other loans and leases, the operating results, experience and ability
of the borrower or lessee, historical and expected market conditions and the age, condition, value, nature
and marketability of collateral. In addition, for each category the Company considers secondary sources of
income and the financial strength of the borrower or lessee and any guarantors.
Residential 1-4 family 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 for residential 1-4
family and consumer loans are determined by management and are adjusted periodically. In determining
these allowance allocation percentages, management considers, among other factors, historical loss
percentages and a variety of subjective criteria in determining the allowance allocation percentages.
For covered loans, management separately monitors this portfolio and periodically reviews loans contained
within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. To the
extent that a loan’s performance has deteriorated from management’s expectation established in conjunction
with the determination of the Day 1 Fair Values, such loan is considered in the determination of the required
level of allowance for loan and lease losses. To the extent that a revised loss estimate exceeds the loss
estimate established in the determination of the Day 1 Fair Values, such deterioration will result in an
allowance allocation or a charge-off.
For purchased non-covered loans, management segregates this portfolio into loans that contain evidence
of credit deterioration on the date of purchase and loans that do not contain evidence of credit deterioration
on the date of purchase. Purchased non-covered loans with evidence of credit deterioration are regularly
monitored and are periodically reviewed by management. To the extent that a loan’s performance has
deteriorated from management’s expectation established in conjunction with the determination of the Day 1
Fair Values, such loan is considered in the determination of the required level of allowance for loan and lease
38
losses. To the extent that a revised loss estimate exceeds the loss estimate established in the determination
of Day 1 Fair Values, such determination will result in an allowance allocation or a charge-off.
All other purchased non-covered loans are graded by management at the time of purchase. The grades on
these purchased non-covered loans are reviewed regularly as part of the ongoing assessment of such loans.
To the extent that current information indicates it is possible that the Company will not be able to collect all
amounts according to the contractual terms thereof, such loan is considered in the determination of the
required level of allowance for loan and lease losses and may result in an allowance allocation or a charge-off.
At December 31, 2012 and 2011, the Company had no allowance for its purchased non-covered loans and
its covered loans because all losses had been charged off on such loans whose performance had deteriorated
from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.
All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan or
lease, excluding purchased non-covered loans and covered loans, to be impaired when based on current
information and events, it is probable that the Company will be unable to collect all amounts due according to
the contractual terms thereof. The Company considers a purchased non-covered loan with evidence of credit
deterioration at the date of purchase and a covered loan to be impaired once a decrease in expected cash
flows or other deterioration in the loan’s expected performance, subsequent to the determination of the Day 1
Fair Values, results in an allowance allocation, a partial or full charge-off or in a provision for loan and lease
losses. Purchased non-covered loans without evidence of credit deterioration at the date of purchase are
considered impaired when current information indicates it is probable that the Company will not be able to
collect all amounts due according to the contractual terms thereof. Most of the Company’s nonaccrual loans
and leases, excluding purchased non-covered loans and covered loans, and all TDRs are considered impaired.
The majority of the Company’s impaired loans and leases are dependent upon collateral for repayment. For
such loans and leases, impairment is measured by comparing collateral value, net of holding and selling
costs, to the current investment in the loan or lease. For all other impaired loans and leases, the Company
compares estimated discounted cash flows to the current investment in the loan or lease. To the extent that
the Company’s current investment in a particular loan or lease exceeds its estimated net collateral value or its
estimated discounted cash flows, the impaired amount is specifically considered in the determination of the
allowance for loan and lease losses or is charged off as a reduction of the allowance for loan and lease losses.
The Company also maintains an allowance for certain loans and leases, excluding purchased non-covered
loans and covered loans, not considered impaired where (i) the customer is continuing to make regular
payments, although payments may be past due, (ii) there is a reasonable basis to believe the customer may
continue to make regular payments, although there is also an elevated risk that the customer may default,
and (iii) the collateral or other repayment sources are likely to be insufficient to recover the current investment
in the loan or lease if a default occurs. The Company evaluates such loans and leases to determine if an
allowance is needed for these loans and leases. For the purpose of calculating the amount of such allowance,
management assumes that (i) no further regular payments occur and (ii) all sums recovered will come from
liquidation of collateral and collection efforts from other payment sources. To the extent that the Company’s
current investment in a particular loan or lease evaluated for the need for such an allowance exceeds its net
collateral value or its estimated discounted cash flows, such excess is considered allocated allowance for
purposes of the determination of the allowance for loan and lease losses.
The Company may also include further allowance allocation for risk-rated loans, including commercial real
estate loans and excluding purchased non-covered loans and covered loans, that are in markets determined
by management to be “stressed”. Stressed markets may include any specific geography experiencing (i) high
unemployment substantially above the U.S. average, (ii) significant over-development in one or more
commercial real estate categories, (iii) recent or announced loss of a major employer or significant workforce
reductions, (iv) significant declines in real estate values and (v) various other factors. The additional allowance
for such stressed markets compensates for the expectation that a higher risk of loss is anticipated for the
“work-out” or liquidation of a real estate loan in a stressed market versus a market that is not experiencing
any significant levels of stress. The required allocation percentage applicable to real estate loans in stressed
markets may be applied to the total market or it may be determined at the individual loan level based on
collateral value, loan-to-value ratios, strength of the borrower and/or guarantor, viability of the underlying
project and other factors. The Company had no allowance allocation for loans in stressed markets at
December 31, 2012 or 2011.
Prior to December 31, 2011, the Company utilized the sum of all allowance amounts derived as described
above, combined with a reasonable unallocated allowance, as the primary indicator of the appropriate level
of allowance for loan and lease losses. During the fourth quarter of 2011, the Company refined its allowance
39
calculation whereby it “allocated” the portion of the allowance that was previously deemed to be unallocated
allowance. This refined allowance calculation includes specific allowance allocations for qualitative factors
including, among other factors, (i) concentrations of credit, (ii) general economic and business conditions,
(iii) trends that could effect collateral values and (iv) expectations regarding the current business cycle. The
Company may also consider other qualitative factors in future periods for additional allowance allocations,
including, among other factors, (1) credit quality trends (including trends in nonperforming loans and leases
expected to result from existing conditions), (2) seasoning of the loan and lease portfolio, (3) specific industry
conditions affecting portfolio segments, (4) the Company’s expansion into new markets and (5) the offering
of new loan and lease products. Because the Company refined its allowance calculation during 2011 such
that it no longer maintains unallocated allowance, the Company’s allocation of its allowance at December 31,
2012 and 2011 may not be comparable with prior periods.
In addition to the allowance for loan and lease losses methodology described above, the Company compares
the allowance for loan and lease losses (as a percentage of total loans and leases, excluding purchased non-
covered loans and covered loans) maintained by the Bank to the peer group average percentages as shown
on the most recently available FDIC’s Uniform Bank Performance Report and FRB’s Uniform Bank Holding
Company Performance Report. This comparison is used to validate the overall adequacy of the allowance
for loan and lease losses.
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 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, consumer loans, purchased non-covered loans and covered loans,
(ii) the past due status of residential 1-4 family loans and consumer loans, (iii) allowances made for specific
loans and leases, (iv) “stressed” market allocations, (v) allowance allocations for purchased non-covered
loans and covered loans and (vi) qualitative factor allocations, 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, prior to December 31, 2011, the unallocated allowance. As previously discussed, the Company refined
its allowance calculation during 2011 such that it no longer maintains unallocated allowance. The table
also reflects the percentage of loans and leases in each category to the total portfolio of loans and leases,
excluding covered loans and purchased non-covered loans, for each of the periods indicated. These allowance
amounts have been computed using the Company’s internal grading system, specific impairment analyses,
specific special reserve analyses, “stressed” markets allocations, if any, and qualitative factor allocations.
The amounts shown are not necessarily indicative of the actual future losses that may occur within
particular categories. The Company had no allocation of its allowance to covered loans or purchased
non-covered loans for any of the periods presented.
Allocation of the Allowance for Loan and Lease Losses
2012
2011
% of
Loans
and
% of
Loans
and
December 31,
2010
% of
Loans
and
2009
2008
% of
Loans
and
% of
Loans
and
Allowance Leases Allowance Leases
Allowance Leases Allowance Leases Allowance Leases
Real estate:
Residential 1-4 family ................. $ 4,820
Non-farm/non-residential ........... 10,107
Construction/land development ... 12,000
2,878
Agricultural ................................
2,030
Multifamily residential ................
3,655
Commercial and industrial ............
1,015
Consumer .....................................
2,050
Direct financing leases ..................
183
Other ............................................
Unallocated allowance ..................
–
Total ...................................... $38,738
(Dollars in thousands)
12.9% $ 3,848
12,203
38.1
9,478
27.4
3,383
2.4
2,564
6.7
4,591
7.6
1,209
1.4
1,632
3.2
261
0.3
–
$39,169
13.8 % $ 2,999
37.7
8,313
10,565
25.4
2,569
3.8
1,320
7.6
4,142
6.4
2,051
1.9
1,726
2.9
201
0.5
6,344
$40,230
14.3% $ 3,600
6,574
36.5
11,585
26.8
750
4.4
710
5.6
3,587
6.5
2,599
2.9
1,560
2.3
289
0.7
8,365
$39,619
14.9% $ 2,170
4,396
31.9
8,560
31.5
745
4.5
1,658
2.9
2,421
7.9
1,894
3.4
808
2.1
209
0.9
6,651
$29,512
13.6%
27.3
34.4
4.2
3.0
10.2
3.7
2.5
1.1
40
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, the list of loans and leases with specific reserves, the
“stressed” market allocations, if any, and the qualitative factor allocations, 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, 2012 substandard loans and leases, excluding
covered loans and purchased non-covered loans, not designated as impaired, nonaccrual or 90 days past
due, totaled $27.5 million, compared to $28.1 million at December 31, 2011 and $35.8 million at December 31,
2010. No loans or leases were designated as doubtful or loss at December 31, 2012, 2011 or 2010.
Administration of the Bank’s lending function is the responsibility of the Chief Executive Officer, Chief
Credit Officer, Chief Lending 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 granted by the loan committee on
the recommendation of appropriate senior officers.
During 2012, loans and leases and aggregate loan and lease relationships exceeding $3.0 million up to
the lending limits established by the Company’s board of directors may be approved by the loan committee.
At December 31, 2012 the loan committee consisted of five or more directors and four of the Bank’s senior
officers. 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, 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 functions. 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.
41
Investment Securities
At December 31, 2012, 2011 and 2010, 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).
The following table presents the amortized cost and the fair value of investment securities as of the dates
indicated. The Company’s holdings of “other equity securities” include FHLB-Dallas, Federal Home Loan
Bank of Atlanta (“FHLB-Atlanta”) and First National Banker’s Bankshares, Inc. (“FNBB”) shares which do
not have readily determinable fair values and are carried at cost.
Investment Securities
2012
December 31,
2011
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(Dollars in thousands)
2010
Amortized
Cost
Fair
Value
Obligations of states and political
subdivisions ........................................ $345,224 $361,517
$359,667 $373,047
$378,822 $378,547
U.S. Government agency residential
mortgage-backed securities .................
Corporate obligations ..............................
Other equity securities ..............................
116,835
776
13,689
118,284
776
13,689
46,068
–
17,828
48,035
–
17,828
1,269
–
18,882
1,269
–
18,882
Total ............................................ $476,524 $494,266
$423,563 $438,910
$398,973 $398,698
The Company utilizes independent third parties as its principal sources for determining fair value of
investment securities which are measured on a recurring basis. As a result, the Company receives estimates
of fair values from at least two independent pricing sources for the majority of its individual securities within
its investment portfolio. For investment securities traded in an active market, the fair values are obtained
from independent pricing services and 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, pricing matrices or a combination thereof. For investment securities traded in a market
that is not active, fair value is determined using unobservable inputs. Additionally, the valuation of investment
securities acquired in FDIC-assisted or traditional acquisitions may include certain unobservable inputs. All
fair value estimates received by the Company from its investment securities are reviewed and approved on a
quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.
The Company’s investment securities portfolio is reported at estimated fair value, which included gross
unrealized gains of $18.1 million and gross unrealized losses of $0.3 million at December 31, 2012; gross
unrealized gains of $16.3 million and gross unrealized losses of $1.0 million at December 31, 2011; and
gross unrealized gains of $6.4 million and gross unrealized losses of $6.7 million at December 31, 2010.
Management believes that all of its unrealized losses on individual investment securities at December 31,
2012 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 does not have the intent to sell these investment securities and more likely than not would
not be required to sell these investment securities before fair value recovers to amortized cost.
The Company owns three different maturities of bonds totaling an aggregate of $2.6 million issued by the
Northwest Arkansas Regional Solid Waste Management District (“District”). The District owns and operates
a landfill for the benefit of the residents of certain counties located in north Arkansas, with the landfill,
the revenues therefrom and certain personal property serving as collateral under the bond indenture. On
October 9, 2012, a special election was held where an additional 3/8-cent sales tax proposal to be used to
support the purchase of the landfill by a third party from the District was defeated. On October 23, 2012, the
management board governing the District voted to place the District into receivership, and on November 30,
2012 the landfill ceased operations. As a result, during the fourth quarter of 2012, the Company recorded a
$2.6 million impairment charge to reduce the carrying value of the bonds to zero. This impairment charge is
included in “Net gains on investment securities,” in the accompanying consolidated statement of income.
42
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
Amortized Unaccreted Unamortized
Cost
Discount
Premium
Par
Value
(Dollars in thousands)
December 31, 2012:
Obligations of states and political subdivisions .......... $345,224
U.S. Government agency residential
116,835
mortgage-backed securities .....................................
776
Corporate obligations ...................................................
Other equity securities ..................................................
13,689
Total .................................................................... $476,524
December 31, 2011:
Obligations of states and political subdivisions .......... $359,667
U.S. Government agency residential
46,068
mortgage-backed securities .....................................
Other equity securities ..................................................
17,828
Total .................................................................... $423,563
$6,324
$ (516)
$351,032
279
–
–
$6,603
(4,935)
(23)
–
$(5,474)
112,179
753
13,689
$477,653
$4,969
$ (134)
$364,502
–
–
$4,969
(1,556)
–
$(1,690)
44,512
17,828
$426,842
The Company recognized premium amortization, net of discount accretion, of $0.2 million during 2012
and $0.4 million during 2011. During 2010 the Company recognized discount accretion, net of premium
amortization, of $0.4 million. Any premium amortization or discount accretion is considered an adjustment
to the yield of the Company’s investment securities.
The Company had net gains on investment securities of $0.5 million in 2012, which included gains of
$3.1 million from the sale of $40 million of investment securities and an impairment charge of $2.6 million,
as previously discussed, compared to net gains of $0.9 million from the sale of $94 million of investment
securities in 2011. The Company had net gains of $4.5 million from the sale of $251 million of investment
securities in 2010. During 2012, 2011 and 2010, respectively, investment securities totaling $57 million,
$31 million and $60 million matured or were called by the issuer. The Company purchased $63 million,
$13 million and $121 million of investment securities during 2012, 2011 and 2010, respectively.
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 decisions to sell or purchase
securities, the Company considers credit quality, call features, maturity dates, relative yields, current market
factors, interest rate risk and other relevant factors.
43
The following table presents the types and estimated fair values of the Company’s investment securities at
December 31, 2012 based on credit ratings by one or more nationally-recognized credit rating agencies.
Credit Ratings of Investment Securities
AA(2)
AAA(1)
A(3)
(Dollars in thousands)
BBB(4) Non-Rated(5)
Total
Obligations of states and
political subdivisions:
Arkansas ...................................
Texas ..........................................
Alabama.....................................
Georgia ......................................
Louisiana ...................................
Connecticut ................................
Iowa ...........................................
Massachusetts ............................
Florida .......................................
Missouri .....................................
U.S. Government agency
residential mortgage-backed
securities .....................................
Corporate obligations ......................
Other equity securities ....................
Total ........................................
$ –
1,253
–
–
–
–
–
–
–
–
$110,819
40,827
842
1,498
5,482
–
–
–
–
–
$ 9,673
5,920
2,988
2,490
–
2,792
2,643
–
–
–
$ 5,347
14,740
373
305
–
–
–
–
1,324
–
$128,974
14,257
3,911
1,908
–
–
–
1,997
–
1,154
$254,813
76,997
8,114
6,201
5,482
2,792
2,643
1,997
1,324
1,154
–
–
–
$1,253
118,284
–
–
$277,752
–
776
–
$27,282
–
–
–
$22,089
–
–
13,689
$165,890
118,284
776
13,689
$494,266
Percentage of total ..........................
Cumulative percentage of total ........
0.3%
0.3%
56.2%
56.5%
5.5%
62.0%
4.4%
66.4%
33.6%
100.0%
100.0%
(1) Includes securities rated Aaa by Moody’s, AAA by Standard & Poor’s (“S&P”) or a comparable rating by other
nationally-recognized credit rating agencies.
(2) Includes securities rated Aa1 to Aa3 by Moody’s, AA+ to AA- by S&P or a comparable rating by other nationally-
recognized credit rating agencies.
(3) Includes securities rated A1 to A3 by Moody’s, A+ to A- by S&P or a comparable rating by other nationally-
recognized credit rating agencies.
(4) Includes securities rated Baa1 to Baa3 by Moody’s, BBB+ to BBB- by S&P or a comparable rating by other
nationally-recognized credit rating agencies.
(5) Includes all securities that are not rated or securities that are not rated but that have a rated credit enhancement
where the Company has ignored such credit enhancement. For these securities, the Company has performed its own
evaluation of the security and/or the underlying issuer and believes that such security or its issuer would warrant a
credit rating of investment grade (i.e., Baa3 or better by Moody’s or BBB- or better by S&P or a comparable rating
by other nationally-recognized credit rating agencies).
44
The following table reflects the expected maturity distribution of the Company’s investment securities,
at fair value, at December 31, 2012 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 residential 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, 2012, and (3) callable investment securities for which
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
Obligations of states and political subdivisions ...
U.S. Government agency
residential mortgage-backed securities ............
Corporate obligations .........................................
Other equity securities(1) .....................................
Total ...........................................................
Percentage of total .............................................
Cumulative percentage of total ...........................
Weighted-average yield – FTE ............................
1 Year
or
Less
$ 8,036
8,580
–
–
$16,616
Over 1
Through
5 Years
$10,885
Over 5
Through
10 Years
(Dollars in thousands)
$34,256
Over
10
Years
$308,340
23,752
–
–
$34,637
25,817
–
–
$60,073
60,135
776
13,689
$382,940
Total
$361,517
118,284
776
13,689
$494,266
3.4%
3.4%
5.1%
7.0%
10.4%
3.8%
12.2%
22.6%
5.3%
77.4%
100.0%
6.5%
100.0%
6.1%
(1) Includes approximately $13.3 million of FHLB-Dallas stock which has historically paid quarterly dividends at a
variable rate approximating the federal funds rate.
Deposits
The Company’s lending and investing activities are funded primarily by deposits. The amount and type of
deposits outstanding at December 31, 2012, 2011 and 2010 and their respective percentage of total deposits
are reflected in the following table.
Non-interest bearing ...............................
Interest bearing:
Transaction (NOW) ..............................
Savings and money market ..................
Time deposits less than $100,000 ........
Time deposis of $100,000 or more .......
Total deposits ...................................
Deposits
2012
December 31,
2011
(Dollars in thousands)
2010
$ 578,528
18.6% $ 447,214
15.2% $ 298,585
11.8%
806,293
935,385
443,233
337,616
26.0
30.2
14.3
10.9
738,926
839,523
508,675
409,581
25.1
28.5
17.3
13.9
625,524
673,534
459,027
484,083
24.6
26.5
18.1
19.0
$3,101,055 100.0% $2,943,919 100.0% $2,540,753 100.0%
In recent years, the Company has benefited from favorable change in its deposit mix. The Company’s non-
CD deposits have grown and comprised 74.8% of total deposits at December 31, 2012, compared to 68.8% at
December 31, 2011 and 62.9% at December 31, 2010. Non-CD deposits totaled $2.32 billion at December 31,
2012, compared to $2.03 billion at December 31, 2011 and $1.60 billion at December 31, 2010.
At December 31, 2012, the Company had outstanding brokered deposits of $47 million compared to $41
million at December 31, 2011 and $58 million at December 31, 2010.
45
The following table reflects the average balance and average rate paid for each deposit category shown for
the years ended December 31, 2012, 2011 and 2010.
Average Deposit Balances and Rates
2012
Average Average
Balance Rate Paid
Year Ended December 31,
2011
Average Average
Balance Rate Paid
(Dollars in thousands)
2010
Average Average
Balance Rate Paid
Non-interest bearing accounts .......... $ 492,299
Interest bearing accounts:
713,539
Transaction (NOW) ........................
866,370
Savings and money market ...........
444,451
Time deposits less than $100,000 ....
351,002
Time deposits $100,000 or more ....
Total deposits ............................. $2,867,661
–
$ 392,780
–
$ 256,910
–
0.22%
0.35
0.57
0.53
0.38
698,808
825,274
569,428
438,030
$2,924,320
0.39%
0.67
0.94
0.92
0.70
574,432
547,096
392,671
476,748
$2,247,857
0.49%
1.09
1.40
1.22
1.01
The following table sets forth, by time remaining to maturity, time deposits of $100,000 and over at
December 31, 2012.
Maturity Distribution of Time Deposits of $100,000 and Over
December 31, 2012
(Dollars in thousands)
3 months or less ................................................... $113,769
92,192
Over 3 to 6 months ...............................................
89,964
Over 6 to 12 months .............................................
Over 12 months ....................................................
41,691
Total ................................................................ $337,616
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
2012
Amount
%
Arkansas ......................................... $1,714,455
673,702
Georgia ............................................
390,532
Texas ...............................................
152,653
Alabama ..........................................
135,957
Florida .............................................
20,057
North Carolina .................................
South Carolina .................................
13,699
Total .......................................... $3,101,055 100.0%
55.3%
21.7
12.6
4.9
4.4
0.7
0.4
Other Interest Bearing Liabilities
December 31,
2011
Amount
(Dollars in thousands)
%
$1,582,294
751,087
419,422
11,966
157,230
12,952
8,968
53.6%
25.5
14.3
0.4
5.4
0.5
0.3
2010
Amount
%
$1,752,977
152,333
455,089
17,322
110,556
19,615
32,861
69.0%
6.0
17.9
0.7
4.3
0.8
1.3
$2,943,919 100.0%
$2,540,753 100.0%
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-Dallas
advances and, to a lesser extent, FRB borrowings and federal funds purchased) and subordinated debentures.
The average balance of other interest bearing liabilities decreased from $432.6 million in 2010 to $400.8
million in 2011 and $391.4 billion in 2012. The average balance of repurchase agreements with customers
decreased from $49.8 million in 2010 to $39.6 million in 2011 and $34.8 million in 2012. The average
balance of other borrowings decreased from $317.8 million in 2010 to $296.2 million in 2011 and $291.7
million in 2012.
46
The following table reflects the average balance and average rate paid for each category of other interest
bearing liabilities for the years ended December 31, 2012, 2011 and 2010.
Average Balances and Rates of Other Interest Bearing Liabilities
2012
Average Average
Balance Rate Paid
Year Ended December 31,
2011
Average Average
Balance Rate Paid
(Dollars in thousands)
2010
Average Average
Balance Rate Paid
Repurchase agreements
with customers .............................. $ 34,776
Other borrowings(1) ...........................
291,678
Subordinated debentures ..................
64,950
Total other interest
bearing liabilities ....................... $391,404
0.13%
3.68
2.85
$ 39,638
296,195
64,950
0.44%
3.66
2.68
$ 49,835
317,796
64,950
0.76%
3.82
2.72
3.22%
$400,783
3.18%
$432,581
3.30%
(1) Included in other borrowings at December 31, 2012, 2011 and 2010 are FHLB-Dallas advances that contain
quarterly call features and mature as follows: 2017, $260.0 million at 3.90% weighted-average rate; and 2018,
$20.0 million at 2.53% weighted-average rate.
Capital Resources
Capital Resources and Liquidity
Subordinated Debentures. At December 31, 2012, 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.
Common Stockholders’ Equity and Tangible Common Stockholder’s Equity. The Company uses its common
stockholders’ equity ratio and its tangible common stockholders’ equity ratio as the principal measures of the
strength of its capital. The calculation of the Company’s common stockholders’ equity ratio and its tangible
common stockholders’ equity ratio at December 31, 2012, and 2011 are presented in the following table.
Common Stockholders’ Equity and Tangible Common Stockholders’ Equity
December 31,
2012
2011
(Dollars in thousands)
Total common stockholders’ equity ................................................................
Less: intangible assets ...................................................................................
Total tangible common stockholders’ equity ............................................
$ 507,664
(11,827)
$ 424,551
(12,207)
$ 495,837 $ 412,344
Total assets ....................................................................................................
Less: intangible assets ...................................................................................
Total tangible assets ................................................................................
$4,040,207 $3,841,651
(12,207)
$3,829,444
(11,827)
$4,028,380
Common stockholders’ equity to total assets .................................................
Tangible common stockholders’ equity to tangible assets ..............................
12.57%
12.31%
11.05%
10.77%
Common Stock Dividend Policy. In 2012 the Company paid dividends of $0.50 per share. In 2011 and
2010 the Company paid dividends of $0.37 per share and $0.30 per share, respectively. In 2012, the per
share dividend was $0.11 in the first quarter, $0.12 in the second quarter, $0.13 in the third quarter and
$0.14 in the fourth quarter. In 2011, the per share dividend was $0.085 in the first quarter, $0.09 in the
second quarter, $0.095 in the third quarter and $0.10 in the fourth quarter. In 2010, the per share dividend
was $0.07 in the first quarter, $0.075 per quarter in the second and third quarters, and $0.08 in the fourth
47
quarter. On January 2, 2013, the Company’s board of directors approved a dividend of $0.15 per common
share that was paid on January 25, 2013. The determination of future dividends on the Company’s common
stock will depend on conditions existing at that time.
Capital Compliance
Regulatory Capital. 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, 2012 and 2011 and are presented in the following table, followed by the capital ratios of the
Bank at December 31, 2012 and 2011.
Tier 1 capital:
Consolidated Capital Ratios
December 31,
2011
2012
(Dollars in thousands)
Common stockholders’ equity ..................................................................... $ 507,664
63,000
Allowed amount of trust preferred securities ..............................................
(10,783)
Net unrealized losses (gains) on investment securities AFS .......................
(11,827)
Less goodwill and certain intangible assets ................................................
548,054
Total Tier 1 capital ...................................................................................
$ 424,551
63,000
(9,327)
(12,207)
466,017
Tier 2 capital:
Qualifying allowance for loan and lease losses ...........................................
33,038
Total risk-based capital ........................................................................... $ 585,874 $ 499,055
37,820
Risk-weighted assets ....................................................................................... $3,026,495 $2,636,875
Adjusted quarterly average assets – fourth quarter ......................................... $3,806,635 $3,864,468
Ratios at end of period:
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”:
Tier 1 leverage ............................................................................................
Tier 1 risk-based capital ..............................................................................
Total risk-based capital ...............................................................................
14.40%
18.11
19.36
3.00%
4.00
8.00
5.00%
6.00
10.00
12.06%
17.67
18.93
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 ............................................................................
48
December 31,
2012
(Dollars in thousands)
2011
$536,084
$445,789
14.13%
17.70
18.95
11.58%
16.98
18.23
The regulatory capital ratios for the Company and the Bank at December 31, 2012 include the assets
acquired, liabilities assumed, and capital issued in connection with the acquisition of Genala. However,
pursuant to the instructions for bank holding company regulatory reports filed with the FRB and the
instructions for bank regulatory reports filed with the FDIC, separate regulatory reports were required to
be filed with the FRB for the Company (without the assets and liabilities of Genala) and for Genala at
December 31, 2012. Separate regulatory reports were also required to be filed with the FDIC for the Bank
(without the assets and liabilities of Genala’s wholly-owned bank subsidiary, The Citizens Bank) and for
the The Citizens Bank at December 31, 2012. Beginning January 1, 2013 all regulatory reports filed by the
Company and the Bank will include all assets, liabilities and activity of Genala and The Citizens Bank, with
separate regulatory reports for Genala and The Citizens Bank no longer required.
