2013 Annual Report
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 this annual report under “Part I—Forward-
Looking Information” and under “Item 1A. Risk Factors.”
All scenic photographs from Bank of the Ozarks’ trade area.
1
6
5
4
3
2
1
0
140
120
100
80
60
40
20
0
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
A Long-Term Perspective
The outstanding results we achieved in 2013 reflect our commitment to excellence and
our focus on long-term goals. 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
$64.0
$2.94
$31.5
$31.7
$31.7
$34.5
$36.8
$1.88
$0.94 $0.94
$0.94
$1.02
$1.09
$25.9
$20.2
$0.78
$0.62
$87.1
$77.0
$2.41
$2.21
Over the past ten years, we have
achieved compounded annual
growth rates of 15.7% in net
income and 14.5% in diluted
earnings per common share.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans and Leases, including
Covered Loans and Purchased
Non-covered Loans
(Millions)
$3,357
$2,692
$2,754
$2,346
$1,871
$2,021
$1,904
$1,677
$1,371
$1,135
$909
Over the past ten years, our
loans and leases, including
covered loans and purchased
non-covered loans, have grown
at a compounded annual rate
of 14.0%.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
$3,717
$3,101
$2,944
Over the past ten years, our
deposits have grown at a
compounded annual rate
of 13.4%.
$2,341
$2,541
$2,045
$2,057
$2,029
Deposits
(Millions)
$1,592
$1,380
$1,062
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2
300
250
200
150
100
50
0
35
30
25
20
15
10
5
0
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
9
8
7
6
5
4
3
2
1
0
Net interest income is our largest revenue component, and income from service charges,
trust and mortgage lending have traditionally been key contributors to non-interest income.
Net Interest Income
(Millions)
$68.6
$70.7
$77.6
$60.6
$48.8
$193.5
$168.7
$168.7
$174.3
Net interest income has grown
over the last ten years at a
compounded annual rate
of 14.8%.
$118.3
$123.6
$98.7
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Service Charge Income
(Millions)
$15.2
$12.2 $12.0
$12.4
$9.5
$9.9
$10.2
$7.8
$21.6
$19.4
$18.1
Income from service charges on
deposit accounts has grown at
a compounded annual rate of
10.8% over the past ten years.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Trust Income
(Millions)
$2.6
$2.2
$1.6
$1.5
$1.9
$1.7
$3.4
$3.2
$3.5
$3.1
$4.1
Over the past ten years,
trust income has grown at
a compounded annual rate
of 10.1%.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Mortgage Lending Income
(Millions)
$5.5
$5.6
$5.6
$3.3
$3.0
$2.9
$2.7
$2.2
$3.9
$3.3
$3.3
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
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.
3
Efficiency Ratios
47.5%47.5%
46.2%
43.4%
47.1%
46.3%
42.3%
42.9%
41.6%
37.8%
46.6%
46.0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Charge-Off Ratios
FDIC Insured Financial Institutions
2.52%
2.55%
Bank of the Ozarks, Inc.
0.78%
0.20%
0.56%
0.49%
0.10%
0.11%
0.59%
0.39%
0.12% 0.24%
1.29%
0.45%
1.75%
1.55%
1.10%
0.81% **
0.69% **
0.30% **
0.13% **
4.5
4.0
3.5
2013
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.72%*
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
80
60
We have worked hard to become one of the most
efficient bank holding companies in the nation.
40
20
4.00
3.2
2.4
We consider the net charge-off ratio as the ultimate
measure of asset quality. Our net charge-off ratio
has consistently compared favorably with the
ratio for all FDIC insured institutions as a group.
1.6
0.8
Source: Data from the FDIC Quarterly Banking Profile for 3Q13.
*FDIC data for 2013 is annualized September 30, 2013 data.
** Excludes loans covered by FDIC loss share agreements and net
0.0
charge-offs related to such loans.
4
3
2
1
0
Nonperforming Loans & Leases/
Total Loans & Leases
1.24%1.24%
Nonperforming Assets/
Total Assets
3.06%3.06%
0.57%0.57%
0.47%
0.34%
0.35%
0.25%
0.76%
0.75%†
0.70%†
0.43%†
0.33%†
1.72%†
1.17%†
0.36%
0.39%0.39%
0.18%
0.24%
0.36%
0.81%
0.57%†
0.43%†
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Loans & Leases
Past Due 30 Days
or More/Total
Loans & Leases
2.68%
2.01%†
1.99% 2.01%†
1.53%†
1.14%
0.77%
0.76 %
0.76 %
0.60%
0.39%
0.73%†
0.45%†
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Maintaining good asset quality has been an
important factor in our historically strong growth
in net income.
† 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.
2.0
1.5
1.0
0.5
0.0
4
4
3
2
1
0
Our Senior Management Team
George Gleason Chairman of the Board and Chief Executive Officer
George Gleason has led the Company and its predecessors for 35 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 170 times
its 1979 size.
Dan Thomas Vice Chairman and Chief Lending Officer, President—Real Estate Specialties Group
Dan Thomas has 29 years of experience in structuring, financing and managing commerical 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,
Austin, and Houston, Texas; Atlanta, Georgia and New York, New York.
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,
funds management, mergers and acquisitions, investment portfolio, loan review, facilities, compliance and human
resource functions. Mr. McKinney has 22 years of accounting and financial reporting experience and is a Certified
Public Accountant.
Tyler Vance Chief Operating Officer and Chief Banking Officer
Tyler Vance joined Bank of the Ozarks in 2006. He has 17 years of banking experience and is a Certified Public
Accountant. Mr. Vance was named Chief Banking Officer in 2011 and Chief Operating Officer in 2013. Mr. Vance
oversees a broad range of duties including retail banking, technology, deposit operations, marketing, training, deposit
pricing, internal audit, and treasury management.
Darrel Russell Chief Credit Officer and Chairman of the Directors’ Loan Committee
Darrel Russell has 33 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 banking office in Charlotte, North Carolina.
Sean O’Connell Chief Information Officer
Sean O’Connell joined the Company in 2013 and is responsible for oversight of information systems and security,
information technology, deposit operations, e-banking and item processing. Mr. O’Connell has 34 years of financial
services experience.
Note: George Gleason, Dan Thomas, Greg McKinney, Tyler Vance, Sean O’Connell and Dennis James serve in the same officer capacity for
both the Company and its bank subsidiary. All other officers shown serve as officers only of the bank subsidiary in the capacities indicated.
5
Duane Bickings President, Central Georgia/Florida Division
Duane Bickings has 34 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), Cartersville (2), Dawsonville (2), Adairsville, Athens, Cairo, Calhoun, Cumming, Dallas, Douglasville,
Lake Park, Marble Hill, McDonough, Newnan, Oakwood, Rome, Senoia and Sharpsburg, Georgia; Bradenton (2),
Ocala and Palmetto, Florida; and Geneva, Alabama.
John Carter Deputy Director of Community Bank Lending and Vice Chairman of the Officers’
Loan Committee
John Carter joined Bank of the Ozarks in 2009 and has 12 years of banking experience. Mr. Carter is responsible for
providing additional strategic leadership and direction regarding sound loan growth initiatives throughout the
Company’s community bank footprint.
Larry Dicks President, River Valley Arkansas Division
Larry Dicks has 36 years of banking experience, 28 of those with Bank of the Ozarks. As President of the Arkansas
River Valley 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 31 years experience
in leasing.
Gene Holman President, Mortgage Division
Gene Holman has 40 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 41 years of experience in finance and management. Mr. James is
responsible for leading the Company’s merger and acquisition activity.
Helen Jeffords President, Carolina Foothills Market
Helen Jeffords has over 31 years of banking experience and joined the Company in 2013. Mrs. Jeffords oversees
banking operations in the Carolina Foothills Market, which includes offices in Shelby (5), Bessemer City, Boiling
Springs, Cramerton, Forest City, Gastonia, Lawndale, Lincolnton and Kings Mountain, North Carolina.
John Jenkins President, North Arkansas Division
John Jenkins joined Bank of the Ozarks in 2009 and has 13 years of banking experience. Mr. Jenkins oversees business
operations in the Company’s North Little Rock (3), Harrison (2), Bellefonte, Clinton, Jasper, Marshall, Maumelle,
Sherwood and Western Grove offices.
Alan Jessup President, South Central Arkansas Division
Alan Jessup joined Bank of the Ozarks in 2008 and has over 21 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 35 years of 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, Northwest Arkansas Division
Ross Mallioux joined Bank of the Ozarks in 2011 and has 29 years of banking experience. As President of the
Northwest Arkansas Division, Mr. Mallioux oversees banking operations in the Company’s offices in Rogers (3),
Bella Vista (2), Bentonville (2), Fayetteville (2) and Springdale.
Eddie Melton President, Franklin County, Arkansas
Eddie Melton joined Bank of the Ozarks in 1989 and has 24 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 41 years of banking experience. Mr. Miller oversees business
operations in Johnson County, which includes two offices in Clarksville.
Paul Oberkirch President, Mobile, Alabama Area Market
Paul Oberkirch joined Bank of the Ozarks in 2012 and has 18 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 21 years of banking experience. Mr. Parrish oversees
business operations in the Company’s Geneva market, which includes one office in Geneva.
Frank Posey President, Southern Region Market
Frank Posey joined Bank of the Ozarks in 2011 and has 27 years of banking experience. Mr. Posey oversees business
operations in the Company’s Southern Region Market, which includes offices in Valdosta (3), Bainbridge (2), Cairo
and Lake Park, Georgia; Ocala, Florida; and Geneva, Alabama.
Matt Reddin Director of Community Bank Lending and Chairman of the Officers’ Loan Committee
Matt Reddin has 12 years of banking experience and has been with the Company since 2006. Mr. Reddin is responsible
for providing strategic leadership and direction regarding sound loan growth initiatives throughout the Company’s
community bank footprint.
Scott Shortes President, Western Arkansas Division
Scott Shortes joined Bank of the Ozarks in 2006 and has 23 years of banking experience. Mr. Shortes oversees banking
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 29 years of banking experience. Mrs. Shaw oversees business
operations in the Company’s Conway market, which includes four offices in Conway.
Chris Stringer President, North Texas Division
Chris Stringer has 17 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.
7
Audwin Vaughn President, North Central Arkansas Group Market
Audwin Vaughn joined Bank of the Ozarks in 2009 and has 28 years of banking experience. Mr. Vaughn oversees
business operations in the Company’s Cabot (2), Mountain Home (2), and Lonoke offices.
Randy Whitaker President, West Georgia Region Market
Randy Whitaker has 23 years of banking experience and joined the Company in 2011. Mr. Whitaker oversees business
operations in the Company’s West Georgia Region which includes offices in Cartersville (2), Adairsville, Calhoun,
Dallas, Douglasville, Newnan, Rome, Senoia and Sharpsburg.
Rick Wisdom President, Southwest and Coastal Divisions
Rick Wisdom has 32 years of banking experience and joined the Company in 2004. Mr. Wisdom oversees banking
operations in the Company’s offices in Mobile, Alabama (2); Texarkana, Texas (2); 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 26 years of banking experience. Mrs. Wolfe oversees business
operations in the metro Charlotte market, which includes one office in Charlotte.
Bank of the Ozarks’ Locations
Our franchise includes a total of 132 offices in eight states, providing us
substantial capacity and opportunities for growth.
Office Locations
Arkansas
Georgia
North Carolina
Texas
Florida
Alabama
South Carolina
New York
66
28
15
14
4
3
1
1
Total
132
8
New York
North Carolina
South Carolina
Arkansas
Alabama
Georgia
Texas
Florida
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2013
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________.
Commission File Number 0-22759
BANK OF THE OZARKS, INC.
(Exact name of registrant as specified in its charter)
ARKANSAS
(State or other jurisdiction of
incorporation or organization)
71-0556208
(I.R.S. Employer
Identification Number)
17901 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS
(Address of principal executive offices)
72223
(Zip Code)
Registrant’s telephone number, including area code:
(501) 978-2265
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange
on Which Registered
Common Stock, par value $0.01 per share
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (X)
No ( )
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ( )
No (X)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (X)
Non-accelerated filer ( ) (Do not check if a smaller reporting company)
Accelerated filer ( )
Smaller reporting company ( )
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity
as of the last business day of the registrant’s most recently completed second fiscal quarter: $1,354,000,000.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest
practicable date.
Class
-------------------------------------------------
Common Stock, par value $0.01 per share
Outstanding at February 14, 2014
------------------------------------------
36,890,152
Documents incorporated by reference: Portions of the Registrant’s Proxy Statement for the 2014 Annual Meeting
of Shareholders, scheduled to be held on May 19, 2014, are incorporated by reference into Part III of this Form 10-K.
BANK OF THE OZARKS, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 2013
INDEX
PART I.
Forward-Looking Information
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III.
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV.
Item 15.
Exhibits, Financial Statement Schedules
Exhibit Index
Signatures
Page
2
3
20
31
32
35
37
38
41
43
93
95
158
158
160
161
161
161
161
161
162
163
166
PART I
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and
Results of Operations, other filings made by the Company with the Securities and Exchange Commission (“SEC” or
“Commission”) and other oral and written statements or reports by the Company and its management include certain
forward-looking statements that are intended to be covered by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by,
and information available to, management at that time. Those statements are subject to certain risks, uncertainties and other
factors that may cause actual results to differ materially from those projected in such forward-looking statements. Forward-
looking statements include, 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 merger and acquisition transactions; income from accretion of the Federal Deposit
Insurance Corporation (“FDIC”) loss share receivable, net of amortization of the FDIC clawback payable; other income
from loss share and purchased non-covered loans; 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 acquisitions; problems with integrating or managing acquisitions; the effect of the announcements or completion
of any pending or future mergers or acquisitions on customer relationships and operating results; opportunities to profitably
deploy capital; plans for opening new offices or relocating or closing existing offices; opportunities and goals for future
market share growth; expected capital expenditures; loan, lease and deposit growth, including growth from unfunded closed
loans; 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. 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 future 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 acquisitions; problems with integrating or managing acquisitions;
opportunities to profitably deploy capital; the ability to attract new or retain existing or acquired deposits, or to retain or
grow loans and leases, including growth from unfunded closed loans; 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, and the effect of any
such conditions 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, strengthen the
capital of financial institutions, 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; the ability
to keep pace with technological changes, including changes regarding cyber security; 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
Annual Report on Form 10-K 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. See also Item 1A. “Risk Factors” of this Annual Report on Form 10-K.
2
Item 1. BUSINESS
Unless this Annual Report on Form 10-K indicates otherwise, or the context otherwise requires, the terms “we,”
“our,” “us,” and “the Company,” as used herein refer to Bank of the Ozarks, Inc. and its subsidiaries, including Bank of
the Ozarks, which we sometimes refer to as “Bank of the Ozarks,” “our bank subsidiary,” or “the Bank.”
The disclosures set forth in this item are qualified by Item 1A. Risk Factors, the section captioned “Forward-
Looking Information” on page 2, and other cautionary statements set forth elsewhere in this Annual Report on Form 10-K.
General
Bank of the Ozarks, Inc. (the “Company”) was incorporated in June 1981 and is an Arkansas business corporation
registered under the Bank Holding Company Act of 1956. The Company owns an Arkansas state chartered subsidiary bank,
Bank of the Ozarks (the “Bank”). At February 14, 2014, the Company, through the Bank, conducted banking operations
through 132 offices, including 66 offices in Arkansas, 28 in Georgia, 15 in North Carolina,14 in Texas, four in Florida,
three in Alabama, and one each in South Carolina and New York. The Company also owns Ozark Capital Statutory Trust II,
Ozark Capital Statutory Trust III, Ozark Capital Statutory Trust IV and Ozark Capital Statutory Trust V, all 100%-owned
finance subsidiary business trusts formed in connection with the issuance of certain subordinated debentures and related
trust preferred securities, 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. At December 31, 2013, the Company had total assets of $4.79 billion, total loans and leases, including loans
covered by FDIC loss share agreements (“covered loans”) and purchased loans not covered by FDIC loss share agreements
(“purchased non-covered loans”), of $3.36 billion, total deposits of $3.72 billion and total common stockholders’ equity of
$625 million. Net interest income for 2013 was $193.5 million, net income available to common stockholders was $87.1
million and diluted earnings per common share were $2.41.
The Company provides a wide range of retail and commercial banking services. Deposit services include checking,
savings, money market, time deposit and individual retirement accounts. Loan services include various types of real estate,
consumer, commercial, industrial and agricultural loans and various leasing services. The Company also provides mortgage
lending; treasury management services for businesses, individuals and non-profit and governmental entities including
wholesale lock box services; remote deposit capture services; trust and wealth management services for businesses,
individuals and non-profit and governmental entities including financial planning, money management, custodial services
and corporate trust services; real estate appraisals; credit-related life and disability insurance; ATMs; telephone banking;
online and mobile banking services including electronic bill pay; debit cards, gift cards and safe deposit boxes, among other
products and services. Through third party providers, the Company offers credit cards for consumers and businesses,
processing of merchant debit and credit card transactions, and full-service investment brokerage services. While the
Company provides a wide variety of retail and commercial banking services, it operates in only one segment. No revenues
are derived from foreign countries and no single external customer comprises more than 10% of the Company’s revenues.
De Novo Growth
With five banking offices in 1994, the Company commenced an expansion strategy, via de novo branching, into
selected Arkansas markets. Since embarking on this strategy, the Company has added one or more new banking offices each
year.
Prior to 1994 the Company’s offices were located in two relatively rural counties in northern and western
Arkansas. The Company’s de novo branching strategy initially focused on opening new branches in small communities in
counties contiguous to its then existing offices. As the Company continued to open additional offices, it generally expanded
into larger communities throughout much of northern, western and central Arkansas.
In 1998 and 1999 the Company expanded into Arkansas’ then three largest cities, Little Rock, Fort Smith and
North Little Rock. While the Company has opened a few additional offices in smaller Arkansas communities, the majority
of the Company’s Arkansas expansion since 1998 has been in these cities, surrounding communities and in other Arkansas
counties which are among the top ten counties in Arkansas in terms of bank deposits.
In 2001 the Company opened a loan production office in Charlotte, North Carolina. In 2003 the Company opened
a loan production office in Dallas, Texas for its Real Estate Specialties Group (“RESG”). The RESG handles many of the
Company’s large, more complex real estate lending transactions. In 2004 the Company opened its first retail banking office
in Texas. Since their opening, the Company’s Charlotte, North Carolina office, its RESG and its Texas retail banking offices
have contributed significantly to its growth.
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The Company is continuing its growth and de novo branching strategy. In 2012, the Company opened loan
production offices for its RESG in Austin, Texas and Atlanta, Georgia, and it opened additional retail banking offices in
The Colony and Southlake, both of which are in the metro-Dallas area, and in Mobile, Alabama. In March 2013, the
Company converted its Charlotte, North Carolina loan production office to a full-service retail banking office. In July 2013,
the Company opened a loan production office for its RESG in New York, New York and in August 2013, the Company
relocated from a leased facility to a bank-owned facility in Bradenton, Florida.
On January 2, 2014, the Company opened a loan production office for its RESG in Houston, Texas, and on
February 24, 2014, it opened a RESG loan production office in Los Angeles, California. On February 26, 2014, the
Company relocated its Savannah, Georgia office from a leased facility to a bank-owned facility. In the first quarter of 2014,
the Company expects to open a third retail banking office in Bradenton, Florida, and in the second quarter of 2014, the
Company expects to open a retail banking office in Cornelius, North Carolina.
Opening new offices is subject to local banking market conditions, availability of suitable sites, hiring qualified
personnel, obtaining regulatory and other approvals and many other conditions and contingencies that the Company cannot
predict with certainty. The Company may increase or decrease its expected number of new office openings 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.
FDIC-Assisted Acquisitions
During 2010 and 2011, the Company, through the Bank, acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of seven failed financial institutions in FDIC-assisted
acquisitions. A summary of each acquisition is as follows:
Date of FDIC-
Assisted Acquisition
March 26, 2010
July 16, 2010
September 10, 2010
December 17, 2010
January 14, 2011
April 29, 2011
April 29, 2011
Failed Financial Institution
Unity National Bank (“Unity”)
Woodlands Bank (“Woodlands”)
Horizon Bank (“Horizon”)
Chestatee State Bank (“Chestatee”)
Oglethorpe Bank (“Oglethorpe”)
First Choice Community Bank (“First Choice”)
The Park Avenue Bank (“Park Avenue”)
Location
Cartersville, Georgia
Bluffton, South Carolina
Bradenton, Florida
Dawsonville, Georgia
Brunswick, Georgia
Dallas, Georgia
Valdosta, Georgia
Loans comprise the majority of the assets acquired in each of these FDIC–assisted acquisitions and, with the
exception of Unity, 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 foreclosed assets covered by FDIC loss share
agreements (“covered foreclosed assets”). In the Unity acquisition, all loans, including consumer loans, are subject to loss
share agreements with the FDIC.
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 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
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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 or (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 terms of the purchase and assumption agreements for these FDIC-assisted 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 directors, officers or employees of Unity,
Woodlands, Horizon, Chestatee, Oglethorpe, First Choice or Park Avenue.
Traditional Acquisitions
On December 31, 2012, the Company completed its acquisition of Genala Banc, Inc. (“Genala”) whereby Genala
merged into the Company in a transaction valued at $27.5 million. The Company paid $13.4 million of cash and issued
423,616 shares of its common stock valued at $14.1 million in exchange for all outstanding shares of Genala common stock.
This was the Company’s first traditional acquisition since 2003. Genala was the holding company for The Citizens Bank,
which operated one banking office in Geneva, Alabama. Simultaneous with the closing of the transaction, The Citizens
Bank was merged into the Bank.
On July 31, 2013, the Company completed its acquisition of The First National Bank of Shelby (“First National
Bank”) in Shelby, North Carolina, whereby First National Bank merged with and into the Bank in a transaction valued at
$68.5 million. The Company paid $8.4 million of cash and issued 1,257,385 shares of its common stock valued at $60.1
million in exchange for all outstanding shares of First National Bank common stock. The Company also acquired certain
real property from parties related to First National Bank and on which certain First National Bank offices are located for
$3.8 million. The acquisition of First National Bank expanded the Company’s service area in North Carolina by adding 14
offices in Shelby, North Carolina and the surrounding communities. On September 24, 2013 the Company closed one of
the acquired offices in Shelby, North Carolina.
On December 9, 2013, the Company entered into a definitive agreement and plan of merger (“Bancshares
Agreement”) with Bancshares, Inc. (“Bancshares”) and its wholly-owned bank subsidiary, OMNIBANK, N.A., which
operates seven offices in Texas, including Houston (3), San Antonio, Austin, Cedar Park and Lockhart. Under the terms of
the Bancshares Agreement, the Company will pay approximately $23 million in cash for all outstanding shares of
Bancshares common stock, subject to potential adjustments. Completion of the transaction, which is subject to certain
closing conditions, is expected to close in March 2014.
On January 30, 2014, the Company entered into a definitive agreement and plan of merger (“Summit
Agreement”) with Summit Bancorp, Inc. (“Summit”) and its wholly-owned bank subsidiary, Summit Bank, in a transaction
valued at approximately $216 million. Summit Bank operates 24 banking offices in central and southwestern Arkansas.