Notices of Proposed Rulemaking (“NPR”). On June 7, 2012 the FRB, the Office of Comptroller of Currency
and the FDIC jointly issued two NPRs for public comment. The first NPR, “Regulatory Capital Rules: Regulatory
Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition
Provisions,” would revise the general risk-based capital rules to incorporate certain revisions by the Basel
Committee on Banking Supervision to the Basel capital framework. The provisions of this NPR would:
• revise the definition of regulatory capital components and related calculations;
• add a new common equity tier 1 capital ratio;
• increase the minimum tier 1 risk-based capital ratio requirement from four percent to six percent;
• impose different limitations to qualifying minority interest in regulatory capital;
• incorporate revised regulatory capital requirements into the Prompt Corrective Action (“PCA”) Framework;
• implement a new capital conservation buffer that would limit payment of capital distributions and certain
discretionary bonus payments to executive officers if the banking organization does not hold certain
amounts of common tier 1 capital in addition to the minimum risk-based capital requirements; and
• provide for a transition period for several aspects of the proposed rule, including a phase-out period for
certain non-qualifying capital instruments, the new minimum capital ratio requirements, the capital
conservation buffer, and the regulatory capital adjustments and deductions.
The specific provisions of the NPR regarding capital requirements would alter the existing definition of
capital by imposing, among other requirements, additional constraints on the inclusion of certain items in
regulatory capital (including trust preferred securities), require that most accumulated other comprehensive
income be included in regulatory capital, and establish a new common equity tier 1 capital requirement. This
NPR also would establish a capital conservation buffer that, if not met, could reduce a bank’s payout amount
for capital distributions and discretionary bonus payments. Additionally, this NPR proposes revisions to the
PCA capital category thresholds to reflect new capital ratio requirements. The provisions of this NPR would
phase in over a number of years with certain changes to the capital requirements initially proposed to begin
in 2013 and phase in over three years and with the capital conservation buffer requirements beginning in
2016 and phasing in over four years.
The second NPR, “Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets: Market
Discipline and Disclosure Requirements,” would revise the measurement of risk-weighted assets. The
provisions of this NPR would:
• revise risk weights for exposures to foreign sovereign entities, foreign banking organizations and
foreign public sector entities;
• revise risk weights for residential mortgages based on loan-to-value ratios and certain products and
underwriting features;
• increase capital requirements for past-due loans, high volatility commercial real estate exposures,
and certain short-term loan commitments;
• expand the recognition of collateral and guarantors in determining risk-weighted assets; and
• establish due diligence requirements for securitization exposures.
The provisions of this NPR would take effect on January 1, 2015. At the present time neither of these NPRs
has been issued as a final rule or revised and re-proposed for further public comment. Management is currently
evaluating these proposed rules and is continuing to monitor developments with these NPRs to determine
what effect these NPRs might have on both the Bank’s and Company’s regulatory capital requirements.
49
Liquidity
Bank Liquidity. Liquidity represents an institution’s ability to provide funds to satisfy demands from
depositors, borrowers and other creditors 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 funding requirements and needs. The ALCO and Investments Committee (“ALCO”),
which reports to the board of directors, has primary responsibility for oversight of the Company’s liquidity,
funds management, asset/liability (interest rate risk) position and investment portfolio functions.
The objective of managing liquidity risk is to ensure the cash flow requirements resulting from depositor,
borrower and other creditor demands are met, as well as operating cash needs of the Company, and the
cost of funding such requirements and needs is reasonable. The Company maintains an interest rate risk,
liquidity and funds management policy and a contingency funding plan that, among other things, include
policies and procedures for managing liquidity risk. Generally the Company relies on deposits, repayments
of loans, leases, covered loans and purchased non-covered loans, 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. The Company has used these funds,
together with wholesale deposit sources such as brokered deposits, along with FHLB-Dallas advances,
federal funds purchased and other sources of short-term 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, general economic and market
conditions and other factors. 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 growth in loans and leases and deposit withdrawal demands or
otherwise fund operations. Such secondary sources include FHLB-Dallas advances, secured and unsecured
federal funds lines of credit from correspondent banks and FRB borrowings.
At December 31, 2012 the Company had substantial unused borrowing availability. This availability was
primarily comprised of the following four options: (1) $426 million of available blanket borrowing capacity
with the FHLB-Dallas, (2) $175 million of investment securities available to pledge for federal funds or
other borrowings, (3) $154 million of available unsecured federal funds borrowing lines and (4) up to $96
million of available borrowing capacity from borrowing programs of the FRB.
The Company anticipates it will continue to rely primarily on deposits, repayments of loans, leases,
covered loans and purchased non-covered loans, and repayments of its investment securities to provide
liquidity, as well as other funding sources as appropriate. Additionally, where necessary, the sources of
borrowed funds described above will be used to augment the Company’s primary funding sources.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). On July 21,
2010, the Dodd-Frank Act was signed into law. Among other things, the Dodd-Frank Act provided for full
deposit insurance with no maximum coverage amount for non-interest bearing transaction accounts for
two years beginning December 31, 2010. Additionally, the Dodd-Frank Act permanently increased the
maximum deposit insurance coverage for all other deposit categories to $250,000 retroactive to January 1,
2008. On December 31, 2012 the full deposit insurance provided by the Dodd-Frank Act for non-interest
bearing transaction accounts expired. As a result, these accounts are now insured up to the maximum
of $250,000.
Sources and Uses of Funds. Operating activities used net cash of $15 million in 2012 and provided
net cash of $21 million and $41 million in 2011 and 2010, respectively. Net cash provided by operating
activities is comprised primarily of net income, adjusted for certain non-cash items and for changes in
various operating assets and liabilities.
Investing activities provided $187 million in 2012, $792 million in 2011 and $492 million in 2010.
The Company’s investing activities include net loan and lease fundings, which used $216 million in 2012
and $27 million in 2011 and provided $38 million in 2010. Net activity in the Company’s investment
securities portfolio provided $37 million in 2012, $112 million in 2011 and $194 million in 2010.
The Company received $29 million of cash, net of amounts paid, in its acquisition of Genala in 2012.
50
The Company received $365 million of cash in connection with its three FDIC-assisted acquisitions in 2011
and $201 million of cash in connection with its four FDIC-assisted acquisitions in 2010. Payments received
on covered loans provided $212 million in 2012, $206 million in 2011 and $46 million in 2010, and payments
received from the FDIC under loss share agreements provided $144 million in 2012, $109 million in 2011
and $20 million in 2010. Other loss share activity provided $22 million in 2012 and $8 million in 2011.
Purchases of premises and equipment used $46 million in 2012, $21 million in 2011, and $17 million in
2010. The Company purchased $59 million of BOLI in 2012 and $10 million of BOLI in 2010 (none in
2011). The Company invested $2 million in 2011 and $5 million in 2010 in unconsolidated investments
and noncontrolling interest. Proceeds from sales of other assets provided $65 million in 2012, $42 million
in 2011 and $24 million in 2010.
Financing activities used $23 million in 2012, $804 million in 2011 and $562 million in 2010. The
Company’s net changes in deposit accounts provided $14 million in 2012 and used $712 million in 2011
and $441 million in 2010. The Company’s net repayments of other borrowings and repurchase agreements
with customers used $24 million in 2012, $84 million in 2011 and $115 million in 2010. The Company
paid common stock cash dividends of $17 million in 2012, $13 million in 2011, and $10 million in 2010.
Proceeds and current tax benefits on exercise of stock options provided $6 million in 2012, $5 million in
2011 and $3 million in 2010.
Contractual Obligations. The following table presents, as of December 31, 2012, 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, software contracts and various other contractual obligations.
Contractual Obligations
1 Year
or
Less
Over 1
Over 3
Through Through
5 Years
3 Years
Over
5
Years
(Dollars in thousands)
Total
Time deposits(1) ............................................... $ 685,199 $ 91,506 $ 5,709 $ 644 $ 783,058
Deposits without a stated maturity(2) ..............
– 2,320,495
2,320,495
Repurchase agreements with customers(1) ......
29,551
29,551
Other borrowings(1) .........................................
332,583
11,761
Subordinated debentures(1) .............................
87,383
1,943
4,869
Lease obligations ............................................
1,147
Other obligations ............................................
63,973
21,567
Total contractual obligations ...................... $3,071,663 $124,361 $291,924 $133,964 $3,621,912
–
–
278,425
3,542
948
3,300
–
–
21,686
3,542
1,538
6,089
–
20,711
78,356
1,236
33,017
(1) Includes unpaid interest through the contractual maturity on both fixed and variable rate obligations. The interest
included on variable rate obligations is based upon interest rates in effect at December 31, 2012. The contractual
amounts to be paid on variable rate obligations are affected by changes in interest rates. Future changes in interest
rates could materially affect the contractual amounts to be paid.
(2) Includes interest accrued and unpaid through December 31, 2012.
Off-Balance Sheet Commitments. The following table details the amounts and expected maturities of
significant off-balance sheet commitments as of December 31, 2012. 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
Commitments to extend credit(1) ..... $159,462
18,201
Standby letters of credit .................
Total commitments ................. $177,663
Over 1
Through
3 Years
$460,047
983
$461,030
Over 3
Through
5 Years
(Dollars in thousands)
$156,119
56
$156,175
Over
5
Years
$11,879
–
$11,879
Total
$787,507
19,240
$806,747
(1) Includes commitments to extend credit under mortgage interest rate locks of $18.1 million that expire in
one year or less.
51
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.
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 the 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 ceiling 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, up 300 bps, up 400 bps, down 100 bps, down 200 bps, down 300
bps and down 400 bps. Based on current conditions, the Company believes that modeling its change in net
interest income assuming rates go down 100 bps, down 200 bps, down 300 bps and down 400 bps is not
meaningful. 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, 2013. 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)
+400
+300
+200
+100
-100
-200
-300
-400
% Change in
Projected Baseline
Net Interest Income
1.6%
0.6
0.2
0.0
Not meaningful
Not meaningful
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, leases and deposits.
52
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes presented elsewhere in this report have been
prepared in accordance GAAP. 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, the vast majority of 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.
Growth and Expansion
The Company expects to continue its growth and de novo branching strategy, although it has slowed
the pace of new office openings in recent years. During 2010 and 2011, most new offices added by the
Company were the result of branches acquired in FDIC-assisted acquisitions. In the first quarter of 2012,
the Company opened its ninth metro-Dallas area office in The Colony, Texas and a loan production office in
Austin, Texas. In July of 2012, the Company opened its tenth metro-Dallas area office in Southlake, Texas and
a loan production office in Atlanta, Georgia. In August of 2012, the Company relocated from a leased facility
to a bank-owned facility in Bluffton, South Carolina, and in September of 2012, the Company opened its
second office in Mobile, Alabama. In October of 2012, the Company relocated from a leased facility to a
bank-owned facility in Wilmington, North Carolina and in December 2012, it relocated its original Mobile,
Alabama office from the current leased facility to a bank-owned facility. In the first or second quarter of
2013, the Company expects to replace its existing Charlotte, North Carolina loan production office with a
full-service banking office.
On December 31, 2012, the Company completed its acquisition of Genala in a transaction valued at
approximately $27.5 million. The Company paid $13.4 million of cash and issued 423,616 shares of its
common stock valued at approximately $14.1 million in exchange for all outstanding shares of Genala
common stock. Genala was the holding company for The Citizens Bank, which operated one banking office
in Geneva, Alabama.
On January 24, 2013 the Company entered into a definitive agreement and plan of merger (“Agreement”)
with The First National Bank of Shelby (“First National Bank”) in Shelby, North Carolina. According to the
terms of the Agreement, the Company will acquire all of the outstanding common stock of First National
Bank in a transaction valued at approximately $67.8 million, including $64.0 million of merger consideration
for the outstanding common stock of the First National Bank, subject to certain adjustments, and
approximately $3.8 million representing the value of real property which is being simultaneously purchased
by the Company from parties related to First National Bank and on which certain First National Bank offices
are located. First National Bank operates 14 North Carolina banking offices in a four county area west of
Charlotte including nine offices in Cleveland County, three offices in Gaston County, and one office each in
Lincoln and Rutherford Counties. The closing of the transaction with First National Bank is subject to certain
conditions, including receipt of state and federal banking regulatory approvals and the approval of the
shareholders of First National Bank.
Opening new offices is subject to availability of qualified personnel and suitable sites, designing,
constructing, equipping and staffing such offices, 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 2012 the Company spent $46 million on capital expenditures for premises and equipment,
including premises and equipment acquired in FDIC-assisted acquisitions. The Company’s capital expenditures
for 2013 are expected to be in the range of $11 million to $17 million, including progress payments on
construction projects expected to be completed in 2013 and 2014, 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 acquired or 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, potential premises and equipment expenditures associated with FDIC-assisted
or traditional acquisitions, if any, and other factors.
53
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates,
assumptions and judgments that affect the amounts reported in the consolidated financial statements. The
Company’s determination of (i) the provisions to and the adequacy of the allowance for loan and lease losses,
(ii) the fair value of its investment securities portfolio, (iii) the fair value of foreclosed assets not covered by
FDIC loss share agreements and (iv) the fair value of the assets acquired and liabilities assumed pursuant to
business combination transactions all involve a higher degree of judgment and complexity than its other
significant accounting policies. Accordingly, the Company considers the determination of (i) provisions to
and the adequacy of the allowance for loan and lease losses, (ii) the fair value of its investment securities
portfolio, (iii) the fair value of foreclosed assets not covered by FDIC loss share agreements and (iv) the fair
value of the assets acquired and liabilities assumed pursuant to business combination transactions to be
critical accounting policies.
Provisions to and adequacy of the allowance for loan and lease losses. The ALLL is established through
a provision for such losses charged against income. All or portions of loans or leases, excluding purchased
non-covered loans and covered loans, deemed to be uncollectible are charged against the ALLL when
management believes that 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 probable incurred
losses in the loan and lease portfolio. Provisions to and the adequacy of the allowance for loan and lease
losses are based on evaluations of the loan and lease portfolio utilizing objective and subjective criteria.
The objective criteria primarily include an internal grading system and specific allowances. In addition to
these objective criteria, the Company subjectively assesses the adequacy of the allowance for loan and lease
losses and the need for additions thereto, with consideration given to the nature and mix of the portfolio,
including concentrations of credit; general economic and business conditions, including national, regional
and local business and economic conditions that may affect borrowers’ or lessees’ ability to pay; expectations
regarding the current business cycle; trends that could affect collateral values and other relevant factors. The
Company also utilizes a peer group analysis and a historical analysis to validate the overall adequacy of its
allowance for loan and lease losses. Changes in any of these criteria or the availability of new information
could require adjustment of the ALLL in future periods. While a specific allowance has been calculated for
impaired loans and leases and for loans and leases where the Company has otherwise determined a specific
reserve is appropriate, no portion of the Company’s ALLL is restricted to any individual loan or lease or
group of loans or leases, and the entire ALLL is available to absorb losses from any and all loans and leases.
The Company’s internal grading system assigns one of nine grades to all loans and leases, with each grade
being assigned a specific allowance allocation percentage, except residential 1-4 family loans, consumer loans,
purchased non-covered loans, and covered loans.
The grade for each graded individual loan or lease is determined by the account officer and other approving
officers at the time the loan or lease is made and changed from time to time to reflect an ongoing assessment
of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by senior management
and as part of the Company’s internal loan review process. These risk elements include, among others, the
following: (1) for non-farm/non-residential, multifamily residential, and agricultural real estate loans, the
debt service coverage ratio (income from the property in excess of operating expenses compared to loan
repayment requirements), operating results of the owner in the case of owner-occupied properties, the loan-
to-value ratio, the age, condition, value, nature and marketability of the collateral and the specific risks and
volatility of income, property value and operating results typical of properties of that type; (2) for construction
and land development loans, the perceived feasibility of the project including the ability to sell developed lots
or improvements constructed for resale or ability to lease property constructed for lease, the quality and
nature of contracts for presale or preleasing, if any, experience and ability of the developer and loan-to-cost
and loan-to-value ratios; (3) for commercial and industrial loans and leases, the operating results of the
commercial, industrial or professional enterprise, the borrower’s or lessee’s business, professional and
financial ability and expertise, the specific risks and volatility of income and operating results typical for
businesses in the applicable industry and the age, condition, value, nature and marketability of collateral;
and (4) for non-real estate agricultural loans and leases, the operating results, experience and ability of the
borrower or lessee, historical and expected market conditions and the age, condition, value, nature and
marketability of collateral. In addition, for each category the Company considers secondary sources of
income and the financial strength of the borrower or lessee and any guarantors.
54
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 for residential 1-4
family and consumer loans are determined by management and are adjusted periodically. In determining
these allowance allocation percentages, management considers, among other factors, historical loss
percentages and a variety of subjective criteria in determining the allowance allocation percentages.
For covered loans, management separately monitors this portfolio and periodically reviews loans contained
within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. To the
extent that a loan’s performance has deteriorated from management’s expectation established in conjunction
with the determination of the Day 1 Fair Values, such loan is considered in the determination of the required
level of allowance for loan and lease losses. To the extent that a revised loss estimate exceeds the loss
estimate established in the determination of the Day 1 Fair Values, such deterioration will result in an
allowance allocation or a charge-off.
For purchased non-covered loans, management segregates this portfolio into loans that contain evidence
of credit deterioration on the date of purchase and loans that do not contain evidence of credit deterioration
on the date of purchase. Purchased non-covered loans with evidence of credit deterioration are regularly
monitored and are periodically reviewed by management. To the extent that a loan’s performance has
deteriorated from management’s expectation established in conjunction with the determination of the Day 1
Fair Values, such loan is considered in the determination of the required level of allowance for loan and lease
losses. To the extent that a revised loss estimate exceeds the loss estimate established in the determination
of Day 1 Fair Values, such determination will result in an allowance allocation or a charge-off.
All other purchased non-covered loans are graded by management at the time of purchase. The grade on
these purchased non-covered loans are reviewed regularly as part of the ongoing assessment of such loans.
To the extent that current information indicates it is possible that the Company will not be able to collect all
amounts according to the contractual terms thereof, such loan is considered in the determination of the
required level of allowance for loan and lease losses and may result in an allowance allocation or a charge-off.
At December 31, 2012 and 2011, the Company had no allowance for its purchased non-covered loans and
its covered loans because all losses had been charged off on such loans whose performance had deteriorated
from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.
The Company generally places a loan or lease on nonaccrual status when such loan or lease is (i) deemed
impaired or (ii) 90 days or more past due, or earlier when doubt exists as to the ultimate collection of
payments. The Company may continue to accrue interest on certain loans or leases contractually past due 90
days or more if such loans or leases are both well secured and in the process of collection. At the time a loan
or lease is placed on nonaccrual status, interest previously accrued but uncollected is generally reversed and
charged against interest income. Nonaccrual loans and leases are generally returned to accrual status when
payments are less than 90 days past due and the Company reasonably expects to collect all 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. Loans for which the terms have been modified
and for which (i) the borrower is experiencing financial difficulties and (ii) a concession has been granted
to the borrower by the Company are considered TDRs and are included in impaired loans and leases. Income
on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs which continue
to accrue interest, is recognized on a cash basis when and if actually collected.
All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan
or lease, excluding purchased non-covered loans and covered loans, to be impaired when based on current
information and events, it is probable that the Company will be unable to collect all amounts due according to
the contractual terms thereof. The Company considers a purchased non-covered loan with evidence of credit
deterioration at the date of purchase and a covered loan to be impaired once a decrease in expected cash
flows or other deterioration in the loan’s expected performance, subsequent to the determination of the Day 1
Fair Values, results in an allowance allocation, a partial or full charge-off or in a provision for loan and lease
losses. Purchased non-covered loans without evidence of credit deterioration at the date of purchase are
considered impaired when current information indicates it is probable that the Company will not be able to
collect all amounts due according to the contractual terms thereof. Most of the Company’s nonaccrual loans
and leases, excluding purchased non-covered loans and covered loans, and all TDRs are considered impaired.
The majority of the Company’s impaired loans and leases are dependent upon collateral for repayment. For
such loans and leases, impairment is measured by comparing collateral value, net of holding and selling
55
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 charged off as a reduction of the allowance for loan and lease losses.
The Company also maintains an allowance for certain loans and leases, excluding purchased non-covered
loans and covered loans, not considered impaired where (i) the customer is continuing to make regular
payments, although payments may be past due, (ii) there is a reasonable basis to believe the customer may
continue to make regular payments, although there is also an elevated risk that the customer may default, and
(iii) the collateral or other repayment sources are likely to be insufficient to recover the current investment
in the loan or lease if a default occurs. The Company evaluates such loans and leases to determine if an
allowance is needed for these loans and leases. For the purpose of calculating the amount of such allowance,
management assumes that (i) no further regular payments occur and (ii) all sums recovered will come from
liquidation of collateral and collection efforts from other payment sources. To the extent that the Company’s
current investment in a particular loan or lease evaluated for the need for such an allowance exceeds its net
collateral value or its estimated discounted cash flows, such excess is considered allocated allowance for
purposes of the determination of the allowance for loan and lease losses.
The Company may also include further allowance allocation for risk-rated loans, including commercial
real estate loans and excluding purchased non-covered loans and covered loans, that are in markets
determined by management to be “stressed”. Stressed markets may include any specific geography
experiencing (i) high unemployment substantially above the U.S. average, (ii) significant over-development
in one or more commercial real estate categories, (iii) recent or announced loss of a major employer or
significant workforce reductions, (iv) significant declines in real estate values and (v) various other factors.
The additional allowance for such stressed markets compensates for the expectation that a higher risk of loss
is anticipated for the “work-out” or liquidation of a real estate loan in a stressed market versus a market that
is not experiencing any significant levels of stress. The required allocation percentage applicable to real estate
loans in stressed markets may be applied to the total market or it may be determined at the individual loan
level based on collateral value, loan-to-value ratios, strength of the borrower and/or guarantor, viability of
the underlying project and other factors. The Company had no allowance allocation for loans in stressed
markets at December 31, 2012 or 2011.
Prior to December 31, 2011, the Company utilized the sum of all allowance amounts derived as described
above, combined with a reasonable unallocated allowance, as the primary indicator of the appropriate level
of allowance for loan and lease losses. During the fourth quarter of 2011, the Company refined its allowance
calculation whereby it “allocated” the portion of the allowance that was previously deemed to be unallocated
allowance. This refined allowance calculation includes specific allowance allocations at December 31, 2012
and 2011 for qualitative factors including (i) concentrations of credit, (ii) general economic and business
conditions, (iii) trends that could affect collateral values and (iv) expectations regarding the current business
cycle. The Company may also consider other qualitative factors in future periods for additional allowance
allocations, including, among other factors, (1) credit quality trends (including trends in nonperforming
loans and leases expected to result from existing conditions), (2) seasoning of the loan and lease portfolio,
(3) specific industry conditions affecting portfolio segments, (4) the Company’s expansion into new markets
and (5) the offering of new loan and lease products.
Changes in the criteria used in this evaluation or the availability of new information could cause the
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.
Fair value of the investment securities portfolio. 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).
56
The Company utilizes independent third parties as its principal sources for determining fair value of
investment securities which are measured on a recurring basis. As a result, the Company receives estimates
of fair values from at least two independent pricing sources for the majority of its individual securities within
its investment portfolio. For investment securities traded in an active market, the fair values are obtained
from independent pricing services and 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, pricing matrices or a combination thereof. For investment securities
traded in a market that is not active, fair value is determined using unobservable inputs. Additionally, the
valuation of investment securities acquired in FDIC-assisted or traditional acquisitions may include certain
unobservable inputs. All fair value estimates received by the Company from its investment securities are
reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief
Financial Officer.
The fair values of the Company’s investment securities traded in both active and inactive markets can be
volatile and may be influenced by a number of factors including market interest rates, prepayment speeds,
discount rates, credit quality of the issuer, general market conditions including market liquidity conditions
and other factors. Factors and conditions are constantly changing and fair values could be subject to material
variations that may significantly impact the Company’s financial condition, results of operations and liquidity.
Fair value of foreclosed assets not covered by FDIC loss share agreements. Repossessed personal properties
and real estate acquired through or in lieu of foreclosure are initially recorded at the lesser of current principal
investment or fair value less estimated cost to sell at the date of repossession or foreclosure. Valuations of
these assets are periodically reviewed by management with the carrying value of such assets adjusted
through non-interest expense to the then estimated fair value net of estimated selling costs, if lower, until
disposition. Fair values of these assets are generally based on third party appraisals, broker price opinions
or other valuations of the property.
Fair value of assets acquired and liabilities assumed pursuant to business combination transactions.
Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on
their purchase date. As provided for under GAAP, management has up to 12 months following the date of
the acquisition to finalize the fair values of acquired assets and assumed liabilities. Once management has
finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management
considers such values to be the Day 1 Fair Values.
Loans covered by FDIC loss share agreements, or covered loans, are accounted for in accordance with the
provisions of GAAP applicable to loans acquired with deteriorated credit quality and pursuant to the AICPA’s
December 18, 2009 letter in which the AICPA summarized the SEC’s view regarding the accounting in
subsequent periods for discount accretion associated with non-credit impaired loans acquired in a business
combination or asset purchase. Considering, among other factors, the general lack of adequate underwriting,
proper documentation, appropriate loan structure and insufficient equity contributions for a large number of
these acquired loans, and the uncertainty of the borrowers’ and/or guarantors’ ability or willingness to make
contractually required (or any) principal and interest payments, management has determined that a significant
portion of the loans acquired in FDIC-assisted acquisitions had evidence of credit deterioration since origination.
Accordingly, management has elected to apply the provisions of GAAP applicable to loans acquired with
deteriorated credit quality as provided by the AICPA’s December 18, 2009 letter, to all loans acquired in its
FDIC-assisted acquisitions.
At the time such covered loans are acquired, management individually evaluates substantially all loans
acquired in the transaction. This evaluation allows management to determine the estimated fair value of the
covered loans (not considering any FDIC loss sharing agreements) and includes no carryover of any previously
recorded allowance for loan and lease losses. In determining the estimated fair value of covered loans,
management considers a number of factors including, among other things, the remaining life of the acquired
loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated
holding periods, and net present value of cash flows expected to be received. To the extent that any covered
loan is not specifically reviewed, management applies a loss estimate to that loan based on the average
expected loss rates for the covered loans that were individually reviewed in that loan portfolio.
57
In determining the Day 1 Fair Values of covered loans, management calculates a non-accretable difference
(the credit component of the covered loans) and an accretable difference (the yield component of the covered
loans). The non-accretable difference is the difference between the contractually required payments and the
cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values.
Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses.
Subsequent increases in cash flows will result in a reversal of the provision for loan and lease losses to the
extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on
interest income. Any such increase or decrease in expected cash flows will result in a corresponding decrease
or increase, respectively, of the FDIC loss share receivable for the portion of such reduced or additional loss
expected to be collected from the FDIC.
The accretable difference on covered loans is the difference between the expected cash flows and the
net present value of expected cash flows. Such difference is accreted into earnings using the effective yield
method over the term of the loans. In determining the net present value of the expected cash flows, the
Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics
of each individual loan. At December 31, 2012, the weighted average period during which management
expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment
under the FDIC loss share agreements) is 2.2 years.
Management separately monitors the covered loan portfolio and periodically reviews loans contained
within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan
is typically reviewed (i) when it is modified or extended, (ii) when material information becomes available
to the Company that provides additional insight regarding the loan’s performance, the status of the borrower,
or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected
cash flows which include a substantial portion of each acquired covered loan portfolio. Management separately
reviews, on an annual basis, the performance of the portfolio of covered loans, or more frequently to the
extent that material information becomes available regarding the performance of an individual loan, to
make determinations of the constituent loans’ performance and to consider whether there has been any
significant change in performance since management’s initial expectations established in conjunction with
the determination of the Day 1 Fair Values. To the extent that a loan is performing in accordance with
management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such
loan is not included in any of the Company’s credit quality ratios, is not considered to be an impaired loan,
and is not considered in the determination of the required allowance for loan and lease losses. To the extent
that a loan’s performance has deteriorated from management’s expectation established in conjunction with
the determination of the Day 1 Fair Values, such loan is generally included in certain of the Company’s credit
quality metrics, may be considered an impaired loan, and is considered in the determination of the required
level of allowance for loan and lease losses. Any improvement in the expected performance of a covered loan
would result in a reversal of the provision for loan and lease losses to the extent of prior charges and then
an adjustment to accretable yield, which would have a positive impact on interest income.
At the time of acquisition of purchased non-covered loans, management individually evaluates substantially
all loans acquired in the transaction. For those purchased loans without evidence of credit deterioration,
management evaluates each reviewed loan using an internal grading system with a grade assigned to each
loan at the date of acquisition. The grade for each purchased non-covered loan is reviewed subsequent to
the date of acquisition any time a loan is renewed or extended or at any time information becomes available
to the Company that provides material insight regarding the loan’s performance, the borrower or the
underlying collateral. To the extent that a loan is performing in accordance with management’s initial
expectations, such loan is not considered impaired and is not considered in the determination of the required
allowance for loan and lease losses. To the extent that current information indicates it is possible that the
Company will not be able to collect all amounts according to the contractual terms thereof, such loan is
considered impaired and is considered in the determination of the required level of allowance for loan and
lease losses.
58
In determining the Day 1 Fair Values of purchased non-covered loans without evidence of credit deteriora-
tion at the date of acquisition, management includes (i) no carry over of any previously recorded allowance
for loan losses and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate
of interest, given the risk profile and grade assigned to each loan. This adjustment will be accreted into
earnings as an adjustment to the yield on purchased non-covered loans, using the effective yield method,
over the remaining life of each loan.
Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are
accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated
credit quality. At the time such purchased non-covered loans with evidence of credit deterioration are
acquired, management individually evaluates each loan to determine the estimated fair value of each loan.
This evaluation includes no carryover of any previously recorded allowance for loan and lease losses. In
determining the estimated fair value of purchased non-covered loans with evidence of credit deterioration,
management considers a number of factors including, among other things, the remaining life of the acquired
loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated
holding periods, and net present value of cash flows expected to be received.
In determining the Day 1 Fair Values of purchased non-covered loans with evidence of credit deterioration,
management calculates a non-accretable difference (the credit component of the purchased loans) and an
accretable difference (the yield component of the purchased loans). The non-accretable difference is the
difference between the contractually required payments and the cash flows expected to be collected in
accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected
cash flows will generally result in a provision for loan and lease losses. Subsequent increases in cash flows
will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an
adjustment to accretable yield, which would have a positive impact on interest income.
The accretable difference on purchased non-covered loans with evidence of credit deterioration is the
difference between the expected cash flows and the net present value of expected cash flows. Such difference
is accreted into earnings using the effective yield method over the term of the loans. In determining the net
present value of the expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per
annum depending on the risk characteristics of each individual loan.
Management separately monitors purchased non-covered loans with evidence of credit deterioration on
the date of purchase and periodically reviews such loans contained within this portfolio against the factors
and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed
or extended, (ii) at any other time additional information becomes available to the Company that provides
material additional insight regarding the loan’s performance, the status of the borrower, or the quality or
value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of
each acquired portfolio. Management separately reviews, on an annual basis, the performance of the
portfolio of purchased non-covered loans with evidence of credit deterioration, or more frequently to the
extent that material information becomes available regarding the performance of an individual loan, to
make determinations of the constituent loans’ performance and to consider whether there has been any
significant change in performance since management’s initial expectations established in conjunction with
the determination of the Day 1 Fair Values. To the extent that a loan is performing in accordance with or
exceeding management’s performance expectation established in conjunction with the determination of the
Day 1 Fair Values, such loan is not included in any of the credit quality ratios, is not considered to be a
nonaccrual or impaired loan, and is not considered in the determination of the required allowance for loan
and lease losses. To the extent that a loan’s performance has deteriorated from management’s expectation
established in conjunction with the determination of the Day 1 Fair Values, such loan is included in certain
of the Company’s credit quality metrics, is generally considered an impaired loan, and is considered in
the determination of the required level of allowance for loan and lease losses. Any improvement in the
expected performance of such loan would result in a reversal of the provision for loan and lease losses to
the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact
on interest income.
59
Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are recorded at
Day 1 Fair Values. In estimating the Day 1 Fair Values of covered foreclosed assets, management considers a
number of factors including, among others, appraised value, estimated selling prices, estimated selling costs,
estimated holding periods and net present value of cash flows expected to be received. Discount rates ranging
from 8.0% to 9.5% per annum were used to determine the net present value of covered foreclosed assets.
In connection with the Company’s FDIC-assisted acquisitions, the Company has recorded an FDIC loss
share receivable to reflect the indemnification provided by the FDIC. Currently, the expected losses on
covered assets for each of the Company’s loss share agreements would result in expected recovery of
approximately 80% of incurred losses. Since the indemnified items are covered loans and covered foreclosed
assets, which are measured at Day 1 Fair Values, the FDIC loss share receivable is also measured and
recorded at Day 1 Fair Values, and is calculated by discounting the cash flows expected to be received from
the FDIC. A discount rate of 5.0% per annum was used to determine the net present value of the FDIC loss
share receivable. These cash flows are estimated by multiplying estimated losses by the reimbursement
rates as set forth in the loss share agreements. The balance of the FDIC loss share receivable is adjusted
periodically to reflect changes in expectations of discounted cash flows, expense reimbursements under
the loss share agreements and other factors.
Pursuant to the clawback provisions of the loss share agreements for the Company’s FDIC-assisted
acquisitions, the Company may be required to reimburse the FDIC should actual losses be less than certain
thresholds established in each loss share agreement. The amount of the clawback provision for each
acquisition is measured and recorded at Day 1 Fair Values. It is calculated as the difference between
management’s estimated losses on covered loans and covered foreclosed assets and the loss threshold
contained in each loss share agreement, multiplied by the applicable clawback provisions contained in
each loss share agreement. This clawback amount, which is payable to the FDIC upon termination of the
applicable loss share agreement, is then discounted back to net present value using a discount rate of 5.0%
per annum. To the extent that actual losses on covered loans and covered foreclosed assets are less than
estimated losses, the applicable clawback payable to the FDIC upon termination of the loss share agreements
will increase. To the extent that actual losses on covered loans and covered foreclosed assets are more than
estimated losses, the applicable clawback payable to the FDIC upon termination of the loss share agreements
will decrease.
The Day 1 Fair Values of investment securities acquired in business combinations are generally based on
quoted market prices, broker quotes, comprehensive interest rate tables or pricing matrices, or a combination
thereof. Additionally, these valuations may include certain unobservable inputs. The Day 1 Fair Values of
assumed liabilities in business combinations is generally the amount payable by the Company necessary to
completely satisfy the assumed obligations.
Recently Issued Accounting Standards
See note 1 to the Consolidated Financial Statements for a discussion of certain recently issued accounting
pronouncements.
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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, real estate market, competitive, employment,
credit market and interest rate conditions; plans, goals, beliefs, expectations, thoughts, estimates and
outlook for the future; revenue growth; net income and earnings per common 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; gains on mergers and
acquisition transactions; income from accretion of the FDIC loss share receivable, net of amortization of the
FDIC clawback payable; other loss share income; non-interest expense; efficiency ratio; anticipated future
operating results and financial performance; asset quality and asset quality ratios, including the effects of
current economic and real estate market conditions; nonperforming loans and leases; nonperforming assets;
net charge-offs; net charge-off ratio; provision and allowance for loan and lease losses; past due loans and
leases; current or future litigation; interest rate sensitivity, including the effects of possible interest rate
changes; future growth and expansion opportunities including plans for making additional FDIC-assisted
and traditional acquisitions and plans for opening new offices and relocating or closing offices; opportunities
and goals for future market share growth; expected capital expenditures; loan and lease growth; deposit
growth; changes in covered assets; 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,” “could,” “estimate,” “expect,” “goal,” “hope,” “intend,” “look,” “may,”
“plan,” “project,” “seek,” “target,” “trend,” “will,” “would,” 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 or retaining qualified personnel, obtaining regulatory or other
approvals, obtaining permits and designing, constructing and opening new offices; the ability to enter into
additional FDIC-assisted or traditional acquisitions or problems with integrating or managing acquisitions;
opportunities to profitably deploy capital; the ability to attract new or retain existing deposits, loans and
leases; the ability to generate future revenue growth or to control future growth in non-interest expense;
interest rate fluctuations, including 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 real estate market conditions, including their effect
on the creditworthiness of borrowers and lessees, collateral values, the value of investment securities and
asset recovery values, including the value of the FDIC loss share receivable and related assets covered by
FDIC loss share agreements; changes in legal and regulatory requirements; recently enacted and potential
legislation and regulatory actions, including legislation and regulatory actions intended to stabilize
economic conditions and credit markets, increase regulation of the financial services industry and protect
homeowners or consumers; changes in U.S. government monetary and fiscal policy; possible further
downgrade of U.S. Treasury securities; adoption of new accounting standards or changes in existing
standards; and adverse results in current or 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.
61
Summary of Quarterly Results of
Operations, Market Prices of Common Stock and Dividends
Unaudited
2012 – Three Months Ended
Mar. 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share amounts)
Interest income .................................................... $49,943
(6,110)
Interest expense ..................................................
43,833
Net interest income ......................................
(3,076)
Provision for loan and lease losses .....................
13,810
Non-interest income ............................................
(28,607)
Non-interest expense ..........................................
(7,950)
Income taxes .......................................................
(1)
Noncontrolling interest ........................................
Net income available to
common stockholders ............................... $18,009
$47,772
(5,474)
42,298
(3,055)
15,710
(27,282)
(8,584)
5
$49,456
(5,012)
44,444
(3,080)
14,491
(28,682)
(7,883)
(15)
$48,775
(5,004)
43,771
(2,533)
18,848
(29,891)
(9,519)
(9)
$19,092
$19,275
$20,667
Per common share:
Earnings – diluted ........................................ $ 0.52
0.11
Cash dividends .............................................
$ 0.55
0.12
$ 0.55
0.13
$ 0.59
0.14
Bid price per common share:
Low .............................................................. $ 27.73
31.86
High .............................................................
$ 28.08
32.03
$ 29.91
34.65
$ 31.00
34.47
2011 - Three Months Ended
Mar. 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share amounts)
Interest income .................................................... $44,023
(7,940)
Interest expense ..................................................
36,083
Net interest income ......................................
(2,250)
Provision for loan and lease losses .....................
12,990
Non-interest income ............................................
(26,192)
Non-interest expense ..........................................
(6,004)
Income taxes .......................................................
3
Noncontrolling interest ........................................
$50,874
(8,398)
42,476
(3,750)
75,058
(35,200)
(28,380)
13
$51,902
(7,566)
44,336
(1,500)
16,071
(31,800)
(8,220)
17
$52,370
(6,531)
45,839
(4,275)
12,964
(29,339)
(7,604)
(15)
Net income available to
common stockholders ............................... $14,630
$50,217
$18,904
$17,570
Per common share:
Earnings – diluted ........................................ $ 0.43
Cash dividends .............................................
0.085
$ 1.46
$ 0.55
$ 0.51
0.090
0.095
0.100
Bid price per common share:
Low .............................................................. $ 20.96
22.23
High .............................................................
$ 22.04
26.03
$ 19.89
26.88
$ 20.64
30.80
See Note 17 to Consolidated Financial Statements for discussion of dividend restrictions.
62
Company Performance
The graph below shows a comparison for the period commencing December 31, 2007 through December 31,
2012 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, 2007.
Cumulative Return Comparison
$300
$275
$250
$225
$200
$175
$150
$125
$100
$ 75
$ 50
12/31/2007
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012
OZRK (Bank of the Ozarks, Inc.)
SML (S&P Smallcap Index)
NDF (NASDAQ Financial Index)
12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012
OZRK (Bank of the Ozarks, Inc.)
SML (S&P Smallcap Index)
NDF (NASDAQ Financial Index)
$100
$100
$100
$115
$ 69
$ 71
$116
$ 87
$ 73
$174
$109
$ 84
$240
$110
$ 75
$275
$128
$ 88
63
Report of Management on the Company’s
Internal Control Over Financial Reporting
February 28, 2013
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, 2012, 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. As permitted by
SEC guidance, management excluded from its assessment the operations of the Genala Banc,
Inc. acquisition made during 2012, which is described in Note 2 to the Consolidated Financial
Statements. The assets acquired in this acquisition consist primarily of cash, investment
securities and loans which comprised approximately 4% of total consolidated assets at
December 31, 2012. Based on this assessment, management has concluded that the Company’s
internal control over financial reporting was effective as of December 31, 2012, 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
Greg McKinney
Chief Financial Officer and Chief Accounting Officer
64
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Bank of the Ozarks, Inc.
We have audited Bank of the Ozarks, Inc.’s internal control over financial reporting as of
December 31, 2012, 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.
As permitted, the Company excluded the operations of the financial institution acquired during
2012, which is described in Note 2 of the consolidated financial statements, from the scope of
management’s report on internal control over financial reporting. As such it has also been excluded
from the scope of our audit of internal control over financial reporting.
In our opinion, Bank of the Ozarks, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2012, 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 sheets of Bank of the Ozarks, Inc. as of
December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive
income, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2012, and our report dated February 28, 2013, expressed an unqualified opinion
thereon.
Atlanta, Georgia
February 28, 2013
65
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
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, 2012 and 2011 and the related
consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2012.
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, 2012 and 2011 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2012, 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), Bank of the Ozarks, Inc.’s internal
control over financial reporting as of December 31, 2012, 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 28, 2013, expressed an unqualified opinion thereon.
Atlanta, Georgia
February 28, 2013
66
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
Purchased loans not covered by Federal Deposit Insurance Corporation
(“FDIC”) loss share agreements (“purchased non-covered loans”)
Loans covered by FDIC loss share agreements (“covered loans”)
Allowance for loan and lease losses
Net loans and leases
FDIC loss share receivable
Premises and equipment, net
Foreclosed assets not covered by FDIC loss share agreements
Foreclosed assets covered by FDIC loss share agreements
Accrued interest receivable
Bank owned life insurance (“BOLI”)
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
FDIC clawback payable
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized;
no shares outstanding at December 31, 2012 and 2011
Common stock; $0.01 par value; 50,000,000 shares authorized;
35,271,724 and 34,463,880 shares issued and outstanding at
December 31, 2012 and 2011, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity before noncontrolling interest
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to the consolidated financial statements.
67
December 31,
2012
2011
(Dollars in thousands, except per share amounts)
$ 206,500
1,467
207,967
494,266
2,115,834
41,534
596,239
(38,738)
2,714,869
152,198
225,754
13,924
52,951
13,201
123,846
11,827
29,404
$4,040,207
$ 578,528
1,741,678
780,849
3,101,055
29,550
280,763
64,950
25,169
27,614
3,529,101
$ 58,247
680
58,927
438,910
1,880,483
4,799
806,922
(39,169)
2,653,035
279,045
186,533
31,762
72,907
12,868
62,078
12,207
33,379
$3,841,651
$ 447,214
1,578,449
918,256
2,943,919
32,810
301,847
64,950
24,645
45,507
3,413,678
–
–
353
73,043
423,485
10,783
507,664
3,442
511,106
$4,040,207
345
51,145
363,734
9,327
424,551
3,422
427,973
$3,841,651
Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF INCOME
2012
Year Ended December 31,
2011
(Dollars in thousands, except per share amounts)
2010
$115,362
61,820
2,949
15,807
8
195,946
8,982
47
10,723
1,848
21,600
174,346
11,745
$113,283
66,135
$118,150
17,141
3,013
16,702
36
199,169
17,686
174
10,835
1,740
30,435
168,734
11,775
4,130
18,533
18
157,972
20,047
380
12,146
1,764
34,337
123,635
16,000
162,601
156,959
107,635
19,400
5,584
3,455
2,767
7,375
10,645
457
6,809
2,403
3,965
62,860
59,028
15,793
39,641
114,462
18,094
3,277
3,206
2,307
10,141
6,432
933
3,738
65,708
3,247
117,083
56,262
14,705
51,564
122,531
151,511
50,208
101,303
18
$101,321
$ 2.96
$ 2.94
15,156
3,863
3,406
2,151
2,429
599
4,544
802
35,019
2,353
70,322
40,161
10,618
36,640
87,419
90,538
26,614
63,924
77
$ 64,001
$ 1.89
$ 1.88
Interest income:
Loans and leases
Covered loans
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
Accretion of FDIC loss share receivable, net of
amortization of FDIC clawback payable
Other loss share income, net
Net gains on investment securities
Gains on sales of other assets
Gains on merger and acquisition transactions
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
Net (income) loss attributable to noncontrolling interest
Net income available to common stockholders
110,999
33,935
77,064
(20)
$ 77,044
Basic earnings per common share
Diluted earnings per common share
$ 2.22
$ 2.21
See accompanying notes to the consolidated financial statements.
68
Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2012
Year Ended December 31,
2011
(Dollars in thousands)
2010
Net income
Other comprehensive income (loss):
Unrealized gains and losses on investment securities AFS
Tax effect of unrealized gains and losses on investment
securities AFS
Reclassification of gains and losses on investment securities AFS
included in net income
Tax effect of reclassification of gains and losses on
investment securities AFS included in net income
Total other comprehensive income (loss)
Total comprehensive income
See accompanying notes to the consolidated financial statements.
$77,064
$101,303
$63,924
2,852
16,555
(5,655)
(1,118)
(6,494)
2,218
(457)
(933)
(4,544)
179
1,456
$78,520
366
9,494
$110,797
1,782
(6,199)
$57,725
69
Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Non-
Retained
Earnings
Comprehensive Controlling
Income (Loss)
Interest
Total
(Dollars in thousands, except per share amounts)
$338
–
$41,415
–
$221,243
63,924
$6,032
–
$3,442 $272,470
63,924
–
77
–
(77)
–
Balances – January 1, 2010
Net income
Net loss attributable to
noncontrolling interest
Unrealized gains/losses on
investment securities AFS,
net of $2,218 tax effect
Reclassification of gains/losses
included in net income,
net of $1,782 tax effect
Common stock dividends paid,
$0.30 per share
Issuance of 227,600 shares of common
stock for exercise of stock options
Tax benefit on exercise
of stock options
Stock-based compensation expense
Investment in noncontrolling interest
Issuance of 74,600 shares of
unvested common stock under
restricted stock plan
Forfeiture of 4,000 shares of
unvested common stock under
restricted stock plan
Balances – December 31, 2010
Net income
Net loss attributable to
noncontrolling interest
Unrealized gains/losses on
investment securities AFS,
net of $6,494 tax effect
Reclassification of gains/losses
included in net income,
net of $366 tax effect
Common stock dividends paid,
$0.37 per share
Issuance of 262,500 shares of common
stock for exercise of stock options
Tax benefit on exercise
of stock options
Stock-based compensation expense
Investment in noncontrolling interest
Issuance of 95,700 shares of
unvested common stock under
restricted stock plan
Forfeiture of 1,600 shares of
unvested common stock under
restricted stock plan
Balances – December 31, 2011
–
–
–
–
2
–
–
–
1
–
–
–
–
2,823
37
833
–
(1)
(10,170)
–
–
–
–
–
–
341
–
–
45,107
–
–
275,074
101,303
–
–
–
–
3
–
–
–
1
–
–
–
–
18
–
–
(12,661)
4,029
482
1,528
–
(1)
–
–
–
–
–
–
–
(3,437)
(2,762)
–
–
–
–
–
–
–
(167)
–
–
10,061
(567)
–
–
–
–
–
–
–
–
–
–
–
–
50
–
(3,437)
(2,762)
(10,170)
2,825
37
833
50
–
–
3,415
–
–
323,770
101,303
(18)
–
–
–
–
–
–
–
25
–
10,061
(567)
(12,661)
4,032
482
1,528
25
–
–
$345
–
$51,145
–
$363,734
–
$9,327
–
–
$3,422 $427,973
70
Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Additional
Common Paid-In
Capital
Stock
Accumulated
Other
Non-
Retained Comprehensive Treasury Controlling
Earnings Income (Loss)
Interest
Stock
Total
Balances – December 31, 2011
Net income
Net income attributable to
noncontrolling interest
Unrealized gains/losses on
investment securities AFS,
net of $1,118 tax effect
Reclassification of gains/losses
included in net income,
net of $179 tax effect
Common stock dividends paid,
$0.50 per share
Issuance of 267,300 shares
of common stock for
exercise of stock options
Tax benefit on exercise and
of stock options and vesting
of common stock under
restricted stock plan
Stock-based compensation expense
Repurchase of 10,422 shares of
common stock under
restricted stock plan
Issuance of 128,150 shares of
unvested common stock under
restricted stock plan
Forfeiture of 800 shares of
unvested common stock under
restricted stock plan
Issuance of 423,616 shares of
common stock for acquisition
of Genala Banc, Inc.
Balances – December 31, 2012
(Dollars in thousands, except per share amounts)
$345
–
$51,145
–
$363,734
77,064
$ 9,327
–
$ –
–
$3,422
–
$427,973
77,064
–
–
–
–
3
–
–
–
1
–
–
–
–
–
3,976
1,538
2,607
–
(342)
–
(20)
–
–
–
1,734
(278)
(17,293)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(341)
341
–
20
–
–
–
–
–
–
–
–
–
–
1,734
(278)
(17,293)
3,979
1,538
2,607
(341)
–
–
4
$353
14,119
$73,043
–
$423,485
–
$10,783
–
$ –
–
$3,442
14,123
$511,106
See accompanying notes to the consolidated financial statements.
71
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 (used)
provided by operating activities:
Depreciation
Amortization
Net (income) loss attributable to noncontrolling interest
Provision for loan and lease losses
Provision for losses on foreclosed assets
Writedown of other assets
Net amortization (accretion) of investment securities AFS
Net gains on investment securities AFS
Originations and purchases of mortgage loans held for sale
Proceeds from sales of mortgage loans held for sale
Accretion of loans covered by FDIC loss share agreements
Accretion of FDIC loss share receivable, net of amortization of
FDIC clawback payable
Gains on sales of other assets
Gains on merger and acquisition transactions
Deferred income tax (benefit) expense
Increase in cash surrender value of BOLI
Tax benefit on exercise of stock options and vesting of
common stock under restricted stock plan
Stock-based compensation expense
Changes in assets and liabilities:
Accrued interest receivable
Other assets, net
Accrued interest payable and other liabilities
Net cash (used) provided by operating activities
Cash flows from investing activities:
Proceeds from sales of investment securities AFS
Proceeds from maturities/calls/paydowns of investment securities AFS
Purchases of investment securities AFS
Net (advances) repayments of loans and leases
Payments received on loans covered by FDIC loss share agreements
Payments received from FDIC under loss share agreements
Net decrease in covered assets and FDIC loss share receivable
Purchases of premises and equipment
Proceeds from sales of other assets
Purchase of BOLI
Cash received from (invested in) unconsolidated investments and
noncontrolling interest
Net cash proceeds received in merger and acquisition transactions
Net cash provided by investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Net repayments of other borrowings
Net decrease in repurchase agreements with customers
Proceeds from exercise of stock options
Tax benefit on exercise of stock options and vesting of common stock
under restricted stock plan
Repurchase of common stock under restricted stock plan
Cash dividends paid on common stock
Net cash used by financing activities
Net increase (decrease) 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.
72
2012
Year Ended December 31,
2011
(Dollars in thousands)
2010
$ 77,064
$ 101,303
$ 63,924
6,761
2,037
(20)
11,745
1,713
-
190
(457)
(252,998)
234,539
(61,820)
(7,375)
(6,809)
(2,403)
(7,808)
(2,767)
(1,538)
2,607
887
3,792
(12,784)
(15,444)
43,177
57,342
(63,064)
(216,328)
211,787
143,997
21,915
(46,099)
64,750
(59,000)
323
28,542
187,342
13,602
(21,083)
(3,260)
3,979
1,538
(341)
(17,293)
(22,858)
149,040
58,927
$ 207,967
5,358
1,677
18
11,775
9,525
1,250
426
(933)
(154,168)
150,562
(66,135)
(10,141)
(3,738)
(65,708)
11,866
(2,307)
(870)
1,528
1,551
13,637
14,844
21,320
94,676
31,052
(13,453)
(27,216)
205,788
109,001
8,122
(21,138)
41,847
–
(1,795)
365,394
792,278
(711,568)
(73,111)
(11,262)
4,032
870
–
(12,661)
(803,700)
9,898
49,029
$ 58,927
4,471
431
77
16,000
8,960
–
(585)
(4,544)
(188,120)
180,371
(17,141)
(2,429)
(802)
(35,019)
8,195
(2,151)
(535)
833
1,430
6,519
1,015
40,900
255,232
59,887
(121,086)
38,195
46,150
20,110
288
(16,881)
23,507
(10,200)
(4,575)
201,473
492,100
(440,624)
(113,948)
(883)
2,825
535
–
(10,170)
(562,265)
(29,265)
78,294
$ 49,029
Bank of the Ozarks, Inc.
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
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, a subsidiary that owns private aircraft and various other entities that hold
foreclosed assets or tax credits or engage in other activities. The Bank is subject to the regulation of certain federal
and state agencies and undergoes periodic examinations by those regulatory authorities. At December 31, 2012,
the Company had 117 offices, including 66 in Arkansas, 28 in Georgia, 13 in Texas, four in Florida, three in
Alabama, two in North Carolina and one in South 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 (“GAAP”)
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 from those estimates.
The consolidated financial statements include the accounts of the Company, the Bank, the real estate
subsidiary and the aircraft subsidiary. In addition, 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
(typically less than 20%) are generally accounted for by the cost method of accounting. Significant
intercompany transactions and amounts have been eliminated in consolidation.
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, management
makes a determination, based on its review of applicable GAAP, on when the assets, liabilities and activities
of a variable interest entity (“VIE”) should be included in the Company’s consolidated financial statements.
GAAP requires 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 issued to the Trusts 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.
Stock Split – On August 16, 2011, the Company completed a 2-for-1 stock split in the form of a stock
dividend, effected by issuing one share of common stock for each share of such stock outstanding on
August 5, 2011. All share and per share information in the consolidated financial statements and the notes
to the consolidated financial statements has been adjusted to give effect to this stock split.
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, 2012 and
2011, the Company has classified all of its investment securities as available for sale (“AFS”).
73
AFS investment securities are stated at estimated fair value, with the unrealized gains and losses determined
on a specific identification basis. Such unrealized gains and losses, net of tax, are reported as a separate
component of stockholders’ equity and included in other comprehensive income (loss). The Company utilizes
independent third parties as its principal pricing sources for determining fair value of investment securities
which are measured on a recurring basis. As a result, the Company receives estimates of fair values from
at least two independent pricing sources for the majority of its individual securities within its investment
portfolio. For investment securities traded in an active market, fair values are based on quoted market prices
if available. If quoted market prices are not available, fair values are based on quoted market prices of
comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination
thereof. For investment securities traded in a market that is not active, fair value is determined using
unobservable inputs. Additionally, the valuation of investment securities acquired in FDIC-assisted or
traditional acquisitions may include certain unobservable inputs. All fair value estimates received by the
Company for its investment securities are reviewed and approved on a quarterly basis by the Company’s
Investment Portfolio Manager and its Chief Financial Officer.