Under the terms of the Summit Agreement, each outstanding share of common stock of Summit will be converted, at the
election of each Summit 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 80% of the merger consideration paid to Summit shareholders will consist of shares of the Company’s common
stock. The number of Company shares to be issued will be determined based on Summit shareholder elections and the
Company’s 10-day average closing stock price as of the fifth business day prior to the closing date, subject to a minimum
agreed value of $43.58 per share and a maximum agreed value of $72.63 per share. Upon the closing of the transaction,
Summit will merge with and into the Company and Summit Bank will merge with and into the Bank. Completion of the
transaction is subject to certain closing conditions, including receipt of customary federal and state regulatory approvals
and the approval of the shareholders of Summit. The transaction is expected to close during the second quarter of 2014.
Future Growth Strategy
The Company expects to continue growing through both its de novo branching strategy and traditional acquisitions.
With respect to its de novo branching strategy, future de novo branches are expected to be focused in the seven states in
which the Company has retail banking offices, including Arkansas, Georgia, North Carolina, Texas, Florida, Alabama and
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South Carolina. With respect to traditional acquisitions, the Company is focusing primarily on opportunities in the seven
states in which it operates retail banking offices and secondarily on opportunities in surrounding states. The Company is
seeking acquisitions that are either immediately accretive to book value, tangible book value, net income and diluted
earnings per share, or strategic in location, or both.
Lending and Leasing Activities
The Company’s primary source of income is interest earned from its loan and lease portfolio and its investment
securities portfolio. Administration of the Company’s lending function is the responsibility of the Chief Executive Officer
(“CEO”), the Chief Credit Officer (“CCO”), the Chief Lending Officer (“CLO”) and certain senior lenders. Such lenders
perform their lending duties subject to the oversight and policy direction of the Company’s and Bank’s board of directors
and the directors’ loan committee. Loan or lease authority is granted to the CEO, CCO and CLO by the board of directors.
The loan or lease authorities of other lending officers are granted by the directors’ loan committee on the recommendation
of appropriate senior officers. Until February 18, 2013, loans and leases and aggregate loan and lease relationships
exceeding $3 million up to the limits established by the Company’s board of directors could be approved by the directors’
loan committee. Effective February 18, 2013, the $3 million threshold was increased to $5 million. The Company’s officers’
loan committee approves loans and leases and aggregate loan and lease relationships between $3 million and $5 million.
Interest rates charged by the Bank vary with degree of risk, type, size, complexity, repricing frequency and other
relevant factors associated with the loan or lease. Competition from other financial services companies also impacts interest
rates charged on loans and leases.
The Company’s designated compliance and loan review officers are primarily responsible for the Bank’s
compliance and loan review functions. Periodic reviews are performed to evaluate asset quality and the effectiveness of loan
and lease administration. The results of such evaluations are included in reports which describe any identified deficiencies,
recommendations for improvement and management’s proposed action plan for curing or addressing identified deficiencies
and recommendations. Such reports are provided to and reviewed by the Company’s and Bank’s audit committee.
Additionally, the reports issued by the loan review function are provided to and reviewed by the Company’s and Bank’s
directors’ loan committee.
In underwriting loans and leases, primary emphasis is placed on the borrower’s or lessee’s financial condition,
including ability to generate cash flow to support the debt or lease obligations and other cash expenses. Additionally,
substantial consideration is given to collateral value and marketability as well as the borrower’s or lessee’s character,
reputation and other relevant factors.
The Company’s loan portfolio, including covered loans and purchased non-covered loans, includes most types of
real estate loans, consumer loans, commercial and industrial loans, agricultural loans and other types of loans. A majority,
but not all, of the properties collateralizing the Company’s loan portfolio are located within the trade areas of the
Company’s offices. The Company’s lease portfolio consists primarily of small ticket direct financing commercial equipment
leases. The equipment collateral securing the Company’s lease portfolio is located throughout the United States.
Real Estate Loans. The Company’s portfolio of real estate loans includes loans secured by residential 1-4 family,
non-farm/non-residential, agricultural, construction/land development, multifamily residential properties and other land
loans. Non-farm/non-residential loans include those secured by real estate mortgages on owner-occupied commercial
buildings of various types, leased commercial, retail and office buildings, hospitals, nursing and other medical facilities,
hotels and motels, and other business and industrial properties. Agricultural real estate loans include loans secured by
farmland and related improvements, including some loans guaranteed by the Farm Service Agency. Real estate
construction/land development loans include loans secured by vacant land, loans to finance land development or
construction of industrial, commercial, residential or farm buildings or additions or alterations to existing structures.
Included in the Company’s residential 1-4 family loans are home equity lines of credit.
The Company offers a variety of real estate loan products that are generally amortized over five to thirty years,
payable in monthly or other periodic installments of principal and interest, and due and payable in full (unless renewed) at a
balloon maturity generally within one to seven years. Certain loans may be structured as term loans with adjustable interest
rates (adjustable daily, monthly, semi-annually, annually, or at other regular adjustment intervals usually not to exceed five
years). Many of the Company’s adjustable rate loans have established “floor” and “ceiling” interest rates.
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Residential 1-4 family loans are underwritten primarily based on the borrower’s ability to repay, including prior
credit history, and the value of the collateral. Other real estate loans are underwritten based on the ability of the property, in
the case of income producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt.
Secondary emphasis is placed upon collateral value, financial strength of any guarantors and other factors. Loans
collateralized by real estate have generally been originated with loan-to-appraised-value ratios of not more than 89% for
residential 1-4 family, 85% for other residential and other improved property, 80% for construction loans secured by
commercial, multifamily and other non-residential properties, 75% for land development loans and 65% for raw land loans.
The Company typically requires mortgage title insurance in the amount of the loan and hazard insurance on
improvements. Documentation requirements vary depending on loan size, type, degree of risk, complexity and other
relevant factors.
Consumer Loans. The Company’s portfolio of consumer loans generally includes loans to individuals for
household, family and other personal expenditures. Proceeds from such loans are used to, among other things, fund the
purchase of automobiles, recreational vehicles, boats, mobile homes and for other similar purposes. Consumer loans made
by the Company are generally collateralized and have terms typically ranging up to 72 months, depending upon the nature
of the collateral, size of the loan, and other relevant factors.
Consumer loans generally have higher interest rates. However, such loans pose additional risks of collectability and
loss when compared to certain other types of loans. The borrower’s ability to repay is of primary importance in the
underwriting of consumer loans.
Commercial and Industrial Loans and Leases. The Company’s commercial and industrial loan portfolio consists
of loans for commercial, industrial and professional purposes including loans to fund working capital requirements (such as
inventory, floor plan and receivables financing), purchases of machinery and equipment and other purposes. The Company
offers a variety of commercial and industrial loan arrangements, including term loans, balloon loans and lines of credit with
the purpose and collateral supporting a particular loan determining its structure. These loans are offered to businesses and
professionals for short and medium terms on both a collateralized and uncollateralized basis. As a general practice, the
Company obtains as collateral a lien on furniture, fixtures, equipment, inventory, receivables or other assets. The
Company’s leases are primarily equipment leases for commercial, industrial and professional purposes, have terms generally
ranging up to 48 months and are collateralized by a lien on the lessee’s interest in the leased property.
Commercial and industrial loans and leases typically are underwritten on the basis of the borrower’s or lessee’s
ability to make repayment from the cash flow of its business and generally are collateralized by business assets. As a result,
such loans and leases involve additional complexities, variables and risks and require more thorough underwriting and
servicing than other types of loans and leases.
Agricultural (Non-Real Estate) Loans. The Company’s portfolio of agricultural (non-real estate) loans includes
loans for financing agricultural production, including loans to businesses or individuals engaged in the production of timber,
poultry, livestock or crops. The Company’s agricultural (non-real estate) loans are generally secured by farm machinery,
livestock, crops, vehicles or other agricultural-related collateral. A portion of the Company’s portfolio of agricultural (non-
real estate) loans is comprised of loans to individuals which would normally be characterized as consumer loans but for the
fact that the individual borrowers are primarily engaged in the production of timber, poultry, livestock or crops.
Deposits
The Company offers an array of deposit products consisting of non-interest bearing checking accounts, interest
bearing transaction accounts, business sweep accounts, savings accounts, money market accounts, time deposits, including
access to products offered through the various CDARS® programs, and individual retirement accounts. Rates paid on such
deposits vary among the deposit categories due to different terms and conditions, individual deposit size, services rendered
and rates paid by competitors on similar deposit products. The Company acts as depository for a number of state and local
governments and government agencies or instrumentalities. Such public funds deposits are often subject to competitive bid
and in many cases must be secured by the Company’s pledge of investment securities or a letter of credit.
The Company’s deposits come primarily from within the Company’s trade area. As of December 31, 2013 the
Company had $48.6 million in “brokered deposits,” defined as deposits which, to the knowledge of the Company, have been
placed with the Bank by a person who acts as a broker in placing these deposits on behalf of others or are otherwise deemed
to be “brokered” by bank regulatory authority rules and regulations. Brokered deposits are typically from outside the
Company’s primary trade area, and such deposit levels may vary from time to time depending on competitive interest rate
conditions and other factors.
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Other Banking Services
Mortgage Lending. The Company offers a broad array of residential mortgage products including long-term fixed
rate and variable rate loans which are sold on a servicing-released basis in the secondary mortgage market. These loans are
originated primarily through the Company’s larger banking offices located in Arkansas, Texas, Georgia, North Carolina and
in certain of its recently acquired offices in the southeastern and eastern United States. In addition to long-term secondary
market loans, the Company offers a small number of fixed rate loan products which balloon periodically, typically every
eight to nine years, as well as variable rate loans. These loans are retained by the Company in its loan portfolio.
Trust and Wealth Management Services. The Company offers a broad array of trust and wealth management
services from its headquarters in Little Rock, Arkansas, with additional staff in Shelby, North Carolina, Bluffton, South
Carolina and Texarkana, Texas. These trust and wealth management services include personal trusts, custodial accounts,
investment management accounts, retirement accounts, corporate trust services including trustee, paying agent and
registered transfer agent services, and other incidental services. As of December 31, 2013, total trust assets were
approximately $1.48 billion compared to approximately $1.21 billion as of December 31, 2012 and approximately $1.02
billion as of December 31, 2011.
Treasury Management Services. The Company offers treasury management services which are designed to provide
a high level of specialized support to the treasury operations of business and public funds customers. Treasury management
has four basic functions: collection, disbursement, management of cash and information reporting. The Company’s treasury
management services include automated clearing house services (e.g. direct deposit, direct payment and electronic cash
concentration and disbursement), wire transfer, zero balance accounts, current and prior day transaction reporting, lock box
services, remote deposit capture services, automated credit line transfer, investment sweep accounts, reconciliation services,
positive pay services, credit line analysis and account analysis.
Online and Mobile Banking. The Company offers an online banking service for both business customers and
consumers. Through this service customers can access their account information, pay bills, transfer funds, view images of
cancelled checks, reorder checks, change addresses, issue stop payment requests, receive detailed statements and handle
other banking business electronically from a laptop, desktop or tablet. Businesses are offered more advanced features which
allow them to handle most treasury management functions electronically and access their account information on a more
timely basis, including having the ability to download transaction history into QuickBooks® for instant reconciliation. The
Company also provides businesses and consumers the option to electronically receive monthly bank statements and provides
a 13-month archive of monthly statements and cancelled check images. Mobile banking services allow consumers to access
their account information, pay bills or transfer funds conveniently through their mobile device.
Market Area and Competition
At February 14, 2014, the Company, through the Bank, conducted banking operations through 132 offices,
including 66 Arkansas offices, 28 Georgia offices, 15 North Carolina offices, 14 Texas offices, four Florida offices, three
Alabama offices and one office each in South Carolina and New York. Additionally, in connection with the pending
Bancshares acquisition, the Company expects to add seven Texas offices and, in connection with the proposed Summit
acquisition, it expects to add 24 Arkansas offices.
The banking industry in the Company’s market areas is highly competitive. In addition to competing with other
commercial and savings banks and savings and loan associations, the Company competes with credit unions, finance
companies, leasing companies, mortgage companies, insurance companies, brokerage and investment banking firms, asset-
based non-bank lenders and many other financial service firms. Competition is based on interest rates offered on deposit
accounts, interest rates charged on loans and leases, fees and service charges, the quality and scope of the services rendered,
the convenience of banking facilities and, in the case of loans to commercial borrowers, relative lending limits, as well as
other factors.
A substantial number of the commercial banks operating in the Company’s market area are branches or subsidiaries
of much larger organizations affiliated with statewide, regional or national banking companies and as a result may have
greater resources and lower costs of funds than the Company. Additionally the Company faces competition from a large
number of community banks, including de novo community banks, many of which have senior management who were
previously with other local banks or investor groups with strong local business and community ties. Despite the highly
competitive environment, management believes the Company will continue to be competitive because of its strong
commitment to quality customer service, convenient local branches, active community involvement and competitive
products and pricing.
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Employees
At December 31, 2013, the Company employed 1,223 full-time equivalent employees. None of the Company’s
employees were represented by any union or similar group. The Company has not experienced any labor disputes or strikes
arising from any organized labor groups. The Company believes its employee relations are good.
Executive Officers of Registrant
The following is a list of the executive officers of the Company.
George Gleason, age 60, Chairman and Chief Executive Officer. Mr. Gleason has served the Company or the Bank
as Chairman, Chief Executive Officer and/or President since 1979. He holds a B.A. in Business and Economics from
Hendrix College and a J.D. from the University of Arkansas.
Dan Thomas, age 51, Vice Chairman of the Company, President of the Bank’s Real Estate Specialties Group and
its Chief Lending Officer. Mr. Thomas has served as Vice Chairman of the Company since April 2013, President of RESG
since 2005 and was appointed as the Chief Lending Officer of the Bank in August 2012. Mr. Thomas joined the Company
in 2003 and served as Executive Vice President from 2003 to 2005. Prior to joining the Company, Mr. Thomas held various
positions with privately-held commercial real estate management and development firms, with an international accounting
and consulting firm, and with an international law firm, in which he focused primarily on real estate services, management,
investing, and strategic structuring. Mr. Thomas is a C.P.A. and is a licensed attorney (Arkansas and Texas). He holds a
B.S.B.A. from the University of Arkansas, an M.B.A. from the University of North Texas, a J.D. from the University of
Arkansas at Little Rock, and an LL.M. (taxation) from Southern Methodist University.
Greg McKinney, age 45, Chief Financial Officer and Chief Accounting Officer. Mr. McKinney joined the
Company in 2003 and served as Executive Vice President and Controller prior to assuming the role of Chief Financial
Officer and Chief Accounting Officer in December 2010. From 2001 to 2003 Mr. McKinney served as a member of the
financial leadership team of a publicly-traded software development and data management company. From 1991 to 2000 he
held various positions with a big-four public accounting firm. Mr. McKinney is a C.P.A. and holds a B.S. in Accounting
from Louisiana Tech University.
Tyler Vance, age 39, Chief Operating Officer and Chief Banking Officer. Prior to assuming the Chief Operating
Officer title in October 2013, Mr. Vance served as Chief Banking Officer since May 2011. Mr. Vance joined the Company
in 2006 and served as Senior Vice President from 2006 to 2009 and Executive Vice President of Retail Banking from 2009
to 2011. From 2001 to 2006 Mr. Vance served as CFO of a competitor bank. From 1996 to 2000, Mr. Vance held various
positions with a big-four public accounting firm. Mr. Vance is a C.P.A. and holds a B.A. in Accounting from Ouachita
Baptist University.
Darrel Russell, age 60, Chief Credit Officer and Chairman of the Loan Committee. Prior to assuming his role as
Chief Credit Officer and Chairman of the Loan Committee in May 2011, Mr. Russell served as President of the Bank’s
Central Division since 2001 and as Co-Chairman of the Loan Committee since 2007. He joined the Bank in 1983 and
served as Executive Vice President of the Bank from 1997 to 2001 and Senior Vice President of the Bank from 1992 to
1997. Prior to 1992 Mr. Russell served in various positions with the Bank. He received a B.S.B.A. in Banking and Finance
from the University of Arkansas.
Scott Hastings, age 56, President of the Bank’s Leasing Division since 2003. From 2001 to 2002 he served as
division president of the leasing division of a large diversified national financial services firm. From 1995 to 2001 he served
in several key positions including President, Chief Operating Officer and Director of a large regional bank’s leasing
subsidiary. Mr. Hastings holds a B.A. degree from the University of Arkansas-Little Rock.
Gene Holman, age 66, President of the Bank’s Mortgage Division since 2004. Prior to 2004 Mr. Holman served as
President and Chief Operating Officer of a competitor mortgage company and held various senior management positions
with that company during his 21-year tenure. Mr. Holman has 38 years of real estate and mortgage banking experience. Mr.
Holman is a C.P.A. and received a B.S.B.A. in Accounting from the University of Mississippi.
Rex Kyle, age 57, President of the Bank’s Trust and Wealth Management Division since 2004. Prior to 2004 Mr.
Kyle was Senior Vice President and Chief Administrative Officer in the trust division of a competitor bank. Mr. Kyle has 34
years’ experience as a banking trust professional providing a wide array of asset management and trust services for
individuals, businesses and government entities. He holds a B.S. and M.S. in Agricultural Economics from Texas A&M
University, a J.D. from the University of Texas and a Trust Services diploma from the Southwestern Graduate School of
Banking.
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Messrs. Gleason, Thomas, McKinney and Vance serve in the same positions with both the Company and the Bank.
All other listed officers are officers of the Bank.
SUPERVISION AND REGULATION
In addition to the generally applicable state and federal laws governing businesses and employers, bank holding
companies and banks are extensively regulated under both federal and state law. With few exceptions, state and federal
banking laws have as their principal objective either the maintenance of the safety and soundness of the Deposit Insurance
Fund (“DIF”) of the FDIC or the protection of consumers or classes of consumers, rather than the specific protection of the
shareholders of the Company. Bank holding companies and banks that fail to conduct their operations in a safe and sound
basis or in compliance with applicable laws can be compelled by the regulators to change the way they do business and may
be subject to regulatory enforcement actions, including restrictions imposed on their operations. To the extent that the
following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those
particular statutory and regulatory provisions. Any change in applicable laws or regulations may have an adverse effect on
the results of operation and financial condition of the Company and the Bank.
Primary Federal Regulators
The primary federal banking regulatory authority for the Company is the Board of Governors of the Federal
Reserve System (the “FRB”), acting pursuant to its authority to regulate bank holding companies. The primary federal
regulatory authority of the Bank is the FDIC because the Bank is an insured depository institution which is not a member
bank of the Federal Reserve System.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was
signed into law. The goals of the Dodd-Frank Act include restoring public confidence in the financial system following the
recent financial and credit crises, preventing another financial crisis and allowing regulators to identify failings in the system
before another crisis can occur. Further, the Dodd-Frank Act is intended to effect a fundamental restructuring of federal
banking regulation by taking a systemic view of regulation rather than focusing on prudential regulation of individual
financial institutions. However, the Dodd-Frank Act itself may be more appropriately considered as a blueprint for
regulatory change, as many of the provisions in the Dodd-Frank Act require that regulatory agencies draft implementing
regulations. In many cases, such implementing regulations have not yet been promulgated and it may be, in some cases,
years before the study and rulemaking processes called for by the Dodd-Frank Act are concluded. Among other significant
developments, the Dodd-Frank Act created a new Financial Stability Oversight Council to identify systemic risks in the
financial system, and in an effort to end the notion that any financial institution is “too big to fail,” gave federal regulators
new authority to take control of and liquidate systemically important but distressed financial firms. The Dodd-Frank Act
additionally created a new independent federal regulator, the Consumer Financial Protection Bureau (the “CFPB”), which is
exclusively authorized to adopt rules for designated federal consumer protection laws. The CFPB shares examination,
supervision and enforcement authority with other federal regulators. The Dodd-Frank Act is expected to have a significant
impact on the Company’s business operations as its provisions and implementing regulations continue to take effect by,
among other things:
• Changing the assessment base for federal deposit insurance from the amount of insured deposits to consolidated
assets less tangible capital, eliminating the ceiling and increasing the size of the floor of the DIF, and offsetting the
impact of the increase in the minimum floor on institutions with less than $10 billion in assets.
• Making permanent the $250,000 limit for federal deposit insurance, increasing the cash limit of Securities Investor
Protection Corporation protection to $250,000 and providing that unlimited federal deposit insurance for non-
interest-bearing demand transaction accounts at all insured depository institutions would expire after December 31,
2012.
• Eliminating the requirement that the FDIC pay dividends from the DIF when the reserve ratio is between 1.35%
and 1.5%, and continuing the FDIC’s authority to declare dividends when the reserve ratio at the end of a calendar
year is at least 1.5%. However, the FDIC is granted sole discretion in determining whether to suspend or limit the
declaration or payment of dividends.
• Repealing the federal prohibition on payment of interest on demand deposits, thereby permitting depository
institutions to pay interest on business transaction and other accounts.
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•
Implementing certain corporate governance revisions that apply to all public companies, including regulations that
require publicly traded companies to give shareholders a non-binding vote on executive compensation, commonly
referred to as a “say-on-pay” vote and on so-called “golden parachute” payments in connection with approvals of
mergers and acquisitions; new director independence requirements and considerations to be taken into account by
compensation committees and their advisers relating to executive compensation; additional executive
compensation disclosures; and a requirement that companies adopt a policy providing for the recovery of executive
compensation in the event of a restatement of its financial statements.
• Centralizing responsibility for consumer financial protection by creating a new independent federal agency, the
CFPB, responsible for implementing federal consumer protection laws to be applicable to all depositary
institutions, including the Company and the Bank, although institutions below $10 billion in assets will continue to
be examined and supervised for compliance with these laws by their primary federal regulator.
•
•
Imposing new requirements for mortgage lending, including new minimum underwriting standards, limitations with
respect to prepayment penalties, prohibitions on certain yield-spread compensation to mortgage originators,
establishment of new “qualified residential mortgage” standards intended to protect consumers, prohibition and
limitation of certain mortgage terms and imposition of new mandated disclosures to mortgage borrowers.
Imposing new limits on affiliate transactions and causing derivative transactions to be subject to lending limits and
other restrictions, including adoption of the so-called “Volker Rule” regulating transactions in derivative securities.
• Permitting national and state banks to establish de novo interstate branches at any location where a bank based in
another state could establish a branch, and requiring that bank holding companies and banks be well-capitalized
and well-managed in order to acquire banks located outside their home state.
• Applying the same leverage and risk-based capital requirements to holding companies that apply to insured
depository institutions, although the Company’s existing trust preferred securities (but not new issuances) are
“grandfathered” under the Dodd-Frank Act and continue to qualify as Tier 1 capital unless otherwise restricted by
federal regulators.
• Limiting debit card interchange fees that financial institutions with $10 billion or more in assets are permitted to
charge.