At December 31, 2012, the Company owned stock in the Federal Home Loan Bank of Dallas (“FHLB-
Dallas”), and First National Banker’s Bankshares, Inc. (“FNBB”). At December 31, 2011, the Company
owned stock in FHLB-Dallas, FNBB and Federal Home Loan Bank of Atlanta (“FHLB-Atlanta”). The FHLB-
Dallas, FHLB-Atlanta 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 amortized cost are reviewed at least
quarterly by the Company for other-than-temporary impairment. Factors considered during such review
include, among other things, the length of time and extent that fair value has been less than cost and the
financial condition and near term prospects of the issuer. The Company also assesses whether it has the
intent to sell the investment security or more likely than not would be required to sell the investment
security before any anticipated recovery in fair value. If either of the criteria regarding intent or requirement
to sell is met, the entire difference between amortized cost and fair value is recognized as impairment
through the income statement. For securities that do not meet the aforementioned criteria, the amount
of impairment is split into (i) other-than-temporary impairment related to credit loss, which must be
recognized in the income statement, and (ii) other-than-temporary impairment related to other factors,
which is recognized in other comprehensive income. The credit loss is defined as the difference between
the present value of the cash flows expected to be collected and the amortized cost basis.
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, excluding loans covered by Federal Deposit Insurance Corporation (“FDIC”) loss
share agreements (“covered loans”) and purchased loans not covered by FDIC loss share agreements (“purchased
non-covered 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 and deferred
fees or costs. 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 over the life of the loan 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.
74
Mortgage loans held for sale are included in the Company’s loans and leases and totaled $36.4 million and
$17.9 million, respectively, at December 31, 2012 and 2011. 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 enters into a forward sale commitment (“FSC”) for
the sale of its mortgage loan 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 GAAP.
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 particular IRLC and FSC were
entered into and year-end. At December 31, 2012 and 2011, respectively, the Company’s IRLC and FSC
derivative assets and corresponding derivative liabilities were not material. The notional amounts of loan
commitments under both the IRLC and FSC were $18.1 million and $13.3 million at December 31, 2012
and 2011, respectively.
Covered loans – Covered loans are accounted for in accordance with the provisions of GAAP applicable
to loans acquired with deteriorated credit quality and pursuant to the American Institute of Certified Public
Accountants’ (“AICPA”) December 18, 2009 letter in which the AICPA summarized the Security and Exchange
Commission’s (“SEC”) view regarding the accounting in subsequent periods for discount accretion associated
with non-credit impaired loans acquired in a business combination or asset purchase. Considering, among
other factors, the general lack of adequate underwriting, proper documentation, appropriate loan structure
and insufficient equity contributions for a large number of these loans, and the uncertainty of the borrowers’
and/or guarantors’ ability or willingness to make contractually required (or any) principal and interest
payments, management has determined that a significant portion of the loans acquired in FDIC-assisted
acquisitions had evidence of credit deterioration since origination. Accordingly, management has elected to
apply the provisions of GAAP applicable to loans acquired with deteriorated credit quality, as provided by
the AICPA’s December 18, 2009 letter to all loans acquired in its FDIC-assisted acquisitions.
At the time covered loans are acquired, management individually evaluates substantially all loans
acquired in the transaction. This evaluation allows management to determine the estimated fair value of
the covered loans (not considering any FDIC loss sharing agreements) and includes no carryover of any
previously recorded allowance for loan and lease losses. In determining the estimated fair value of covered
loans, management considers a number of factors including, among other things, the remaining life of the
acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral,
estimated holding periods, and net present value of cash flows expected to be received. To the extent that any
covered loan acquired is not specifically reviewed, management applies a loss estimate to that loan based on
the average expected loss rates for the covered loans that were individually reviewed in that loan portfolio.
As provided for under GAAP, management has up to 12 months following the date of the acquisition to
finalize the fair values of acquired assets and assumed liabilities. Once management has finalized the fair
values of acquired assets and assumed liabilities within this 12-month period, management considers such
values to be the day 1 fair values (“Day 1 Fair Values”).
In determining the Day 1 Fair Values of covered loans, management calculates a non-accretable difference
(the credit component of the covered loans) and an accretable difference (the yield component of the covered
loans). The non-accretable difference is the difference between the contractually required payments and the
cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values.
Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses.
Subsequent increases in cash flows will result in a reversal of the provision for loan and lease losses to the
extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on
interest income. Any such increase or decrease in expected cash flows will result in a corresponding decrease
or increase, respectively, of the FDIC loss share receivable for the portion of such reduced or additional loss
expected to be collected from the FDIC.
75
The accretable difference on covered loans is the difference between the expected cash flows and the
net present value of expected cash flows. Such difference is accreted into earnings using the effective yield
method over the term of the loans. In determining the net present value of the expected cash flows, the
Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics
of each individual loan. At December 31, 2012, the weighted average period during which management
expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment
under the FDIC loss share agreements) is 2.2 years.
Management separately monitors the covered loan portfolio and periodically reviews loans contained
within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan
is typically reviewed (i) when it is modified or extended, (ii) when material information becomes available
to the Company that provides additional insight regarding the loan’s performance, the status of the borrower,
or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected
cash flows which include a substantial portion of each acquired covered loan portfolio. To the extent that a
loan is performing in accordance with management’s expectation established in conjunction with the
determination of the Day 1 Fair Values, such loan is not included in any of the Company’s credit quality
ratios, is not considered to be an impaired loan, and is not considered in the determination of the required
allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated from
management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such
loan is generally included in certain of the Company’s credit quality metrics, may be considered an impaired
loan, and is considered in the determination of the required level of allowance for loan and lease losses.
Purchased non-covered loans – Purchased non-covered loans include a small volume of non-covered loans
acquired in FDIC-assisted acquisitions and loans acquired in the Company’s acquisition of Genala Banc, Inc.
(“Genala”) and are initially recorded at fair value on the date of purchase. Purchased non-covered loans
that contain evidence of credit deterioration on the date of purchase are carried at the net present value of
expected future proceeds. All other purchased non-covered loans are recorded at their initial fair value,
adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on
purchase, charge-offs and any other adjustment to carrying value.
At the time of acquisition of purchased non-covered loans, management individually evaluates substantially
all loans acquired in the transaction. For those purchased loans without evidence of credit deterioration,
management evaluates each reviewed loan using an internal grading system with a grade assigned to each
loan at the date of acquisition. The grade for each purchased non-covered loan is reviewed subsequent to the
date of acquisition any time a loan is renewed or extended or at any time information becomes available to
the Company that provides material insight regarding the loan’s performance, the borrower or the underlying
collateral. To the extent that a loan is performing in accordance with management’s initial expectations, such
loan is not considered impaired and is not considered in the determination of the required allowance for loan
and lease losses. To the extent that current information indicates it is probable that the Company will not
be able to collect all amounts according to the contractual terms thereon, such loan is considered impaired
and is considered in the determination of the required level of allowance for loan and lease losses. Any
improvement in the expected performance of a covered loan would result in a reversal of the provision for
loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would
have a positive impact on interest income.
In determining the Day 1 Fair Values of purchased non-covered loans without evidence of credit deterioration
at the date of acquisition, management includes (i) no carry over of any previously recorded allowance for
loan losses and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate of
interest, given the risk profile and grade assigned to each loan. This adjustment will be accreted into earnings
as an adjustment to the yield on purchased non-covered loans, using the effective yield method, over the
remaining life of each loan.
Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are
accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated
credit quality. At the time such purchased non-covered loans with evidence of credit deterioration are
acquired, management individually evaluates each loan to determine the estimated fair value of each loan.
This evaluation includes no carryover of any previously recorded allowance for loan and lease losses. In
determining the estimated fair value of purchased non-covered loans with evidence of credit deterioration,
management considers a number of factors including, among other things, the remaining life of the acquired
loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated
holding periods, and net present value of cash flows expected to be received.
76
In determining the Day 1 Fair Values of purchased non-covered loans with evidence of credit deterioration,
management calculates a non-accretable difference (the credit component of the purchased loans) and an
accretable difference (the yield component of the purchased loans). The non-accretable difference is the
difference between the contractually required payments and the cash flows expected to be collected in
accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected
cash flows will generally result in a provision for loan and lease losses. Subsequent increases in cash flows
will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an
adjustment to accretable yield, which would have a positive impact on interest income.
The accretable difference on purchased non-covered loans with evidence of credit deterioration is the
difference between the expected cash flows and the net present value of expected cash flows. Such difference
is accreted into earnings using the effective yield method over the term of the loans. In determining the net
present value of the expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per
annum depending on the risk characteristics of each individual loan.
Management separately monitors purchased non-covered loans with evidence of credit deterioration on
the date of purchase and periodically reviews such loans contained within this portfolio against the factors
and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed
or extended, (ii) at any other time additional information becomes available to the Company that provides
material additional insight regarding the loan’s performance, the status of the borrower, or the quality or
value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of
each acquired portfolio. Management separately reviews, on an annual basis, the performance of the
portfolio of purchased non-covered loans with evidence of credit deterioration, or more frequently to the
extent that material information becomes available regarding the performance of an individual loan, to
make determinations of the constituent loans’ performance and to consider whether there has been any
significant change in performance since management’s initial expectations established in conjunction with
the determination of the Day 1 Fair Values. To the extent that a loan is performing in accordance with or
exceeding management’s performance expectation established in conjunction with the determination of the
Day 1 Fair Values, such loan is not included in any of the credit quality ratios, is not considered to be an
impaired loan, and is not considered in the determination of the required allowance for loan and lease losses.
To the extent that a loan’s performance has deteriorated from management’s expectation established in
conjunction with the determination of the Day 1 Fair Values, such loan is included in certain of the Company’s
credit quality metrics, may be considered an impaired loan, and is considered in the determination of the
required level of allowance for loan and lease losses. Any improvement in the expected performance of such
loan would result in a reversal of the provision for loan and lease losses to the extent of prior charges and
then an adjustment to accretable yield, which would have a positive impact on interest income.
FDIC loss share receivable – In connection with the Company’s FDIC-assisted acquisitions, the Company
has recorded a FDIC loss share receivable to reflect the indemnification provided by the FDIC. Currently, the
expected losses on covered assets for each of the Company’s loss share agreements would result in expected
recovery of approximately 80% of incurred losses. Since the indemnified items are covered loans and
covered foreclosed assets, which are measured at Day 1 Fair Values, the FDIC loss share receivable is also
measured and recorded at Day 1 Fair Values, and is calculated by discounting the cash flows expected to
be received from the FDIC. A discount rate of 5.0% per annum was used to determine the net present value
of the FDIC loss share receivable. These cash flows are estimated by multiplying estimated losses by the
reimbursement rates as set forth in the loss share agreements. The balance of the FDIC loss share receivable
is adjusted periodically to reflect changes in expectations of discounted cash flows, expense reimbursements
under the loss share agreements and other factors.
FDIC clawback payable – Pursuant to the clawback provisions of the loss share agreements for the
Company’s FDIC-assisted acquisitions, the Company may be required to reimburse the FDIC should actual
losses be less than certain thresholds established in each loss share agreement. The amount of the clawback
provision for each acquisition is measured and recorded at Day 1 Fair Values. It is calculated as the difference
between management’s estimated losses on covered loans and covered foreclosed assets and the loss
threshold contained in each loss share agreement, multiplied by the applicable clawback provisions
contained in each loss share agreement. This clawback amount, which is payable to the FDIC upon
termination of the applicable loss share agreement, is then discounted back to net present value using a
discount rate of 5.0% per annum. To the extent that actual losses on covered loans and covered foreclosed
77
assets are less than estimated losses, the applicable clawback payable to the FDIC upon termination of the
loss share agreements will increase. To the extent that actual losses on covered loans and covered foreclosed
assets are more than estimated losses, the applicable clawback payable to the FDIC upon termination of the
loss share agreements will decrease.
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, excluding purchased non-covered loans
and covered loans, 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 probable incurred
losses in the loan and lease portfolio. Provision to and the adequacy of the ALLL are based on evaluations
of the loan and lease portfolio utilizing objective and subjective criteria. The objective criteria primarily
include an internal grading system and specific allowances. In addition to the 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 and mix of the portfolio, including concentrations of credit;
general economic and business conditions, including national, regional and local business and economic
conditions that may affect the borrowers’ or lessees’ ability to pay; expectations regarding the current
business cycle; trends that could affect collateral values and other relevant factors. The Company also utilizes
a peer group analysis and a historical analysis to validate the overall adequacy of its ALLL. Changes in any
of these criteria or the availability of new information could require adjustment of the ALLL in future periods.
While a specific allowance has been calculated for impaired loans and leases and for loans and leases where
the Company has otherwise determined a specific reserve is appropriate, no portion of the Company’s ALLL
is restricted to any individual loan or lease or group of loans or leases, and the entire ALLL is available to
absorb losses from any and all loans and leases.
For covered loans, management separately monitors this portfolio and periodically reviews loans contained
within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. To the
extent that a loan’s performance has deteriorated from management’s expectation established in conjunction
with the determination of the Day 1 Fair Values, such loan is considered in the determination of the required
level of allowance for loan and lease losses. To the extent that a revised loss estimate exceeds the loss
estimate established in the determination of the Day 1 Fair Values, such deterioration will result in an
allowance allocation or a charge-off.
For purchased non-covered loans, management segregates this portfolio into loans that contain evidence
of credit deterioration on the date of purchase and loans that do not contain evidence of credit deterioration
on the date of purchase. Purchased non-covered loans with evidence of credit deterioration are regularly
monitored and are periodically reviewed by management. To the extent that a loan’s performance has
deteriorated from management’s expectation established in conjunction with the determination of the Day 1
Fair Values, such loan is considered in the determination of the required level of allowance for loan and lease
losses. To the extent that a revised loss estimate exceeds the loss estimate established in the determination
of Day 1 Fair Values, such determination will result in an allowance allocation or a charge-off.
All other purchased non-covered loans are graded by management at the time of purchase. The grade on
these purchased non-covered loans are reviewed regularly as part of the ongoing assessment of such loans.
To the extent that current information indicates it is probable that the Company will not be able to collect all
amounts according to the contractual terms thereon, such loan is considered in the determination of the
required level of allowance for loan and lease losses and may result in an allowance allocation or a charge-off.
At December 31, 2012 and 2011, the Company had no allowance for its purchased non-covered loans and
its covered loans because all losses had been charged off on such loans whose performance had deteriorated
from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.
The Company generally places a loan or lease on nonaccrual status when such loan or lease is (i) deemed
impaired or (ii) 90 days or more past due, or earlier when doubt exists as to the ultimate collection of payments.
The Company may continue to accrue interest on certain loans or leases contractually past due 90 days or
more if such loans or leases are both well secured and in the process of collection. At the time a loan or lease
is placed on nonaccrual status, interest previously accrued but uncollected is generally reversed and charged
against interest income. Nonaccrual loans and leases are generally returned to accrual status when payments
are less than 90 days past due and the Company reasonably expects to collect all payments. If a loan or lease
is determined to be uncollectible, the portion of the principal determined to be uncollectible will be charged
78
against the allowance for loan and lease losses. Loans for which the terms have been modified and for which
(i) the borrower is experiencing financial difficulties and (ii) a concession has been granted to the borrower
by the Company are considered troubled debt restructurings (“TDRs”) and are included in impaired loans and
leases. Income on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs
which continue to accrue interest, is recognized on a cash basis when and if actually collected. For the year
ended December 31, 2012, there were no defaults during the preceding 12 months on any loans that were
considered TDRs.
All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan
or lease, excluding purchased non-covered loans and covered loans, to be impaired when based on current
information and events, it is probable that the Company will be unable to collect all amounts due according
to the contractual terms thereof. The Company considers a purchased non-covered loan with evidence of
credit deterioration at the date of purchase and a covered loan to be impaired once a decrease in expected
cash flows or other deterioration in the loan’s expected performance, subsequent to the determination of the
Day 1 Fair Values, results in an allowance allocation, a partial or full charge-off or in a provision for loan and
lease losses. Purchased non-covered loans without evidence of credit deterioration at the date of purchase are
considered impaired when current information indicates it is probable that the Company will not be able to
collect all amounts due according to the contractual terms thereof. Most of the Company’s nonaccrual loans
and leases, excluding purchased non-covered loans and covered loans, and all TDRs are considered impaired.
The majority of the Company’s impaired loans and leases are dependent upon collateral for repayment. For
such loans and leases, impairment is measured by comparing collateral value, net of holding and selling
costs, to the current investment in the loan or lease. For all other impaired loans and leases, the Company
compares estimated discounted cash flows to the current investment in the loan or lease. To the extent that
the Company’s current investment in a particular loan or lease exceeds its estimated net collateral value or its
estimated discounted cash flows, the impaired amount is specifically considered in the determination of the
allowance for loan and lease losses or is charged off as a reduction of the allowance for loan and lease losses.
The Company also maintains an allowance for certain loans and leases, excluding purchased non-covered
loans and covered loans, not considered impaired where (i) the customer is continuing to make regular
payments, although payments may be past due, (ii) there is a reasonable basis to believe the customer
may continue to make regular payments, although there is also an elevated risk that the customer may
default, and (iii) the collateral or other repayment sources are likely to be insufficient to recover the current
investment in the loan or lease if a default occurs. The Company evaluates such loans and leases to determine
if an allowance is needed for these loans and leases. For the purpose of calculating the amount of such
allowance, management assumes that (i) no further regular payments occur and (ii) all sums recovered will
come from liquidation of collateral and collection efforts from other payment sources. To the extent that the
Company’s current investment in a particular loan or lease evaluated for the need for such allowance exceeds
its net collateral value or its estimated discounted cash flows, such excess is considered allocated allowance
for purposes of the determination of the allowance for loan and lease losses.
The Company may also include further allowance allocation for risk-rated loans, including commercial
real estate loans and excluding purchased non-covered loans and covered loans, that are in markets
determined by management to be “stressed”. Stressed markets may include any specific geography
experiencing (i) high unemployment substantially above the U.S. average, (ii) significant over-development
in one or more commercial real estate categories, (iii) recent or announced loss of a major employer or
significant workforce reductions, (iv) significant declines in real estate values and (v) various other factors.
The additional allowance for such stressed markets compensates for the expectation that a higher risk of loss
is anticipated for the “work-out” or liquidation of a real estate loan in a stressed market versus a market that
is not experiencing any significant levels of stress. The required allocation percentage applicable to real estate
loans in stressed markets may be applied to the total market or it may be determined at the individual loan
level based on collateral value, loan-to-value ratios, strength of the borrower and/or guarantor, viability of
the underlying project and other factors. The Company had no allowance allocation for loans in stressed
markets at December 31, 2012 or 2011.
Prior to December 31, 2011, the Company utilized the sum of all allowance amounts derived as described
above, combined with a reasonable unallocated allowance, as the primary indicator of the appropriate level
of allowance for loan and lease losses. During the fourth quarter of 2011, the Company refined its allowance
calculation whereby it “allocated” the portion of the allowance that was previously deemed to be unallocated
allowance. This refined allowance calculation includes specific allowance allocations for qualitative factors
including (i) concentrations of credit, (ii) general economic and business conditions, (iii) trends that could
79
affect collateral values and (iv) expectations regarding the current business cycle. The Company may also
consider other qualitative factors in future periods for additional allowance allocations, including, among
other factors, (1) credit quality trends (including trends in nonperforming loans and leases expected to
result from existing conditions), (2) seasoning of the loan and lease portfolio, (3) specific industry conditions
affecting portfolio segments, (4) the Company’s expansion into new markets and (5) the offering of new
loan and lease products. Because the Company refined its allowance calculation during 2011 such that it no
longer maintains unallocated allowance, the Company’s allocation of its allowance at December 31, 2012
and 2011 may not be comparable with prior periods.
The accrual of interest on loans and leases, excluding purchased non-covered loans and covered loans,
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 interest payments are received. Interest income on
purchased non-covered loans with evidence of credit deterioration and covered loans is accreted into
income and is the difference between the carrying value of the loans and the net present value of expected
cash flows.
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 20 to 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 covered by FDIC loss share agreements – Foreclosed assets covered by FDIC loss share
agreements, or covered foreclosed assets, are recorded at Day 1 Fair Values. In estimating the fair value of
covered foreclosed assets, management considers a number of factors including, among others, appraised
value, estimated selling prices, estimated selling costs, estimated holding periods and net present value of
cash flows expected to be received. Discount rates ranging from 8.0% to 9.5% per annum were used to
determine the net present value of covered foreclosed assets. Gains and losses on sale and writedowns
of covered foreclosed assets are recorded in non-interest income. Expenses to maintain the properties,
net of amounts reimbursable by the FDIC, are included in non-interest expense.
Foreclosed assets not covered by FDIC loss share agreements – Repossessed personal properties and
real estate acquired through or in lieu of foreclosure are initially recorded at the lesser of current principal
investment or fair value less estimated cost to sell at the date of repossession or foreclosure. Valuations of
these assets are periodically reviewed by management with the carrying value of such assets adjusted
through non-interest expense to the then estimated fair value net of estimated selling costs, if lower, until
disposition. Fair values of these assets are generally based on third party appraisals, broker price opinions
or other valuations of the property. Gains and losses from the sale of such repossessions and real estate
acquired through or in lieu of foreclosure 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 recognizes a tax position 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 has a greater than 50% likelihood 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 related to income tax matters as interest income or expense,
and penalties related to income tax matters are recognized as non-interest expense. The Company is no
longer subject to income tax examinations by U.S. federal tax authorities for years prior to 2009.
80
Bank owned life insurance (“BOLI”) – BOLI consists of life insurance purchased by the Company on
(i) a qualifying group of officers with the Company designated as owner and beneficiary of the policies and
(ii) one of the Company’s executive officers with the Company designated as owner and both the Company
and the executive officer designated as beneficiaries 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 values
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, 2012 and 2011. The Company
performed its annual impairment test of goodwill as of September 30, 2012. 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, 2012 and 2011, less accumulated
amortization of $107,000 and $95,000 at December 31, 2012 and 2011, respectively.
Core deposit intangibles represent premiums paid for deposits acquired via acquisition and are being
amortized over three to seven years. Core deposit intangibles totaled $10.4 million and $9.5 million at
December 31, 2012 and 2011, respectively, less accumulated amortization of $3.9 million and $2.7 million
at December 31, 2012 and 2011, respectively.
The aggregate amount of amortization expense for the Company’s core deposit and bank charter intangibles
is expected to be $2.2 million in 2013; $1.7 million in 2014; $1.3 million in 2015, $0.6 million in 2016 and
$0.2 million in 2017.
Stock-based compensation – The Company has an employee stock option plan, a non-employee director
stock option plan and an employee restricted stock plan, which are described more fully in Note 14. The
Company measures 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, 2012, 2011 and 2010, the Company recognized $2.6 million,
$1.5 million and $0.8 million, respectively, of non-interest expense for its stock-based compensation plans.
Earnings per common share – Earnings per common share are computed using the two-class method.
Basic earnings per share are computed by dividing net earnings allocated to common stockholders by the
weighted-average number of common shares outstanding during the applicable period. Diluted earnings
per common share are computed by dividing reported earnings allocated 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 using the treasury stock method. The Company has determined that
its outstanding non-vested stock awards granted under its restricted stock plan are participating securities.
Segment disclosures – The Company operates in only one segment – community banking. Accordingly,
there is no requirement to report segment information in the Company’s consolidated financial statements.
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 May 2011, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2011-04 “Fair Value Measurement: Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS.” ASU 2011-04
expands the disclosure requirements for fair value measurements categorized within Level 3 of the fair value
hierarchy to include (1) a quantitative disclosure of the unobservable inputs and assumptions used within
the measurement, (2) a description of the valuation processes in place and (3) a narrative description of the
sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.
In addition, ASU 2011-04 requires that companies disclose the level within the fair value hierarchy for items
not measured at fair value in the statement of financial position but whose fair value must be disclosed.
ASU 2011-04 was effective for reporting periods beginning January 1, 2012. The adoption of the provisions
of ASU 2011-04 did not have a material impact on the Company’s financial position, results of operations or
liquidity, but did expand its fair value disclosures.
81
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the
manner in which entities present comprehensive income in their financial statements. The provisions of ASU
2011-05 require reporting the components of comprehensive income in either (i) a continuous statement of
comprehensive income or (ii) two separate but consecutive statements. ASU 2011- 05 does not change the
items that must be reported in other comprehensive income but rather removes the presentation option of
including other comprehensive income in the statement of stockholders’ equity. The new presentation
disclosures required by ASU 2011-05 were effective for interim and annual periods beginning after January 1,
2012. As this ASU amended only the presentation of comprehensive income, the adoption did not have an
impact on the Company’s financial position, results of operations or liquidity. In December 2011, the FASB
deferred certain provisions of ASU 2011-05 that would have required companies to present reclassification
adjustments out of accumulated other comprehensive income by component in both the statement of income
and statement of other comprehensive income. In February 2013, the FASB issued ASU 2013-02, “Reporting
of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” that requires disclosure, either
in a single footnote or parenthetically on the face of the financial statements, of the effect of significant items
reclassified from accumulated other comprehensive income to their respective line items in the statement
of net income. The effective date of ASU 2013-02 is for reporting periods beginning January 1, 2013. The
Company does not expect that the adoption of these provisions will have a material impact on its financial
position, results of operations or liquidity.
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” The provisions
of ASU 2011-08 provide the option of performing a qualitative assessment before calculating the fair value
of a reporting unit in step 1 of the goodwill impairment test. If based on qualitative factors, the fair value of
the reporting unit is more likely than not less than the carrying amount, then the two step impairment test
would be required. This ASU was effective for reporting periods beginning January 1, 2012. The Company
adopted the provisions of ASU 2011-08 during 2012 which had no material impact on its financial position,
results of operations or liquidity.
In July 2012, the FASB issued ASU No. 2012-02 “Intangibles – Goodwill and Other (Topic 350) –
Testing Indefinite-Lived Intangible Assets for Impairment” that amends the guidance related to testing
indefinite-lived intangible assets, other than goodwill, for impairment. The provisions of ASU 2012-02
allow for a qualitative assessment in testing an indefinite-lived intangible asset for impairment before
calculating the fair value of the asset. If the qualitative assessment determines that it is more likely than
not that the asset is impaired, then a quantitative assessment of the fair value of the asset is required;
otherwise, the quantitative calculation is not necessary. The provisions of ASU 2012-02 are effective
January 1, 2013; however, early adoption is permitted. The Company does not expect that the provisions
of ASU 2012-02 will have a material impact on its financial position, results of operation, or liquidity.
In October 2012, the FASB issued ASU No. 2012-06 “Subsequent Accounting for an Indemnification
Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial
Institution,” to address diversity in practice about how to subsequently measure an indemnification asset for
a government-assisted acquisition that includes a loss-sharing agreement. Specifically, this standard update
will require a reporting entity to account for a change in the subsequent measurement of the indemnification
asset on the same basis as the changes in the asset subject to indemnification. As a result, for any change
in expected cash flows of an indemnified asset that is immediately recognized in earnings, the associated
change in the indemnification asset would also be immediately recognized in earnings. For any change in
expected cash flows of an indemnified asset that is amortized or accreted into earnings over time, the
associated change in the indemnification asset would also be accreted or amortized into earnings over the
shorter of the contractual term of the indemnification agreement or the remaining life of the indemnified
asset. The provisions of ASU 2012-06 will be applied prospectively beginning January 1, 2013. Management
does not expect that the provisions of ASU 2012-06 will have a material change on the accounting for its
loss share receivable from the FDIC under its current loss share agreements.