•
•
Increasing the dollar threshold below which consumers are required to be provided with certain disclosures under
the Truth In Lending Act of 1968, as amended (“TILA”) and Consumer Leasing Act with respect to consumer
credit transactions and personal property leases for personal, family, or household use exceeding four months in
duration, as well as requiring such disclosures without regard for dollar limits or length of time where security
interests will be given in real estate or personal property used or expected to be used as, or in conjunction with, a
consumer’s principal residence.
Implementing regulations to incentivize and protect individuals, commonly referred to as whistleblowers, to report
violations of federal securities laws.
The Dodd-Frank Act contains many other provisions relating to financial institutions, and federal regulators
continue to draft implementing regulations mandated by the Dodd-Frank Act which may affect the Company or the Bank.
Accordingly, the topics discussed above are only a representative sample of the types of new or increasing regulatory issues
in the Dodd-Frank Act that have or are expected to have an impact on the Company and the Bank.
Other Recent Legislative and Regulatory Initiatives to Address Current Financial and Economic Conditions.
Emergency Economic Stabilization Act. The U.S. Congress, the U.S. Department of the Treasury (“Treasury”),
and federal banking regulators took broad action, beginning in the third quarter of 2008 and continuing to the present time,
to strengthen the capital and liquidity positions of financial institutions in the U.S. and to address volatility in the financial
markets and the financial services industry. On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(“EESA”) became law. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“Recovery Act”),
more commonly known as the economic stimulus or economic recovery package became law. The Recovery Act, which
amends EESA, includes a wide variety of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. Under the Troubled Asset Relief Program (“TARP”) authorized by
EESA, the Treasury established a capital purchase program (“CPP”) providing for the purchase of senior preferred shares of
qualifying U.S. controlled banks, savings associations and certain bank and savings and loan holding companies. Financial
institutions participating in the TARP or CPP programs were subject to numerous Recovery Act provisions relating to
11
executive compensation, which included restrictions on bonus and incentive compensation, severance compensation and so-
called “golden parachutes” to the institution’s executive officers, and provided for “clawbacks” or mandatory repayments of
bonuses, retention awards or incentive compensation payments to a larger group of employees if it were later determined
that such compensation payments were based on materially inaccurate financial results, as well as concerning other matters
regarding executive compensation policies and practices.
In December 2008, pursuant to the TARP program, the Treasury purchased $75 million of a newly created series
of Company preferred stock along with a warrant to purchase common stock of the Company. In November 2009, the
Company redeemed the preferred stock from Treasury, returned to Treasury the original investment amount of $75 million,
plus accrued and unpaid dividends thereon, and repurchased the warrant from Treasury. The Company is no longer a
participant in the CPP or TARP programs.
The Company’s issuance of preferred stock to Treasury made it subject to the enforcement and oversight authority
of the Office of the Special Inspector General for TARP (“Special Inspector General”). The Special Inspector General
retains authority to audit and investigate all aspects of TARP even after the capital received by the Company under the CPP
was repaid to Treasury. Although the Company has not had any Special Inspector General investigations concerning
compliance with TARP, the Company remains subject to requests by the Special Inspector General for documentation
pertaining to the Company’s compliance with TARP requirements prior to its repayment of the capital received under the
CPP.
Except for the statutory mandate regarding clawbacks for compensation paid or accrued while Treasury held the
preferred stock and any future investigations by the Special Inspector General as described above, the Company is no longer
subject to the executive compensation restrictions and related mandates imposed by EESA and the Recovery Act.
Pursuant to authority granted to it under EESA, in October 2008, the FRB adopted an interim final rule amending
Regulation D (Reserve Requirements of Depository Institutions) and directed the Federal Reserve Banks to pay interest on
required reserve balances (that is, balances held to satisfy depository institutions’ reserve requirements) and on excess
balances (balances held in excess of required reserve balances and clearing balances). Since publication of the interim final
rule, the FRB has frequently modified the method for determining the rates to be paid on required reserve balances and on
excess balances. The rate of interest required to be paid on both required reserve balances and on excess balances is, as of
January 1, 2014, set at 0.25%. Such rates may be reset by the FRB from time to time.
The Making Home Affordable Program. During March 2009, Treasury announced the “Making Home Affordable”
program (the “MHA”) intended to provide assistance to homeowners by, among other things, introducing new refinancing
and loan modification programs. The refinancing program is intended to allow homeowners who have loans either owned or
guaranteed by Freddie Mac or Fannie Mae, and who have seen the value of their homes decline, to refinance their existing
mortgages thereby providing them with lower mortgage payments. As part of the loan modification program, which is
intended to prevent residential mortgage foreclosures and resulting loss of home ownership, Treasury issued guidelines
designed to enable mortgagors and their mortgage holders to modify existing loans and reduce homeowners’ monthly
mortgage payments, thereby reducing the risk of foreclosure. Such refinancing program was initially scheduled to end on
December 31, 2013 but has been extended through December 31, 2015.
The actions described above under the captions “Dodd-Frank Wall Street Reform and Consumer Protection Act”
and “Other Recent Legislative and Regulatory Initiatives to Address Current Financial and Economic Conditions,” together
with additional actions announced by Treasury and other regulatory agencies, continue to evolve. It remains unclear at this
time what will be the long-term impact on the financial markets and the financial services industry of the Dodd-Frank Act,
EESA, TARP, MHA or any of the other liquidity, funding and home ownership initiatives of Treasury and other bank
regulatory agencies that have been previously announced, or any additional programs that may be initiated in the future.
However, given the sweeping nature of the Dodd-Frank Act and other federal government initiatives, the Company expects
that its regulatory compliance costs will increase over time.
Other Federal Legislation and Regulation
Bank Holding Company Act. The Company is subject to supervision by the FRB under the provisions of the Bank
Holding Company Act of 1956, as amended (the “BHCA”). The BHCA restricts the types of activities in which bank
holding companies may engage and imposes a range of supervisory requirements on their activities, including regulatory
enforcement actions for violations of laws and policies. The BHCA limits the activities of the Company and any companies
controlled by it to the activities of banking, managing and controlling banks, furnishing or performing services for its
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subsidiaries, and any other activity that the FRB determines to be incidental to or closely related to banking. These
restrictions also apply to any company in which the Company owns 5% or more of the voting securities.
Before a bank holding company engages in any non-bank-related activity, either by acquisition or commencement
of de novo operations, it must comply with the FRB’s notification and approval procedures. In reviewing these notifications,
the FRB considers a number of factors, including the expected benefits to the public versus the risks of possible adverse
effects. In general, the potential benefits include greater convenience to the public, increased competition and gains in
efficiency, while the potential risks include undue concentration of resources, decreased or unfair competition, conflicts of
interest and unsound banking practices.
Under the BHCA, a bank holding company must obtain FRB approval before engaging in acquisitions of banks or
bank holding companies. In particular, the FRB must generally approve the following actions by a bank holding company:
•
•
•
the acquisition of ownership or control of more than 5% of the voting securities of any bank or bank holding
company;
the acquisition of all or substantially all of the assets of a bank; and
the merger or consolidation with another bank holding company.
In considering any application for approval of an acquisition or merger, the FRB is required to consider various
competitive factors, the financial and managerial resources of the companies and banks concerned, the convenience and
needs of the communities to be served, the effectiveness of the applicant in combating money laundering activities, and the
applicant’s record of compliance with the Community Reinvestment Act of 1977 (the “CRA”). The CRA is more
particularly described below.
Pursuant to the Dodd-Frank Act, the FRB is now required to also consider the extent to which a proposed
acquisition, merger, or consolidation would increase the systemic risk of the banking system. The Dodd-Frank Act also
amended the BHCA to require that bank holding companies be well-capitalized and well-managed before acquiring control
of a bank in another state. FRB regulations regard a bank holding company as well-capitalized if it has a total risk-based
capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater.
The Attorney General of the United States may, within 30 days after approval of an acquisition by the FRB, bring an action
challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed
pending a final ruling by the courts.
Source of Strength Doctrine. The Dodd-Frank Act codifies and expands the existing FRB policy that a bank
holding company is required to serve as a source of financial and managerial strength to its subsidiary banks. Under the
Dodd-Frank Act, the term “source of financial strength” is defined to mean the “ability of a company that directly or
indirectly controls an insured depository institution to provide financial assistance to such insured depository institution in
the event of the financial distress of the insured depository institution.” While rules implementing this provision of the
Dodd-Frank Act have not yet been adopted or proposed, as of December 2013 the FRB has listed proposing source of
strength rules as one of its planned objectives. It is the FRB’s existing policy that a bank holding company should stand
ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting
its subsidiary banks. Consistent with this, the FRB has stated that, as a matter of prudent banking, a bank holding company
should generally not maintain a given rate of cash dividends unless its net income available to common shareholders has
been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the
organization’s capital needs, asset quality, and overall financial condition.
Gramm-Leach-Bliley Act. Under the Gramm-Leach-Bliley Act (the “GLBA”), a bank holding company that elects
to become a “financial holding company” will be permitted to engage in any activity that the FRB, in consultation with the
Secretary of the Treasury, determines by regulation or order is (i) financial in nature or incidental to such financial activity
or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. In addition to traditional lending activities, the GLBA specifies the following
activities as financial in nature:
acting as principal, underwriter, agent or broker for insurance;
underwriting, dealing in or making a market in securities;
•
•
• merchant banking activities; and
•
providing financial and investment advice.
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A bank holding company may become a financial holding company only if all depository institution subsidiaries of
the holding company are well-capitalized, well-managed and have at least a satisfactory rating under the CRA. A financial
holding company that falls out of compliance with such requirement may be required to cease engaging in certain activities.
The Company currently has no plans to elect to become a financial holding company. As long as the Company elects not to
become a financial holding company, it will remain subject to the current restrictions of the BHCA.
The GLBA provides that state banks, such as the Bank, may invest in financial subsidiaries that engage as the
principal in activities that would only be permissible for a national bank to conduct in a financial subsidiary. This authority
is generally subject to the same conditions that apply to national bank investments in financial subsidiaries.
Under the consumer privacy provisions mandated by the GLBA, when establishing a customer relationship a
financial institution must give the consumer certain privacy-related information, such as when the institution will disclose
nonpublic, personal information to unaffiliated third parties, what type of information it may share and what types of
affiliates may receive the information. The institution must also provide customers with annual privacy notices, a reasonable
means for preventing the disclosure of information to third parties, and the opportunity to opt out of many features of the
institution’s disclosure policies at any time.
Community Reinvestment Act. The CRA requires, in connection with examinations of financial institutions, that
federal banking regulators evaluate the record of each financial institution in meeting the credit needs of its local
community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional
requirements and limitations on the Bank. Additionally, banks must make available for public review, certain portions of its
most recent CRA examination report conducted by its federal banking regulators.
USA Patriot Act. The USA PATRIOT Act of 2001 (the “Patriot Act”) increased the obligations of financial
institutions, including banks, to identify their customers, watch for and report suspicious transactions, respond to requests
for information by federal banking regulatory authorities and law enforcement agencies, and share information with other
financial institutions. The Patriot Act also amended the BHCA and Section 18(c) of the Federal Deposit Insurance Act
(commonly referred to as the “Bank Merger Act”) to require federal banking regulatory authorities to consider the
effectiveness of a financial institution’s anti-money laundering activities when reviewing an application to expand
operations. Financial institutions, including banks, are required under final rules implementing Section 326 of the Patriot
Act to establish procedures for collecting standard information from customers opening new accounts and verifying the
identity of these new account holders within a reasonable period of time.
Federal Insurance of Deposit Accounts. Deposits in the Bank are insured by the FDIC’s DIF, generally up to a
maximum of $250,000 per separately insured depositor, pursuant to changes made permanent by the Dodd-Frank Act. The
FDIC assesses insured depository institutions to maintain the DIF. No institution may pay a dividend if in default of its
deposit insurance assessment.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to a risk category based on
supervisory evaluations, regulatory capital levels and other factors. An institution’s assessment rate depends upon the
category to which it is assigned and certain adjustments specified by the FDIC, with less risky institutions paying lower
assessments.
In February 2011, as required by the Dodd-Frank Act, the FDIC published a final rule to revise the deposit
insurance assessment system. The rule, which took effect April 1, 2011, changes the assessment base used for calculating
deposit insurance assessments from deposits to total assets less tangible (Tier 1) capital. Since the new base is larger than
the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of
revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new
assessment base. The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for
funding, and shift more of the burden for supporting the insurance fund to larger institutions, which are thought to have
greater access to nondeposit funding.
The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35%
of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. In setting the
assessments necessary to achieve the 1.35% ratio, the FDIC is supposed to offset the effect of the increased ratio on insured
institutions with assets of less than $10 billion. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead
leaving it to the discretion of the FDIC. The FDIC has recently exercised that discretion by establishing a long range fund
target ratio of 2.0%.
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Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
Capital Adequacy Requirements. The FRB monitors the capital adequacy of bank holding companies such as the
Company, and the FDIC monitors the capital adequacy of the Bank. The federal bank regulators use a combination of risk-
based guidelines and leverage ratios to evaluate capital adequacy.
Under the risk-based capital guidelines, bank regulators assign a risk weight to each category of assets based
generally on the perceived credit risk of the asset class. The risk weights are then multiplied by the corresponding asset
balances to determine a “risk-weighted” asset base. The minimum ratio of total risk-based capital to risk-weighted assets is
8.0%. At least half of the risk-based capital must consist of Tier 1 capital, which is comprised of common stock, additional
paid-in capital, retained earnings, certain types of preferred stock, a limited amount of trust preferred securities and
qualifying minority interests in the equity capital accounts of consolidated subsidiaries, and excludes goodwill and various
intangible assets. However, on December 30, 2008, the federal banking regulators issued a final rule providing that a
banking organization may reduce the amount of goodwill deducted from Tier 1 capital by the amount of any deferred tax
liability associated with that goodwill. The remainder, or Tier 2 capital, may consist of amounts of trust preferred securities
and other preferred stock excluded from Tier 1 capital, certain hybrid capital instruments and other debt securities and an
allowance for loan and lease losses not to exceed 1.25% of risk-weighted assets. The sum of Tier 1 capital and Tier 2 capital
is “total risk-based capital.”
The leverage ratio is a company’s Tier 1 capital divided by its adjusted average total consolidated assets. The
minimum required leverage ratio is 3.0% of Tier 1 capital to adjusted average assets for institutions with the highest
regulatory rating of 1 under the BOPEC (Bank subsidiaries, Other subsidiaries, Parent, Earnings, Capital) component rating
system and bank holding companies that have implemented the FRB’s risk-based capital measure for market risk. All other
institutions must maintain a minimum leverage ratio of 4.0%.
In January 2010, the FRB adopted a final rule to amend its general risk-based capital adequacy and advanced risk-
based capital adequacy framework and to address the accounting treatment of special purpose entities, known as “variable
interest entities” often used in securitizations. The rule requires variable interest entities to be treated as consolidated for
risk-based capital purposes. Although the Company does not believe it currently has any variable interest entities required to
be consolidated under GAAP, it is possible that such an entity could be used in future business operations.
Basel III. On July 9, 2013, the FDIC and other federal banking regulators issued a final rule that will substantially
revise the risk-based capital requirements applicable to bank holding companies and insured depository institutions,
including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee
on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule applies to all depository
institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and
loan holding companies.
The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets),
increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and
assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to
certain commercial real estate facilities that finance the acquisition, development or construction of real property.
The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year
transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2
capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain
deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be
required to be deducted from capital, subject to a two-year transition period. Finally, the new rules allow for insured
depository institutions to make a one-time election not to include most elements of accumulated other comprehensive
income in regulatory capital and instead effectively use the existing treatment under the general risk-based capital rules.
Insured depository institutions must make their accumulated other comprehensive income opt-out election in the first
Consolidated Reports of Condition and Income (“Call Report”), Consolidated Financial Statements for Bank Holding
Companies (“FR Y-9C”) or Parent Company Only Financial Statements for Large Bank Holding Companies (“FR Y-9LP”)
reports that are filed for the first quarter of 2015.
15
The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and
other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate
acquisition, development and construction loans and the unsecured portion of non-residential mortgage loans that are 90
days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a
commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up
from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk
weights (from 0% to up to 600%) for equity exposures.
Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization
does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in
addition to the amount necessary to meet its minimum risk-based capital requirements.
The final rule becomes effective on January 1, 2015. The capital conservation buffer requirement will be phased in
beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on
January 1, 2019.
On October 30, 2013, the FDIC and other federal banking regulators issued a notice of proposed rule that seeks to
establish a quantitative liquidity requirement consistent with the liquidity coverage ratio outlined in Basel III. The rule is
limited to insured depository institutions with total consolidated assets greater than $250 billion or more than $10 billion in
foreign exposures, and to any consolidated insured depository subsidiaries of one of these companies that has total
consolidated assets of $10 billion or more.
Enforcement Authority. The FRB has enforcement authority over bank holding companies and non-banking
subsidiaries to forestall activities that represent unsafe or unsound practices or constitute violations of law. It may exercise
these powers by issuing cease-and-desist orders or through other actions. The FRB may also assess civil penalties in
amounts up to $1 million for each day’s violation against companies or individuals who violate the BHCA or related
regulations. The FRB can also require a bank holding company to divest ownership or control of a non-banking subsidiary
or require such subsidiary to terminate its non-banking activities. Certain violations may also result in criminal penalties.
For purposes of enforcing the designated consumer financial protection laws, (i) the CFPB has primary enforcement
authority over banks with total assets greater than $10 billion and their affiliates, and (ii) a bank’s primary federal regulators
retain exclusive enforcement authority over banks with $10 billion or less in total assets and their affiliates.
The FDIC possesses comparable authority under the Federal Deposit Insurance Act, the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the “FDICIA”) and other statutes with respect to the Bank. In addition, the FDIC
can terminate insurance of accounts, after notice and hearing, upon a finding that the insured institution is or has engaged in
any unsafe or unsound practice that has not been corrected, is in an unsafe and unsound condition, or has violated any
applicable law, regulation, rule, or order of, or condition imposed by the appropriate supervisors.
The FDICIA required federal banking agencies to broaden the scope of regulatory corrective action taken with
respect to depository institutions that do not meet minimum capital and related requirements and to take such actions
promptly in order to minimize losses to the FDIC. In connection with FDICIA, federal banking agencies established capital
measures (including both a leverage measure and a risk-based capital measure) and specified for each capital measure the
levels at which depository institutions will be considered well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized. If an institution becomes classified as undercapitalized, the
appropriate federal banking agency will require the institution to submit an acceptable capital restoration plan and can
suspend or greatly limit the institution’s ability to effect numerous actions including capital distributions, acquisitions of
assets, the establishment of new branches and the entry into new lines of business.
Examination. The FRB may examine the Company and any or all of its subsidiaries. To assess compliance with the
designated consumer financial protection laws, the Dodd-Frank Act gives the CFPB the authority to include its examiners,
on a sampling basis, in examinations performed by primary federal regulators such as the FRB. The FDIC examines and
evaluates insured banks approximately every 12 months, and it may assess the institution for its costs of conducting the
examinations. The FDIC has a reciprocal agreement with the Arkansas State Bank Department whereby each will accept the
other’s examination reports in certain cases. The Bank generally undergoes FDIC and state examinations on a joint basis.
Reporting Obligations. As a bank holding company, the Company must file with the FRB an annual report and
such additional information as the FRB may require pursuant to the BHCA. The Bank must submit to federal and state
regulators annual audit reports prepared by independent auditors. The Company’s Annual Report on Form 10-K, which
includes the report of the Company’s independent auditors, can be used to satisfy this requirement. The Bank must submit
16
quarterly, to the FDIC, a Call Report. The Company must submit quarterly, to the FRB, an FR Y-9C and an FR Y-9LP. The
Company and Bank also file various other required reports with federal and state regulators.
Other Consumer Laws and Regulations. The Company’s status as a registered bank holding company under the
BHCA does not exempt it from certain federal and state laws and regulations applicable to corporations generally,
including, without limitation, certain provisions of the federal securities laws. The Company is subject to the jurisdiction of
the SEC and of state securities regulatory authorities for matters relating to the offer and sale of its securities.
The Bank’s loan operations are subject to certain federal laws applicable to credit transactions, including, among
others:
•
•
•
•
•
•
•
•
the TILA, which governs disclosures of credit terms to consumer borrowers;
the Home Mortgage Disclosure Act of 1975, which requires financial institutions to provide information to
enable the public and public officials to determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the communities it serves;
the Equal Credit Opportunity Act, which prohibits discrimination on the basis of race, creed or other
prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978 (the “FCRA”), which governs the use and provision of information to
credit reporting agencies;
the Fair and Accurate Credit Transactions Act of 2003, which permanently extended the national credit
reporting standards of the FCRA, and permits consumers, including customers of the Bank, to opt out of
information sharing among affiliated companies for marketing purposes and requires financial institutions,
including banks, to notify a customer if the institution provides negative information about the customer to a
national credit reporting agency or if the credit that is granted to the customer is on less favorable terms than
those generally available;
the Fair Debt Collection Practices Act, which governs the manner in which consumer debts may be collected
by collection agencies;
the Fair Housing Act, which prohibits discriminatory practices relative to real estate related transactions,
including the financing of housing and the rules and regulations of the various federal agencies charged with
the responsibility of implementing such federal laws; and
the Real Estate Settlement and Procedures Act of 1974, which affords consumers greater protection pertaining
to federally related mortgage loans by requiring, among other things, improved and streamlined good faith
estimate forms including clear summary information and improved disclosure of yield spread premiums.
The Bank’s loan operations are also subject to the many requirements governing mortgages and lending practices
set forth in the Dodd-Frank Act discussed above.
The Bank’s deposit operations are subject to several laws, including but not limited to:
•
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the Right to Financial Privacy Act of 1978, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative subpoenas of financial records;
the Electronic Funds Transfer Act, which governs automatic deposits to and withdrawals from deposit
accounts and customers’ rights and liabilities arising from the use of automated teller machines and other
electronic banking services;
the Truth in Savings Act, which requires depository institutions to disclose the terms of deposit accounts to
consumers;
the Expedited Funds Availability Act, which requires financial institutions to make deposited funds available
according to specified time schedules and to disclose funds availability policies to consumers; and
17
•
the Check Clearing for the 21st Century Act (“Check 21”), which is designed to foster innovation in the
payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation.
Check 21 created a new negotiable instrument called a substitute check and permits, but does not require,
banks to truncate original checks, process check information electronically, and deliver substitute checks to
banks that wish to continue receiving paper checks.
State Regulation
The Company and the Bank are subject to examination and regulation by the Arkansas State Bank Department.
Examinations of the Bank are typically conducted annually but may be extended to 24 months if an interim examination is
performed by the FDIC. The Arkansas State Bank Department may also examine the activities of the Company in
conjunction with its examination of the Bank. The extent of such examination will depend upon the complexity of the
Company, the level of debt owed by the Company, and other criteria as determined by the Arkansas State Bank Department.
The Company is also required to submit certain reports filed with the FRB to the Arkansas State Bank Department.
Under the Arkansas Banking Code of 1997, the acquisition by the Company of more than 25% of any class of the
outstanding capital stock of any bank located in Arkansas requires approval of the Arkansas State Bank Commissioner (the
“Bank Commissioner”). Additionally, a bank holding company may not acquire any bank if after such acquisition the
holding company would control, directly or indirectly, banks having 25% of the total bank deposits (excluding deposits
from other banks and public funds) in the State of Arkansas. A bank holding company also cannot own more than one bank
subsidiary if any of its bank subsidiaries has been chartered for less than five years.