Reclassifications and recasts – Certain reclassifications of prior years’ amounts have been made to conform
with the 2012 financial statements presentation. These reclassifications had no impact on prior years’ net
income, as previously reported. Additionally, as discussed in Note 2, the Company has made adjustments to
the acquired assets and assumed liabilities for certain of its FDIC-assisted acquisitions in the determination
of Day 1 Fair Values. As a result, certain amounts previously reported in the Company’s December 31, 2011
consolidated balance sheet have been recast.
82
2. Acquisitions
2012 Acquisition
On December 31, 2012, the Company completed its acquisition of Genala whereby Genala merged with
and into the Company in a transaction valued at approximately $27.5 million. The Company paid $13.4
million of cash and issued 423,616 shares of its common stock valued at approximately $14.1 million
for all the outstanding shares of Genala common stock. Genala was the holding company for The Citizens
Bank, which operated one banking office in Geneva, Alabama. The acquisition was effective at the close
of business on December 31, 2012. Accordingly, no revenue or earnings of Genala or The Citizens Bank
are included in the consolidated income statement for the period ending December 31, 2012. As provided
for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair
values of the acquired assets and liabilities.
A summary of the assets acquired and liabilities assumed in the Genala acquisition is as follows:
As Recorded
by
Genala
Fair Value
Adjustments
(Dollars in thousands)
As Recorded
by the
Company
(1)
Assets acquired:
Cash and due from banks ............................................
Investment securities ...................................................
Loans and leases .........................................................
Allowance for loan losses ............................................
Premises and equipment .............................................
Foreclosed assets .........................................................
Accrued interest receivable ..........................................
Intangible assets .........................................................
Other ...........................................................................
Total assets acquired ..............................................
Liabilities assumed:
Deposits .......................................................................
Accrued interest payable and other liabilities ..............
Total liabilities assumed .........................................
Net assets acquired ...........................................................
Consideration paid:
Cash .............................................................................
Common stock .............................................................
Total consideration paid ...............................................
Pre-tax gain .................................................................
$ 41,938
85,291
43,401
(1,247)
426
652
1,220
–
482
172,163
142,652
391
143,043
$ 29,120
$ –
2,344
a
(3,785) b
1,247
b
c
590
(342) d
–
1,656
(26)
1,684
e
f
g
882
–
882
$ 802
$ 41,938
87,635
39,616
–
1,016
310
1,220
1,656
456
173,847
143,534
391
143,925
29,922
(13,396)
(14,123)
(27,519)
$ 2,403
(1) Represents the Day 1 Fair Values of assets acquired and liabilities assumed in the Genala acquisition.
Explanation of fair value adjustments
a – Adjustment reflects the fair value adjustment based on the Company’s pricing of investment securities, including
certain investment securities classified by Genala as held to maturity.
b – Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio
and to eliminate the recorded allowance for loan losses.
c – Adjustment reflects the fair value adjustments based on the Company’s evaluation of the premises and
equipment acquired.
d – Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired
foreclosed assets.
e – Adjustment reflects the fair value adjustment for core deposit intangibles recorded as a result of the acquisition.
f – Adjustment reflects the amount needed to adjust the carrying value of other assets to estimated fair value.
g – Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired deposits.
83
The following unaudited supplemental pro-forma information is presented to show the estimated results
as if Genala had been acquired as of January 1, 2012, adjusted for any potential costs savings.
Year Ended December 31, 2012
(Dollars in thousands, except per share amounts)
Net interest income (unaudited) ........................... $180,600
Net income (unaudited) ........................................ $ 79,800
EPS – Diluted (unaudited) .................................... $ 2.26
2011 Acquisitions
On January 14, 2011, the Company, through the Bank, entered into a purchase and assumption agreement
with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and
assumed substantially all of the deposits and certain other liabilities of the former Oglethorpe Bank
(“Oglethorpe”) with offices in Brunswick and St. Simons Island, Georgia.
On April 29, 2011, the Company, through the Bank, entered into a purchase and assumption agreement
with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and
assumed substantially all of the deposits and certain other liabilities of the former First Choice Community
Bank (“First Choice”) with offices in Dallas, Newnan (2), Senoia, Sharpsburg, Douglasville and Carrollton,
Georgia. On July 1, 2011, the Company closed one of the offices in Newnan, Georgia, and on October 26,
2011, the Company closed the office in Carrollton, Georgia.
On April 29, 2011, the Company, through the Bank, entered into a purchase and assumption agreement
with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and
assumed substantially all of the deposits and certain other liabilities of the former The Park Avenue Bank
(“Park Avenue”) with offices in Valdosta (3), Bainbridge (2), Cairo, Lake Park, Stockbridge, McDonough,
Oakwood and Athens, Georgia and in Ocala, Florida. On October 21, 2011, the Company closed the office
in Stockbridge, Georgia.
Subsequent to the reporting of the assets acquired and the liabilities assumed in the Oglethorpe, First
Choice and Park Avenue acquisitions, the Company made certain adjustments to these values in order to
finalize the Day 1 Fair Values. As a result of those adjustments, the Company has “recast” the assets acquired
and liabilities assumed in the Oglethorpe, First Choice and Park Avenue acquisitions to reflect the Day 1 Fair
Values. The following tables provide a summary of the Day 1 Fair Values of assets acquired and liabilities
assumed, including any such recast adjustments, for the Company’s 2011 FDIC-assisted acquisitions.
A summary of the assets acquired and liabilities assumed in the Oglethorpe acquisition, including recast
adjustments, is as follows:
As Recorded
by
Oglethorpe
January 14, 2011
Fair Value
Recast
Adjustments Adjustments
(Dollars in thousands)
As Recorded
by the
Company
(1)
Assets acquired:
Cash and cash equivalents ................................. $ 14,710
6,532
Purchased non-covered loans .............................
154,018
Covered loans .....................................................
FDIC loss share receivable ..................................
–
Foreclosed assets covered by
FDIC loss share agreements .............................
Core deposit intangible .......................................
Other assets ........................................................
Total assets acquired .....................................
16,554
–
1,054
192,868
Liabilities assumed:
195,067
Deposits ..............................................................
–
FDIC clawback payable .......................................
333
Other liabilities ...................................................
195,400
Total liabilities assumed ................................
(2,532)
Net assets acquired ..................................................
Asset discount bid ...................................................
(38,000)
Cash received from FDIC .......................................... $ 40,532
Pre-tax gain .............................................................
$ –
(3,447) b
(73,342) b
52,395 c
$ –
–
758
(1,292)
$ 14,710
3,085
81,434
51,103
(9,410) d
401 e
(621) f
(34,024)
(59)
–
726
133
i
–
924 h
100 f
1,024
$(35,048)
–
133
–
133
$ –
7,085
401
1,159
158,977
195,067
1,057
433
196,557
(37,580)
40,532
$ 2,952
(1) Represents the Day 1 Fair Values of assets acquired and liabilities assumed in the Oglethorpe acquisition.
84
A summary of the assets acquired and liabilities assumed in the First Choice acquisition, including recast
adjustments, is as follows:
April 29, 2011
As Recorded
by
As Recorded
by the
First Choice Adjustments Adjustments Company
Fair Value
Recast
(1)
Assets acquired:
Cash and cash equivalents .................................
Investment securities AFS ..................................
Purchased non-covered loans .............................
Covered loans .....................................................
FDIC loss share receivable ..................................
Foreclosed assets covered by
FDIC loss share agreements .............................
Core deposit intangible .......................................
Other assets ........................................................
Total assets acquired .....................................
$ 38,018
4,588
1,973
246,451
–
2,773
–
931
294,734
(Dollars in thousands)
$ –
(20) a
(419) b
$ –
–
–
(96,557) b (1,382)
460
c
59,544
(1,102) d
495
e
(861) f
(38,920)
–
–
884
(38)
Liabilities assumed:
Deposits ..............................................................
FHLB-Atlanta advances ......................................
FDIC clawback payable .......................................
Other liabilities ...................................................
Total liabilities assumed ................................
Net assets acquired ..................................................
Asset discount bid ...................................................
Cash received from FDIC ..........................................
Pre-tax gain .............................................................
293,344
4,000
–
478
297,822
–
–
930
100
1,030
(3,088) $(39,950)
i
g
h
f
–
–
(38)
–
(38)
$ –
(42,900)
$ 45,988
$ 38,018
4,568
1,554
148,512
60,004
1,671
495
954
255,776
293,344
4,000
892
578
298,814
(43,038)
45,988
$ 2,950
(1) Represents the Day 1 Fair Values of assets acquired and liabilities assumed in the First Choice acquisition.
85
A summary of the assets acquired and liabilities assumed in the Park Avenue acquisition, including recast
adjustments, is as follows:
April 29, 2011
As Recorded
by
Fair Value
Park Avenue Adjustments
Recast
Adjustments
As Recorded
by the
Company
(1)
Assets acquired:
Cash and cash equivalents ................................. $ 66,825
132,737
Investment securities AFS ..................................
23,664
Purchased non-covered loans .............................
408,069
Covered loans .....................................................
FDIC loss share receivable ..................................
–
Foreclosed assets covered by
(Dollars in thousands)
$ –
(947) a
(5,968) b
(145,152) b
113,683 c
$ –
–
–
1,380
2,571
FDIC loss share agreements .............................
Core deposit intangible .......................................
Other assets ........................................................
Total assets acquired .....................................
91,442
–
5,012
727,749
(59,812) d
5,063 e
(2,035) f
(95,168)
(450)
–
(1,799)
1,702
Liabilities assumed:
626,321
Deposits ..............................................................
84,260
FHLB-Atlanta advances ......................................
–
FDIC clawback payable .......................................
1,588
Other liabilities ...................................................
712,169
Total liabilities assumed ................................
15,580
Net assets acquired ..................................................
Asset discount bid ...................................................
(174,900)
Cash received from FDIC .......................................... $159,320
Pre-tax gain .............................................................
i
–
4,559 g
14,868 h
500 f
19,927
$(115,095)
–
–
77
1,625
1,702
$ –
$ 66,825
131,790
17,696
264,297
116,254
31,180
5,063
1,178
634,283
626,321
88,819
14,945
3,713
733,798
(99,515)
159,320
$ 59,805
(1) Represents the Day 1 Fair Values of the assets acquired and liabilities assumed in the Park Avenue acquisition.
Explanation of fair value adjustments
a – Adjustment reflects the fair value adjustment based on the Company’s pricing of investment securities AFS.
b – Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio.
c – Adjustment reflects the estimated fair value of payments the Company expects to receive from the FDIC under
the loss share agreements.
d – Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired foreclosed
assets covered by FDIC loss share agreements.
e – Adjustment reflects the estimated fair value of the core deposit intangible.
f – Adjustment reflects the amount needed to adjust the carrying value of other assets and other liabilities
to estimated fair value.
g – Adjustment reflects the amount of the prepayment penalty, if any, assessed on early payoff of FHLB-
Atlanta advances.
h – Adjustment reflects the estimated fair value of payments the Company expects to make to the FDIC under the
clawback provisions of the loss share agreements at the conclusion of the term of the loss share agreements.
i – Because the Company reset deposit rates for these assumed deposits, as provided for under the purchase and
assumption agreements, to reflect an appropriate market rate of interest, there was no fair value adjustment for
such assumed deposits.
The Company’s results of operations include the operating results of the acquired assets and assumed
liabilities from the respective dates of acquisition through the end of the reporting period. Due to the
significant fair value adjustments and the nature of the loss sharing agreements with the FDIC, the
Company believes pro forma information that would include pre-acquisition historical results of the
acquired assets and assumed liabilities is not relevant. Accordingly, no pro forma information is included
in these consolidated financial statements.
86
2010 Acquisitions
On March 26, 2010, the Company, through the Bank, entered into a purchase and assumption agreement
with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and
assumed substantially all of the deposits and certain other liabilities of the former Unity National Bank
(“Unity”) with offices in Cartersville (2), Rome, Adairsville and Calhoun, Georgia.
On July 16, 2010, the Company, through the Bank, entered into a purchase and assumption agreement
with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets
and assumed substantially all of the deposits and certain other liabilities of the former Woodlands Bank
(“Woodlands”) with offices in South Carolina (2); North Carolina (2); Georgia and Alabama (3). On October 26,
2010, the Company closed four of the Woodlands offices.
On September 10, 2010, the Company, through the Bank, entered into a purchase and assumption
agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the
assets and assumed substantially all of the deposits and certain other liabilities of the former Horizon Bank
(“Horizon”) with offices in Bradenton (2), Palmetto and Brandon, Florida. On December 23, 2010, the
Company closed the office in Brandon, Florida.
On December 17, 2010, the Company, through the Bank, entered into a purchase and assumption agreement
with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and
assumed substantially all of the deposits and certain other liabilities of the former Chestatee State Bank
(“Chestatee”) with offices in Dawsonville (2), Cumming and Marble Hill, Georgia.
Purchase Accounting Adjustments
The recast adjustments to the acquired assets and assumed liabilities for each of the Company’s FDIC-
assisted acquisitions were made subsequent to the acquisition, but prior to their one-year anniversaries and,
as provided for under GAAP, were considered to be purchase accounting adjustments in deriving the Day 1
Fair Values for the acquired assets and assumed liabilities. These adjustments impacted the net assets
acquired and the resulting pre-tax gains on these acquisitions. However, because the net effect on net assets
acquired and resulting pre-tax gains was not material, management recorded the impact of such adjustments
as an increase or decrease to non-interest income during the quarter in which the adjustments were determined.
The net decrease to non-interest income is included as an adjustment to “other assets” or “other liabilities”
in the previous tables.
As a result of the recent adjustments, certain amounts previously reported in the Company’s December 31,
2011 consolidated financial statements have been recast. The following is a summary of those financial
statement captions that have been impacted by these recast adjustments.
As Previously
Reported
Recast
Adjustments
(Dollars in thousands)
As
Recast
December 31, 2011:
Covered loans ..............................................................
FDIC loss share receivable ...........................................
Other assets .................................................................
FDIC clawback payable ................................................
Accrued interest payable and other liabilities ..............
$806,924
278,263
32,495
24,606
43,882
$ (2)
782
884
39
1,625
$806,922
279,045
33,379
24,645
45,507
87
Loss Share Agreements and Other FDIC-Assisted Acquisition Matters
In conjunction with these FDIC-assisted acquisitions, the Bank entered into loss share agreements with
the FDIC such that the Bank and the FDIC will share in the losses on assets covered under the loss share
agreements. Pursuant to the terms of the loss share agreements for the Unity acquisition, on losses up to
$65.0 million, the FDIC will reimburse the Bank for 80% of losses. On losses exceeding $65.0 million, the
FDIC will reimburse the Bank for 95% of losses. Pursuant to the terms of the loss share agreements for the
Woodlands acquisition, the Chestatee acquisition, the Oglethorpe acquisition and the First Choice acquisi-
tion, the FDIC will reimburse the Bank for 80% of losses. Pursuant to the terms of the loss share agree-
ments for the Horizon acquisition, the FDIC will reimburse the Bank on single family residential loans and
related foreclosed assets for (i) 80% of losses up to $11.8 million, (ii) 30% of losses between $11.8 million
and $17.9 million and (iii) 80% of losses in excess of $17.9 million. For non-single family residential loans
and related foreclosed assets, the FDIC will reimburse the Bank for (i) 80% of losses up to $32.3 million,
(ii) 0% of losses between $32.3 million and $42.8 million and (iii) 80% of losses in excess of $42.8 million.
Pursuant to the terms of the loss share agreements for the Park Avenue acquisition, the FDIC will reimburse
the Bank for (i) 80% of losses up to $218.2 million, (ii) 0% of losses between $218.2 million and $267.5
million and (iii) 80% of losses in excess of $267.5 million.
The loss share agreements applicable to single family residential mortgage loans and related foreclosed
assets provide for FDIC loss sharing and the Bank’s reimbursement to the FDIC for recoveries of covered
losses for ten years from the date on which each applicable loss share agreement was entered. The loss
share agreements applicable to commercial loans and related foreclosed assets provide for FDIC loss sharing
for five years from the date on which each applicable loss share agreement was entered and the Bank’s
reimbursement to the FDIC for recoveries of covered losses for an additional three years thereafter.
To the extent that actual losses incurred by the Bank are less than (i) $65 million on the Unity assets
covered under the loss share agreements, (ii) $107 million on the Woodlands assets covered under the loss
share agreements, (iii) $60 million on the Horizon assets covered under the loss share agreements, (iv) $66
million on the Chestatee assets covered under the loss share agreements, (v) $66 million on the Oglethorpe
assets covered under the loss share agreements, (vi) $87 million on the First Choice assets covered under
the loss share agreements and (vii) $269 million on the Park Avenue assets covered under the loss share
agreements, the Bank may be required to reimburse the FDIC under the clawback provisions of the loss
share agreements.
The terms of the purchase and assumption agreements for the Unity, Woodlands, Horizon, Chestatee,
Oglethorpe, First Choice and Park Avenue acquisitions provide for the FDIC to indemnify the Bank against
certain claims, including claims with respect to assets, liabilities or any affiliate not acquired or otherwise
assumed by the Bank and with respect to claims based on any action by the former directors, officers or
employees of Unity, Woodland, Horizon, Chestatee, Oglethorpe, First Choice or Park Avenue.
3. Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable
A summary of the covered assets, the FDIC loss share receivable and the FDIC clawback payable is
as follows:
December 31,
2012
2011
(Dollars in thousands)
Covered loans ....................................................... $596,239
152,198
FDIC loss share receivable ....................................
Covered foreclosed assets .....................................
52,951
Total ................................................................. $801,388
$ 806,922
279,045
72,907
$1,158,874
FDIC clawback payable ......................................... $ 25,169
$ 24,645
88
Covered Loans
The following table presents a summary, by acquisition, of covered loans acquired as of the dates of
acquisition and activity within covered loans during the periods indicated.
Unity Woodlands Horizon Chestatee Oglethorpe Choice Avenue
Total
First
Park
At acquistion date:
(Dollars in thousands)
Contractually required
principal and interest ........ $208,410 $315,103 $179,441 $181,523 $174,110 $260,178 $452,658 $1,771,423
Nonaccretable difference .....
(52,526)
(83,933) (52,388)
(47,538) (67,300)
(86,876) (124,899)
(515,460)
Cash flows expected
to be collected ...................
155,884
231,170 127,053
133,985 106,810
173,302 327,759
1,255,963
Accretable difference ...........
(21,432)
(44,692) (35,245)
(22,604) (25,376)
(24,790) (63,462)
(237,601)
Fair value at
acquisition date ................. $134,452 $186,478 $ 91,808 $111,381 $ 81,434 $148,512 $264,297 $1,018,362
Carrying value at
January 1, 2011 .................... $114,983 $175,720 $ 87,714 $111,051 $ – $ – $ – $ 489,468
Covered loans acquired ........
–
–
–
–
81,434
148,512 264,297
494,243
Accretion .............................
7,662
13,716
6,716
8,193
6,461
7,798
15,589
66,135
Transfers to covered
foreclosed assets ...............
(5,197)
(14,938)
(1,990)
(2,381)
(1,218)
(858)
(2,432)
(29,014)
Payments received ...............
(20,296)
(40,256) (11,598)
(40,814) (22,061)
(22,514) (48,249)
(205,788)
Other activity, net ................
(792)
(2,467)
(1,044)
(1,348)
(225)
(1,015)
(1,231)
(8,122)
Carrying value at
December 31, 2011 ..............
96,360
131,775
79,798
74,701
64,391
131,923 227,974
806,922
Accretion .............................
6,360
10,031
5,768
5,708
5,665
9,915
18,373
61,820
Transfers to covered
foreclosed assets ..............
(4,077)
(4,543)
(3,731)
(3,299)
(4,065)
(4,742)
(8,563)
(33,020)
Payments received ...............
(21,144)
(28,777) (14,888)
(18,205) (15,425)
(41,756) (71,592)
(211,787)
Charge-offs ..........................
(4,422)
(8,332)
(3,714)
(2,089)
(2,117)
(4,008)
(1,410)
(26,092)
Other activity, net ................
(228)
(420)
(40)
(148)
(356)
(251)
(161)
(1,604)
Carrying value at
December 31, 2012 ............. $ 72,849 $ 99,734 $ 63,193 $ 56,668 $ 48,093 $ 91,081 $164,621 $ 596,239
89
The following table presents a summary of the carrying value and type of covered loans at December 31,
2012 and 2011.
Real estate:
Residential 1-4 family ........................................
Non-farm/non-residential ..................................
Construction/land development .........................
Agricultural .......................................................
Multifamily residential .......................................
Total real estate .............................................
Commercial and industrial ....................................
Consumer ..............................................................
Other .....................................................................
Total covered loans ........................................
December 31,
2011
2012
(Dollars in thousands)
$152,348
288,104
105,087
19,690
10,701
575,930
18,496
176
1,637
$596,239
$202,620
369,756
160,872
24,104
15,894
773,246
29,749
958
2,969
$806,922
The following table presents a summary, by acquisition, of changes in the accretable difference on covered
loans during the periods indicated.
First
Unity Woodlands Horizon Chestatee Oglethorpe Choice
Park
Avenue
Total
113,628
(66,135)
–
(Dollars in thousands)
(191)
(934)
(384)
(273)
–
(6,716)
–
(8,193)
(327)
(3,167)
(315)
(2,811)
(503)
(4,564)
(91)
(1,435)
(1,611)
(2,146)
25,376
(6,461)
–
(7,662) (13,716)
63,462
24,790
(7,798) (15,589)
Accretable difference
at January 1, 2011 ............. $15,279 $37,182 $32,165 $22,265 $ – $ – $ – $106,891
Accretable difference
acquired ..........................
Accretion ..........................
Adjustments to accretable
difference due to:
Covered loans
transferred to covered
foreclosed assets ...........
Covered loans paid off ....
Cash flow revisions as
a result of renewals
and/or modifications
of covered loans ...........
Other, net ..........................
Accretable difference at
December 31, 2011 ............ 10,614
Accretion ..........................
Adjustments to accretable
difference due to:
Covered loans
transferred to covered
foreclosed assets ...........
Covered loans paid off ....
Cash flow revisions
as a result of renewals
and/or modifications
of covered loans ...........
Other, net ..........................
Accretable difference at
December 31, 2012 ............ $ 8,574 $17,452 $16,524 $ 5,712 $11,372 $ 9,919 $27,942 $ 97,495
16,900
47,147
(9,915) (18,373)
24,555
(6,360) (10,031)
10,663
(5,708)
17,338
(5,665)
24,432
(5,768)
(700)
(1,291)
(190)
(1,418)
(364)
(1,220)
(1,679)
(3,507)
(455)
(1,529)
14,508
1,509
21,331
825
3,514
140
2,097
671
4,691
155
1,481
177
5,196
2
1,446
103
1,269
165
4,396
116
1,835
181
4,791
127
4,164
190
1,567
123
(159)
(719)
(448)
(811)
(618)
86
10
98
151,649
(61,820)
(3,422)
(15,330)
(3,995)
(10,495)
90
FDIC Loss Share Receivable
The following table presents a summary, by acquisition, of the FDIC loss share receivable as of the dates
of acquisition and the activity within the FDIC loss share receivable during the periods indicated.
First
Unity Woodlands Horizon Chestatee Oglethorpe Choice
Park
Avenue
Total
80%
628
80%
80%
80%
80%
80%
80%
80%
7,907
3,678
9,979
5,897
93,899
49,850
15,960
60,333
82,840
44,215
79,117
62,829
70,797
56,638
66,272
48,266
50,263
63,294
35,372
(5,535)
(6,268)
(4,204)
(4,119)
(6,283)
(7,428)
(48,561)
–
741
163,722
563,853
451,083
130,978
(14,724)
(Dollars in thousands)
–
1,807
(5,069) (23,001)
At acquisition date:
Expected principal loss
on covered assets:
Covered loans .................... $50,354 $73,220 $40,537 $46,869 $62,890 $82,212 $113,872 $469,954
Covered foreclosed
assets ..............................
Total expected
principal losses ...................
Estimated loss sharing
percentage(1) .......................
Estimated recovery from FDIC
loss share agreements ........
Discount for net present
value on FDIC loss share
receivable ...........................
Net present value of FDIC
loss share receivable
at acquisition date .............. $44,147 $55,866 $29,089 $46,059 $51,103 $60,004 $116,254 $402,522
Carrying value at
January 1, 2011 .................... $31,120 $51,776 $29,182 $46,059 $ – $ – $ – $158,137
FDIC loss share receivable
recorded at acquisition .......
Accretion income ..................
Cash received from FDIC .......
Reductions of FDIC loss share
receivable for payments on
covered loans in excess of
Day 1 Fair Values .................
Expenses on covered assets
reimbursable by FDIC .........
Other activity, net .................
Carrying value at
December 31, 2011 ...............
Accretion income ..................
Cash received from FDIC .......
Reductions of FDIC loss share
receivable for payments on
covered loans in excess of
Day 1 Fair Values .................
Increase in FDIC loss share
receivable for:
Charge-offs on
covered loans ...................
Write downs of covered
foreclosed assets ..............
Expenses on covered assets
reimbursable by FDIC .........
Other activity, net .................
Carrying value at
December 31, 2012 ............... $19,818 $22,373 $16,859 $11,162 $23,996 $17,918 $ 40,072 $152,198
60,004
1,814
(9,505) (18,466) (11,942) (12,372)
48,442
1,485
(8,948) (22,301) (13,062) (29,870)
29,177
1,108
(12,945) (14,433)
116,254
2,427
279,045
8,574
(42,438) (143,997)
227,361
11,076
(28,646) (109,001)
11,378
2,085
37,720
1,310
29,382
725
21,757
680
84,992
2,473
27,575
793
51,103
1,997
1,318
(293)
1,097
(457)
1,276
755
1,360
598
1,726
562
1,537
491
3,064
429
1,330
1,988
1,183
918
1,606
579
1,376
282
8,647
4,511
1,943
218
–
1,363
(12,657)
(33,011)
737
390
472
136
(21,686)
–
927
(1,612)
(6,208)
(2,122)
(4,918)
(1,335)
(3,377)
(2,394)
(2,892)
(3,590)
(7,204)
(4,565)
19,279
2,297
1,589
6,417
3,170
1,028
1,627
3,151
3,181
8,845
1,858
1,193
1,591
(948)
(875)
294
450
278
(1) Certain of the Company’s loss share agreements contain tranches whereby the FDIC’s loss sharing percentage is
more than or less than 80%. However, management’s current expectation of most of the principal losses on covered
assets under each of the loss share agreements falls in the tranches whereby the FDIC would reimburse the
Company for approximately 80% of such losses.
91
Foreclosed Assets Covered by FDIC Loss Share Agreements
The following table presents a summary, by acquisition, of foreclosed assets covered by FDIC loss share
agreements, or covered foreclosed assets, as of the dates of acquisition and the activity within covered
foreclosed assets during the periods indicated.
First
Park
Unity Woodlands Horizon Chestatee Oglethorpe Choice Avenue
Total
At acquisition date:
Balance on acquired
bank’s books ....................... $20,304 $12,258 $8,391 $ 31,647 $16,554 $2,773 $91,442 $183,369
Total expected losses ..............
(93,899)
Discount for net present value
of expected cash flows .........
(18,557)
Fair value at acquisition date ... $ 8,859 $ 5,029 $3,683 $13,406 $ 7,085 $1,671 $31,180 $ 70,913
(5,897) (3,678) (15,960)
(1,332) (1,030)
(474) (10,412)
(628) (49,850)
(Dollars in thousands)
(2,281)
(1,562)
(7,907)
(1,466)
(9,979)
–
–
–
–
5,197
1,990
1,671
7,085
2,381
14,938
31,180
Carrying value at
January 1, 2011 ...................... $ 8,060 $ 5,996 $3,683 $13,406 $ – $ – $ – $ 31,145
Covered foreclosed
assets acquired ....................