The Bank Commissioner has the authority, with the consent of the Governor of the State of Arkansas, to declare a
state of emergency and temporarily modify or suspend banking laws and regulations in communities where such a state of
emergency exists. The Bank Commissioner may also authorize a bank to close its offices and any day when such bank
offices are closed will be treated as a legal holiday, and any director, officer or employee of such bank shall not incur any
liability related to such emergency closing. To date no such state of emergency has been declared to exist by the Bank
Commissioner.
Restrictions on Bank Subsidiary
The lending and investment authority of the Bank is derived from Arkansas law. The lending power is generally
subject to certain restrictions, including the amount which may be lent to a single borrower.
Reserve Requirements. Arkansas law requires state chartered banks to maintain such reserves as are required by the
applicable federal regulatory agency. Federal banking laws require all insured banks to maintain reserves against their
checking and transaction accounts (primarily checking accounts, NOW and Super NOW checking accounts). Because
reserves must generally be maintained in cash, non-interest bearing accounts or in accounts that earn only a nominal amount
of interest, the effect of the reserve requirements is to increase the Bank’s cost of funds.
Payment of Dividends. Regulations of the FDIC and the Arkansas State Bank Department limit the ability of the
Bank to pay dividends to the Company without the prior approval of such agencies. FDIC regulations prevent insured state
banks from paying any dividends from capital and allow the payment of dividends only from net profits then on hand after
deduction for losses and bad debts. The Arkansas State Bank Department currently limits the amount of dividends that the
Bank can pay the Company to 75% of the Bank’s net profits after taxes for the current year plus 75% of its retained net
profits after taxes for the immediately preceding year.
Restrictions on Transactions with Affiliates. Federal law substantially restricts transactions between financial
institutions and their affiliates, particularly their non-financial institution affiliates. As a result, the Bank is sharply limited in
making extensions of credit to the Company or any non-bank subsidiary, in investing in the stock or other securities of the
Company or any non-bank subsidiary, in buying the assets of, or selling assets to, the Company and/or in taking such stock
or securities as collateral for loans to any borrower. The Bank is subject to Section 23A of the Federal Reserve Act, which
places limits on the amount of loans or extensions of credit to, or investments in, or certain other transactions with,
affiliates, including the Company. In addition, limits are placed on the amount of advances to third parties collateralized by
the securities or obligations of affiliates. Most of these loans and certain other transactions must be secured in prescribed
amounts. The Bank is also subject to Section 23B of the Federal Reserve Act, which prohibits an institution from engaging
in transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to
such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliated companies.
The Bank is subject to restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and
18
their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with third parties and (2) must not involve more
than the normal risk of repayment or present other unfavorable features.
Effect of Governmental Monetary Policies
The Company’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the
United States government and its agencies. The FRB’s monetary policies have had, and are likely to continue to have, an
important impact on the operating results of commercial banks through the FRB’s statutory power to implement national
monetary policy in order, among other things, to curb inflation or combat a recession. The FRB, through its monetary and
fiscal policies, affects the levels of bank loans, investments and deposits through its control over the issuance of U.S.
government securities, its regulation of the discount rate applicable to member banks and its influence over reserve
requirements to which member banks are subject. The Company cannot predict the nature or impact of future changes in
monetary and fiscal policies.
Future Regulation of Bank Holding Companies And Banks
Certain proposals affecting the banking industry have been discussed from time to time. Such proposals have
included, but are not limited to, the following: regulation of all insured depository institutions by a single “super” federal
regulator; limitations on the number of accounts protected by the federal deposit insurance funds and further modification of
the coverage limit on deposits. During 2014, numerous regulatory agencies will continue to promulgate rules and
regulations to implement the Dodd-Frank Act. The ultimate impact of the Dodd-Frank Act on the Company’s business and
results of operations will depend on regulatory interpretation and rulemaking, as well as the success of any actions taken to
mitigate the negative earnings impact of certain provisions. The Company cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to which its business may be affected by any new regulation or
statute.
Available Information
The Company files periodic and current reports, proxy statements and other information with the SEC. All filings
made by the Company with the SEC may be copied and read at the SEC’s Public Reference Room at 100 F Street NE,
Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC as the Company does. The website address of the
SEC is http://www.sec.gov. In addition, the Company makes available, free of charge, through the Investor Relations
section of its Internet website at www.bankozarks.com its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after the Company electronically files such reports with or furnishes them to
the SEC. Also the Company’s Corporate Governance Principles, Process for Nominating Candidates to the Board of
Directors of the Company, Corporate Code of Ethics, Audit Committee Charter, Community Reinvestment Act Committee
Charter, Information Systems Steering Committee Charter, Personnel and Compensation Committee Charter, Nominating
and Governance Committee Charter, Directors’ Loan Committee Charter, Trust Committee Charter, ALCO and Investments
Committee Charter, and Executive Committee Charter are available under the Investor Relations section on its website.
References to the Company’s website do not constitute incorporation by reference of the information contained on the
website and should not be considered part of this Annual Report on Form 10-K.
19
Item 1A. RISK FACTORS
An investment in shares of the Company’s common stock involves certain risks. The following risks and other
information in this report or incorporated in this report by reference, including the Company’s consolidated financial
statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” should be carefully considered in the evaluation of the Company before investing in shares of its common
stock. These risks may adversely affect the Company’s financial condition, results of operations or liquidity. Many of these
risks are out of the Company’s direct control, though efforts are made to manage those risks while optimizing financial
results. These risks are not the only ones facing the Company. Additional risks and uncertainties that management is not
aware of or focused on or that management currently deems immaterial may also adversely affect the Company’s business
and operation. This Annual Report on Form 10-K is qualified in its entirety by all these risk factors.
RISKS RELATED TO OUR BUSINESS
Our Profitability is Dependent on Our Banking Activities.
Because the Company is a bank holding company, its profitability is directly attributable to the success of the
Bank. The Company’s banking activities compete with other banking institutions on the basis of service, convenience and
price. Due in part to both regulatory changes and consumer demands, banks have experienced increased competition from
other entities offering similar products and services. The Company relies on the profitability of the Bank and dividends
received from the Bank for payment of its operating expenses, satisfaction of its obligations and payment of dividends. As is
the case with other similarly situated financial institutions, the profitability of the Bank, and therefore the Company, will be
subject to the fluctuating cost and availability of funds, changes in the prime lending rate and other interest rates, changes in
economic conditions in general and, because of the location of its banking offices, changes in economic conditions in the
Southeastern and South Central United States in particular.
We Depend on Key Personnel for Our Success.
The Company’s operating results and ability to adequately manage its growth and minimize loan and lease losses
are highly dependent on the services, managerial abilities and performance of its executive officers and other key personnel.
The Company has an experienced management team that the board of directors believes is capable of managing and
growing the Company. The Company does not have employment contracts with its executive officers or, except in limited
cases related to recent acquisitions, key personnel. Losses of or changes in its current executive officers or other key
personnel and their responsibilities may disrupt the Company’s business and could adversely affect the Company’s financial
condition, results of operations and liquidity. Additionally, the Company’s ability to retain its current executive officers and
other key personnel may be further impacted by existing and proposed legislation and regulations affecting the financial
services industry. There can be no assurance that the Company will be successful in retaining its current executive officers
or other key personnel, or hiring additional key personnel to assist in executing the Company’s growth strategy.
Our Operations are Significantly Affected by Interest Rate Levels.
The Company’s profitability is dependent to a large extent on net interest income, which is the difference between
interest income earned on loans, including covered loans and purchased non-covered loans, leases and investment securities
and interest expense paid on deposits, other borrowings and subordinated debentures. The Company is affected by changes
in general interest rate levels and changes in the differential between short-term and long-term interest rates, both of which
are beyond its control. Interest rate risk can result from mismatches between the dollar amount of repricing or maturing
assets and liabilities, as well as from mismatches in the timing and rate at which assets and liabilities reprice. Although the
Company has implemented procedures it believes will reduce the potential effects of changes in interest rates on its results
of operations, these procedures may not always be successful. In addition, any substantial, unexpected or prolonged change
in market interest rates could adversely affect the Company’s financial condition, results of operations and liquidity.
The Fiscal and Monetary Policies of the Federal Government and its Agencies Could Have a Material Adverse
Effect on Our Earnings.
The FRB regulates the supply of money and credit in the United States. Its policies determine in large part the cost
of funds for lending and investing and the return earned on those loans and investments, both of which may affect the
Company’s net interest income and net interest margin. Changes in the supply of money and credit can also materially
decrease the value of financial assets held by the Company, such as debt securities. The FRB’s policies can also adversely
20
affect borrowers, potentially increasing the risk that they may fail to repay their loans and leases. Changes in such policies
are beyond the Company’s control and difficult to predict; consequently, the impact of these changes on the Company’s
activities and results of operations is difficult to predict.
Our Business Depends on the Condition of the Local and Regional Economies Where We Operate.
A majority of the Company’s business is located in Arkansas, Texas and, to a lesser extent, Georgia, North
Carolina and other southeastern states. As a result the Company’s financial condition and results of operations may be
significantly impacted by changes in the Arkansas, Texas, Georgia and North Carolina economies as well as the economies
of other southeastern states. Slowdown in economic activity, deterioration in housing markets or increases in unemployment
and under-employment in these areas may have a significant and disproportionate impact on consumer and business
confidence and the demand for the Company’s products and services, result in an increase in non-payment of loans and
leases and a decrease in collateral value, and significantly impact the Company’s deposit funding sources. Any of these
events could have an adverse impact on the Company’s financial position, results of operations and liquidity.
Our Business May Suffer if There are Significant Declines in the Value of Real Estate.
The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions
in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for the
Company’s loan and lease portfolio were to decline materially, a significant part of its loan portfolio could become under-
collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are
declining or have declined, the Company may not be able to realize the value of security anticipated at the time of
originating the loan, which in turn could have an adverse effect on the Company’s provision for loan and lease losses and its
financial condition, results of operations and liquidity.
Most of the Company’s foreclosed assets are comprised of real estate properties. The Company carries these
properties at their estimated fair values less estimated selling costs. While the Company believes the carrying values for
such assets are reasonable and appropriately reflect current market conditions, there can be no assurance that the amount of
proceeds realized upon disposition of foreclosed assets will approximate the carrying value of such assets. If the proceeds
are less than the carrying value of foreclosed assets, the Company will record a loss on the disposition of such assets, which
in turn could have an adverse effect on the Company’s financial position, results of operations and liquidity.
We are Subject to Environmental Liability Risks.
A significant portion of the Company’s loan and lease portfolio is secured by real property. In the ordinary course
of business, the Company may foreclose on and take title to real properties securing certain loans. In doing so, there is a risk
that hazardous or toxic substances could be found on these properties. Additionally, the Company has acquired a number of
retail banking facilities and other real properties as a result of recent acquisitions, any of which may contain hazardous or
toxic substances. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as
for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and
may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In
addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the
Company’s exposure to environmental liability. The Company has policies and procedures that require either formal or
informal evaluation of environmental risks and liabilities on real property (i) before originating any loan or foreclosure
action, except for (a) loans originated for sale in the secondary market secured by 1-4 family residential properties and (b)
certain loans where the real estate collateral is second lien collateral or (ii) prior to the completion of any acquisition when
the Company is acquiring retail banking facilities or any other real property. These policies, procedures and evaluations may
not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities
associated with an environmental hazard could have an adverse effect on the Company’s financial condition, results of
operations and liquidity.
If We Do Not Properly Manage Our Credit Risk, Our Business Could Be Seriously Harmed.
There are substantial risks inherent in making any loan or lease, including, but not limited to –
•
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•
•
risks resulting from changes in economic and industry conditions;
risks inherent in dealing with individual borrowers;
risks inherent from uncertainties as to the future value of collateral; and
the risk of non-payment of loans and leases.
21
Although the Company attempts to minimize its credit risk through prudent loan and lease underwriting procedures
and by monitoring concentrations of its loans and leases, there can be no assurance that these underwriting and monitoring
procedures will reduce these risks. Moreover, as the Company expands into new markets, credit administration and loan and
lease underwriting policies and procedures may need to be adapted to local conditions. The inability of the Company to
properly manage its credit risk or appropriately adapt its credit administration and loan and lease underwriting policies and
procedures to local market conditions or changing economic circumstances could have an adverse impact on its provision
for loan and lease losses and its financial condition, results of operations and liquidity.
We Make and Hold in Our Loan and Lease Portfolio a Significant Number of Construction/Land Development,
Non-Farm/Non-Residential and Other Real Estate Loans.
The Company’s loan and lease portfolio is comprised of a significant amount of real estate loans, including a large
number of construction/land development and non-farm/non-residential loans. Excluding covered loans and purchased non-
covered loans, the Company’s real estate loans comprised 88.5% of its total loans and leases at December 31, 2013. In
addition, excluding covered loans and purchased non-covered loans, the Company’s construction/land development and
non-farm/non-residential loans, which are a subset of its real estate loans, comprised 27.4% and 41.9%, respectively, of the
Company’s total loan and lease portfolio at December 31, 2013. Real estate loans, including construction/land development
and non-farm/non-residential loans, pose different risks than do other types of loan and lease categories. The Company
believes it has established appropriate underwriting procedures for its real estate loans, including construction/land
development and non-farm/non-residential loans, and has established appropriate allowances to cover the credit risk
associated with such loans. However, there can be no assurance that such underwriting procedures are, or will continue to
be, appropriate or that losses on real estate loans, including construction/land development and non-farm/non-residential
loans, will not require additions to its allowance for loan and lease losses, and could have an adverse impact on the
Company’s financial position, results of operations or liquidity.
We Could Experience Deficiencies in Our Allowance for Loan and Lease Losses.
The Company maintains an allowance for loan and lease losses, established through a provision for loan and lease
losses charged to expense, that represents the Company’s best estimate of probable losses inherent in the existing loan and
lease portfolio. Although the Company believes that it maintains its allowance for loan and lease losses at a level adequate
to absorb losses in its loan and lease portfolio, estimates of loan and lease losses are subjective and their accuracy may
depend on the outcome of future events. Experience in the banking industry indicates that some portion of the Company’s
loans and leases may only be partially repaid or may never be repaid at all. Loan and lease losses occur for many reasons
beyond the control of the Company. Accordingly, the Company may be required to make significant and unanticipated
increases in the allowance for loan and lease losses during future periods which could materially affect the Company’s
financial position, results of operations and liquidity. Additionally, bank regulatory authorities, as an integral part of their
supervisory functions, periodically review the Company’s allowance for loan and lease losses. These regulatory authorities
may require adjustments to the allowance for loan and lease losses or may require recognition of additional loan and lease
losses or charge-offs based upon their judgment. Any increase in the allowance for loan and lease losses or charge-offs
required by bank regulatory authorities could have an adverse effect on the Company’s financial condition, results of
operations and liquidity.
The Performance of Our Investment Securities Portfolio is Subject to Fluctuation Due to Changes in Interest Rates
and Market Conditions, Including Credit Deterioration of the Issuers of Individual Securities.
Changes in interest rates can negatively affect the performance of most of the Company’s investment securities.
Interest rate volatility can reduce unrealized gains or increase unrealized losses in the Company’s portfolio. Interest rates are
highly sensitive to many factors including monetary policies, domestic and international economic and political issues, and
other factors beyond the Company’s control. Fluctuations in interest rates can materially affect both the returns on and
market value of the Company’s investment securities. Additionally, actual investment income and cash flows from
investment securities that carry prepayment risk, such as mortgage-backed securities and callable securities, may materially
differ from those anticipated at the time of investment or subsequently as a result of changes in interest rates and market
conditions.
The Company’s investment securities portfolio consists of a number of securities whose trading markets are “not
active.” As a result, management has had to develop internal models or other methodologies for pricing these securities that
include various estimates and assumptions. There can be no assurance that the Company could sell these investment
securities at the price derived by the internal model or methodology, or that it could sell these investment securities at all,
which could have an adverse effect on the Company’s financial position, results of operation or liquidity.
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Many state and local governments and other political subdivisions have experienced deterioration of financial
condition in recent years due to declining tax revenues, increased demand for services and various other factors. As a result
many bonds issued by state and local governments and other political subdivisions have experienced, and are continuing to
experience, pricing pressure. To the extent the Company has securities in its portfolio from issuers who have experienced a
deterioration of financial condition, or who may experience future deterioration of financial condition, the value of such
securities may decline and could result in an other-than-temporary impairment charge, which could have an adverse effect
on the Company’s financial condition, results of operations and liquidity.
Our Recent Results May Not Be Indicative of Our Future Results.
The Company may not be able to grow its business at the same rate of growth achieved in recent years or even
grow its business at all. Additionally, in the future the Company may not have the benefit of several factors that have been
favorable to the Company’s business in past years, such as an interest rate environment where changes in rates occur at a
relatively orderly and modest pace, the ability to find suitable expansion opportunities, or the Company otherwise may be
unable to capitalize on opportunities presented by economic turbulence, or other factors and conditions. Numerous factors,
such as weakening or deteriorating economic conditions, regulatory and legislative considerations, and competition may
impede or restrict the Company’s ability to expand its market presence and could adversely impact its future operating
results.
Our FDIC Insurance Premiums May Increase.
The FDIC has increased premiums charged to all financial institutions for FDIC insurance protection during recent
years and such premiums may increase further in future years. The Company has historically paid at or near the lowest
applicable premium rate under the FDIC’s insurance premium rate structure due to the Company’s sound financial position.
However, should bank failures increase, FDIC insurance premiums may increase and could have an adverse impact on the
Company’s results of operations.
To Successfully Implement Our Growth and De Novo Branching Strategy, We Must Expand Our Operations in
Both New and Existing Markets.
The Company intends to continue the expansion and development of its business by pursuing its growth and de
novo branching strategy. Accordingly, the Company’s growth prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by banking companies pursuing growth strategies. In order to successfully execute its
growth strategy, the Company must, among other things:
identify and expand into suitable markets;
obtain regulatory and other approvals;
identify and acquire suitable sites for new banking offices;
attract and retain qualified bank management and staff;
build a substantial customer base;
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•
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• maintain credit quality;
•
• maintain adequate common equity and regulatory capital.
attract sufficient deposits to fund anticipated loan and lease growth; and
In addition to the foregoing factors, there are considerable costs involved in opening banking offices, and such new
offices generally do not generate sufficient revenues to offset their costs until they have been in operation for some time.
Therefore, any new banking offices the Company opens can be expected to negatively affect its operating results until those
offices reach a size at which they become profitable. The Company could also experience an increase in expenses if it
encounters delays in opening any new banking offices. Moreover, the Company cannot give any assurances that any new
banking offices it opens will be successful, even after they have become established, or that the Company can hire and retain
qualified bank management and staff to achieve its growth and profitability goals. If the Company does not manage its
growth effectively, the Company’s business, future prospects, financial condition, results of operations and liquidity could
be adversely affected.
23
We May Engage in Additional FDIC-Assisted Acquisitions, Which Could Present Additional Risks to Our Business.
Although the pace of FDIC-assisted acquisitions across the U.S. has dramatically slowed in the past two years, the
Company may be presented with additional opportunities to acquire the assets and assume liabilities of failed banks in
FDIC-assisted acquisitions. These acquisitions involve risks similar to acquiring existing banks even though the FDIC might
provide assistance to mitigate certain risks such as sharing in loan losses and losses on other covered assets and providing
indemnification against certain liabilities of the failed institution. However, because these acquisitions are for failed banks
and are structured in a manner that does not allow the Company the time normally associated with preparing for and
evaluating an acquisition (including preparing for integration of an acquired institution), the Company may face additional
risks when it engages in FDIC-assisted acquisitions. The assets that the Company acquires in such an acquisition are
generally more troubled than in a typical acquisition. The deposits that the Company assumes are generally higher priced
than in a typical acquisition and therefore subject to higher rates of attrition. Integration of operations may be more difficult
in an FDIC-assisted acquisition than in a typical acquisition since key staff may have departed. Any inability to overcome
these risks could have an adverse effect on the Company’s ability to achieve its business objectives and maintain its market
value and profitability.
Additionally, if the Company seeks to participate in additional FDIC-assisted acquisitions, the Company can only
participate in the bid process if it receives approval of bank regulators. There can be no assurance that the Company will be
allowed to participate in the bid process, or what the terms of any such transaction might be or whether the Company would
be successful in acquiring any bank or targeted assets. The Company may be required to raise additional capital as a
condition to, or as a result of, participation in certain FDIC-assisted acquisitions. Any such transactions and related
issuances of stock may have a dilutive effect on earnings per common share and share ownership.
Furthermore, to the extent the Company is allowed to, and chooses to, participate in future FDIC-assisted
acquisitions, the Company may face competition from other financial institutions. To the extent that other competitors
participate, the Company’s ability to make acquisitions on favorable terms may be adversely affected. Additionally, if the
Company acquires bank assets and operations through future FDIC-assisted acquisitions, the Company could encounter
difficulties in achieving profitability of those operations.
Failure to Comply with the Terms of Loss Sharing Arrangements with the FDIC May Result in Significant Losses.
Any failure to comply with the terms of any loss share agreements the Bank has with the FDIC, or to properly
service the loans and foreclosed assets covered by loss share agreements, may cause individual loans, large pools of loans or
other covered assets to lose eligibility for reimbursement to the Company from the FDIC. This could result in material
losses that are currently not anticipated and could adversely affect the Company’s financial condition, results of operations
or liquidity.
We Expect to Engage in Additional Negotiated Transactions, Which May Present Special Risks Associated with
Integration of Operations or Undiscovered Risks or Losses.
In addition to the Company’s growth strategy through de novo branching, the Company has pursued and expects to
pursue additional negotiated transactions with publicly owned or privately held banking institutions. Such negotiated
acquisitions will be accompanied by the risks commonly encountered in acquisitions, including, among other things:
•
•
•
•
credit risk associated with the acquired bank’s loans and leases and investments;
difficulty of integrating operations and personnel;
potential disruption of the Company’s ongoing business; and
potential loss of key employees, customers and deposits of acquired banks.
Competition for suitable acquisition candidates may continue to be significant in the negotiated acquisition area.
The Company competes with other banks or financial service companies with similar acquisition strategies, many of which
are larger and have greater financial and other resources. The Company cannot give any assurance that it will be able to
successfully identify and acquire any additional acquisition targets on acceptable terms and conditions.
In most cases, negotiated acquisitions include the acquisition of all the target bank’s assets and liabilities, including
its loan and lease portfolio. While the Company conducts extensive due diligence investigations regarding any targeted bank
in a negotiated transaction, there may be instances after closing of a negotiated transaction when, under normal operating
procedures, the Company may find that there may be more losses or undisclosed liabilities with respect to the assets and
liabilities of the target bank, and, with respect to its loan and lease portfolio, than were anticipated prior to the acquisition.