Transfers from covered
loans ....................................
Sales of covered
foreclosed assets ..................
Carrying value at
December 31, 2011 ................. 10,272
Transfers from covered
loans ....................................
Sales of covered
foreclosed assets ..................
Writedowns of covered
foreclosed assets included in
other loss share income .......
Carrying value at
December 31, 2012 ................. $ 8,187 $ 8,050 $2,538 $ 4,211 $ 6,797 $3,584 $19,584 $ 52,951
(4,063) (3,038) (11,719)
(9,304) (4,285)
(6,499) (1,996)
(1,695)
(1,624)
(2,750)
(1,654)
(7,111)
(4,467)
(8,122)
(1,171)
(6,110)
(2,985)
25,490
72,907
14,435
33,020
29,014
39,936
9,677
7,132
2,224
3,677
8,563
4,742
4,065
1,218
3,731
3,299
2,432
4,543
4,077
(344)
(337)
(585)
(305)
858
(27,188)
(43,987)
(8,989)
The following table presents a summary of the carrying value and type of covered foreclosed assets at
December 31, 2012 and 2011.
December 31,
2012
2011
(Dollars in thousands)
Real estate:
Residential 1-4 family .................................................................... $12,279
9,570
Non-farm/non-residential ..............................................................
30,602
Construction/land development .....................................................
449
Agricultural ...................................................................................
51
Multifamily residential ...................................................................
52,951
Total real estate .......................................................................
Repossessions ..................................................................................
–
$52,951
Total covered foreclosed assets ................................................
$15,945
11,624
43,323
–
2,014
72,906
1
$72,907
92
FDIC Clawback Payable
The following table presents a summary, by acquisition, of the FDIC clawback payable as of the dates of
acquisition and activity within the FDIC clawback payable during the periods indicated.
First
Unity Woodlands Horizon Chestatee Oglethorpe Choice
Park
Avenue
Total
(1,046)
At acquisition date:
Estimated FDIC
clawback payable ........... $2,612
Discount for net present
value on FDIC
clawback payable ...........
Net present value of FDIC
clawback payable at
acquisition date ............. $1,566
Carrying value
at January 1, 2011 ........... $1,629
FDIC clawback payable
recorded at acquisition ...
Amortization expense ......
Changes in FDIC
clawback payable related
to changes in expected
losses on covered
assets.............................
Carrying value at
December 31, 2011 ..........
Amortization expense ......
Changes in FDIC
clawback payable related
to changes in expected
losses on covered
assets.............................
Carrying value at
December 31, 2012 ........... $1,644
1,709
79
–
80
–
(144)
(Dollars in thousands)
$4,846
$2,380
$1,291
$1,721
$1,452 $24,344 $38,646
(1,905)
(919 )
(499)
(664)
(560)
(9,399) (14,992)
$2,941
$1,461
$ 792
$ 1,057
$ 892 $14,945 $23,654
$3,004
$1,479
$ 792
$ –
$ – $ – $ 6,904
–
149
–
73
–
55
1,057
42
892
31
14,945
505
16,894
935
–
–
(88)
–
–
–
(88)
3,153
138
1,552
73
759
35
1,099
53
923
45
15,450
776
24,645
1,199
(305)
(157)
–
(69)
–
–
(675)
$2,986
$1,468
$ 794
$1,083
$ 968 $16,226 $25,169
4. Investment Securities
The following table is a summary of the amortized cost and estimated fair values of investment securities,
all of which are classified as AFS. The Company’s holdings of “other equity securities” include FHLB-Dallas,
FHLB-Atlanta and FNBB shares which do not have readily available fair values and are carried at cost.
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Estimated
Fair
Value
December 31, 2012:
Obligations of states and political subdivisions ....... $345,224
U.S. Government agency residential
mortgage-backed securities ..................................
116,835
Corporate obligations ...............................................
776
13,689
Other equity securities .............................................
Total investment securities AFS ......................... $476,524
December 31, 2011:
Obligations of states and political subdivisions ....... $359,667
U.S. Government agency residential
46,068
mortgage-backed securities ..................................
Other equity securities .............................................
17,828
Total investment securities AFS ......................... $423,563
(Dollars in thousands)
$16,586
$(293)
$361,517
1,466
–
–
$18,052
(17)
–
–
$(310)
118,284
776
13,689
$494,266
$14,359
$(979)
$373,047
1,967
–
$16,326
–
–
$(979)
48,035
17,828
$438,910
93
The Company utilizes independent third parties as its principal sources for determining fair value of
investment securities which are measured on a recurring basis. As a result, the Company receives estimates
of fair values from at least two independent pricing sources for the majority of its individual securities within
its investment portfolio. For investment securities traded in an active market, the fair values are obtained
from independent pricing services and 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, comprehensive
interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market
that is not active, fair value is determined using unobservable inputs. Additionally, the valuation of investment
securities acquired in FDIC-assisted or traditional acquisitions may include certain unobservable inputs. All
fair value estimates received by the Company from its investment securities are reviewed and approved on a
quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.
The following table 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.
December 31, 2012:
Obligations of states and
political subdivisions ................
U.S. Government agency
residential mortgage-backed
securities ..................................
Total temporarily impaired
investment securities ..............
December 31, 2011:
Obligations of states and
political subdivisions ................
Total temporarily impaired
investment securities ..............
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
$14,085
$188
$ 7,324
$105
$21,409
$293
14,320
17
–
–
14,320
17
$28,405
$205
$ 7,324
$105
$35,729
$310
$ 6,035
$248
$16,582
$731
$22,617
$979
$ 6,035
$248
$16,582
$731
$22,617
$979
In evaluating the Company’s unrealized loss positions for other-than-temporary impairment for 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, 2012
and 2011, 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. The Company does not have the
intent to sell these investment securities and more likely than not would not be required to sell these
investment securities before fair value recovers to amortized cost.
The Company owns three different maturities of bonds totaling an aggregate of $2.6 million issued by
the Northwest Arkansas Regional Solid Waste Management District (“District”). The District owns and
operates a landfill for the benefit of the residents of certain counties located in north Arkansas, with the
landfill, the revenues therefrom and certain personal property serving as collateral under the bond indenture.
On October 9, 2012, a special election was held where an additional 3/8-cent sales tax proposal to be used to
support the purchase of the landfill by a third party from the District was defeated. On October 23, 2012, the
management board governing the District voted to place the District into receivership, and on November 30,
2012 the landfill ceased operations. As a result, during the fourth quarter of 2012, the Company recorded a
$2.6 million impairment charge to reduce the carrying value of the bonds to zero. This impairment charge is
included in “Net gains on investment securities,” on the consolidated statement of income.
94
A maturity distribution of investment securities AFS reported at amortized cost and estimated fair value as
of December 31, 2012 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 .................................................................
$ 16,285
33,794
58,613
367,832
$476,524
$ 16,616
34,637
60,073
382,940
$494,266
For purposes of this maturity distribution, all investment securities are shown based on their contractual
maturity date, except (i) FHLB-Dallas and FNBB stock with no contractual maturity date are shown in the
longest maturity category and (ii) U.S. Government agency residential 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, 2012. 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 charges of the Company’s investment securities
AFS are summarized as follows:
2012
Year Ended December 31,
2011
(Dollars in thousands)
$94,676
2010
$255,232
Sales proceeds ......................................................... $43,177
Gross realized gains ................................................. $ 3,075
(15)
Gross realized losses ................................................
(2,603)
Other-than-temporary impairment charges ..............
$ 1,044
(111)
–
$ 5,030
(486)
–
Net gains on investment securities ...................... $ 457
$ 933
$ 4,544
Investment securities with carrying values of $317.1 million and $316.8 million at December 31, 2012
and 2011, respectively, were pledged to secure public funds and trust deposits and for other purposes
required or permitted by law.
At December 31, 2012, the Company had no holdings of investment securities of any one issuer in an
amount greater than 10% of total common stockholders’ equity. At December 31, 2011, the Company’s
holdings of investment securities issued by the Government National Mortgage Association, which carry
the full faith and credit guaranty of the U.S. Government, totaled $45.6 million, or 10.7% of total common
stockholder’s equity.
95
5. Loans and Leases
The following table is a summary of the loan and lease portfolio, excluding purchased non-covered loans
and covered loans, by principal category.
December 31,
2012
2011
Real estate:
Residential 1-4 family .............................. $ 272,052
807,906
Non-farm/non-residential ........................
578,776
Construction/land development ...............
50,619
Agricultural .............................................
141,243
Multifamily residential .............................
1,850,596
Total real estate ...................................
159,804
Commercial and industrial ..........................
29,781
Consumer ....................................................
68,022
Direct financing leases ................................
Other ...........................................................
7,631
Total loans and leases .......................... $2,115,834
(Dollars in thousands)
12.9% $ 260,402
708,766
38.1
478,106
27.4
71,158
2.4
142,131
6.7
1,660,563
87.5
120,048
7.6
36,161
1.4
54,745
3.2
8,966
0.3
100.0% $1,880,483
13.9%
37.7
25.4
3.8
7.6
88.4
6.4
1.9
2.9
0.4
100.0%
The above table includes deferred costs, net of deferred fees, that totaled $1.7 million and $0.6 million
at December 31, 2012 and 2011, respectively. Direct financing leases are presented net of unearned income
totaling $8.4 million and $7.4 million at December 31, 2012 and 2011, respectively.
Loans and leases on which the accrual of interest has been discontinued aggregated $9.1 million and
$12.5 million at December 31, 2012 and 2011, respectively. Interest income collected and recognized during
2012, 2011 and 2010 for nonaccrual loans and leases at December 31, 2012, 2011 and 2010 was $0.2
million, $0.4 million and $0.1 million, respectively. Under the original terms, these loans and leases would
have reported $0.7 million, $1.2 million and $1.1 million of interest income during 2012, 2011 and 2010,
respectively.
The following table is a summary of the purchased non-covered loan portfolio, by principal category.
December 31,
2012
2011
(Dollars in thousands)
Real estate ...................................................... $29,283
5,333
Commercial and industrial ..............................
4,168
Consumer ........................................................
Other ...............................................................
2,750
Total ........................................................ $41,534
70.5%
12.8
10.0
6.7
100.0%
$ 71
631
4,001
96
$4,799
1.5%
13.1
83.4
2.0
100.0%
6. Allowance for Loan and Lease Losses (“ALLL”)
The following table is a summary of activity within the ALLL.
2012
Year Ended December 31,
2011
(Dollars in thousands)
2010
Balance – beginning of year ....................................................................
Non-covered loans and leases charged off ..............................................
Recoveries of non-covered loans and leases previously charged off .......
Net charge-offs – non-covered loans and leases .....................................
Covered loans charged off .......................................................................
Net charge-offs – total loans and leases ...........................................
Provision for loan and lease losses:
Non-covered loans and leases ............................................................
Covered loans .....................................................................................
Total provision ..................................................................................
Balance – end of year ....................................................................
$39,169
(6,636)
655
(5,981)
(6,195)
(12,176)
$40,230
(12,988)
427
(12,561)
(275)
(12,836)
5,550
6,195
11,745
$38,738
11,500
275
11,775
$39,169
$39,619
(16,764)
1,375
(15,389)
–
(15,389)
16,000
–
16,000
$40,230
96
As of December 31, 2012, the Company identified covered loans where the expected performance of such
loans had deteriorated from management’s performance expectations established in conjunction with the
determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of
adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $6.2 million for such
loans during 2012 and $0.3 million in 2011. The Company also recorded $6.2 million during 2012 and $0.3
million during 2011 of provision for loan and lease losses to cover such charge-offs. In addition to these net
charge-offs, the Company transferred certain of these covered loans to covered foreclosed assets. As a result
of these actions, the Company had $38.5 million and $1.9 million of impaired covered loans at December 31,
2012 and 2011, respectively.
The following table is a summary of the Company’s ALLL as of and for the years ended December 31,
2012 and 2011.
Beginning
Balance
Charge-offs Recoveries Provision
(Dollars in thousands)
December 31, 2012:
Real estate:
Residential 1-4 family ................................. $ 3,848
12,203
Non-farm/non-residential ............................
9,478
Construction/land development ...................
3,383
Agricultural .................................................
2,564
Multifamily residential .................................
4,591
Commercial and industrial ..............................
1,209
Consumer ........................................................
1,632
Direct financing leases ....................................
261
Other ...............................................................
–
Covered loans .................................................
Total ........................................................ $39,169
December 31, 2011:
Real estate:
Residential 1-4 family ................................. $ 2,999
8,313
Non-farm/non-residential ............................
10,565
Construction/land development ...................
2,569
Agricultural .................................................
1,320
Multifamily residential .................................
4,142
Commercial and industrial ..............................
2,051
Consumer ........................................................
1,726
Direct financing leases ....................................
201
Other ...............................................................
Covered loans .................................................
–
6,344
Unallocated .....................................................
Total ........................................................ $40,230
$ (1,312)
(1,226)
(466)
(997)
–
(1,323)
(732)
(361)
(219)
(6,195)
$(12,831)
$ (2,743)
(1,033)
(5,651)
(771)
–
(1,465)
(825)
(413)
(87)
(275)
–
$(13,263)
$ 107
18
106
141
–
35
238
2
8
–
$ 655
$ 64
16
30
–
–
142
166
5
4
–
–
$ 427
$ 2,177
(888)
2,882
351
(534)
352
300
777
133
6,195
$11,745
$ 3,528
4,907
4,534
1,585
1,244
1,772
(183)
314
143
275
(6,344)
$11,775
Ending
Balance
$ 4,820
10,107
12,000
2,878
2,030
3,655
1,015
2,050
183
–
$38,738
$ 3,848
12,203
9,478
3,383
2,564
4,591
1,209
1,632
261
–
–
$39,169
97
The following table is a summary of the Company’s ALLL and recorded investment in loans and leases,
excluding purchased non-covered loans and covered loans, as of December 31, 2012 and 2011.
Allowance for
Loan and Leases Losses
Loans and Leases Excluding Purchased
Non-Covered Loans and Covered Loans
ALLL for
Individually
Evaluated
Impaired
Loans and
Leases
ALLL
for All
Other
Loans
and
Leases
Individually
Evaluated
Impaired All Other
Loans
and
Leases
Loans
and
Leases
Total
ALLL
Total
Loans
and
Leases
(Dollars in thousands)
December 31, 2012:
Real estate:
Residential 1-4 family .................
Non-farm/non-residential ............
Construction/land development ...
Agricultural .................................
Multifamily residential .................
Commercial and industrial ..............
Consumer ........................................
Direct financing leases ....................
Other ...............................................
Total ........................................
December 31, 2011:
Real estate:
Residential 1-4 family(1) ..............
Non-farm/non-residential ............
Construction/land development ...
Agricultural .................................
Multifamily residential .................
Commercial and industrial ..............
Consumer ........................................
Direct financing leases ....................
Other ...............................................
Total ........................................
$ 518
53
7
254
–
649
–
–
2
$1,483
$ 415
410
31
–
–
868
57
–
2
$1,783
$ 4,302 $ 4,820
10,107
12,000
2,878
2,030
3,655
1,015
2,050
183
$37,255 $38,738
10,054
11,993
2,624
2,030
3,006
1,015
2,050
181
$ 2,906
2,898
542
985
–
761
33
–
22
$ 8,147
$ 269,146 $ 272,052
807,906
578,776
50,619
141,243
159,804
29,781
68,022
7,631
$2,107,687 $2,115,834
805,008
578,234
49,634
141,243
159,043
29,748
68,022
7,609
$ 3,433 $ 3,848
12,203
9,478
3,383
2,564
4,591
1,209
1,632
261
$37,386 $39,169
11,793
9,447
3,383
2,564
3,723
1,152
1,632
259
$ 3,239
3,837
3,001
737
–
1,390
87
–
11
$12,302
$ 257,163 $ 260,402
708,766
478,106
71,158
142,131
120,048
36,161
54,745
8,966
$1,868,181 $1,880,483
704,929
475,105
70,421
142,131
118,658
36,074
54,745
8,955
(1) Includes one individually evaluated loan classified as a TDR totaling $1.0 million with an ALLL of $0.3 million
allocated for such loan.
98
The following table is a summary of credit quality indicators for the Company’s total loans and leases,
excluding purchased non-covered loans and covered loans, as of December 31, 2012 and 2011.
Satisfactory
December 31, 2012:
Real estate:
Residential 1-4 family(1) .................... $ 263,737
649,494
Non-farm/non-residential ..................
395,821
Construction/land development .........
25,854
Agricultural .......................................
112,360
Multifamily residential .......................
121,898
Commercial and industrial ....................
Consumer(1) ...........................................
29,079
66,657
Direct financing leases ..........................
Other(1) ..................................................
6,116
Total ............................................. $1,671,016
December 31, 2011:
Real estate:
Residential 1-4 family(1) .................... $ 251,799
541,830
Non-farm/non-residential ..................
263,149
Construction/land development .........
45,276
Agricultural .......................................
94,049
Multifamily residential .......................
81,543
Commercial and industrial ....................
Consumer(1) ...........................................
35,128
52,329
Direct financing leases ..........................
Other(1) ..................................................
6,731
Total ............................................. $1,371,834
Moderate
Watch
(Dollars in thousands)
Substandard
$ –
109,429
130,057
12,105
24,092
31,338
–
1,365
1,204
$309,590
$ –
96,341
164,500
11,549
43,622
30,996
–
2,070
1,724
$350,802
$ 3,146
38,231
37,069
9,509
4,009
3,950
424
–
239
$ 96,577
$ 1,924
53,976
41,741
7,328
3,673
3,093
623
26
385
$112,769
$ 5,169
10,752
15,829
3,151
782
2,618
278
–
72
$38,651
$ 6,679
16,619
8,716
7,005
787
4,416
410
320
126
$45,078
Total
$ 272,052
807,906
578,776
50,619
141,243
159,804
29,781
68,022
7,631
$2,115,834
$ 260,402
708,766
478,106
71,158
142,131
120,048
36,161
54,745
8,966
$1,880,483
(1) The Company does not risk rate its residential 1-4 family loans, its consumer loans, and certain “other” loans.
However, for purposes of the above table, the Company considers such loans to be (i) satisfactory – if they are
performing and less than 30 days past due, (ii) watch – if they are performing and 30 to 89 days past due or
(iii) substandard – if they are nonperforming or 90 days or more past due.
The Company’s credit quality indicators consist of an internal grading system used to assign grades to
all loans and leases except residential 1-4 family loans, consumer loans, covered loans and purchased non-
covered loans. The grade for each individual loan or lease is determined by the account officer and other
approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing
assessment of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by
senior management and as part of the Company’s internal loan review process. 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
and loan-to-cost ratios; (3) for commercial and industrial loans and leases, the operating results of the
commercial, industrial or professional enterprise, the borrower’s or lessee’s business, professional and
financial ability and expertise, the specific risks and volatility of income and operating results typical for
businesses in the applicable industry and the age, condition, value, nature and marketability of collateral;
and (4) for other loans and leases, the operating results, experience and ability of the borrower or lessee,
historical and expected market conditions and the age, condition, value, nature and marketability of the
99
collateral. In addition, for each category the Company considers secondary sources of income and the
financial strength of the borrower or lessee and any guarantors. The following categories of credit quality
indicators are used by the Company.
Satisfactory – Loans and leases in this category are considered to be a satisfactory credit risk and are
generally considered to be collectible in full.
Moderate – Loans and leases in this category are considered to be a marginally satisfactory credit risk and
are generally considered to be collectible in full.
Watch – Loans and leases in this category are presently protected from apparent loss, however weaknesses
exist which could cause future impairment of repayment of principal or interest.
Substandard – Loans and leases in this category are characterized by deterioration in quality exhibited by
a number of weaknesses requiring corrective action and posing risk of some loss.
The following table is a summary of credit quality indicators for the Company’s covered loans as of
December 31, 2012 and 2011.
FV 1
FV 2
(Dollars in thousands)
December 31, 2012:
Real estate:
Residential 1-4 family ...................................................
Non-farm/non-residential .............................................
Construction/land development ....................................
Agricultural ..................................................................
Multifamily residential ..................................................
Commercial and industrial ................................................
Consumer ..........................................................................
Other .................................................................................
Total .........................................................................
$146,687
271,705
90,321
18,937
9,871
18,495
123
1,637
$557,776
December 31, 2011:
Real estate:
Residential 1-4 family ...................................................
Non-farm/non-residential .............................................
Construction/land development ....................................
Agricultural ..................................................................
Multifamily residential ..................................................
Commercial and industrial ................................................
Consumer ..........................................................................
Other .................................................................................
Total .........................................................................
$202,620
368,555
160,737
24,104
15,376
29,749
958
2,969
$805,068
$ 5,661
16,399
14,766
753
830
1
53
-
$38,463
$ –
1,201
135
–
518
–
–
–
$ 1,854
Total
Covered
Loans
$152,348
288,104
105,087
19,690
10,701
18,496
176
1,637
$596,239
$202,620
369,756
160,872
24,104
15,894
29,749
958
2,969
$806,922
For covered loans, management separately monitors this portfolio and periodically reviews loans contained
within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. To the
extent that a loan is performing in accordance with management’s expectation established in conjunction
with the determination of the Day 1 Fair Values, such loan is rated FV 1, is not included in any of the
Company’s credit quality ratios, is not considered to be an impaired loan and is not considered in the
determination of the required allowance for loan and lease losses. To the extent that a loan’s performance
has deteriorated from management’s expectation established in conjunction with the determination of the
Day 1 Fair Values, such loan is rated FV 2, is included in certain of the Company’s credit quality metrics, may
be considered an impaired loan, and is considered in the determination of the required level of allowance for
loan and lease losses. At December 31, 2012 and 2011, the Company had no allowance for its covered loans
because all losses had been charged off on covered loans whose performance had deteriorated from
management’s expectations established in conjunction with the determination of the Day 1 Fair Values.
100
The following table is a summary of credit quality indicators for the Company’s purchased non-covered
loans as of December 31, 2012 and 2011.
Purchased Non-Covered Loans Without
Evidence of Credit Deterioration at Acquisition
FV 33
FV 77
FV 55
FV 36
FV 44
Purchased Non-
Covered Loans With
Evidence of Credit
Deterioration at
Acquisition
FV 66
FV 88
Total
Purchased
Non-Covered
Loans
December 31, 2012:
Real Estate ................... $5,042
Commercial and
576
industrial .................
857
Consumer .....................
Other ............................
222
Total ........................ $6,697
December 31, 2011:
Real Estate ................... $ –
Commercial and
–
industrial .................
–
Consumer .....................
Other ............................
–
Total ........................ $ –
$10,218
$ 8,705
$1,229 $ –
$4,089 $ –
$29,283
(Dollars in thousands)
1,802
231
110
$12,361
1,788
384
79 1,341
102 2,071
–
783
– 1,660
245
–
$5,025 $ –
–
–
–
$6,777 $ –
$10,674
5,333
4,168
2,750
$41,534
$ –
$ –
$ – $ –
$ 71 $ –
$ 71
–
–
–
$ –
–
–
–
631
–
– 4,001
96
–
$ – $ – $ –
–
–
–
$4,799 $ –
–
–
–
631
4,001
96
$ 4,799
At the time of acquisition of purchased non-covered loans, management individually evaluates substantially
all loans acquired in the transaction. For those purchased loans without evidence of credit deterioration,
management evaluates each reviewed loan using an internal grading system with a grade assigned to each
loan at the date of acquisition. The grade for each purchased non-covered loan is reviewed subsequent to the
date of acquisition any time a loan is renewed or extended or at any time information becomes available to
the Company that provides material insight regarding the loan’s performance, the borrower or the underlying
collateral. To the extent that a loan is performing in accordance with management’s initial expectations, such
loan is not considered impaired and is not considered in the determination of the required allowance for loan
and lease losses. To the extent that current information indicates it is probable that the Company will not be
able to collect all amounts according to the contractual terms thereon, such loan is considered impaired and
is considered in the determination of the required level of allowance for loan and lease losses.
The following grades are used for purchased non-covered loans without evidence of credit deterioration.
FV 33 – Loans in this category are considered to be satisfactory with minimal credit risk and are generally
considered collectible.
FV 44 – Loans in this category are considered to be marginally satisfactory with minimal to moderate
credit risk and are generally considered collectible.
FV 55 – Loans in this category exhibit weakness and are considered to have elevated credit risk and
elevated risk of repayment.
FV 36 – Loans in this category were not individually reviewed at the date of purchase and are assumed
to have characteristics similar to the characteristics of the aggregate acquired portfolio.
FV 77 – Loans in this category have deteriorated since the date of purchase and are considered impaired.
In determining the Day 1 Fair Values of purchased non-covered loans without evidence of credit deterioration
at the date of acquisition, management includes (i) no carry over of any previously recorded allowance for
loan losses and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate
of interest, given the risk profile and grade assigned to each loan. This adjustment will be accreted into
earnings as an adjustment to the yield on purchased non-covered loans, using the effective yield method,
over the remaining life of each loan.
101
Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are
accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated
credit quality. At the time such purchased non-covered loans with evidence of credit deterioration are
acquired, management individually evaluates each loan to determine the estimated fair value of each loan.
This evaluation includes no carryover of any previously recorded allowance for loan and lease losses. In
determining the estimated fair value of purchased non-covered loans with evidence of credit deterioration,
management considers a number of factors including, among other things, the remaining life of the acquired
loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated
holding periods, and net present value of cash flows expected to be received.
Management separately monitors purchased non-covered loans with evidence of credit deterioration on
the date of purchase and periodically reviews such loans contained within this portfolio against the factors
and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed
or extended, (ii) at any other time additional information becomes available to the Company that provides
material additional insight regarding the loan’s performance, the status of the borrower, or the quality or
value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of
each acquired portfolio. Management separately reviews, on an annual basis, the performance of the portfolio
on purchased non-covered loans with evidence of credit deterioration, or more frequently to the extent that
material information becomes available regarding the performance of an individual loan, to make determinations
of the constituent loans’ performance and to consider whether there has been any significant change in
performance since management’s initial expectations established in conjunction with the determination of
the Day 1 Fair Values. To the extent that a loan is performing in accordance with or exceeding management’s
performance expectation established in conjunction with the determination of the Day 1 Fair Values, such
loan is rated FV 66, is not included in any of the credit quality ratios, is not considered to be a nonaccrual
or impaired loan, and is not considered in the determination of the required allowance for loan and lease
losses. To the extent that a loan’s performance has deteriorated from management’s expectation established
in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 88, is included in
certain of the Company’s credit quality metrics, is generally considered an impaired loan, and is considered
in the determination of the required level of allowance for loan and lease losses. Any improvement in the
expected performance of such loan would result in a reversal of the provision for loan and lease losses to
the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact
on interest income.
The Company had no loans rated FV 88 at December 31, 2012 or 2011. Additionally, the Company had
no allowance for its purchased non-covered loans at December 31, 2012 or 2011 as all such loans are
performing in accordance with management’s expectations established in conjunction with the determination
of the Day 1 Fair Values.
102
The following table is a summary of impaired loans and leases, excluding purchased non-covered loans
and covered loans, as of and for the years ended December 31, 2012 and 2011.
Principal
Balance
Net
Charge-offs
to Date
Principal
Balance,
Net of
Specific
Charge-offs Allowance
Average
Carrying
Value
(Dollars in thousands)
December 31, 2012:
Impaired loans and leases for which
there is a related ALLL:
Real estate:
Residential 1-4 family ............................... $ 1,887
204
Non-farm/non-residential ..........................
711
Construction/land development .................
599
Agricultural ...............................................
1,473
Commercial and industrial ............................
243
Consumer .....................................................
Other ............................................................
527
Total impaired loans and leases
with a related ALLL .................................
Impaired loans and leases for which
there is not a related ALLL:
Real estate:
Residential 1-4 family ...............................
Non–farm/non-residential .........................
Construction/land development .................
Agricultural ...............................................
Commercial and industrial ............................
Consumer .....................................................
Other ............................................................
Total impaired loans and leases
without a related ALLL ............................
8,088
Total impaired loans and leases .......................... $13,732
1,550
4,267
837
801
443
31
159
5,644
December 31, 2011:
Impaired loans and leases for which
there is a related ALLL:
Real estate:
Residential 1-4 family ............................... $ 3,200
2,931
Non–farm/non-residential .........................
238
Construction/land development .................
9
Agricultural ...............................................
3,071
Commercial and industrial ............................
101
Consumer .....................................................
Other ............................................................
46
Total impaired loans and leases
with a related ALLL .................................
Impaired loans and leases for which
there is not a related ALLL:
Real estate:
Residential 1-4 family ...............................
Non–farm/non-residential .........................
Construction/land development .................
Agricultural ...............................................
Multifamily residential ...............................
Commercial and industrial ............................
Consumer .....................................................
Other ............................................................
Total impaired loans and leases
without a related ALLL ............................
10,850
Total impaired loans and leases .......................... $20,446
2,121
1,159
6,254
842
133
294
47
–
9,596
103
$ (219)
(1)
(660)
(40)
(911)
(240)
(517)
$ 1,668
203
51
559
562
3
10
$ 518
53
7
254
649
–
2
$ 1,622
234
38
291
620
8
24
(2,588)
3,056
1,483
2,837
(312)
(1,572)
(346)
(375)
(244)
(1)
(147)
1,238
2,695
491
426
199
30
12
–
–
–
–
–
–
–
1,721
2,432
600
374
426
31
13
(2,997)
$(5,585)
5,091
$ 8,147
–
$ 1,483
5,597
$ 8,434
$(1,675)
(146)
(90)
(9)
(1,775)
(28)
(35)
$ 1,525
2,785
148
–
1,296
73
11
$ 415
410
31
–
868
57
2
$ 504
1,173
882
575
844
81
30
(3,758)
5,838
1,783
4,089
(407)
(107)
(3,401)
(105)
(133)
(200)
(33)
–
1,714
1,052
2,853
737
–
94
14
–
–
–
–
–
–
–
–
–
1,239
1,633
5,833
1,000
15
194
15
5
(4,386)
$(8,144)
6,464
$12,302
–
$ 1,783
9,934
$14,023
Interest income on impaired loans and leases is recognized on a cash basis when and if actually collected.
Total interest income recognized on impaired loans and leases for the years ended December 31, 2012, 2011
and 2010 was not material.
The following table is an aging analysis of past due loans and leases, excluding purchased non-covered
loans and covered loans, at December 31, 2012 and 2011.
30-89
90
Days Past Days or
More(2)
Due(1)
Total
Past Due
Current(3)
Total
(Dollars in thousands)
December 31, 2012:
Real estate:
Residential 1-4 family .................................. $ 3,656
3,284
Non-farm/non-residential .............................
868
Construction/land development ....................
952
Agricultural ..................................................
Multifamily residential ..................................
312
1,091
Commercial and industrial ...............................
425
Consumer .........................................................
–
Direct financing leases .....................................
Other ................................................................
9
Total ........................................................ $10,597
December 31, 2011:
Real estate:
Residential 1-4 family .................................. $ 2,449
3,448
Non-farm/non-residential .............................
10,453
Construction/land development ....................
275
Agricultural ..................................................
319
Multifamily residential ..................................
1,477
Commercial and industrial ...............................
669
Consumer .........................................................
42
Direct financing leases .....................................
Other ................................................................
79
Total ........................................................ $19,211
$ 1,160
2,524
329
570
–
185
57
–
–
$ 4,825
$ 4,816
5,808
1,197
1,522
312
1,276
482
–
9
$15,422
$ 267,236 $ 272,052
807,906
578,776
50,619
141,243
159,804
29,781
68,022
7,631
$2,100,412 $2,115,834
802,098
577,579
49,097
140,931
158,528
29,299
68,022
7,622
$ 1,757
3,448
2,827
727
–
348
120
277
–
$ 9,504
$ 4,206
6,896
13,280
1,002
319
1,825
789
319
79
$28,715
$ 256,196 $ 260,402
708,766
478,106
71,158
142,131
120,048
36,161
54,745
8,966
$1,851,768 $1,880,483
701,870
464,826
70,156
141,812
118,223
35,372
54,426
8,887
(1) Includes $1.0 million of loans and leases, excluding purchased non-covered loans and covered loans, on nonaccrual
status at both December 31, 2012 and 2011.
(2) All loans and leases greater than 90 days past due, excluding purchased non-covered loans and covered loans, were
on nonaccrual status at December 31, 2012 and 2011.
(3) Includes $3.3 million and $1.4 million of loans and leases, excluding purchased non-covered loans and covered
loans, on nonaccrual status at December 31, 2012 and 2011, respectively.
104
The following table is an aging analysis of past due covered loans at December 31, 2012 and 2011.
30-89
Days Past
Due
90
Days or
More
Total
Past Due
(Dollars in thousands)
Current
December 31, 2012:
Real estate:
Residential 1-4 family .......................... $ 9,539
18,476
Non-farm/non-residential .....................
6,693
Construction/land development ............
1,063
Agricultural ..........................................
–
Multifamily residential ..........................
901
Commercial and industrial .......................
29
Consumer .................................................
Other ........................................................
–
Total ................................................ $36,701
December 31, 2011:
Real estate:
Residential 1-4 family .......................... $12,013
26,023
Non-farm/non-residential .....................
15,335
Construction/land development ............
3,111
Agricultural ..........................................
288
Multifamily residential ..........................
795
Commercial and industrial .......................
246
Consumer .................................................
Other ........................................................
14
Total ................................................ $57,825
$ 20,958
55,753
42,604
3,338
3,345
4,133
5
–
$130,136
$ 34,075
71,898
54,165
4,390
4,208
4,390
14
133
$173,273
$ 30,497
74,229
49,297
4,401
3,345
5,034
34
–
$166,837
$ 46,088
97,921
69,500
7,501
4,496
5,185
260
147
$231,098
$121,851
213,875
55,790
15,289
7,356
13,462
142
1,637
$429,402
$156,532
271,835
91,372
16,603
11,398
24,564
698
2,822
$575,824
Total
Covered
Loans
$152,348
288,104
105,087
19,690
10,701
18,496
176
1,637
$596,239
$202,620
369,756
160,872
24,104
15,894
29,749
958
2,969
$806,922
At December 31, 2012 and 2011, a significant portion of the Company’s covered loans were past due,
including many that were 90 days or more past due. However, such delinquencies were included in the
Company’s performance expectations in determining the Day 1 Fair Values. Accordingly, all covered loans
continue to accrete interest income and all covered loans rated “FV 1” continue to perform in accordance
with management’s expectations established in conjunction with the determination of the Day 1 Fair Values.
The following table is an aging analysis of past due purchased non-covered loans at December 31, 2012
and 2011.
December 31, 2012:
30-89
Days Past
Due
90
Days or
More
Total
Past Due
Current
(Dollars in thousands)
Total
Purchased
Non-Covered
Loans
Real estate .............................................. $ 3,061
855
Commercial and industrial ......................
431
Consumer ................................................
Other .......................................................
434
Total ............................................... $ 4,781
$ 3,025
2,589
1,295
259
$ 7,168
$ 6,086
3,444
1,726
693
$ 11,949
$ 23,197
1,889
2,442
2,057
$ 29,585
December 31, 2011:
Real estate .............................................. $ –
–
Commercial and industrial ......................
363
Consumer ................................................
Other .......................................................
–
Total ............................................... $ 363
$ –
121
159
–
$ 280
$ –
121
522
–
$ 643
$ 71
510
3,479
96
$ 4,156
$ 29,283
5,333
4,168
2,750
$ 41,534
$ 71
631
4,001
96
$ 4,799
105
7. Foreclosed Assets Not Covered by FDIC Loss Share Agreements
The following table is a summary of activity within foreclosed assets not covered by FDIC loss share
agreements for the periods indicated.
2012
Year Ended December 31,
2011
(Dollars in thousands)
$42,216
2010
$61,148
Balance – beginning of year .......................................... $31,762
Loans transferred into foreclosed assets not covered
by FDIC loss share agreements ...................................
Sales of foreclosed assets not covered
by FDIC loss share agreements ...................................
Writedowns of foreclosed assets not covered
by FDIC loss share agreements ...................................
Foreclosed assets acquired in acquisitions -
not covered by FDIC loss share agreements ................
310
Balance – end of year .................................................... $13,924
9,047
(25,482)
(1,713)
10,676
17,095
(11,719)
(27,152)
(9,525)
(8,960)
114
$31,762
85
$42,216
The amount and type of foreclosed assets not covered by FDIC loss share agreements are as follows:
Real estate:
Residential 1-4 family ...................................
Non-farm/non-residential .............................
Construction/land development .......................
Agricultural ..................................................
Total real estate ......................................
Commercial and industrial ...............................
Consumer .........................................................
Foreclosed assets not covered by
FDIC loss share agreements .................
8. Premises and Equipment
The following table is a summary of premises and equipment.
December 31,
2012
2011
(Dollars in thousands)
$ 2,863
2,481
8,072
378
13,794
102
28
$ 1,078
2,857
27,675
–
31,610
145
7
$13,924
$31,762
December 31,
2012
2011
(Dollars in thousands)
Land ................................................................ $ 72,499
2,498
Construction in progress ..................................
135,840
Buildings and improvements ...........................
5,158
Leasehold improvements .................................
51,548
Equipment .......................................................
267,543
Gross premises and equipment .....................
Accumulated depreciation ................................
(41,789)
Premises and equipment, net ........................ $225,754
$ 64,226
1,849
114,081
5,147
36,212
221,515
(34,982)
$186,533
The Company capitalized $0.1 million of interest on construction projects during each of the years ended
December 31, 2012, 2011 and 2010. Included in occupancy expense is rent of $1.6 million, $2.0 million and
$1.1 million incurred under noncancelable operating leases in 2012, 2011 and 2010, respectively, for leases
of real estate, buildings and premises. These leases contain certain renewal and purchase options according
to the terms of the agreements. Future amounts due under these noncancelable leases at December 31, 2012
are as follows: $1.1 million in 2013, $0.8 million in 2014, $0.7 million in 2015, $0.5 million in 2016, $0.4
million in 2017 and $1.2 million thereafter. Rental income recognized for leases of buildings and premises
under operating leases was $1.2 million for 2012, $1.1 million for 2011 and $1.1 million for 2010.
106
9. Deposits
The following table is a summary of the scheduled maturities of all time deposits.
December 31,
2012
2011
(Dollars in thousands)
Up to one year ................................................. $684,118
65,138
Over one to two years ......................................
25,425
Over two to three years ....................................
3,366
Over three to four years ...................................
2,188
Over four to five years .....................................
Thereafter ........................................................
614
Total time deposits ........................................ $780,849
$820,742
63,932
21,933
7,025
4,451
173
$918,256
The aggregate amount of time deposits with a minimum denomination of $100,000 was $337.6 million
and $409.6 million at December 31, 2012 and 2011, respectively.
10. Borrowings
Short-term borrowings with original maturities less than one year include FHLB-Dallas advances, Federal
Reserve Bank (“FRB”) borrowings, treasury, tax and loan note accounts and federal funds purchased. The
following table is a summary of information relating to these short-term borrowings.
December 31,
2012
2011
(Dollars in thousands)
Average annual balance ....................................... $10,900
–
December 31 balance ...........................................
Maximum month-end balance during year ...........
58,925
Interest rate:
Weighted-average – year ..................................
Weighted-average – December 31 .....................
0.36%
–
$14,956
21,050
54,077
0.33%
0.35
At both December 31, 2012 and 2011, the Company had fixed rate FHLB-Dallas advances with original
maturities exceeding one year of $280.8 million. These fixed rate advances bear interest at rates ranging
from 1.34% to 4.54% at December 31, 2012, are collateralized by a blanket lien on a substantial portion of
the Company’s real estate loans and are subject to prepayment penalties if repaid prior to maturity date.
At December 31, 2012, the Bank had $426 million of unused FHLB-Dallas borrowing availability.
At December 31, 2012, aggregate annual maturities and weighted-average interest rates of FHLB-Dallas
advances with an original maturity of over one year were as follows:
Maturity
Amount
Weighted-Average
Interest Rate
2013
2014
2015
2016
2017
2018
Thereafter
Total
(Dollars in thousands)
$ 31
32
33
21
260,022
20,023
601
$280,763
3.22%
3.25
3.27
4.54
3.89
2.54
4.54
3.80
Included in the above table are $280.0 million of FHLB-Dallas advances that contain quarterly call
features and are callable as follows:
Amount
Weighted-Average
Interest Rate
(Dollars in thousands)
Callable quarterly ............... $260,000
Callable quarterly ...............
20,000
Total ................................ $280,000
3.90%
2.53
3.80
Maturity
2017
2018
107
11. Subordinated Debentures
At December 31, 2012 the Company had the following issues of trust preferred securities outstanding and
subordinated debentures owed to the Trusts.
Subordinated
Debentures
Owed to Trust
Trust Preferred
Securities
of the Trust
Interest Rate
at
December 31, 2012
(Dollars in thousands)
Ozark III ...............
Ozark II .................
Ozark IV ...............
Ozark V ................
Total ..................
$14,434
14,433
15,464
20,619
$64,950
$14,000
14,000
15,000
20,000
$63,000
3.29%
3.26
2.53
1.99
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, 2012 and 2011, 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, 2012 and 2011, 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, 2012 and 2011. 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.
The Company has the option to defer interest payments on the subordinated debentures from time to time
for a period not to exceed five consecutive years.
These securities generally mature at or near the 30th 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.
108
12. Income Taxes
The following table 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 ...........................................
2012
2010
Year Ended December 31,
2011
(Dollars in thousands)
$33,360
4,982
38,342
$15,696
2,723
18,419
$37,254
4,489
41,743
(6,384)
(1,424)
(7,808)
$33,935
10,230
1,636
11,866
$50,208
6,895
1,300
8,195
$26,614
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 tax-exempt interest income ........................
Effect of BOLI and other tax-exempt income ............
Other, net .................................................................
Effective income tax rate ......................................
Year Ended December 31,
2011
35.0%
2012
35.0%
2010
35.0%
1.8
(5.0)
(0.8)
(0.4)
30.6%
2.8
(3.8)
(0.5)
(0.4)
33.1%
2.9
(7.2)
(0.8)
(0.5)
29.4%
Income tax benefits from the exercise of stock options in the amount of $1.5 million, $0.9 million and
$0.5 million in 2012, 2011 and 2010, respectively, were recorded as an increase to additional paid-in capital.
At December 31, 2012 and 2011, respectively, current income taxes payable of $2.8 million and $15.4
million were included in other liabilities.
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:
Deferred tax assets:
December 31,
2012
2011
(Dollars in thousands)
Allowance for loan and lease losses ............................................... $14,939
1,831
Stock-based compensation .............................................................
1,767
Deferred compensation ..................................................................
3,080
Foreclosed assets ...........................................................................
Gross deferred tax assets ...................................................................
21,617
Deferred tax liabilities:
$ 15,148
1,435
1,429
5,644
23,656
13,940
Accelerated depreciation on premises and equipment ....................
6,959
Investment securities AFS ..............................................................
8,810
Deferred gains on FDIC-assisted acquisitions ................................
799
Other, net .......................................................................................
Gross deferred tax liabilities ..............................................................
30,508
Net deferred tax assets (liabilities) .................................................... $ (8,891)
9,562
6,020
22,991
950
39,523
$(15,867)
13. 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
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 vest over six years and are held in trust until distributed
pursuant to the terms of the 401(k) Plan.
109
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 2012, 2011 and 2010 of $0.9 million, $0.8
million and $0.6 million, respectively.
On August 21, 2012, the Company’s board of directors amended the 401(k) Plan to make it a Safe-Harbor
Cost or Deferred Arrangement (“Safe-Harbor CODA”) effective January 1, 2013. As a result, (i) certain key
employees are now eligible to make salary deferrals into the 401(k) Plan beginning January 1, 2013, (ii) the
401(k) Plan is no longer subject to any provisions of the average deferral percentage test described in Code
section 401(k)(3) or the average contribution percentage test described in Code section 401(m)(2), (iii) the
basic matching contribution is (a) 100% of the amount of the employee’s deferrals that do not exceed 3% of
the employee’s compensation for the year plus (b) 50% of the amount of the employee’s elective deferrals
that exceed 3% but do not exceed 5% of the employee’s compensation for the year, and (iv) all employer
matching contributions made under the provisions of the Safe-Harbor CODA are non-forfeitable.
Beginning January 1, 2005 and continuing until the amendment of the 401(k) Plan to make it a Safe-
Harbor CODA, certain key employees of the Company were excluded from further salary deferrals to the
401(k) Plan, but were eligible to 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 is 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 2012, 2011 and 2010 totaled $122,000, $123,000 and $117,000, respectively. At December 31,
2012 and 2011, the Company had Plan assets, along with an equal amount of liabilities, totaling $4.2 million
and $3.5 million, respectively, recorded on the accompanying consolidated balance sheet. On August 21,
2012, the Company’s board of directors, in conjunction with amending the 401(k) Plan, amended the Plan
such that the Company no longer matches any participant salary deferrals made into the Plan.
Effective May 4, 2010, the Company established a Supplemental Executive Retirement Plan (“SERP”)
and certain other benefit arrangements for its Chairman and Chief Executive Officer. Pursuant to the SERP,
this officer is entitled to receive 180 equal monthly payments of $32,197, or $386,360 annually, commencing
at the later of obtaining age 70 or separation from service. If separation from service occurs prior to age 70,
such benefit will be at a reduced amount. The costs of such benefits, assuming a retirement date at age 70,
will be fully accrued by the Company at such retirement date. During 2012, 2011 and 2010, respectively,
the Company accrued $161,000, $148,000 and $89,000 for the future benefits payable under the SERP.
The SERP is an unfunded plan and is considered a general contractual obligation of the Company.
14. 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 shares of common stock in the
Company. No option may be granted under this plan for less than the fair market value of the common stock,
defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on
the date of the grant. The benefits or amounts that may be received by or allocated to any particular officer or
employee of the Company under this plan will be determined in the sole discretion of the Company’s board of
directors or its personnel and compensation committee. While the vesting period and the termination date for
the employee plan options are determined when options are granted, all such employee options outstanding
at December 31, 2012 were issued with a vesting period of three years and expire seven years after issuance.
At December 31, 2012 there were 602,050 shares available for future grants under this plan.
The Company also has a nonqualified stock option plan for non-employee directors. This plan permits each
director who is not otherwise an employee of the Company, or any subsidiary, to receive options to purchase
1,000 shares of the Company’s common stock on the day following his or her election as a director of the
Company at each annual meeting of stockholders and up to 1,000 shares upon election or appointment for
110
Company at each annual meeting of stockholders and up to 1,000 shares upon election or appointment for
the first time as a director of the Company. No option may be granted under this plan for less than the fair
market value of the common stock, defined by the plan as the average of the highest reported asked price
and the lowest reported bid price, on the date of the grant. These options are exercisable immediately and
expire ten years after issuance.
All shares issued in connection with options exercised under both the employee and non-employee
director stock option plans are in the form of newly-issued shares.
The following table summarizes stock option activity for both the employee and non-employee director
stock option plans for the year ended December 31, 2012.
Weighted-Average
Exercise
Price/Share
Weighted-Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding – January 1, 2012 .........
Granted ............................................
Exercised .........................................
Forfeited ..........................................
Outstanding – December 31, 2012 ....
Options
991,100
268,550
(267,300)
(35,200)
957,150
Fully vested and exercisable at
December 31, 2012 ........................
Expected to vest in future periods ....
320,300
518,660
$17.45
31.79
14.88
19.45
$22.12
$15.13
Fully vested and expected to vest
at December 31, 2012 (2) ................
838,960
$21.55
(1) Based on closing price of $33.47 per share on December 31, 2012.
5.0
3.2
4.9
$10,863(1)
$ 5,875(1)
$ 9,999(1)
(2) At December 31, 2012 the Company estimates that options to purchase 118,190 shares of the Company’s common
stock will not vest and will be forfeited prior to their vesting date.
Intrinsic value for stock options is defined as the amount by which the current market price of the
underlying stock exceeds the exercise price. For those stock options where the exercise price exceeds the
current market price of the underlying stock, the intrinsic value is zero. The total intrinsic value of options
exercised during 2012, 2011 and 2010 was $4.4 million, $2.2 million and $1.4 million, respectively.
Options to purchase 268,550 shares, 235,200 shares and 221,800 shares, respectively, were granted
during 2012, 2011 and 2010 with a weighted-average grant date fair value of $9.58, $7.30 and $5.69,
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 following assumptions. 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 Staff
Accounting Bulletin No. 110.
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) ............................
2012
0.71%
1.87%
40.6%
5.0
2011
1.15%
1.68%
40.1%
5.0
2010
1.22%
1.69%
39.0%
5.0
The total fair value of options to purchase shares of the Company’s common stock that vested during
2012, 2011 and 2010 was $0.5 million, $0.7 million and $0.7 million, respectively. Stock-based compensation
expense for stock options included in non-interest expense was $1.1 million, $0.8 million, and $0.6 million
for 2012, 2011 and 2010, respectively. Total unrecognized compensation cost related to nonvested stock-
based compensation was $2.9 million at December 31, 2012 and is expected to be recognized over a
weighted-average period of 2.4 years.
111
The Company has a restricted stock plan that permits issuance of up to 400,000 shares of restricted stock
or restricted stock units. All officers and employees of the Company are eligible to receive awards under the
restricted stock plan. The benefits or amounts that may be received by or allocated to any particular officer
or employee of the Company under the restricted stock plan will be determined in the sole discretion of the
Company’s board of directors or its personnel and compensation committee. Shares of common stock issued
under the restricted stock plan may be shares of original issuance, shares held in treasury or shares that
have been reacquired by the Company. At December 31, 2012 there were 70,750 shares available for future
grants under this plan.
The following table summarizes non-vested restricted stock activity for the year ended December 31, 2012.
Outstanding – January 1, 2012 .......................................................
Granted ...........................................................................................
Forfeited .........................................................................................
Earned and issued ..........................................................................
Outstanding – December 31, 2012 ..................................................
Weighted-average grant date fair value ..........................................
Shares
201,900
128,150
(800)
(34,000)
295,250
$ 26.05
Restricted stock awards of 128,150 shares, 95,700 shares, and 74,600 shares, respectively, were granted
during 2012, 2011 and 2010 with a weighted-average grant date fair value of $31.86, $23.69 and $18.84,
respectively. The fair value of the restricted stock awards is amortized to compensation expense over the
vesting period (generally three years) and is based on the market price of the Company’s common stock at the
date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation
expense for restricted stock included in non-interest expense was $1.6 million, $0.8 million and $0.2 million
for 2012, 2011 and 2010, respectively. Unrecognized compensation expense for nonvested restricted stock
awards was $5.6 million at December 31, 2012 and is expected to be recognized over a weighted-average
period of 2.5 years.
15. 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. The type of 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 $769 million
and $313 million at December 31, 2012 and 2011, 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 terms 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, 2012 and 2011 is $19.1 million and $13.5 million,
respectively. The Company holds collateral to support letters of credit when deemed necessary. The total of
collateralized commitments at December 31, 2012 and 2011 was $18.9 million and $13.2 million, respectively.
112
16. 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 following table is a
summary of activity of loans to related parties for the periods indicated.
Balance – beginning of year ...........................................
New loans and advances................................................
Repayments ...................................................................
Change in composition of related parties .......................
Balance – end of year .....................................................
2012
2010
Year Ended December 31,
2011
(Dollars in thousands)
$ 3,374
16,978
(18,202)
–
$ 2,150
$ 2,150
19,778
(19,447)
45
$ 2,526
$ 8,174
9,258
(13,648)
(410)
$ 3,374
The Company has outstanding commitments to extend credit to related parties totaling $10.6 million and
$9.2 million at December 31, 2012 and 2011, respectively.
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
$25,000 in 2012, $40,000 in 2011 and $68,000 in 2010 for such installation contract work.
17. Regulatory Matters
The Company is subject to various regulatory capital requirements administered by federal and state
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 and state 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, 2012 and 2011 the Company’s and the Bank’s Tier 1
and total capital ratios and their Tier 1 leverage ratios exceeded minimum requirements.
113
The actual and required regulatory capital amounts and ratios of the Company and the Bank at December
31, 2012 and 2011 are as follows:
Required
To Be Well
For Capital
Adequacy
Purposes
Amount
Ratio
(Dollars in thousands)
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
Actual
Amount
Ratio
573,926 18.95
548,054 18.11
536,084 17.70
December 31, 2012:
Total capital (to risk-weighted assets):
Company ........................................... $585,874 19.36% $242,120
Bank .................................................
242,263
Tier 1 capital (to risk-weighted assets):
Company ...........................................
Bank .................................................
Tier 1 leverage (to average assets):
Company ...........................................
Bank .................................................
December 31, 2011:
Total capital (to risk-weighted assets):
Company ........................................... $499,055 18.93% $210,950
Bank .................................................
210,068
Tier 1 capital (to risk-weighted assets):
Company ...........................................
Bank .................................................
Tier 1 leverage (to average assets):
Company ...........................................
Bank .................................................
466,017 17.67
445,789 16.98
466,017 12.06
445,789 11.58
548,054 14.40
536,084 14.13
105,475
105,034
115,934
115,508
114,199
113,812
121,060
121,132
478,690 18.23
8.00% $302,650 10.00%
8.00
302,829 10.00
4.00
4.00
3.00
3.00
181,590
181,697
190,332
189,687
6.00
6.00
5.00
5.00
8.00% $263,688 10.00%
8.00
262,585 10.00
4.00
4.00
3.00
3.00
158,213
157,551
193,223
192,514
6.00
6.00
5.00
5.00
The regulatory capital ratios in the table above for the Company and the Bank at December 31, 2012
include the assets acquired, liabilities assumed, and capital issued in connection with the acquisition of
Genala. However, pursuant to the instructions for bank holding company regulatory reports filed with the
FRB and the instructions for bank regulatory reports filed with the FDIC, separate regulatory reports were
required to be filed with the FRB for the Company (without the assets and liabilities of Genala) and for
Genala at December 31, 2012. Separate regulatory reports were also required to be filed with the FDIC for
the Bank (without the assets and liabilities of Genala’s wholly-owned bank subsidiary, The Citizens Bank)
and for the The Citizens Bank at December 31, 2012. Beginning January 1, 2013 all regulatory reports filed
by the Company and the Bank will include all assets, liabilities and activity of Genala and The Citizens Bank,
with separate regulatory reports for Genala and The Citizens Bank no longer required.
As of December 31, 2012 and 2011, 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.
The state bank commissioner’s approval is required before the Bank can 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, 2012 and 2011, respectively, $40.4 million and $68.4
million were 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 types of collateral. 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 $56 million and $47 million, respectively, at December 31, 2012 and 2011.
The Bank is required by bank regulatory agencies to maintain certain minimum balances of cash or
deposits primarily with the FRB. At December 31, 2012 and 2011, these required balances aggregated
$10.1 million and $11.6 million, respectively.
114
18. Fair Value Measurements
The Company measures certain of its assets and liabilities on a fair value basis using various valuation
techniques and assumptions, depending on the nature of the asset or liability. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Additionally, fair value is used either annually or on a non-
recurring basis to evaluate certain assets and liabilities for impairment or for disclosure purposes.
The Company applies the following fair value hierarchy.
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations whose inputs are
observable.
Level 3 – Instruments whose inputs are unobservable.
The following table sets forth the Company’s assets and liabilities at December 31, 2012 and 2011 that
are accounted for at fair value.