24
For example, the ability of a borrower or lessee to repay a loan or lease may have become impaired or the quality of the
value of the collateral securing the loan or lease may fall below the Company’s collateral standards. One or more of these
and other factors affecting asset values or loan and lease loss experience might cause the Company to have additional losses
or liabilities or additional charge-offs, which could have a negative impact on the Company’s financial condition and results
of operations.
Systems Conversions of Acquired Banks May Be Difficult.
Subsequent to the acquisition of a financial institution, the various operating systems must be converted, in most
cases, to the Bank’s existing operating systems. These systems conversions require personnel with unique and specialized
skills and require a significant amount of planning, coordination and effort of internal resources and third-party vendors.
Any inability of the Company to hire or retain individuals with the appropriate skills or to effectively plan, coordinate and
manage these systems conversions or any failure to effectively implement these systems conversions could have serious
negative customer impact, exposing the Company and the Bank to reputational risk and adversely impacting the Company’s
financial condition, results of operations and liquidity.
We Face Strong Competition in Our Markets.
Competition in many of the Company’s banking markets is intense. The Company competes with other financial
and bank holding companies, state and national commercial banks, savings and loan associations, consumer finance
companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, leasing companies,
money market mutual funds, asset-based non-bank lenders and other financial institutions and intermediaries, as well as
non-financial institutions offering payroll, debit card and other services. Many of these competitors have an advantage over
the Company through substantially greater financial resources, lending limits and larger distribution networks, and are able
to offer a broader range of products and services. Other competitors, many of which are smaller than the Company, are
privately held and thus benefit from greater flexibility in adopting or modifying growth or operational strategies than the
Company. If the Company fails to compete effectively for deposit, loan, lease and other banking customers in the
Company’s markets, the Company could lose substantial market share, suffer a slower growth rate or no growth and its
financial condition, results of operations and liquidity could be adversely affected.
The Soundness of Other Financial Institutions Could Adversely Affect Us.
The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and
financial stability of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing,
counterparty or other relationships. The Company has exposure to various counterparties, including brokers and dealers,
commercial and correspondent banks, and others. As a result, defaults by, or rumors or questions about, one or more
financial services institutions, or the financial services industry generally, may result in market-wide liquidity problems and
could lead to losses or defaults by such other institutions. Such occurrences could expose the Company to credit risk in the
event of default of its counterparty and could have a material adverse impact on the Company’s financial position, results of
operations and liquidity.
We Depend on the Accuracy and Completeness of Information About Customers.
In deciding whether to extend credit or enter into certain transactions, the Company relies on information furnished
by or on behalf of customers, including financial statements, credit reports and other financial information. The Company
may also rely on representations of those customers or other third parties, such as independent auditors, as to the accuracy
and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other
financial information could have an adverse impact on the Company’s business, financial condition and results of
operations.
Reputational Risk and Social Factors May Impact Our Results.
The Company’s ability to originate and maintain accounts is highly dependent upon consumer and other external
perceptions of its business practices and/or its financial health. Adverse perceptions regarding the Company’s business
practices and/or its financial health could damage its reputation, leading to difficulties in generating and maintaining
accounts as well as in financing them. Adverse developments or other external perceptions regarding the practices of
competitors, or the industry as a whole, may also adversely impact the Company’s reputation. In addition, adverse
reputational impacts on third parties with whom the Company has important relationships may also adversely impact the
Company’s reputation. Adverse impacts on the Company’s reputation, or the reputation of the industry, may also result in
25
greater regulatory and/or legislative scrutiny, which may lead to laws or regulations that may change or constrain the manner
in which the Company engages with its customers and the products it offers. Adverse reputational impacts or events may
also increase litigation risk. Any of these factors could have an adverse impact on the Company’s ability to achieve its
business objectives and/or its results of operations.
We May Be Subject to Claims and Litigation Asserting Lender Liability.
From time to time, and particularly during periods of economic stress, customers, including real estate developers,
may make claims or otherwise take legal action pertaining to the Company’s performance of its responsibilities. These
claims are often referred to as “lender liability” claims and are sometimes brought in an effort to produce or increase
leverage against the Company in workout negotiations or debt collection proceedings. Lender liability claims frequently
assert one or more of the following: breach of fiduciary duties, fraud, economic duress, breach of contract, breach of the
implied covenant of good faith and fair dealing, and similar claims. Whether customer claims and legal action related to the
Company’s performance of its responsibilities are founded or unfounded, if such claims and legal actions are not resolved in
a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market
perception of the Company and its products and services as well as impact customer demand for those products and
services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business,
which, in turn, could have a material adverse effect on the Company’s financial condition, results of operations and
liquidity.
We May Be Subject to General Claims and Litigation Liability.
In the ordinary course of business, the Company may be named as defendant or may otherwise face claims or legal
action, including class actions, from a variety of sources including, among others, customers; vendors; regulatory agencies;
federal, state or local governments; or employees. Such claims or legal action may include, among others, breach of
contract, breach of fiduciary duty, discrimination, harassment, fraud and infringement of patents, copyrights or trademarks.
Such claims or legal action may also make demands for substantial monetary damages and require substantial amounts of
time and resources to defend. Should the Company be named as defendant or otherwise face such claims or legal actions,
there can be no assurance that the Company would be successful in its defense against such actions, which could have a
material adverse impact on the Company’s financial position, results of operations and liquidity.
We Need to Stay Current on Technological Changes in Order to Compete and Meet Customer Demands.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new
technology-driven products and services. The future success of the Company will depend, in part, upon its ability to address
the needs of its customers by using technology to provide products and services that will satisfy customer demands for
convenience, as well as to create additional operational efficiencies and greater privacy and security protection for
customers and their personal information. Many of the Company’s competitors have substantially greater resources to invest
in technological improvements. The Company may not be able to effectively implement new technology-driven products
and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace
with technological change affecting the financial services industry could impair the Company’s ability to effectively
compete to retain or acquire new business and could have an adverse impact on its business, financial position, results of
operations and liquidity.
We are Subject to a Variety of Systems Failure and Cyber-Security Risks That Could Adversely Affect Our
Business and Financial Performance.
The Company’s internal operations are subject to certain risks, including, but not limited to, information system
failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts, data piracy or natural
disasters. The Company maintains a system of internal controls and security to mitigate the risks of many of these
occurrences and maintains insurance coverage for certain risks. However, should an event occur that is not prevented or
detected by the Company’s internal controls, and is uninsured or in excess of applicable insurance limits, it could have an
adverse impact on the Company’s business, financial condition, results of operations and liquidity.
The Company is currently evaluating many of its various operating systems and may elect to convert one or more
of such systems to an alternative solution. The conversion of one or more of these systems requires personnel with unique
and specialized skills and requires a significant amount of planning, coordination and effort of internal resources and third-
party vendors. Any inability of the Company to hire and retain individuals with the appropriate skills or to effectively plan,
coordinate and manage any such system conversions or to adequately identify appropriate systems to manage the
26
Company’s business operations could have serious negative customer impact, exposing the Company and the Bank to
operational risk and adversely impacting the Company’s financial position, results of operations and liquidity.
The computer systems and network infrastructure in use by the Company could be vulnerable to unforeseen
problems. The Company’s operations are dependent upon the ability to protect its computer equipment against damage from
fire, severe storm, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure of the
Company’s computer systems or network infrastructure that causes an interruption in operations could have an adverse
effect on the Company’s financial condition, results of operations and liquidity.
In addition, the Company’s operations are dependent upon its ability to protect the computer systems and network
infrastructure against damage from physical break-ins, security breaches and other disruptive cyber security problems
caused by Internet users or other users. Computer break-ins and other disruptions could jeopardize the security of
information stored in and transmitted through the Company’s computer systems and network, which may result in
significant liability and reputation risk to the Company, and may deter potential customers. Although the Company, with the
help of third-party service providers, intends to continue to actively monitor and, where necessary, implement improved
security technology and develop additional operational procedures to prevent damage or unauthorized access to its
computer systems and network, there can be no assurance that these security measures or operational procedures will be
successful. In addition, new developments or advances in computer capabilities or new discoveries in the field of
cryptography could enable hackers or data pirates to compromise or breach the security measures used by the Company to
protect customer data. The Company’s failure to maintain adequate security over its customers’ personal and transactional
information could expose the Company or the Bank to reputational risk and could have an adverse effect on the Company’s
financial condition, results of operations and liquidity.
The Company’s risk and exposure to cyber attacks and other information security breaches remain heightened
because of, among other things, the evolving nature of these threats and the prevalence of internet and mobile banking. As
cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to
modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.
Disruptions or failures in the physical infrastructure or operating systems that support the Company’s businesses and
customers, or cyber attacks or security breaches of the networks, systems or devices that customers use to access the
Company’s products and services, could result in customer attrition, regulatory fines, penalties or intervention, reputational
damage, reimbursement or other compensation costs and/or additional compliance costs, any of which could materially and
adversely affect the Company’s business, results of operations or financial condition.
We Rely on Certain External Vendors.
The Company is reliant upon certain external vendors to provide products and services necessary to maintain its
day-to-day operations. Accordingly, the Company’s operations are exposed to risk that these vendors will not perform in
accordance with applicable contractual arrangements or service level agreements. The Company maintains a system of
policies and procedures designed to monitor vendor risks including, among other things, (i) changes in the vendor’s
organizational structure, (ii) changes in the vendor’s financial condition and (iii) changes in the vendor’s support for
existing products and services. While the Company believes these policies and procedures help to mitigate risk, the failure
of an external vendor to perform in accordance with applicable contractual arrangements or the service level agreements
could be disruptive to the Company’s operations, which could have a material adverse impact on the Company’s business
and its financial condition and results of operations.
We May Need to Raise Additional Capital in the Future to Continue to Grow, But That Capital May Not Be
Available When Needed.
Federal and state bank regulators require the Company and the Bank to maintain adequate levels of capital to
support operations. At December 31, 2013, the Company’s and the Bank’s regulatory capital ratios were at “well-
capitalized” levels under bank regulatory guidelines. However, the Company’s business strategy calls for the Company to
continue to grow in its existing banking markets (internally, through opening additional offices and by making additional
acquisitions) and to expand into new markets as appropriate opportunities arise. Growth in assets at rates in excess of the
rate at which the Company’s capital is increased through retained earnings will reduce both the Company’s and the Bank’s
capital ratios unless the Company and the Bank continue to increase capital. If the Company’s or the Bank’s capital ratios
fell below “well-capitalized” levels, the FDIC insurance assessment rate would increase until capital is restored and
maintained at a “well-capitalized” level. Additionally, should the Company’s or Bank’s capital ratios fall below “well-
capitalized” levels, certain funding sources could become more costly or could cease to be available to the Company until
such time as capital is restored and maintained at a “well-capitalized” level. A higher assessment rate resulting in an
27
increase in FDIC insurance assessments, increased cost of funding or loss of funding sources could have an adverse affect
on the Company’s financial condition, results of operations and liquidity.
If, in the future, the Company needs to increase its capital to fund additional growth or satisfy regulatory
requirements, its ability to raise that additional capital will depend on the Company’s financial performance and on
conditions at that time in the capital markets that are outside the Company’s control. There is no assurance that the
Company will be able to raise additional capital on terms favorable to it or at all. If the Company cannot raise additional
capital when needed, the Company’s ability to expand through internal growth or acquisitions or to continue operations
could be impaired.
We May Not Be Able to Meet the Cash Flow Requirements of Our Depositors or the Cash Needs for Expansion and
Other Corporate Activities.
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 a comprehensive 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, including covered loans and purchased non-
covered loans, and leases, 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 Federal
Home Loan Bank of Dallas (“FHLB-Dallas”) advances, FRB borrowings, 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.
Repayments of loans, including covered loans and purchased non-covered loans, and leases are a relatively stable source of
funds but are subject to the borrowers’ and lessees’ ability to repay such 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, including covered loans and purchased non-covered loans,
and leases generally are not readily convertible to cash. Accordingly, the Company may be required from time to time to
rely on secondary sources of liquidity to meet loan, lease and deposit withdrawal demands or otherwise fund operations.
Such secondary sources include FHLB-Dallas advances, secured and unsecured federal funds lines of credit from
correspondent banks and FRB borrowings.
The Company anticipates it will continue to rely primarily on deposits, repayments of loans, including covered
loans and purchased non-covered loans, and leases, and repayments of its investment securities to provide liquidity.
Additionally, where necessary, the secondary sources of borrowed funds described above will be used to augment the
Company’s primary funding sources. If the Company were unable to access any of these secondary funding sources when
needed, it might be unable to meet customers’ or creditors’ needs, which could adversely impact the Company’s financial
condition, results of operations, and liquidity.
Natural Disasters May Adversely Affect Us.
The Company’s operations and customer base are located in markets where natural disasters, including tornadoes,
severe storms, fires, floods, hurricanes and earthquakes often occur. Such natural disasters could significantly impact the
local population and economies and the Company’s business, and could pose physical risks to the Company’s properties.
Although the Company’s business is geographically dispersed throughout Arkansas, Texas and the southeastern United
States, a significant natural disaster in or near one or more of the Company’s markets could have a material adverse impact
on the Company’s financial condition, results of operations or liquidity.
28
RISKS ASSOCIATED WITH OUR INDUSTRY
We are Subject to Extensive Government Regulation That Limits or Restricts Our Activities and Could Adversely
Impact Our Operations.
The Company and the Bank operate in a highly regulated industry and are subject to examination, supervision and
comprehensive regulation by various federal and state agencies. Compliance with these regulations is costly and restricts
certain activities, including payment of dividends, mergers and acquisitions, investments, interest rates charged for loans
and leases, interest rates paid on deposits, locations of banking offices and various other activities and aspects of the
Company’s and Bank’s operations. The Company and the Bank are also subject to capital guidelines established by
regulators which require maintenance of adequate capital. Many of these regulations are intended to protect depositors, the
public and the FDIC’s DIF rather than shareholders.
The Sarbanes-Oxley Act of 2002 and the related rules and regulations issued by the SEC and NASDAQ, as well as
numerous other legislation and regulations, including the Dodd-Frank Act and regulations promulgated thereunder, have
increased the scope, complexity and cost of corporate governance and reporting and disclosure practices, including the costs
of completing the Company’s external audit and maintaining its internal controls.
Government regulation greatly affects the business and financial results of all commercial banks and bank holding
companies, and increases the cost to the Company of complying with regulatory requirements. Additionally, the failure to
comply with these various rules and regulations could subject the Company or the Bank to monetary penalties or sanctions
or otherwise expose the Company or Bank to reputational risk and could adversely affect its results of operations.
Newly Enacted and Proposed Legislation and Regulations May Affect Our Operations and Growth.
To address the recent turbulence in the U.S. economy and the banking and financial markets, the U.S. government
has enacted a series of laws, regulations, guidelines and programs, many of which are discussed in the Supervision and
Regulation section of this report.
Because of the recency and speed with which these and other regulatory measures have been enacted, the Company
and the Bank are continuing to assess the impact of such regulatory measures on their business, financial condition, results
of operations and liquidity. Additionally, in the routine course of regulatory oversight, proposals to change the laws and
regulations governing the operations and taxation of, and federal insurance premiums paid by, banks and other financial
institutions and companies that control financial institutions are frequently raised in the U.S. Congress, state legislatures and
before bank regulatory authorities.
The likelihood of significant changes in laws and regulations in the future and the impact that such changes might
have on the Company or the Bank are impossible to determine. Similarly, proposals to change the accounting, financial
reporting requirements applicable to banks and other depository institutions are frequently raised by the SEC, the federal
banking agencies and other authorities. Further, federal intervention in financial markets and the commensurate impact on
financial institutions may adversely affect the Company’s or the Bank’s rights under contracts with such other institutions
and the way in which the Company conducts business in certain markets. The likelihood and impact of any future changes in
these accounting and financial reporting requirements and the impact these changes might have on the Company or the Bank
are also impossible to determine at this time.
The Earnings of Financial Services Companies are Significantly Affected by General Business and Economic
Conditions.
The Company’s operations and profitability are impacted by general business and economic conditions in the
United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply,
political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in
industry and finance and the strength of the U.S. economy and the local economies in which the Company operates, all of
which are beyond its control. Deterioration in economic conditions could result in an increase in loan and lease
delinquencies and non-performing assets, decreases in loan and lease collateral values and a decrease in demand for
products and services, among other things, any of which could have an adverse impact on the Company’s financial
condition, results of operations and liquidity.
29
Consumers May Decide Not to Use Local Banks to Complete Their Financial Transactions.
Technology and other changes are allowing parties to complete, through alternative methods, financial transactions
that historically have involved banks. For example, consumers can now maintain funds that would have historically been
held as local bank deposits in brokerage accounts, mutual funds with an Internet-only bank, or with virtually any bank in the
country through on line banking. Consumers can also complete transactions such as purchasing goods and services, paying
bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries
could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those
deposits. The loss of these revenue streams and the lower-cost deposits as a source of funds could have an adverse effect on
the Company’s financial condition, results of operations and liquidity.
RISKS ASSOCIATED WITH OUR COMMON STOCK
Our Common Stock Price is Affected by a Variety of Factors, Many of Which are Outside Our Control.
Stock price volatility may make it more difficult for investors to resell shares of the Company’s common stock at
times and prices they find attractive. The Company’s common stock price can fluctuate significantly in response to a variety
of factors, including, among other things:
•
•
•
•
•
•
•
•
actual or anticipated variations in quarterly results of operations;
recommendations or changes in recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to the
Company;
news reports relating to trends, concerns and other issues in the financial services industry;
perceptions in the marketplace regarding the Company and/or its competitors;
new technology used, or services offered, by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital
commitments by or involving the Company or its competitors; and
changes in governmental regulations.
General market fluctuations, industry factors and general economic and political conditions and events such as
economic slowdowns, interest rate changes, credit loss trends and various other factors and events could adversely impact
the price of the Company’s common stock.
We Cannot Guarantee That We Will Pay Dividends to Common Shareholders in the Future.
The Company’s principal business operations are conducted through the Bank. Cash available to pay dividends to
the Company’s common shareholders is derived primarily, if not entirely, from dividends paid by the Bank. The ability of
the Bank to pay dividends, as well as the Company’s ability to pay dividends to its common shareholders, will continue to
be subject to and limited by the results of operations of the Bank and by certain legal and regulatory restrictions. Further,
any lenders making loans to the Company or Bank may impose financial covenants that may be more restrictive than
regulatory requirements with respect to the Company’s payment of dividends to common shareholders. Accordingly, there
can be no assurance that the Company will continue to pay dividends to its common shareholders in the future.
Certain State and/or Federal Laws May Deter Potential Acquirors and May Depress Our Stock Price.
Certain provisions of federal and state laws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of the Company. Under certain federal and state
laws, a person, entity, or group must give notice to applicable regulatory authorities before acquiring a significant amount,
as defined by such laws, of the outstanding voting stock of a bank holding company, including the Company’s common
shares. Regulatory authorities review the potential acquisition to determine if it will result in a change of control. The
applicable regulatory authorities will then act on the notice, taking into account the resources of the potential acquiror, the
potential antitrust effects of the proposed acquisition and numerous other factors. As a result, these statutory provisions may
delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider to be in such shareholder’s best
interest, including those attempts that might result in a premium over the market price for the shares held by shareholders.
30
The Holders of Our Subordinated Debentures Have Rights That are Senior to Those of Our Common Shareholders.
At December 31, 2013 the Company had an aggregate of $64.9 million of floating rate subordinated debentures
and related trust preferred securities outstanding. The Company guarantees payment of the principal and interest on the trust
preferred securities, and the subordinated debentures are senior to shares of the Company’s common stock. As a result, the
Company must make payments on the subordinated debentures (and the related trust preferred securities) before any
dividends can be paid on its common stock and, in the event of the Company’s bankruptcy, dissolution or liquidation, the
holders of the subordinated debentures must be satisfied before any distributions can be made to the holders of common
stock. The Company has the right to defer distributions on its subordinated debentures and the related trust preferred
securities for up to five years, during which time no dividends may be paid to holders of its common stock.
Our Directors and Executive Officers Own a Significant Portion of Our Stock.
The Company’s directors and executive officers, as a group, beneficially owned 10.2% of its common stock as of
February 14, 2014. As a result of their aggregate beneficial ownership, directors and executive officers have the ability, by
voting their shares in concert, to influence the outcome of matters submitted to the Company’s shareholders for approval,
including the election of its directors.
Our Common Stock Trading Volume May Not Provide Adequate Liquidity for Investors.
Although shares of the Company’s common stock are listed on the NASDAQ Global Select Market, the average
daily trading volume in the common stock is less than that of many larger financial services companies. A public trading
market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of a
sufficient number of willing buyers and sellers of the common stock at any given time. This presence depends on the
individual decisions of investors and general economic and market conditions over which the Company has no control.
Given the daily average trading volume of the Company’s common stock, significant sales of the common stock in a brief
period of time, or the expectation of these sales, could cause a decline in the price of the Company’s common stock.
Future Issuances of Additional Equity Securities Could Result in Dilution of Existing Stockholders’ Equity
Ownership.
The Company may determine from time to time to issue additional equity securities to raise additional capital,
support growth, or to make acquisitions. Further, the Company may issue stock options or other stock grants to retain and
motivate its employees. These issuances of our securities could dilute the voting and economic interests of existing
stockholders.
Our Common Stock is Not an Insured Deposit.
The Company’s common stock is not a bank deposit and, therefore, losses in its value are not insured by the FDIC,
any other deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is
inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report, and is subject to the
same market forces and investment risks that affect the price of common stock in any other company, including the possible
loss of some or all principal invested.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
31
Item 2. PROPERTIES
The Company serves its customers by offering a broad range of banking services from the following locations as of
December 31, 2013.
Facility (1)
Shelby, North Carolina (Main) .......................................
Shelby, North Carolina (East) ........................................
Shelby, North Carolina (Highland) ................................
Shelby, North Carolina (North) ......................................
Shelby, North Carolina (South) ......................................
Shelby, North Carolina (Boiling Springs) ......................
Shelby, North Carolina (Blanton Operations Center)(2) ..
Kings Mountain, North Carolina ....................................
Lawndale, North Carolina ..............................................
Bessemer City, North Carolina .......................................
Belmont, North Carolina (Cramerton)............................
Gastonia, North Carolina ................................................
Lincolnton, North Carolina ............................................
Forest City, North Carolina ............................................
New York, New York (Park Avenue)(3) .........................
Charlotte, North Carolina (Park Road) ...........................
Geneva, Alabama (South Commerce St.) .......................
Mobile, Alabama (Airport Blvd) ....................................
Atlanta, Georgia (17th Street NW) (4) ..............................
Southlake, Texas (West Southlake Blvd.) ......................
The Colony, Texas (State Highway 121) .......................
Austin, Texas (Congress Avenue) (5) ..............................
Ocala, Florida (SW Highway 200) .................................
Athens, Georgia (Parkway Place) ...................................
Oakwood, Georgia (Continental Drive) .........................
McDonough, Georgia (South Zack Hinton Parkway) ....
Bainbridge, Georgia (South Broad Street) .....................
Bainbridge, Georgia (East Shotwell) ..............................
Cairo, Georgia (North Broad Street) ..............................
Lake Park, Georgia (Lakes Boulevard) ..........................