December 31, 2012:
Investment securities AFS(1):
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
Obligations of state and political subdivisons ............ $ –
U.S. Government agency residential
mortgage-backed securities ....................................
Corporate bonds .........................................................
Total investment securities AFS ...........................
Impaired non-covered loans and leases .........................
Impaired covered loans ..................................................
Foreclosed assets not covered by
FDIC loss share agreements .......................................
Foreclosed assets covered by
FDIC loss share agreements .......................................
–
Total assets at fair value ...................................... $ –
–
–
–
–
–
–
December 31, 2011:
Investment securities AFS(1):
Obligations of state and political subdivisons ............ $ –
U.S. Government agency residential
mortgage-backed securities ....................................
Total investment securities AFS ...........................
Impaired non-covered loans and leases .........................
Impaired covered loans ..................................................
Foreclosed assets not covered by
FDIC loss share agreements .......................................
Foreclosed assets covered by
FDIC loss share agreements .......................................
–
Total assets at fair value ...................................... $ –
–
–
–
–
–
$257,345
$104,172
$361,517
118,284
776
376,405
–
–
–
–
104,172
6,664
38,463
118,284
776
480,577
6,664
38,463
–
13,924
13,924
–
$376,405
52,951
$216,174
52,951
$592,579
$348,855
$ 24,192
$373,047
48,035
396,890
–
–
–
24,192
10,519
1,854
48,035
421,082
10,519
1,854
–
31,762
31,762
–
$396,890
72,907
$141,234
72,907
$538,124
(1) Does not include $13.7 million at December 31, 2012 and $17.8 million at December 31, 2011 of shares of FHLB-
Dallas, FHLB-Atlanta and FNBB stock that do not have readily determinable fair values and are carried at cost.
115
The following table presents information related to Level 3 non-recurring fair value measurements, at
December 31, 2012.
Description
Fair Values at
December 31, 2012
Technique
Unobservable Inputs
Impaired non-covered
loans and leases
$ 6,664
(Dollars in thousands)
Third party appraisal or
discounted cash flows
Impaired covered
loans
$38,463
Foreclosed assets not
covered by FDIC loss
share agreements
$13,924
Third party appraisal
and/or discounted
cash flows
Third party appraisals,
broker price opinions
and/or discounted
cash flows
1. Management discount based on
underlying collateral characteristics
and market conditions
2. Life of loan
1. Life of loan
1. Management discount based on
collateral share agreements and
market conditions
2. Discount rate
3. Holding period
Foreclosed assets
covered by FDIC loss
share agreements
$52,951
Third party appraisals
and/or discounted
cash flows
1. Discount rate
2. Holding period
The assets and liabilities acquired from Genala that are Level 3 fair value measurements consist primarily
of loans and deposits. Subsequent to the Genala acquisition and to the extent that the purchased non-
impaired loans do not become impaired, these loans and deposits will no longer be carried at fair value but
rather, for loans, will be adjusted for any subsequent advances, pay downs, amortization or accretion of
any premium or discount on purchase, charge-offs, or other adjustments to carrying value and, for deposits,
will be adjusted for subsequent maturities and new account originations.
The following methods and assumptions are used to estimate the fair value of the Company’s assets and
liabilities that are accounted for at fair value.
Investment securities – The Company utilizes independent third parties as its principal sources for
determining fair value of investment securities which are measured on a recurring basis. As a result, the
Company receives estimates of fair values from at least two independent pricing sources for the majority
of its individual securities within its investment portfolio. For investment securities traded in an active
market, the fair values are obtained from independent pricing services and 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, pricing matrices or a combination
thereof. For investment securities traded in a market that is not active, fair value is determined using
unobservable inputs. Additionally, the valuation of investment securities acquired in FDIC-assisted or
traditional acquisitions may include certain unobservable inputs. All fair value estimates received by the
Company from its investment securities are reviewed and approved on a quarterly basis by the Company’s
Investment Portfolio Manager and its Chief Financial Officer.
116
The Company acquired approximately $87.6 million in investment securities with the Genala acquisition,
which were comprised of U.S. Government agency residential mortgage-backed securities and obligations
of state and political subdivisions. In determining the fair value of the acquired investment securities,
the Company initially used two independent third parties as pricing sources. The Company then reviewed
specific characteristics of each investment security and made additional fair value adjustments to certain
securities. The additional fair value adjustments related to various discount factors applied for the impact
of uncertain market conditions in liquidating the securities not typically held in the Company’s investment
portfolio and for the securities with optional call dates that have elapsed or have a relatively short time
until they elapse. These discount factors ranged from 50 basis points to 318 basis points. There were
also certain investment securities the Company deemed as impaired. Accordingly, $81.1 million of the
investment securities acquired in the Genala transaction were deemed to be Level 3 and $6.5 million
were deemed to be Level 2 in the fair value hierarchy at December 31, 2012.
The Company has determined that certain of its investment securities had a limited to non-existent
trading market at December 31, 2012 and 2011. As a result, the Company considers these investments as
Level 3 in the fair value hierarchy. Specifically the fair values of certain obligations of state and political
subdivisions consisting of certain unrated private placement bonds (the “private placement bonds”) in the
amount of $23.1 million and $24.2 million at December 31, 2012 and 2011, respectively, were calculated
using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined
to be “not active”. This determination was based on the limited number of trades or, in certain cases,
the existence of no reported trades for the private placement bonds. The private placement bonds are
generally prepayable at par value at the option of the issuer. As a result, management believes the private
placement bonds should be valued at the lower of (i) the matrix pricing provided by the Company’s third
party pricing services for comparable unrated municipal securities or (ii) par value. At December 31, 2012
and 2011, the third party pricing matrices valued the Company’s total portfolio of private placement bonds
at $23.8 million and $24.5 million, respectively, which exceeded the lower of the matrix pricing or par
value of the private placement bonds by $0.7 million and $0.3 million at December 31, 2012 and 2011,
respectively. Accordingly, at December 31, 2012 and 2011 the Company reported the private placement
bonds at $23.1 million and $24.2 million, respectively.
Impaired non-covered loans and leases – For non-covered loans and leases that are deemed impaired,
fair values are measured on a non-recurring 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. The Company has reduced the carrying value of its impaired loans and leases (all of which
are included in nonaccrual loans and leases) by $7.1 million and $9.9 million, respectively, to the estimated
fair value of $6.7 million and $10.5 million, respectively, for such loans and leases at December 31, 2012
and 2011. These adjustments to reduce the carrying value of impaired loans and leases to estimated fair
value during 2012 and 2011 consisted of $5.6 million and $8.1 million, respectively, of partial charge-offs
and $1.5 million and $1.8 million, respectively, of specific loan and lease loss allocations.
Impaired covered loans – The fair values of impaired covered loans are measured on a non-recurring
basis. As of December 31, 2012 and 2011, the Company had identified purchased loans covered by FDIC
loss share agreements acquired in its FDIC-assisted acquisitions where the expected performance of such
loans had deteriorated from management’s performance expectations established in conjunction with the
determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of
adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $6.2 million for
2012 and $0.3 million for 2011 for such loans. The Company also recorded $6.2 million for 2012 and
$0.3 million for 2011 of provision for loan and lease losses to cover such charge-offs. In addition to those
net charge-offs, the Company also transferred certain of these covered loans to covered foreclosed assets.
As a result of these actions, the Company had $38.5 million and $1.9 million of impaired covered loans
at December 31, 2012 and 2011, respectively.
117
Foreclosed assets not covered by FDIC loss share agreements – Repossessed personal properties and
real estate acquired through or in lieu of foreclosure are measured on a non-recurring basis and are
initially recorded at the lesser of current principal investment or fair value less estimated cost to sell at the
date of repossession or foreclosure. Valuations of these assets are periodically reviewed by management
with the carrying value of such assets adjusted to the then estimated fair value net of estimated selling
costs, if lower, until disposition. Fair values of foreclosed and repossessed assets held for sale are
generally based on third party appraisals, broker price opinions or other valuations of the property,
resulting in a Level 3 classification.
Foreclosed assets covered by FDIC loss share agreements – Foreclosed assets covered by FDIC loss
share agreements, or covered foreclosed assets, are recorded at estimated fair value on the date of
acquisition. In estimating the fair value of covered foreclosed assets, management considers a number
of factors including, among others, appraised value, estimated selling prices, estimated selling costs,
estimating holding periods and net present value of cash flows expected to be received. A discount rate
ranging from 8.0% to 9.5% per annum was used to determine the net present value of covered foreclosed
assets. Valuations of these assets are measured on a non-recurring basis and are periodically reviewed
by management with the carrying value of such assets adjusted to the then estimated fair value net of
estimated selling costs, if lower, until disposition.
The following table presents additional information about assets measured at fair value on a recurring
basis and for which the Company has utilized Level 3 inputs to determine fair value.
Investment
Securities
AFS
Balances – January 1, 2011 ...................................................
Total realized gains/(losses) included in earnings ..............
Total unrealized gains/(losses) included in other
(Dollars in thousands)
$ 20,036
(44)
comprehensive income ....................................................
Purchases ...........................................................................
Paydowns ...........................................................................
Transfers in and/or out of Level 3 ......................................
Balances – December 31, 2011 ..............................................
Total realized gains/(losses) included in earnings ..............
Total unrealized gains/(losses) included in other
comprehensive income ....................................................
Paydowns ...........................................................................
Sales ...................................................................................
Acquired in Genala acquisition ...........................................
Transfers in and/or out of Level 3 ......................................
Balances – December 31, 2012 ..............................................
82
4,500
(1,112)
730
$ 24,192
–
359
(1,150)
(350)
81,121
–
$104,172
During 2012 and 2011, there were no transfers of assets or liabilities measured at fair value between
Level 1 and Level 2 fair value hierarchy.
118
19. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments.
Cash and due from banks – For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Investment securities – The Company utilizes independent third parties as its principal sources for
determining fair value of investment securities which are measured on a recurring basis. As a result, the
Company receives estimates of fair values from at least two independent pricing sources for the majority of
its individual securities within its investment portfolio. For investment securities traded in an active market,
the fair values are obtained from independent pricing services and 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, comprehensive interest rate tables, pricing matrices or a combination thereof.
For investment securities traded in a market that is not active, fair value is determined using unobservable
inputs. Additionally, the valuation of investment securities acquired in FDIC-assisted or traditional acquisitions
may include certain unobservable inputs. All fair value estimates received by the Company from its investment
securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager
and its Chief Financial Officer. The Company’s investments in the common stock of the FHLB-Dallas and
FNBB of $13.7 million at December 31, 2012, and its investments in the common stock of the FHLB-Dallas,
FHLB-Atlanta and FNBB of $17.8 million at December 31, 2011 do not have readily determinable fair values
and are carried at cost.
Loans and leases – The fair value of loans and leases, including covered loans and purchased non-covered
loans, is estimated by discounting the 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.
FDIC loss share receivable – The fair value of the FDIC loss share receivable is based on the net present
value of future cash proceeds expected to be received from the FDIC under the provisions of the loss share
agreements using a discount rate that is based on current market rates.
Deposit liabilities – The fair value of demand deposits, savings accounts, money market deposits and other
transaction accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity
time deposits is estimated using the rate currently available for deposits of similar remaining maturities.
Repurchase agreements – For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Other borrowed funds – For these short-term instruments, the carrying amount is a reasonable estimate
of fair value. The fair value of long-term instruments is estimated based on the current rates available to the
Company for borrowings with similar terms and remaining maturities.
Subordinated debentures – The fair values of these instruments are based primarily upon discounted cash
flows using rates for securities with similar terms and remaining maturities.
Off-balance sheet instruments – The fair values of commercial loan commitments and letters of credit are
based on fees currently charged to enter into similar agreements, taking into account the remaining terms of
the agreements and were not material at December 31, 2012 and 2011.
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.
119
The following table presents the estimated fair values of the Company’s financial instruments.
Financial assets:
December 31,
2012
2011
Fair Value
Hierarchy
Carrying
Amount
Carrying
Estimated
Fair Value Amount
(Dollars in thousands)
Estimated
Fair Value
Cash and cash equivalents ..................
Investment securities AFS ................... Levels 2 and 3
Loans and leases, net of ALLL ............
FDIC loss share receivable ...................
Level 3
Level 3
Level 1
$ 207,967 $ 207,967 $ 58,927 $ 58,927
438,910
2,636,254
279,226
494,266
2,683,896
152,565
438,910
2,653,035
279,045
494,266
2,714,869
152,198
Financial liabilities:
Demand, savings and money market
account deposits ..............................
Time deposits ......................................
Repurchase agreements
with customers ................................
Other borrowings ................................
Subordinated debentures ....................
Level 1
Level 2
Level 1
Level 2
Level 2
20. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
$2,320,206 $2,320,206 $2,025,663 $2,025,663
925,754
918,256
780,849
781,784
29,550
280,763
64,950
29,550
328,881
30,523
32,810
301,847
64,950
32,810
361,373
30,663
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
$32,202
18,448
$35,476
13,879
10,676
17,095
675
29,014
15,622
–
9,755
5,354
(10,201)
–
Cash paid during the period for:
Interest ............................................................................................ $22,540
49,888
Taxes ...............................................................................................
Supplemental schedule of non-cash investing
and financing activities:
Loans transferred to foreclosed assets not covered by
FDIC loss share agreements .......................................................
Loans advanced for sales of foreclosed assets not covered by
FDIC loss share agreements .......................................................
Covered loans transferred to covered foreclosed assets ................
Net change in unrealized gains and losses on
12,710
33,020
9,047
investment securities AFS ..........................................................
Unsettled AFS investment security purchases ..............................
2,395
2,513
120
21. Other Operating Expenses
The following table is a summary of other operating expenses.
2012
Year Ended December 31,
2011
(Dollars in thousands)
2010
Postage and supplies ...................................................... $ 3,195
3,374
Telephone and data lines ................................................
4,089
Advertising and public relations .....................................
4,401
Professional and outside services ...................................
3,265
Software expense ...........................................................
2,705
Travel and meals ............................................................
703
FDIC and state assessments ...........................................
1,505
FDIC Insurance ...............................................................
871
ATM expense ..................................................................
Loan collection and repossession expense .....................
6,135
Writedowns of foreclosed assets
1,713
not covered by FDIC loss share agreements ................
2,037
Amortization of intangible assets ...................................
Other ..............................................................................
5,648
Total other operating expenses .................................. $39,641
$ 3,091
3,049
3,571
4,822
3,082
3,488
719
2,155
1,022
7,873
9,525
1,677
7,490
$51,564
$ 1,981
2,110
2,076
3,024
2,657
1,726
678
3,238
881
4,001
8,960
431
4,877
$36,640
22. Earnings Per Common Share (“EPS”)
The following table sets forth the computation of basic and diluted EPS.
Year Ended December 31,
2010
2011
(In thousands, except per share amounts)
2012
Numerator:
Distributed earnings allocated
to common stockholders ........................................ $17,293
Undistributed earnings allocated
to common stockholders ........................................
59,751
Net earnings allocated to common stockholders .... $77,044
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 ..........
34,637
251
34,888
$ 12,661
$10,170
88,660
$101,321
53,831
$64,001
34,260
222
33,938
152
34,482
34,090
Basic EPS ..................................................................... $ 2.22
$ 2.96
$ 1.89
Diluted EPS .................................................................. $ 2.21
$ 2.94
$ 1.88
Options to purchase 257,350 shares, 213,400 shares and 196,300 shares, respectively, of the Company’s
common stock at a weighted-average exercise price of $31.86 per share, $23.69 per share and $18.84 per
share, respectively, were outstanding during 2012, 2011 and 2010, 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.
23. Litigation Matters
On January 5, 2012, the Company and the Bank were served with a summons and complaint filed on
December 19, 2011, in the Circuit Court of Lonoke County, Arkansas, Division III, styled Robert Walker, Ann
B. Hines and Judith Belk vs. Bank of the Ozarks, Inc. and Bank of the Ozarks, Case No. CV-2011-777. In
addition, on December 21, 2012, the Bank was served with a summons and complaint filed on December 20,
2012, in the Circuit Court of Pulaski County, Arkansas, Ninth Division, styled Audrey Muzingo v. Bank of
the Ozarks, Case No. 60 CV 12-6043. The complaint in each case alleges that the Company and/or the Bank
121
have harmed the plaintiffs, current or former customers of the Bank, by improper, unfair and unconscionable
assessment and collection of excessive overdraft fees from the plaintiffs. According to the complaints, plaintiffs
claim that the Bank employs sophisticated software to automate its overdraft system, and that this system
unfairly and inequitably manipulates and alters customers’ transaction records in order to maximize overdraft
penalties, particularly utilizing a practice of posting of items in “high-to-low” order, despite the actual
sequence in which such items are presented for payment. Plaintiffs claim that the Bank’s deposit agreements
with customers do not adequately disclose the Bank’s overdraft assessment policies and are ambiguous,
deceptive, unfair and misleading. The Complaint in each case alleges that these actions and omissions
constitute breach of contract, breach of the implied covenant of good faith and fair dealing, unconscionable
conduct, unjust enrichment and violation of the Arkansas Deceptive Trade Practices Act. The Complaint in the
Walker case also includes a count for conversion. Each of the complaints seek to have the cases certified by
the court as a class action for all Bank account holders similarly situated, and seek a declaratory judgment as
to the wrongful nature of the Bank’s overdraft fee policies, restitution of overdraft fees paid by the plaintiffs
and the putative class (defined as all Bank customers residing in Arkansas) as a result of the actions cited
in the complaints, disgorgement of profits as a result of the alleged wrongful actions and unspecified
compensatory and statutory or punitive damages, together with pre-judgment interest, costs and plaintiffs’
attorneys’ fees. The Company and Bank believe the plaintiffs’ claims are unfounded and intend to defend
against these claims.
On April 8, 2011, the Company was served with a petition filed on March 31, 2011, by the Seib Family, GP,
LLC, a Texas limited liability company, as General Partner of Seib Family, LP in the District Court of Dallas
County, Texas (“district court”), Cause Number 11-04057, against the Company and two entities which
plaintiff apparently believed had some type of ownership interest in a former borrower of the Bank, alleging,
among other things, that the defendants fraudulently induced the plaintiff to purchase a tract of real estate
consisting of approximately 60 acres located at 318 Cadiz Street in Dallas, Texas, owned by the former
borrower and financed by the Bank. The petition alleges that the defendants knew that a levee protecting
the property from the Trinity River flood plain did not meet federal standards, that the defendants omitted to
disclose that information to plaintiff prior to the sale of the property, and that due to the problems or potential
problems with the levee, the value of the property was significantly impaired, as supported by a report by the
U.S. Corps of Engineers concerning the condition of the levee, released at approximately the same time as the
plaintiff purchased the property from the former borrower and affiliates with the aid and assistance of the
Company. The petition alleges that the plaintiff did not become aware of the U.S. Corps of Engineers’ report
until a month or two after it purchased the property.
The original petition alleged that the defendants’ conduct violated the Texas Securities Act and the Texas
Deceptive Trade Practices Act, and sought compensatory damages, trebled under the Texas Deceptive Trade
Practices Act, plus exemplary damages, attorneys’ fees, costs, interest, and other relief the court deems just.
Since the original petition was filed, plaintiff has (i) dropped all claims against the Company, but added the
Bank as a defendant in its petition and (ii) dropped all claims with respect to the Texas Deceptive Trade
Practices Act. Under its amended petition, plaintiff is seeking $15,962,677 in actual damages and
$31,925,354 in exemplary damages.
On June 15, 2012, the district court granted Bank’s Motion for Summary Judgment. Subsequent to the
district court’s granting of Bank’s Motion for Summary Judgment, the plaintiff filed a notice of nonsuit with
prejudice with respect to its claims against the other two defendants, which was granted. In response, the
Bank filed a notice of nonsuit without prejudice with respect to the Bank’s claim for attorneys’ fees and
costs against the plaintiff as to its claims under the Texas Deceptive Trade Practices Act, which resulted in
dismissal of that claim without prejudice. On or about August 23, 2012, the plaintiff filed a Notice of Appeal
with district court, which appeal of the summary judgment ruling is to the United States Court of Appeals for
the Fifth Circuit (“Court of Appeals”). On or about November 28, 2012, plaintiff filed an appellant’s brief
with the Court of Appeals. The Bank filed its appellee’s brief February 5, 2013. The Company believes the
allegations as contained in the petition are wholly without merit, and this belief is supported by the district
court’s grant of summary judgment. The Company intends to vigorously defend against the appeal of the
district court’s recent ruling.
The Company is party to various other legal proceedings, as both plaintiff and defendant, arising in the
ordinary course of business, including claims of lender liability, predatory lending, broken promises and
other similar lending-related claims, as well as legal proceedings arising from acquired operations in its FDIC-
assisted acquisitions. In addition, the Company and the Bank are parties to three legal proceedings involving
third party claims alleging that the Company and the Bank, along with certain other financial institutions,
122
have infringed certain “business method” patents claimed to be violated by the institutions’ use of web site
authentication software and check imaging and processing software not authorized by the patent holder
claimants. While the ultimate resolution of these various claims and proceedings cannot be determined at
this time, management of the Company believes that such claims and proceedings, individually or in the
aggregate, will not have a material adverse effect on the future results of operations, financial condition or
liquidity of the Company.
24. Subsequent Event
On January 24, 2013, the Company entered into a definitive agreement and plan of merger (the “Agreement”)
with The First National Bank of Shelby (“First National Bank”), in Shelby, North Carolina, whereby the
Company will acquire all of the outstanding common stock of the First National Bank in a transaction valued
at approximately $67.8 million, including $64.0 million of merger consideration for the outstanding common
stock of the First National Bank and approximately $3.8 million representing the value of real property
which is being simultaneously purchased from parties related to First National Bank and on which certain
First National Bank offices are located. At December 31, 2012, total assets of First National Bank were
approximately $854 million.
Under the terms of the Agreement, each outstanding share of common stock of First National Bank will
be converted, at the election of each First National Bank shareholder, into the right to receive shares of the
Company’s common stock, plus cash in lieu of any fractional share, or the right to receive cash, all subject to
certain conditions and potential adjustments, provided that at least 51%, or approximately $32.6 million, of
the merger consideration paid to First National Bank shareholders will consist of shares of the Company’s
common stock. The number of Company shares to be issued will be determined based on First National Bank
shareholder elections and the Company’s 10-day average closing stock price as of the fifth business day
prior to the closing date, ranging between $27.00 per share and $44.20 per share. Upon the closing of the
transaction, First National Bank will merge into the Bank. Completion of the transaction is subject to certain
closing conditions, including customary regulatory approvals and the approval of the shareholders of First
National Bank.
25. 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.
Condensed Balance Sheets
Assets:
Cash .................................................................................................................
Investment in consolidated bank subsidiary .....................................................
Investment in unconsolidated Trusts ................................................................
Loans ................................................................................................................
Excess cost over fair value of net assets acquired .............................................
Other, net ..........................................................................................................
Total assets ................................................................................................
Liabilities and Stockholders’ Equity:
Accounts payable ..............................................................................................
Accrued interest payable ...................................................................................
Income taxes payable ........................................................................................
Subordinated debentures ..................................................................................
Total liabilities ...........................................................................................
Stockholders’ equity:
Common stock ...............................................................................................
Additional paid-in capital ..............................................................................
Retained earnings ..........................................................................................
Accumulated other comprehensive income (loss) ..........................................
Total stockholders’ equity ..........................................................................
Total liabilities and stockholders’ equity .................................................
December 31,
2012
(Dollars in thousands)
2011
$ 11,230
557,601
1,950
–
1,092
1,916
$573,789
$ 27
171
977
64,950
66,125
353
73,043
423,485
10,783
507,664
$573,789
$ 11,307
466,232
1,950
8,768
1,092
1,612
$490,961
$ 115
297
1,048
64,950
66,410
345
51,145
363,734
9,327
424,551
$490,961
123
Condensed Statements of Income
2012
Year Ended December 31,
2011
(Dollars in thousands)
2010
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 ..................................................................................
$26,750
55
437
8
27,250
1,848
5,016
6,864
20,386
2,818
53,840
$77,044
$ 12,300
52
1,145
–
13,497
1,740
3,447
5,187
8,310
1,792
91,219
$101,321
$13,200
53
1,152
–
14,405
1,764
2,853
4,617
9,788
1,527
52,686
$64,001
Condensed Statements of Cash Flows
Year Ended December 31,
2012
2011
(Dollars in thousands)
2010
Cash flows from operating activities:
Net income ........................................................................... $77,044
Adjustments to reconcile net income to net cash
$101,321
$64,001
provided by operating activities:
Equity in undistributed earnings of Bank ......................
Loss on sale of investment securities AFS .....................
Deferred income tax expense (benefit) ..........................
Stock-based compensation expense ...............................
Tax benefits on exercise of stock options and vesting
of common stock under restricted stock plan ..............
Changes in other assets and other liabilities ..................
Net cash provided by operating activities ...................................
Cash flows from investing activities:
Net paydowns (fundings) of portfolio loans ........................
Proceeds from sales of investment securities AFS ...............
Equity contributed to Bank ..................................................
Cash paid in merger and acquisition transactions,
(53,840)
–
(396)
2,607
(1,538)
1,319
25,196
67
–
–
net of cash required ..........................................................
Net cash used by investing activities ..........................................
Cash flows from financing activities:
(13,223)
(13,156)
Proceeds from exercise of stock options ...............................
Tax benefits on exercise of stock options and vesting of
1,538
common stock under restricted stock plan ........................
(341)
Repurchase of common stock under restricted stock plan ....
(17,293)
Cash dividends paid on common stock ................................
(12,117)
Net cash used by financing activities ..........................................
(77)
Net (decrease) increase in cash ..................................................
11,307
Cash – beginning of year ............................................................
Cash – end of year ...................................................................... $11,230
3,979
(91,219)
–
(177)
1,528
(870)
2,445
13,028
(532)
–
–
–
(532)
(52,686)
130
169
834
(535)
(831)
11,082
531
330
(7,000)
–
(6,139)
4,032
2,825
870
–
(12,661)
(7,759)
4,737
6,570
$ 11,307
535
–
(10,170)
(6,810)
(1,867)
8,437
$ 6,570
124
Board of Directors
Standing, left to right:
Our Board of Directors’ outstanding
leadership and vision has moved
the Company forward and created
a solid foundation for strong
future growth and profitability.
George Gleason
Chairman and Chief Executive Officer – Bank of the Ozarks, Inc., Little Rock, Arkansas
R.L. Qualls
Retired President and Chief Executive Officer – Baldor Electric Company, Fort Smith, Arkansas
Jean Arehart
Retired Banker, Newport, Arkansas
Robert Proost
Retired Vice President and Chief Financial Officer – A.G. Edwards, Inc., St. Louis, Missouri
Henry Mariani
Chairman – NLC Products, Inc., Little Rock, Arkansas
Sherece West-Scantlebury
President & CEO – Winthrop Rockefeller Foundation, Little Rock, Arkansas
John Reynolds
Pathologist and Laboratory Director – Memorial Hospital, Bainbridge, Georgia
Richard Cisne
Founding Partner – Hudson, Cisne & Co., LLP, Little Rock, Arkansas
Seated, left to right:
Linda Gleason
Retired Banker, Little Rock, Arkansas
Robert East
Chairman – East-Harding, Inc., Little Rock, Arkansas
Kennith Smith
Retired Lumber Company President, Ozark, Arkansas
Nicholas Brown
President & CEO – Southwest Power Pool, Little Rock, Arkansas
Mark Ross
Vice Chairman and Chief Operating Officer – Bank of the Ozarks, Inc., Little Rock, Arkansas
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
950 East Paces Ferry Road, Suite 3315
Atlanta, Georgia 30326-1388
Transfer Agent:
Bank of the Ozarks Trust and Wealth Management Division
P.O. Box 8811, Little Rock, AR 72231-8811