Valdosta, Georgia (Baytree Road) .................................
Valdosta, Georgia (West Hill Avenue) ..........................
Valdosta, Georgia (North Oak Street Ext) .....................
Douglasville, Georgia (Chapel Hill Road) (6) .................
Sharpsburg, Georgia (Highway 54) ................................
Senoia, Georgia (Highway 16 East) ...............................
Newnan, Georgia (East Broad Street) (7) ........................
Dallas, Georgia (First National Drive) ...........................
Keller, Texas (Keller Parkway) ......................................
Carrollton, Texas (East Hebron Parkway) ......................
Plano, Texas (West Park Blvd.) .....................................
St. Simons Island, Georgia (Frederica Road) .................
Brunswick, Georgia (Cypress Mill) ................................
Cumming, Georgia (Freedom Parkway) .........................
Marble Hill, Georgia (Holcomb Way) ...........................
Dawsonville, Georgia (500 Highway 53 East) ...............
Dawsonville, Georgia (6639 Highway 53 East) .............
Bradenton, Florida (53rd Avenue) 87) ..............................
Palmetto, Florida (8th Avenue) (9) ..................................
Bradenton, Florida (59th Street) (10) ...............................
Benton (Alcoa Road) ......................................................
Bluffton, South Carolina (Clark Summit Dr.) ................
32
Year Opened or
Acquired
2013
2013
2013
2013
2013
2013
2013
2013
2013
2013
2013
2013
2013
2013
2013
2013
2012
2012
2012
2012
2012
2012
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2010
2010
2010
2010
2010
2010
2010
2010
2010
Square Footage
66,208
5,016
2,200
800
4,210
3,355
20,697
6,000
2,530
2,907
2,907
6,336
4,616
5,904
2,367
11,050
15,400
4,650
210
9,620
3,760
928
8,720
3,716
4,467
4,543
8,635
2,782
5,220
2,928
4,917
3,030
17,273
2,388
2,016
6,841
4,000
13,106
4,012
4,494
3,760
2,463
4,005
5,000
2,400
2,400
11,200
4,084
3,731
3,812
5,400
9,500
Facility (1)
Savannah, Georgia (Stephenson) (11) ..............................
Mobile, Alabama (North Royal St.) ...............................
Wilmington, North Carolina (Military Cutoff) ...............
Cartersville, Georgia (Joe Frank Harris Pkwy.) .............
Adairsville, Georgia (Adairsville Hwy.) ........................
Rome, Georgia (Three Rivers) .......................................
Cartersville, Georgia (Henderson) .................................
Calhoun, Georgia (Bryant Pkwy.) ..................................
Allen, Texas (Bethany & Waters) ..................................
Little Rock (Capitol Avenue) .........................................
Little Rock (Rahling Road) ............................................
Lewisville, Texas (Round Grove Rd.) ............................
Rogers (New Hope Road) ..............................................
Frisco, Texas (Preston & Lebanon) ................................
Fayetteville (Wedington Drive) ......................................
Hot Springs (Malvern Avenue) ......................................
Ozark (Porter Hillard Banking Center) ..........................
Rogers (Pleasant Grove).................................................
Frisco, Texas (Lebanon & Tollway) ..............................
Bella Vista (Sugar Creek Center) ...................................
Bella Vista (Highlands Lancashire) ................................
Fayetteville (Crossover) (12) ............................................
Hot Springs (Albert Pike) ...............................................
Springdale (Jones Road) ................................................
Texarkana (Arkansas Blvd.) ...........................................
Texarkana, Texas (Richmond Road) ..............................
Bentonville (Walton & Dodson) ....................................
Hot Springs (Central) .....................................................
Rogers (47th & Olive) .....................................................
Texarkana, Texas (Summerhill) .....................................
Bentonville (Highway 102) ............................................
Russellville (3110 West Main) .......................................
Benton (Highway 35) .....................................................
Mountain Home (Hwy. 62 East).....................................
North Little Rock (Camp Robinson Road) .....................
Mountain Home (Hwy. 5 North) ....................................
Sherwood (Hwy. 107) (13) ..............................................
Little Rock (Rodney Parham & West Markham) (14) .....
Dallas, Texas (Preston Sherry Plaza) (15) ........................
North Little Rock (East McCain) ..................................
Conway (East Oak Street) .............................................
Russellville (East Parkway) ...........................................
Van Buren (Main Street) ...............................................
Cabot (South 2nd Street) ................................................
Conway (Harkrider) .......................................................
Benton (Military Road) ..................................................
Fort Smith (Phoenix) .....................................................
Russellville (405 West Main) ........................................
Little Rock (Taylor Loop & Cantrell) ...........................
Bryant (Highway 5) .......................................................
Cabot (West Main) ........................................................
Conway (Prince & Salem) .............................................
Hot Springs Village (Cranford’s) (16) .............................
Conway (Old Morrilton Hwy.) .......................................
Maumelle (Audubon Dr.) ...............................................
Lonoke (East Front) .......................................................
Little Rock (Otter Creek) ..............................................
33
Year Opened or
Acquired
2010
2010
2010
2010
2010
2010
2010
2010
2009
2009
2008
2008
2007
2007
2007
2007
2006
2006
2006
2006
2006
2006
2006
2006
2006
2006
2006
2006
2006
2005
2005
2005
2005
2005
2005
2005
2004
2004
2004
2004
2004
2004
2004
2004
2004
2003
2003
2003
2003
2003
2003
2003
2002
2002
2002
2001
2001
Square Footage
3,216
2,740
15,280
12,362
4,007
4,180
4,180
4,180
6,176
6,721
89,048
4,352
9,312
12,023
2,784
3,575
9,600
2,784
3,575
3,575
3,575
5,176
2,784
2,784
4,352
3,016
9,312
5,176
2,784
9,312
2,784
2,784
2,400
2,784
2,400
5,176
2,400
4,576
9,651
2,784
2,400
2,800
2,260
2,800
2,400
2,784
2,250
7,644
2,400
2,784
4,400
2,464
449
4,350
3,576
5,731
2,400
Facility (1)
Fort Smith (Zero) ..........................................................
Yellville (West Old Main) ..............................................
Clinton (Hwy. 65 South) ................................................
North Little Rock (North Hills) (17) ................................
Harrison (North Walnut) ................................................
Fort Smith (Rogers) ........................................................
Little Rock (Cantrell) .....................................................
Little Rock (Chenal/Markham) (18) .................................
Little Rock (Rodney Parham) .........................................
Little Rock (Chester) .....................................................
Bellefonte (Hwy. 65 South) ............................................
Alma (Hwy. 71 North) ...................................................
Paris (East Walnut) ........................................................
Mulberry (Mulberry Hwy. 64 W.) ..................................
Harrison (Hwy. 62 & 65 North) .....................................
Clarksville (Rogers) .......................................................
Van Buren (Pointer Trail) ..............................................
Marshall (Hwy. 65 North) (19) .........................................
Clarksville (West Main) .................................................
Ozark (Westside) ............................................................
Western Grove (Hwy. 123 & 65) ...................................
Altus (Franklin St.) .........................................................
Ozark Operation Center (600 W. Commercial) (20) ........
Jasper (East Church St.) .................................................
_________________
Year Opened or
Acquired
2001
2000
1999
1999
1999
1998
1998
1998
1998
1998
1997
1997
1997
1997
1996
1995
1995
1995
1994
1993
1976
1972
1985
1967
Square Footage
2,784
2,716
2,784
4,350
14,000
22,500
2,700
5,264
2,500
1,716
1,444
4,200
3,100
1,875
3,300
3,300
2,520
4,120
2,520
2,520
2,610
1,500
44,794
4,408
(1) Unless otherwise indicated, (i) the Company owns such locations and (ii) the locations are in Arkansas.
(2) This facility does not include retail banking offices.
(3) The Company leases this facility under a lease that expires November 30, 2018.
(4) The Company leases this facility under a lease that expires December 13, 2014.
(5) The Company leases this facility under a lease that expires October 31, 2016.
(6) The Company leases this facility with an initial term of three years expiring April 30, 2014 with a single, one-year renewal option.
(7) The Company leases this facility under a lease that expires April 30, 2016 with five renewal options of four years each.
(8) The Company opened this bank-owned facility in 2013 to replace a previously leased facility in Bradenton, Florida.
(9) The Company leases this facility under a lease that expires May 18, 2015 with two renewal options of five years each.
(10) The Company leases this facility under a lease that expires February 9, 2016 with one renewal option of five years.
(11) The Company leases this facility under a lease that expires February 28, 2014. On February 26, 2014, the Company relocated to a
bank-owned facility to replace this leased facility.
(12) The Company owns the building and leases the land at this location. The lease term expires May 13, 2024 with six renewal
options of five years each.
(13) The Company owns the building and leases the land at this location. The lease expires January 10, 2024 with four renewal options
of five years each.
(14) The Company owns the building and leases the land at this location. The lease expires October 31, 2023 with six renewal options
of five years each.
(15) The Company leases this facility under a lease that expires September 30, 2017.
(16) The Company leases this facility under a lease which expired July 31, 2007, subject to five renewal options of three years each.
The Company is currently in the third, three-year automatic renewal option expiring July 31, 2016.
(17) The Company owns the building and leases the land at this location. The lease expires May 31, 2019, with four renewal options of
five years each.
(18) This building, which is owned by the Company and previously served as the Company’s corporate headquarters, has 40,000
square feet of which 5,264 are currently used for retail banking operations. The Company leased the remaining portion of this
facility to a single tenant under a lease that expires November 30, 2019.
(19) The Company owns the building and leases the land at this location. The lease expires February 28, 2024 with three renewal
options of ten years each.
(20) In addition to this operations center, the Company owns three ancillary facilities located in Ozark, Arkansas. These facilities
include a 4,200 square foot storage facility which was acquired in 2005, a 5,000 square foot warehouse building which was
constructed in 1992, and a 5,625 square foot storage facility that was constructed in 2012. None of these facilities has a retail
banking office.
34
While management believes its existing banking locations are adequate for its present operations, the Company
expects to continue its growth strategy through de novo branching and traditional bank acquisitions. On January 2, 2014 the
Company opened a loan production office in a leased facility in Houston, Texas, and on February 24, 2014, the Company
opened a loan production office in a leased facility in Los Angeles, California. During the first quarter of 2014, the
Company expects to open its third retail banking office in Bradenton, Florida, and in the second quarter of 2014, the
Company expects to open a retail banking office in Cornelius, North Carolina.
Item 3. LEGAL PROCEEDINGS
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, 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 Bank 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, conversion, 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 seeks to have the cases certified
by the court as a class action for all Bank account holders similarly situated, and seeks 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 filed a motion to dismiss and to compel arbitration in the Walker case. The trial court
denied the motion and found that the arbitration provision contained in the controlling Consumer Deposit Account
Agreement was unconscionable and thus unenforceable on the grounds that the provision was the result of unequal
bargaining power. The Company and Bank appealed the trial court’s ruling to the Arkansas Court of Appeals on an
interlocutory basis. On September 18, 2013, a three-judge panel of the Arkansas Court of Appeals reversed the trial court’s
ruling and remanded the case to the trial court for the purpose of entering an order compelling arbitration. On October 7,
2013, the plaintiffs filed petitions for reconsideration and review before the Arkansas Court of Appeals and Arkansas
Supreme Court, respectively. On October 30, 2013, the Arkansas Court of Appeals denied the plaintiffs’ petition for
reconsideration. In January 2014, the Arkansas Supreme Court granted the plaintiff’s petition for review. The Company
and Bank expect a ruling from the Arkansas Supreme Court in the second or third quarter of 2014. During the pendency of
the appeal and review process, the plaintiff in the Muzingo case has agreed to stay the proceedings in that case. 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 the 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,
35
plus exemplary damages, attorneys’ fees, costs, interest, and other relief the court deems just. Since the original petition was
filed, the 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, the plaintiff is
seeking $15,962,677 in actual damages and $31,925,354 in exemplary damages.
On June 15, 2012, the district court granted the Bank’s motion for Summary Judgment. Subsequent to the district
court’s granting of the 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 the district court, which appealed the summary judgment ruling to the Court
of Appeals for the Fifth District of Texas at Dallas (“Court of Appeals”). On or about November 28, 2012, plaintiff filed an
appellant’s brief with the Court of Appeals. The Bank filed its response on February 5, 2013. Oral arguments were heard by
the Court of Appeals on February 5, 2014. The Court of Appeals took the matter under advisement and the parties await a
ruling by the Court of Appeals. 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 these claims.
On or about May 13, 2011, the Bank filed suit to collect on six defaulted promissory notes in a case styled Bank of
the Ozarks, as successor in interest to, and assignee of, the Federal Deposit Insurance Corporation, as Receiver of The
Park Avenue Bank, Valdosta, Georgia v. Money Bayou Group, LLC, Palm Breeze Development, LLC, Palmetto Plantation,
LLC, and George P. Hamm, Jr. The case was pending in the Superior Court of Lanier County, Georgia. On or about July
14, 2011, the Bank was served with defendants’ Answer and Counterclaim (“Counterclaim”). The Counterclaim alleges a
series of agreements between The Park Avenue Bank and defendants to provide defendants with a continuing line of credit
to allow defendants to build additional speculation houses in order to fund repayment of their entire indebtedness.
Count One of the Counterclaim is a breach of contract claim, based on a series of alleged negotiations between the
parties. Count Two of the Counterclaim is for fraud and alleges that The Park Avenue Bank falsely represented to
defendants that it could provide a construction line of credit when it knew, or should have known, that it would be
prohibited from doing so under the terms of its Memorandum of Understanding (“MoU”) with the FDIC and Georgia
Department of Banking and Finance. Count Three is also a fraud count concerning an “A” Note and a “B” Note, in which
defendants claim that The Park Avenue Bank falsely represented that it would forgive said B Note, when it knew, or should
have known, that it would be prohibited from doing so by its MoU with the FDIC and the Georgia Department of Banking
and Finance. Count Four of the Counterclaim is a RICO count in which defendants allege that The Park Avenue Bank and
the Bank, through at least one employee, devised and executed a scheme to defraud defendants, constituting a pattern of
racketeering as defined by the Georgia Code Annotated. Finally, the Counterclaim seeks punitive damages, alleging willful
misconduct with specific intent to cause harm, and that The Park Avenue Bank and the Bank willfully acquired, or
maintained an interest in, or control of, defendants’ enterprises, thereby exhibiting a pattern of racketeering activity.
A day before the scheduled hearing date on the Banks’ motion for summary judgment, Bank counsel was served
with an Order (the “IT Order”), issued ex parte, alleging that the Bank may have acted in bad faith by hiding and/or
destroying documents, particularly, the executed A Note and B Note, the existence of which the Bank denies. The IT Order
required the Bank to allow defendants’ information technology expert witness access to all records of the Bank, its
employees, officers, and directors, in order to search for documents related to the A Note and the B Note. The Bank
declined to comply with the IT Order on the basis that it was procedurally improper and that compliance with the IT Order
would violate state and federal banking and privacy laws. The court denied the Bank’s Motion for Reconsideration of the IT
Order, and upon a subsequent motion of the defendants, found the Bank in contempt and ordered, as sanctions, dismissal
with prejudice of the Bank’s collection action on the defaulted notes and awarded opposing counsel $105,692 in attorney’s
fees (the “Contempt Order”).
The Bank filed its Notice of Appeal from the Contempt Order with the Georgia Court of Appeals, but the
defendants filed a Motion to Dismiss the Bank’s appeal with the trial court (on the theory that the Contempt Order arose
from a discovery dispute and was therefore, not an immediately appealable issue). A hearing on the motion was held on July
16, 2013, and the trial court ruled in favor of the defendants, dismissing the Bank’s appeal. Defendants filed another
Motion for Sanctions against the Bank for alleged continued violations of the IT Order and Contempt Order. The court
heard the arguments of the parties at a hearing held on October 8, 2013. Prior to the matter proceeding to trial, in December
2013 the parties agreed to settle all claims and counterclaims. Pursuant to the settlement agreement, all matters between the
parties were resolved, the defendants’ Counterclaim has been dismissed with prejudice and this litigation has been
36
concluded. The settlement of these matters did not have a material adverse effect on the Company’s financial condition,
results of operations or liquidity.
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. 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.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
37
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s Common Stock is listed on the NASDAQ Global Select Market under the symbol “OZRK” and as
of January 31, 2014, the Company had 500 holders of record. The following table sets forth for each quarter of 2013 and
2012, the high and low closing price of the Company’s common stock and the cash dividends declared per share.
First quarter
Second quarter
Third quarter
Fourth quarter
High
$44.58
44.70
48.42
57.63
2013
Low
$34.09
39.64
43.75
45.56
Year Ended December 31,
2012
High
$31.86
32.03
34.65
34.47
Low
$27.73
28.08
29.91
31.00
Cash
Dividend
$0.15
0.17
0.19
0.21
$0.72
Cash
Dividend
$0.11
0.12
0.13
0.14
$0.50
The Company’s principal business operations are conducted through the Bank. Cash available to pay dividends to
the Company’s common shareholders is derived primarily, if not entirely, from dividends paid by the Bank. The ability of
the Bank to pay dividends, as well as the Company’s ability to pay dividends to its common shareholders, will continue to
be subject to and limited by the results of operations of the Bank and by certain legal and regulatory restrictions. Further,
any lenders making loans to the Company or Bank may impose financial covenants that may be more restrictive than
regulatory requirements with respect to the Company’s payment of dividends to common shareholders. Accordingly, there
can be no assurance that the Company will continue to pay dividends to its common shareholders in the future.
38
The graph below shows a comparison for the period commencing December 31, 2008 through December 31, 2013
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, 2008.
OZRK (Bank of the Ozarks, Inc.)
SML (S&P Smallcap Index)
NDF (NASDAQ Financial Index)
12/31/2008
$100
$100
$100
12/31/2009
$101
$125
$103
12/31/2010
$151
$158
$118
12/31/2011
$209
$159
$105
12/31/2012
$239
$185
$124
12/31/2013
$410
$261
$175
39
There were no sales of the Company’s unregistered securities during the period covered by this report that have not
been previously disclosed in the Company’s quarterly reports on Form 10-Q or its current reports on Form 8-K.
During the fourth quarter of 2013, the Company repurchased shares of its common stock as indicated in the
following table.
October 1, 2013 to October 31, 2013
November 1, 2013 to November 30, 2013
December 1, 2013 to December 31, 2013
Total
Total Number
of Shares
Repurchased
27,957(1)
-
-
27,957
Average
Price Per
Share
$48.98
-
-
$48.98
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
-
-
-
-
Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
That May Yet Be
Purchased Under
the Plans or
Programs
-
-
-
-
(1) 70,400 shares of the Company’s common stock issued to certain of its senior officers under its 2009 Restricted Stock Plan vested
on October 21, 2013 and were no longer subject to the vesting restriction or substantial risk of forfeiture. The Company withheld
27,957 of such shares to satisfy federal and state tax withholding requirements related to the vesting of these shares.
The other information required by Item 201 of Regulation S-K is incorporated herein by this reference to the
Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders expected to be held on May 19, 2014 (“Proxy
Statement”) to be filed with the SEC within 120 days of the Company’s fiscal year-end.
40
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is derived from the Company’s audited financial statements as of
and for the five years ended December 31, 2013 and should be read in conjunction with Management’s Discussion and Analysis
of Financial Conditions and Results of Operations and the Consolidated Financial Statements and footnotes included elsewhere in
this Annual Report on Form 10-K.
Income statement data:
Interest income ...................................................................
Interest expense ..................................................................
Net interest income ............................................................
Provision for loan and lease losses .....................................
Non-interest income ...........................................................
Non-interest expense ..........................................................
Preferred stock dividends ...................................................
Net income available to common stockholders ..................
Common share and per common share data:
Earnings – diluted ..............................................................
Book value .........................................................................
Dividends ...........................................................................
Weighted-average diluted shares outstanding (thousands)
End of period shares outstanding (thousands)....................
Balance sheet data at period end:
Total assets .........................................................................
Loans and leases.................................................................
Purchased non-covered loans .............................................
Loans covered by FDIC loss share agreements ..................
Allowance for loan and lease losses ...................................
FDIC loss share receivable .................................................
Foreclosed assets covered by FDIC loss share agreements
Investment securities ..........................................................
Deposits .............................................................................
Repurchase agreements with customers .............................
Other borrowings ...............................................................
Subordinated debentures ....................................................
Total common stockholders’ equity ...................................
Loan and lease, including covered loans and purchased
2013
$ 212,153
18,634
193,519
12,075
71,937
126,069
-
87,135
$ 2.41
16.96
0.72
36,201
36,856
$4,787,068
2,632,565
372,723
351,791
42,945
71,854
37,960
669,384
3,717,027
53,103
280,895
64,950
624,958
Year Ended December 31,
2011
2012
(Dollars in thousands, except per share amounts)
2010
$ 195,946
21,600
174,346
11,745
62,860
114,462
-
77,044
$ 2.21
14.39
0.50
34,888
35,272
$4,040,207
2,115,834
41,534
596,239
38,738
152,198
52,951
494,266
3,101,055
29,550
280,763
64,950
507,664
$ 199,169
30,435
168,734
11,775
117,083
122,531
-
101,321
$ 2.94
12.32
0.37
34,482
34,464
$3,841,651
1,880,483
4,799
806,922
39,169
279,045
72,907
438,910
2,943,919
32,810
301,847
64,950
424,551
$ 157,972
34,337
123,635
16,000
70,322
87,419
-
64,001
$ 1.88
9.39
0.30
34,090
34,107
$3,273,271
1,851,113
5,316
489,468
40,230
158,137
31,145
398,698
2,540,753
43,324
282,139
64,950
320,355
2009
$ 165,908
47,585
118,323
44,800
51,051
68,632
6,276
36,826
$ 1.09
7.96
0.26
33,800
33,810
$2,770,811
1,904,104
-
-
39,619
-
-
506,678
2,028,994
44,269
342,553
64,950
269,028
non-covered loans, to deposit ratio ..............................
90.32%
88.80%
91.45%
92.33%
93.84%
Average balance sheet data:
Total average assets ............................................................
Total average common stockholders’ equity ......................
Average common equity to average assets .........................
Performance ratios:
Return on average assets ....................................................
Return on average common stockholders’ equity ..............
Net interest margin – FTE ..................................................
Efficiency ratio ...................................................................
Common stock dividend payout ratio ................................
Asset quality ratios:
Net charge-offs to average loans and leases (1) ...................
Nonperforming loans and leases to total loans and
leases (2) ........................................................................
Nonperforming assets to total assets (2) ..............................
Allowance for loan and lease losses as a percentage of:
Total loans and leases (2) ....................................................
Nonperforming loans and leases (2) ....................................
Capital ratios at period end:
Tier 1 leverage ...................................................................
Tier 1 risk-based capital .....................................................
Total risk-based capital ......................................................
$4,268,343
558,642
13.09%
2.04%
15.60
5.63
46.00
29.55
0.13%
0.33
0.43
1.63%
492%
14.12%
16.07
17.09
$3,779,831
458,595
$3,755,291
374,664
$2,998,850
296,035
$3,002,121
267,768
12.13%
2.04%
16.80
5.91
46.58
22.44
0.30%
0.43
0.57
1.83%
425%
14.40%
18.11
19.36
9.98%
2.70%
27.04
5.84
41.56
12.50
0.69%
0.70
1.17
2.08%
297%
12.06%
17.67
18.93
9.87%
2.13%
21.62
5.18
42.86
15.89
0.81%
0.75
1.72
2.17%
289%
11.88%
16.13
17.39
8.92%
1.23%
13.75
4.80
37.84
23.84
1.75%
1.24
3.06
2.08%
168%
11.39%
13.78
15.03
(1) Excludes covered loans and net charge-offs related to covered loans.
(2) Excludes purchased non-covered loans, covered loans and covered foreclosed assets, except for their inclusion in total assets.
41
The following tables are summaries of quarterly results of operations for the periods indicated and should be read
in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and related footnotes included elsewhere in this Annual Report on Form 10-K.
2013 – Three Months Ended
Mar. 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands)
Interest income ..............................................
Interest expense .............................................
Net interest income .................................
Provision for loan and lease losses ................
Non-interest income ......................................
Non-interest expense .....................................
Income taxes ..................................................
Noncontrolling interest ..................................
Net income available to common
$48,769
(4,630)
44,139
(2,728)
16,357
(29,231)
(8,526)
(11)
$47,957
(4,492)
43,465
(2,666)
18,987
(29,901)
(9,506)
8
$55,342
(4,709)
50,633
(3,818)
18,000
(32,208)
(10,224)
(33)
$60,085
(4,803)
55,282
(2,863)
18,593
(34,729)
(11,893)
8
stockholders ......................................
$20,000
$20,387
$22,350
$24,398
2012 – Three Months Ended
Mar. 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands)
Interest income ..............................................
Interest expense .............................................
Net interest income .................................
Provision for loan and lease losses ................
Non-interest income ......................................
Non-interest expense .....................................
Income taxes ..................................................
Noncontrolling interest ..................................
Net income available to common
$49,943
(6,110)
43,833
(3,076)
13,810
(28,607)
(7,950)
(1)
$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)
stockholders ......................................
$18,009
$19,092
$19,275
$20,667
See Note 17 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a
discussion of dividend restrictions.
42
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of our financial condition at December 31, 2013 and 2012 and our results of
operations for each of the years in the three-year period ended December 31, 2013. The purpose of this discussion is to
focus on information about our financial condition and results of operations which is not otherwise apparent from the
consolidated financial statements. The following discussion and analysis should be read along with our consolidated
financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
General
Net income available to common stockholders of Bank of the Ozarks, Inc. (the “Company”) was $87.1 million in
2013, a 13.1% increase from $77.0 million in 2012. Net income available to common stockholders in 2011 was $101.3
million. Diluted earnings per common share were $2.41 in 2013, a 9.0% increase from $2.21 in 2012. Diluted earnings per
common share were $2.94 in 2011.
The table below shows total assets, 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”), 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 indicated and the percentage of change year over year.
Total assets ........................................ $4,787,068
669,384
Investment securities - AFS ...............
2,632,565
Loans and leases ................................
Purchased non-covered loans ............
372,723
Loans covered by FDIC loss share
2013
December 31,
2012
(Dollars in thousands, except per share amounts)
$4,040,207
494,266
2,115,834
41,534
$3,841,651
438,910
1,880,483
4,799
2011
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...........
351,791
71,854
3,717,027
624,958
87,135
2.41
16.96
596,239
152,198
3,101,055
507,664
77,044
2.21
14.39
806,922
279,045
2,943,919
424,551
101,321
2.94
12.32
Critical Accounting Policies
% Change
2013
from 2012
2012
from 2011
18.5%
35.4
24.4
797.4
(41.0)
(52.8)
19.9
23.1
13.1
9.0
17.9
5.2%
12.6
12.5
765.5
(26.1)
(45.5)
5.3
19.6
(24.0)
(24.8)
16.8
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. The Company’s determination of (i) the provisions to and the adequacy of the
allowance for loan and lease losses (“ALLL”), (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 ALLL, (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 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.
43
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 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 ALLL
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 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.
The Company’s internal grading system assigns one of nine grades to all loans and leases, with each grade being
assigned an allowance allocation percentage, except residential 1-4 family loans, consumer loans, purchased non-covered
loans, covered loans and certain other 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.
Residential 1-4 family, consumer loans and certain other 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,
consumer loans and certain other 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.
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
(“Day 1 Fair Values”).
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 ALLL. 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
44
conjunction with the determination of the Day 1 Fair Values, such loan is considered in the determination of the required
level of ALLL. 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 thereof, such loan is considered in the determination of the required level of ALLL and may result in an
allowance allocation or a charge-off.
At December 31, 2013 and 2012, 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, excluding purchased non-covered loans with evidence of credit
deterioration on the date of purchase and covered loans, 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 ALLL. 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, 2013, 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 with evidence of credit deterioration at the date of purchase 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. 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 ALLL or is charged off as a reduction of the ALLL.
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 ALLL.
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
45
announced loss of a major employer or significant workforce reductions, (iv) significant declines in real estate values and
(v) various other factors. The additional ALLL 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, 2013 or 2012.
The Company also includes specific ALLL allocations for qualitative factors including, among other factors, (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 ALLL to be
increased or decreased in future periods. In addition bank regulatory agencies, as part of their examination process, may
require adjustments to the ALLL based on their judgments and estimates.
Fair value of the investment securities portfolio. 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, 2013 and 2012, the Company has classified all of its investment securities as AFS.
AFS investment securities are stated at estimated fair value, with the unrealized gains and losses determined on a
specific identification basis. Such unrealized gains and losses, net of tax, are reported as a separate component of
stockholders’ equity and included in other comprehensive income (loss). The Company utilizes 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 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.
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.
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
46
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. 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 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 ALLL. 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 purchased loans that were individually reviewed in that covered 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 expected cash flows
following any previous decrease 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. Any such increase or decrease in expected cash flows will result in a
corresponding adjustment of the FDIC loss share receivable or accretion thereof and the FDIC clawback payable or the
amortization thereof 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 for purposes of establishing the Day 1 Fair Values,
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, 2013, 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
2.4 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 the performance of the portfolio of covered loans on an annual
basis, 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 or since management’s most recent review of such portfolio’s performance. To the extent that a
loan is performing in accordance with or exceeding management’s expectation established in conjunction with the
determination of the Day 1 Fair Values, such loan is rated FV1, 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 ALLL. For any
loan that is exceeding management’s performance expectation established in conjunction with the determination of Day 1
Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance. To the extent that a loan’s
performance has deteriorated from management’s expectation established in conjunction with the determination of the Day
47
1 Fair Values, such loan is rated FV2, is included in certain of the Company’s credit quality metrics, is considered an
impaired loan, and is considered in the determination of the required level of ALLL. 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.
Purchased non-covered loans include a small volume of non-covered loans acquired in FDIC-assisted acquisitions
and loans acquired in the Genala Banc, Inc. (“Genala”) and The First National Bank of Shelby (“First National Bank”)
acquisitions 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. To the
extent that any purchased non-covered loan is not specifically reviewed, such loan is assumed to have characteristics similar
to the characteristics of the aggregate acquired portfolio. 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 current information indicates it is probable that the Company will collect all amounts according to the
contractual terms thereof, such loan is not considered impaired and is not considered in the determination of the required
ALLL. 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 thereof, such loan is considered impaired and is considered in the determination
of the required level of ALLL.
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 ALLL 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 a yield adjustment, 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
ALLL. 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 increases in expected cash flows will result in an adjustment to
accretable yield, which will have a positive impact on interest income. Subsequent decreases to the expected cash flows
will generally result in a provision for loan and lease losses. Subsequent increases in expected cash flows following any
previous decrease 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.
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
for purposes of establishing the Day 1 Fair Values, 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
48
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 the performance of the
portfolio of purchased non-covered loans with evidence of credit deterioration, on an annual basis, 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 or since
management’s most recent review of such portfolio’s performance. 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 FV66, 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 ALLL. For any loan that is exceeding
management’s performance expectation established in conjunction with the determination of Day 1 Fair Values, the
accretable yield on such loan is adjusted to reflect such increased performance. 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 FV88, is included in certain of the Company’s credit quality metrics, is considered an impaired loan, and
is considered in the determination of the required level of ALLL. 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.
Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are initially 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 for purposes of establishing the Day 1 Fair Values.
Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through
non-interest income 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.
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 initially measured at Day 1 Fair Values, the
FDIC loss share receivable is also initially 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 Day 1 Fair
Values 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 and the
accretion (or amortization) thereof is adjusted periodically to reflect changes in expectations of discounted cash flows,
expense reimbursements under the loss share agreements and other factors. The Company is accreting (or amortizing) its
FDIC loss share receivable over the shorter of (i) the contractual term of the indemnification agreement (ten years for the
single family loss share agreements, and five years for the non-single family loss share agreements) or (ii) the remaining life
of the indemnified asset.
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 balance of the FDIC clawback payable and the
amortization thereof are adjusted periodically to reflect changes in expected losses on covered assets and the impact of such
changes on the clawback payable and other factors.
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,
49
these valuations may include certain unobservable inputs. The Day 1 Fair Values of assumed liabilities in business
combinations are generally the amounts payable by the Company necessary to completely satisfy the assumed obligations.
As a result of recording, at fair value, acquired assets and assumed liabilities pursuant to business combinations,
differences in amounts reported for financial statement purposes and their related basis for federal and state income tax
purposes are created. Such differences are recorded as deferred tax assets and liabilities using enacted tax rates in effect for
the year or years in which the differences are expected to be recovered or settled. Business combination transactions may
result in the acquisition of net operating loss carryforwards and other assets with built-in losses, the realization of which are
subject to limitations pursuant to section 382 (“section 382 limitations”) of the Internal Revenue Code (“IRC”). In
determining the section 382 limitation associated with a business combination, management must make a number of
estimates and assumptions regarding the ability to utilize acquired net operating loss carryforwards and the expected timing
of future recoveries or settlements of acquired assets with built-in losses. To the extent that information available as of the
date of acquisition results in a determination by management that some portion of net operating loss carryforwards cannot
be utilized or assets with built-in losses are expected to be settled or recovered in future periods in which the ability to
realize the benefits will be subject to section 382 limitations, a deferred tax valuation allowance is established for the
estimated amount of the deferred tax assets subject to the section 382 limitation. To the extent that information becomes
available, during the first 12 months following the consummation of a business combination transaction, that results in
changes in management’s initial estimates and assumptions regarding the expected utilization of net operating loss
carryforwards or the expected settlement or recovery of acquired assets with built-in losses subject to section 382
limitations, an increase or decrease of the deferred tax valuation allowance will be recorded as an adjustment to bargain
purchase gain or goodwill. To the extent that such information becomes available 12 months or more after the
consummation of a business combination transaction, or additional information becomes available during the first 12
months as a result of changes in circumstances since the date of the consummation of a business combination transaction, an
increase or decrease of the deferred tax valuation allowance will be recorded as an adjustment to deferred income tax
expense (benefit).
In connection with the acquisition of First National Bank, management determined that net operating loss
carryforwards and other assets with built-in losses are expected to be settled or otherwise recovered in future periods where
the realization of such benefits would be subject to section 382 limitations. Accordingly, as of the date of acquisition and at
December 31, 2013, the Company had established a deferred tax valuation allowance of approximately $4.1 million to
reflect its assessment that the realization of the benefits from the settlement or recovery of certain of these acquired assets
and net operating losses are expected to be subject to section 382 limitations. To the extent that additional information
becomes available, management may be required to adjust its estimates and assumptions regarding the realization of the
benefits associated with these acquired assets by adjusting this deferred tax valuation allowance.
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 income
from loss share and purchased non-covered loans, gains and losses on investment securities and from sales of other assets,
and gains on merger and acquisition transactions.
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.
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 $8.6 million in 2013, $8.5
million in 2012 and $9.0 million in 2011. 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 IRC as a result of investments in
certain tax-exempt securities.
50
2013 compared to 2012
Net interest income for 2013 increased 10.5% to $202.1 million compared to $182.9 million for 2012. Net interest
margin decreased 28 basis points (“bps”) to 5.63% for 2013 compared to 5.91% for 2012. The increase in net interest
income was primarily a result of the growth in average earning assets, which increased 16.0% for 2013 compared to 2012.
The decrease in net interest margin was primarily due to a 46 bps decrease in yield on average earning assets, partially offset
by a 16 bps decrease in rates paid on interest bearing liabilities.
The 46 bps decrease in yield on average earning assets for 2013 compared to 2012 was primarily due to a 39 bps
decrease in yield on loans and leases, an 82 bps decrease in yield on purchased non-covered loans and an 85 bps decrease in
yield on the Company’s aggregate investment securities portfolio, partially offset by a 70 bps increase in yield on covered
loans. The decrease in yield 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 decrease in yield on the Company’s purchased non-covered loan portfolio was primarily attributable to
the loans acquired in the Genala and First National Bank transactions, many of which did not contain evidence of credit
deterioration on the date of purchase and were priced at a lower yield compared to the purchased non-covered loans
acquired in the Company’s FDIC-assisted transactions, most of which contained evidence of credit deterioration on the date
of purchase. The decrease in yield on the Company’s aggregate investment securities portfolio was primarily attributable to
the shift in the composition of such portfolio as a result of the investment securities acquired in the Genala and First
National Bank transactions. During 2013, taxable investment securities comprised of 36.1% and tax-exempt securities
comprised 63.9% of average investment securities. During 2012, taxable investment securities comprised 20.8% and tax-
exempt investment securities comprised 79.2% of average investment securities. The increase in yield on covered loans was
primarily attributable to upward revisions of estimated cash flows in certain covered loans as a result of recent evaluations
of expected performance of such loans.
The decrease in rates on average interest bearing liabilities was primarily due to decreases in rates on interest
bearing deposits, the largest component of the Company’s interest bearing liabilities. Rates on interest bearing deposits
decreased 15 bps for 2013 compared to 2012. This decrease in the rate on interest bearing liabilities was principally due to
(i) 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 and (ii) 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 68.3% of total average interest bearing deposits for 2013
compared to 66.5% for 2012.
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 five bps for 2013 compared to 2012 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 four bps for 2013 compared to 2012. 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, decreased 20 bps for 2013 compared to 2012 as a result of a decrease in the 90-day
LIBOR on the applicable reset dates during 2013.
The increase in average earning assets of $494 million, or 16.0%, for 2013 compared to 2012 was primarily due to
an increase in the average balance of loans and leases of $400 million, an increase in the average balance of purchased non-
covered loans of $184 million, primarily as the result of the First National Bank acquisition, and an increase in the average
balance of taxable investment securities of $115 million, primarily due to the Genala and First National Bank acquisitions.
This increase in average earnings assets for 2013 compared to 2012 was partially offset by a decrease in the average balance
of covered loans of $228 million, primarily as a result of continued paydown and payoff of such covered loans.
51
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 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 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. 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) repos, (ii) other borrowings comprised primarily of FHLB –
Dallas advances, and, to a lesser extent, 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 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 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.
52
The following table sets forth certain information relating to the Company’s net interest income for the years
indicated. 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. 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 and purchased non-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
2013
Year Ended December 31,
2012
2011
Average
Balance
Income Yield/ Average Income/ Yield/ Average Income/ Yield/
Expense Rate
Expense Rate Balance
Expense Rate
Balance
ASSETS
Interest earning assets:
Interest earning deposits and federal
(Dollars in thousands)
funds sold ...........................................
$ 1,108
$ 33
2.96%
$ 1,078
$ 8
0.74%
$ 1,609
$ 36
2.24%
Investment securities:
Taxable ...........................................
Tax-exempt – FTE ..........................
Loans and leases – FTE ..........................
Purchased non-covered loans .................
Covered loans .........................................
Total earning assets – FTE ..............
Non-interest earning assets .......................
202,783
359,068
2,362,827
187,353
476,137
3,589,276
679,067
Total assets ...................................... $4,268,343
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest bearing transaction $1,798,692
390,894
Time deposits of $100,000 or more ......
444,862
Other time deposits ...............................
2,634,448
Total interest bearing deposits ...........
Repurchase agreements with customers ..
39,056
289,615
Other borrowings ....................................
Subordinated debentures ........................
64,950
3,028,069
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’
639,521
38,653
3,706,243
558,642
3,458
6,838 3.37
24,512 6.83
129,470 5.48
14,808 7.90
45,122 9.48
220,783 6.15
88,182
335,784
2,950
24,318
1,962,699 115,132
254
61,820
3,094,939 204,482
2,913
704,283
3.35
7.24
5.87
8.72
8.78
6.61
98,270
345,454
3,013
25,695
1,822,493 112,576
732
66,135
3,043,191 208,187
8,286
767,079
3.07
7.44
6.18
8.83
8.62
6.84
684,892
$3,779,831
712,100
$3,755,291
$ 3,636 0.20% $1,579,909 $ 4,579
1,867
2,536
8,982
47
10,723
1,848
21,600
1,108 0.28
1,359 0.31
6,103 0.23
31 0.08
10,780 3.72
1,720 2.65
18,634 0.62
351,002
444,451
2,375,362
34,776
291,678
64,950
2,766,766
0.29%
0.53
0.57
0.38
0.13
3.68
2.85
0.78
$1,524,082 $ 8,297
4,032
5,357
17,686
174
10,835
1,740
30,435
438,030
569,428
2,531,540
39,638
296,195
64,950
2,932,323
0.54%
0.92
0.94
0.70
0.44
3.66
2.68
1.04
492,299
58,746
3,317,811
458,595
3,425
392,780
52,102
3,377,205
374,664
3,422
equity ..............................................
$4,268,343
$3,779,831
$3,755,291
Net interest income – FTE ........................
Net interest margin – FTE ........................
$202,149
$182,882
$177,752
5.63%
5.91%
5.84%
53
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 years 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 yield/rate and volume have all been allocated to the changes due to volume.
Analysis of Changes in Net Interest Income - FTE
Volume
Increase (decrease) in:
Interest income – FTE:
Interest earning deposits and federal funds
2013 over 2012
Yield/
Rate
Net
Change
Volume
(Dollars in thousands)
2012 over 2011
Yield/
Rate
Net
Change
sold .............................................................
$ 1
$ 24
$ 25
$ (4)
$ (24)
$ (28)
Investment securities:
Taxable .......................................................
Tax-exempt – FTE ......................................
Loans and leases – FTE ..................................
Purchased non-covered loans .........................
Covered loans .................................................
Total interest income – FTE ...................
3,865
1,590
21,925
14,578
(21,620)
20,339
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 .............................
442
113
1
3
(77)
-
482
23
(1,396)
(7,587)
(24)
4,922
(4,038)
(1,385)
(872)
(1,178)
(19)
134
(128)
(3,448)
3,888
194
14,338
14,554
(16,698)
16,301
(943)
(759)
(1,177)
(16)
57
(128)
(2,966)
(337)
(701)
8,225
(469)
(5,512)
1,202
162
(463)
(713)
(7)
(166)
-
(1,187)
274
(676)
(5,669)
(9)
1,197
(4,907)
(3,880)
(1,702)
(2,108)
(120)
54
108
(7,648)
(63)
(1,377)
2,556
(478)
(4,315)
(3,705)
(3,718)
(2,165)
(2,821)
(127)
(112)
108
(8,835)
Increase (decrease) in net interest income – FTE
$19,857
$ (590)
$19,267
$2,389
$2,741
$5,130
Non-Interest Income
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 income from loss share and purchased non-covered loans, net gains on investment securities, gains on sales
of other assets and gains on merger and acquisition transactions.
2013 compared to 2012
Non-interest income for 2013 increased 14.2% to $71.9 million compared to $62.9 million for 2012. Non-interest
income for 2013 included $1.1 million of bargain purchase gain on the Company’s acquisition of First National Bank. Non-
interest income for 2012 included $2.4 million of bargain purchase gain on the Company’s acquisition of Genala.
Service charges on deposit accounts increased 11.6% to $21.6 million in 2013 compared to $19.4 million in 2012.
This increase was primarily due to growth in the number of transaction accounts and the addition of deposit customers from
the Company’s acquisitions.
Mortgage lending income increased 0.8% to $5.63 million in 2013 compared to $5.58 million in 2012.
Originations of mortgage loans for sale, including both originations for home purchases and refinancings of existing
mortgages, decreased 17.3% to $209.1 million in 2013 compared to $253.0 million in 2012. Mortgage originations for
home purchases were 52% of 2013 origination volume compared to 37% in 2012. Refinancing of existing mortgages
accounted for 48% of 2013 origination volume compared to 63% in 2012.
Trust income increased 15.7% to $4.1 million in 2013 compared to $3.5 million in 2012. This increase in trust
income was primarily due to new trust customers added as a result of the First National Bank acquisition.
54
BOLI income increased 63.7% to $4.5 million in 2013 compared to $2.8 million in 2012 primarily due to the $59
million of BOLI purchased during October and November of 2012, and $14.8 million of BOLI acquired in the First
National Bank acquisition.
Net gains on investment securities were $0.2 million in 2013 from the sale of approximately $0.8 million of
investment securities, compared to net gains of $0.5 million in 2012, which included $3.1 million of net gains from the sale
of approximately $40 million of its investment securities and an impairment charge of $2.6 million.
Gains on sales of other assets were $9.4 million in 2013 compared to $6.8 million in 2012. The gains on sales of
other assets for both 2013 and 2012 were primarily due to gains on sales of foreclosed assets covered by FDIC loss share
agreements, or covered foreclosed assets. Because the Day 1 Fair Values of covered foreclosed assets include 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 $7.2 million of income from the accretion of the FDIC loss share receivable, net of
amortization of the FDIC clawback payable, during 2013 compared to $7.4 million during 2012. 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.
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 in future
periods. 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 income from loss share and purchased non-covered loans was $13.2 million in 2013 compared to $10.6
million in 2012. Other income from loss share and purchased non-covered loans consists primarily of income recognized on
covered loan and purchased non-covered loan prepayments and payoffs that are not considered yield adjustments, net of any
adjustments to the related FDIC loss share receivable and the FDIC clawback payable. Because other income from loss
share and purchased non-covered loans may be significantly affected by loan payments and payoffs, this income item may
vary significantly from period to period.
On July 31, 2013, the Company completed its acquisition of First National Bank whereby First National Bank
merged with and into the Company’s wholly-owned bank subsidiary in a transaction valued at $68.5 million. This
acquisition resulted in the Company recognizing a bargain purchase gain of $1.1 million in the third quarter of 2013.
On December 31, 2012, the Company completed its acquisition of Genala whereby Genala merged with and into
the Company in a transaction valued at $27.5 million. This acquisition resulted in the Company recognizing a bargain
purchase gain of $2.4 million during the fourth quarter of 2012.
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 First National Bank acquisition and the
Genala acquisition is included in note 2 to the Notes to the Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
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. 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
55
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.
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. During the fourth quarter of 2012 the landfill
ceased operations and 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.”
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.
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. Other income from loss
share and purchased non-covered loans was $10.6 million in 2012 compared to $6.4 million in 2011.
On December 31, 2012, the Company completed its acquisition of Genala. This acquisition resulted in the
Company recognizing a bargain purchase gain of $2.4 million during the fourth quarter of 2012.
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.
56
The following table presents non-interest income for the years indicated.
Non-Interest Income
2013
Year Ended December 31,
2012
(Dollars in thousands)
2011
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 income from loss share and purchased non-covered loans, net ....
Net gains on investment securities .........................................................
Gains on sales of other assets ................................................................
Gains on merger and acquisition transactions ........................................
Other ......................................................................................................
Total non-interest income ..............................................................
$21,644
5,626
4,096
4,529
7,171
13,153
161
9,386
1,061
5,110
$71,937
$19,400
5,584
3,455
2,767
7,375
10,645
457
6,809
2,403
3,965
$62,860
$ 18,094
3,277
3,206
2,307
10,141
6,432
933
3,738
65,708
3,247
$117,083
Non-Interest Expense
Non-interest expense consists of salaries and employee benefits, net occupancy and equipment expense and other
operating expenses.
2013 compared to 2012
Non-interest expense for 2013 increased 10.1% to $126.1 million compared to $114.5 million for 2012. The
Company’s efficiency ratio (non-interest expense divided by the sum of net interest income FTE and non-interest income)
for 2013 was 46.0% compared to 46.6% for 2012.
Salaries and employee benefits, the Company’s largest component of non-interest expense, increased 9.8% to
$64.8 million in 2013 from $59.0 million in 2012. The Company had 1,223 full-time equivalent employees at December 31,
2013, an increase of 9.2% from 1,120 full-time equivalent employees at December 31, 2012.
Net occupancy and equipment expense for 2013 increased 18.5% to $18.7 million in 2013 compared to $15.8
million in 2012. At December 31, 2013, the Company had 131 offices, including 66 in Arkansas, 28 in Georgia, 15 in North
Carolina, 13 in Texas, four in Florida, three in Alabama and one office each in South Carolina and New York. 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.
Other operating expenses increased 7.3% to $42.5 million in 2013 compared to $39.6 million in 2012, primarily as
a result of (i) $6.7 million of professional and outside services expense in 2013, compared to $4.4 million in 2012, (ii) $5.4
million of software expense in 2013 compared to $3.3 million in 2012, (iii) $2.8 million of amortization of intangibles in
2013 compared to $2.0 million in 2012 and (iv) increases in “other” expenses of $1.6 million. These increases were
partially offset by a decrease in advertising and public relations expense to $2.2 million in 2013 compared to $4.1 million in
2012 and a decrease in loan collection and repossession expense to $4.4 million in 2013 compared to $6.1 million in 2012.
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 for 2012 was 46.6% compared to 41.6% for 2011.
Salaries and employee benefits 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
57
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 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.
The following table presents non-interest expense for the years indicated.
Non-Interest Expense
Salaries and employee benefits .............................
Net occupancy and equipment expense ................
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 FDIC loss share agreements ......................
Amortization of intangibles ...............................
Other .................................................................
Total non-interest expense .........................
Year Ended December 31,
2012
(Dollars in thousands)
$ 59,028
15,793
2011
$ 56,262
14,705
2013
$ 64,825
18,710
3,297
3,419
2,205
6,690
5,400
2,236
695
1,875
1,036
4,381
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
1,203
2,805
7,292
$126,069
1,713
2,037
5,648
$114,462
9,525
1,677
7,490
$122,531
Income Taxes
The Company’s provision for income taxes was $40.1 million in 2013 compared to $33.9 million in 2012 and
$50.2 million in 2011. Its effective income tax rates were 31.53%, 30.57% and 33.14%, respectively, for 2013, 2012 and
2011. The increase in the Company’s effective tax rate of 96 bps in 2013 compared to 2012 was due primarily to the
increase in taxable income, as a percentage of total income, resulting in a higher percentage of the Company’s total income
comprised of taxable income. The decrease in the Company’s effective tax rate of 256 bps for 2012 compared to 2011 was
due primarily to the decrease in taxable income, as a percentage of total income, resulting in a higher percentage of the
Company’s total income comprised 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.
58
Loan and Lease Portfolio
Analysis of Financial Condition
At December 31, 2013, the Company's loan and lease portfolio, excluding purchased non-covered loans and
covered loans, was $2.63 billion, an increase of 24.4% from $2.12 billion at December 31, 2012.
As of December 31, 2013, the Company's loan and lease portfolio, excluding purchased non-covered loans and
covered loans, consisted of 88.5% real estate loans, 4.7% commercial and industrial loans, 1.0% consumer loans, 3.3%
direct financing leases and 2.5% 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
2013
2012
December 31,
2011
(Dollars in thousands)
2010
2009
Real estate:
Residential 1-4 family .................... $ 249,556
1,104,114
Non-farm/non-residential ...............
722,557
Construction/land development ......
45,196
Agricultural ....................................
208,337
Multifamily residential ...................
2,329,760
Total real estate ........................
124,068
Commercial and industrial ....................
26,182
Consumer..............................................
86,321
Direct financing leases..........................
66,234
Other ....................................................
Total loans and leases .............. $2,632,565
$ 272,052
807,906
578,776
50,619
141,243
1,850,596
159,804
29,781
68,022
7,631
$2,115,834
$ 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
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
2013
December 31,
2012
2011
Loans and Leases
Attributable to Offices In
Amount
%
Amount
%
(Dollars in thousands)
Amount
%
Texas .............................
Arkansas ........................
North Carolina ..............
Georgia .........................
New York ......................
Alabama ........................
South Carolina ..............
Florida ...........................
Total ...................
$1,302,061
1,069,200
157,938
57,570
30,837
13,073
1,703
183
$2,632,565
49.5%
40.6
6.0
2.1
1.2
0.5
0.1
0.0
100.0%
$ 935,593
1,048,102
87,859
40,391
-
3,337
91
461
$2,115,834
44.2%
49.5
4.2
1.9
-
0.2
0.0
0.0
100.0%
$ 788,570
1,018,885
65,733
6,680
-
371
-
244
$1,880,483
41.9%
54.2
3.5
0.4
-
0.0
-
0.0
100.0%
59
The amount and type of the Company’s real estate loans, excluding purchased non-covered loans and covered
loans, at December 31, 2013 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
1-4 Family
Non-
Farm/Non-
Residential
Construction
/Land
Development
Agricultural
Multifamily
Residential
Total
(Dollars in thousands)
Arkansas:
Little Rock–North Little Rock–
Conway, AR MSA ......................
Northern Arkansas (1) ......................
Fort Smith, AR–OK MSA ...............
Western Arkansas (2) .......................
Fayetteville–Springdale–Rogers,
AR – MO MSA ...........................
Hot Springs, AR MSA ....................
All other Arkansas (3) ......................
Total Arkansas ..............................
Texas:
Dallas–Fort Worth–Arlington, TX
$ 95,933
42,769
28,325
21,912
8,964
4,177
5,999
208,079
$198,578
15,932
24,755
30,524
22,955
20,984
13,200
326,928
$115,373
5,653
6,042
4,959
16,454
6,800
8,113
163,394
$ 8,141
15,568
3,310
6,146
4,976
-
2,836
40,977
MSA ............................................
15,643
167,774
144,365
Houston–The Woodlands–
Baytown, TX MSA .....................
San Antonio–New Braunfels, TX
MSA ............................................
Austin–Round Rock, TX MSA .......
Texarkana, TX–AR MSA ................
College Station–Bryan, TX MSA....
Beaumont–Port Arthur, TX MSA ...
All other Texas (3) ............................
Total Texas ..................................
California:
Los Angeles–Long Beach–Santa
Ana, CA MSA ............................
San Francisco–Oakland–Fremont,
CA MSA .....................................
Sacramento–Roseville–Arden–
Arcade, CA MSA .......................
All other California(3) .....................
Total California ..........................
North Carolina/South Carolina:
Charlotte–Gastonia–Concord,
NC–SC MSA ..............................
Wilmington, NC MSA ...................
Charleston-N.Charleston, SC MSA
All other North Carolina (3) ............
All other South Carolina (3) .............
Total N. Carolina/S. Carolina .....
Georgia:
Atlanta–Sandy Springs–
Roswell, GA MSA......................
All other Georgia (3) .......................
Total Georgia ..............................
Florida:
Miami–Fort Lauderdale– Pompano
Beach, FL MSA ..........................
All other Florida(3) ..........................
Total Florida ...............................
-
29,522
68,664
-
209
7,991
-
-
1,642
25,485
-
-
-
-
-
2,993
402
-
4,377
1,358
9,130
1,753
1,743
3,496
-
773
773
2,679
-
9,549
-
-
25,916
235,440
100,763
59,043
-
11,290
171,096
54,140
15,900
3,776
14,417
4,418
92,651
41,451
16,521
57,972
-
7,265
7,265
13,338
32,781
867
-
-
7,287
267,302
-
-
42,680
356
43,036
40,621
1,382
735
43,504
10,310
96,552
6,696
1,454
8,150
-
11,296
11,296
60
-
-
-
-
554
-
-
136
690
-
-
-
-
-
-
487
-
-
-
487
410
1,583
1,993
-
644
644
$ 12,453
917
7,669
1,109
3,405
917
1,674
28,144
33,133
15,150
-
16,923
989
17,990
15,825
4,186
104,196
-
-
-
-
-
1,557
-
5,926
-
-
7,483
-
359
359
41,374
-
41,374
$430,478
80,839
70,101
64,650
56,754
32,878
31,822
767,522
360,915
113,336
16,017
49,913
19,950
17,990
15,825
39,167
633,113
100,763
59,043
42,680
11,646
214,132
99,311
18,171
10,437
62,298
16,086
206,303
50,310
21,660
71,970
41,374
19,978
61,352
Geographic Distribution of Real Estate Loans (continued)
Residential
1-4 Family
Non-
Farm/Non-
Residential
Construction
/Land
Development
Agricultural
Multifamily
Residential
Total
(Dollars in thousands)
New York–Northern New Jersey–
Long Island, NY–NJ–PA MSA ..
Phoenix–Mesa–Glendale, AZ MSA ...
Missouri:
St. Louis, MO MSA .......................
Kansas City, MO–KS MSA ............
All other Missouri (3) ......................
Total Missouri ..........................
Virginia/West Virginia:
Washington–Arlington–
Alexandria, DC–VA–MD–WV
MSA .........................................
All other West Virginia(3) ...............
Total Virginia/West Virginia ......
Oklahoma:
Lawton, OK MSA ..........................
All other Oklahoma (3) ....................
Total Oklahoma ..........................
Seattle–Tacoma–Bellevue, WA MSA
Boston–Cambridge–Quincy, MA
MSA ...............................................
Tennessee:
Memphis, TN–MS–AR MSA.........
All other Tennessee (3) ....................
Total Tennessee ..........................
-
-
-
118
509
627
-
-
-
-
129
129
-
-
105
-
105
27,020
54,910
-
1,785
2,010
3,795
351
12,509
12,860
-
6,678
6,678
-
21,565
18,839
1,728
20,567
Baltimore–Columbia–Townson, MD
MSA ...............................................
-
16,693
31,390
-
-
18,445
176
18,621
28,792
-
28,792
22,215
692
22,907
28,432
-
-
-
-
-
-
-
-
41
293
334
-
-
-
-
-
-
-
-
-
-
-
-
-
-
22,974
-
-
22,974
-
-
-
-
-
-
-
-
-
-
-
-
Alabama .............................................
1,479
7,605
1,222
71
3,807
Mississippi: ........................................
Gulfport–Biloxi–Pascagoula, MS
MSA ...........................................
All other Mississippi(3) ....................
Total Mississippi ........................
-
58
58
12,911
-
12,911
-
-
-
-
-
-
-
-
-
58,410
54,910
22,974
20,389
2,988
46,351
29,143
12,509
41,652
22,215
7,499
29,714
28,432
21,565
18,944
1,728
20,672
16,693
14,184
12,911
58
12,969
All other states (4) ...............................
Total real estate loans .................
195
$249,556
28,158
$1,104,114
1,463
$722,557
-
$45,196
-
$208,337
29,816
$2,329,760
(1) This geographic area includes the following counties in Northern Arkansas: Baxter, Boone, Marion, Newton, Searcy and Van Buren.
(2) This geographic area includes the following counties in Western Arkansas: Johnson, Logan, Pope and Yell.
(3) These geographic areas include all MSA and non-MSA areas that are not separately reported.
(4) Includes all states not separately presented above.
61
Excluding purchased non-covered loans and covered loans, the amount and type of non-farm/non-residential loans,
as of the dates indicated, and their respective percentage of the total non-farm/non-residential loan portfolio are reflected in
the following table.
Non-Farm/Non-Residential Loans
2013
Amount
December 31,
2012
%
Amount
(Dollars in thousands)
$ 290,092
44,740
263,986
26.3%
4.1
23.9
$323,017
42,270
123,534
Retail, including shopping centers
and strip centers ..........................
Churches and schools .......................
Office, including medical offices .....
Office warehouse, warehouse and
mini-storage ................................
113,317
Gasoline stations and convenience
stores ...........................................
Hotels and motels .............................
Restaurants and bars .........................
Manufacturing and industrial
8,150
192,527
33,178
facilities ......................................
37,288
Nursing homes and assisted living
centers .........................................
41,317
Hospitals, surgery centers and
other medical ..............................
49,112
10.3
0.7
17.4
3.0
3.4
3.7
4.4
38,355
8,752
92,298
33,421
32,950
29,501
49,797
%
40.0%
5.2
15.3
4.7
1.1
11.4
4.1
4.1
3.7
6.2
Golf courses, entertainment and
recreational facilities ...................
Other non-farm/non-residential ........
Total ........................................
5,261
25,146
$1,104,114
0.5
2.3
100.0%
10,022
23,989
$807,906
1.2
3.0
100.0%
Excluding purchased non-covered loans and covered loans, the amount and type of construction/land development
loans as of the dates indicated, and their respective percentage of the total construction/land development loan portfolio are
reflected in the following table.
Construction/Land Development Loans
Unimproved land...............................
Land development and lots:
1-4 family residential and
multifamily .................................
Non-residential ................................
Construction:
1-4 family residential:
Owner occupied .........................
Non-owner occupied:
Pre-sold ..................................
Speculative .............................
Multifamily .....................................
Industrial, commercial and other .....
Total .....................................
December 31,
2013
2012
Amount
$105,739
%
Amount
(Dollars in thousands)
14.6 %
$ 89,379
%
15.5%
176,893
68,376
24.5
9.5
175,929
70,861
30.4
12.2
12,870
1.8
13,785
2.4
8,206
50,030
187,409
113,034
$722,557
1.1
6.9
26.0
15.6
100.0%
6,218
32,554
89,770
100,280
$578,776
1.1
5.6
15.5
17.3
100.0%
62
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 2013, the Company advanced construction period interest
totaling approximately $11.0 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, 2013 was $1.30 billion, of which $511
million was outstanding at December 31, 2013 and $785 million remained to be advanced. The weighted average loan to
cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 54%, which means that the
weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be
approximately 46%. 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 48%.
The following table reflects loans and leases, excluding purchased non-covered loans and covered loans, grouped
by remaining maturities at December 31, 2013 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
Total
(Dollars in thousands)
Real estate ..................................................... $422,817
65,419
Commercial and industrial ............................
8,103
Consumer ......................................................
4,816
Direct financing leases ..................................
12,206
Other .............................................................
Total ...................................................... $513,361
Fixed rate ...................................................... $193,703
35,103
Floating rate (not at a floor or ceiling rate) ...
284,555
Floating rate (at floor rate) ............................
-
Floating rate (at ceiling rate) .........................
Total ...................................................... $513,361
$1,676,850
55,604
16,683
81,505
34,585
$1,865,227
$ 607,017
58,845
1,199,365
-
$1,865,227
$230,093
3,045
1,396
-
19,443
$253,977
$182,297
3,301
68,379
-
$253,977
$2,329,760
124,068
26,182
86,321
66,234
$2,632,565
$ 983,017
97,249
1,552,299
-
$2,632,565
63
The following table reflects loans and leases, excluding purchased non-covered loans and covered loans, as of
December 31, 2013 grouped by expected amortizations, expected paydowns or the earliest repricing opportunity for floating
rate loans. This cash flow or repricing schedule approximates the Company’s ability to reprice the outstanding principal of
loans and leases either by adjusting rates on existing loans and leases or reinvesting principal cash flow in new loans and
leases.
Loan and Lease Cash Flows or Repricing
1 Year
or Less
Over 1
Through
2 Years
Over 2
Through
3 Years
Over 3
Through
5 Years
(Dollars in thousands)
Over
5 Years
Total
Fixed rate ................................... $ 279,705 $162,414
Floating rate (not at a floor or
$169,912
$240,774
$130,212
$ 983,017
ceiling rate)(1)...........................
Floating rate (at floor rate)(1) ......
Floating rate (at ceiling rate) ......
97,032
1,547,847
-
Total ..................................... $1,924,584
94
139
-
$162,647
123
2,729
-
$172,764
-
1,584
-
$242,358
-
-
-
$130,212
97,249
1,552,299
-
$2,632,565
Percentage of total ......................
Cumulative percentage of total ...
73.1%
73.1
6.2%
79.3
6.6%
85.9
9.2%
95.1
4.9%
100.0
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
elsewhere in this Annual Report on Form 10-K includes 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, as of the dates indicated, are reflected in the
following table.
Purchased Non-Covered Loan Portfolio
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 .................................................
2013
$131,085
152,948
25,633
9,518
17,210
336,394
24,934
6,855
4,540
$372,723
December 31,
2012
2011
(Dollars in thousands)
$19,222
4,842
1,950
3,021
-
29,035
5,333
4,168
2,998
$41,534
$ 71
-
-
-
-
71
631
4,001
96
$4,799
2010
$ -
-
-
-
-
-
-
5,316
-
$5,316
64
The amount and percentage of the Company’s purchased non-covered loans, by state, as of the dates indicated, are
reflected in the following table.
Purchased Non-Covered Loans by State
2013
December 31,
2012
Purchased Non-Covered Loans
Attributable to Offices In
Amount
%
North Carolina ............................
Alabama ......................................
Georgia .......................................
Florida ........................................
South Carolina ............................
Total ............................
$348,651
23,431
537
104
-
$372,723
93.5%
6.3
0.1
0.1
-
100.0%
Amount
%
(Dollars in thousands)
$ 200
39,845
1,231
226
32
$41,534
0.5%
95.9
3.0
0.5
0.1
100.0%
2011
Amount
%
$ 175
219
3,812
564
29
$4,799
3.6%
4.6
79.4
11.8
0.6
100.0%
The amount of unpaid principal balance, the valuation discount and the carrying value of purchased non-covered
loans, as of the dates indicated, are reflected in the following table.
Purchased Non-Covered Loans
2013
December 31,
2012
(Dollars in thousands)
Loans without evidence of credit deterioration at date of purchase:
Unpaid principal balance ............................................................
Valuation discount ......................................................................
Carrying value ......................................................................
$344,065
(11,972)
332,093
Loans with evidence of credit deterioration at date of purchase:
Unpaid principal balance ............................................................
Valuation discount ......................................................................
Carrying value .......................................................................
Total carrying value .........................................................
70,857
(30,227)
40,630
$372,723
$35,800
(1,021)
34,779
12,171
(5,416)
6,755
$41,534
2011
$ -
-
-
9,515
(4,716)
4,799
$4,799
65
The following table presents purchased non-covered loans grouped by remaining maturities at December 31, 2013
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
1 Year
or Less
Over 1
Through
5 Years
Over
5 Years
Total
(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 .......................................................
$19,191
34,862
7,217
1,895
4,927
68,092
7,021
2,625
886
$78,624
$ 46,444
92,953
15,567
5,812
11,747
172,523
15,436
4,012
1,455
$193,426
$ 65,450
25,133
2,849
1,811
536
95,779
2,477
218
2,199
$100,673
Fixed rate .......................................................
Floating rate ..................................................
Total .......................................................
$47,318
31,306
$78,624
$148,055
45,371
$193,426
$ 61,720
38,953
$100,673
$131,085
152,948
25,633
9,518
17,210
336,394
24,934
6,855
4,540
$372,723
$257,093
115,630
$372,723
66
The Company completed its acquisition of Genala on December 31, 2012 and its acquisition of First National Bank
on July 31, 2013. On the date of acquisition, Genala’s and First National Bank’s outstanding loans were categorized into
loans without evidence of credit deterioration and loans with evidence of credit deterioration. The following table presents
by risk rating 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 and First
National Bank acquisitions.
Fair Value Adjustments for Purchased Non-Covered
Loans Without Evidence of Credit Deterioration
At Date of Acquisition
Genala
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
$ (86)
(222)
(219)
(494)
$(1,021)
$ 6,697
12,361
10,431
5,290
$34,779
126
177
205
855
285
First National Bank
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 ..............
$105,702
138,011
57,719
61,297
$362,729
$ (2,935)
(2,631)
(1,577)
(7,276)
$(14,419)
$102,767
135,380
56,142
54,021
$348,310
278
191
273
1,187
398
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.
67
The following table is a summary of the loans acquired in the Genala and First National Bank acquisitions with
evidence of credit deterioration, as of their respective acquisition dates.
Fair Value Adjustment for Purchased Non-Covered Loans
With Evidence of Credit Deterioration
Genala
First
National
Bank
(Dollars in thousands)
At acquisition date:
Contractually required principal and interest ....
Nonaccretable difference ..................................
Cash flows expected to be collected .................
Accretable difference ........................................
Day 1 Fair Value ....................................
$8,769
(3,263)
5,506
(669)
$4,837
$77,258
(30,569)
46,689
(6,932)
$39,757
Total
$86,027
(33,832)
52,195
(7,601)
$44,594
A summary of changes in the accretable difference on purchased non-covered loans with evidence of credit
deterioration at the date of purchase is shown below for the periods indicated.
Accretable Difference on Non-Covered Loans
With Evidence of Credit Deterioration
Year Ended December 31,
2013
2012
(Dollars in thousands)
Accretable difference at January 1 .........................................
Accretable difference acquired ..........................................
Accretion ...........................................................................
Other, net ...........................................................................
Accretable difference at December 31 ...................................
$ 969
6,932
(1,666)
(252)
$5,983
$395
669
(254)
159
$969
Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable
FDIC-Assisted Acquisitions
During 2010 and 2011, the Company, through the Bank, acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of seven failed financial institutions in FDIC-assisted
acquisitions. A summary of each acquisition is as follows:
FDIC-Assisted Acquisitions
Date of FDIC-
Assisted Acquisition
March 26, 2010
July 16, 2010
September 10, 2010
December 17, 2010
January 14, 2011
April 29, 2011
April 29, 2011
Failed Financial Institution
Unity National Bank (“Unity”)
Woodlands Bank (“Woodlands”)
Horizon Bank (“Horizon”)
Chestatee State Bank (“Chestatee”)
Oglethorpe Bank (“Oglethorpe”)
First Choice Community Bank (“First Choice”)
The Park Avenue Bank (“Park Avenue”)
Location
Cartersville, Georgia
Bluffton, South Carolina
Bradenton, Florida
Dawsonville, Georgia
Brunswick, Georgia
Dallas, Georgia
Valdosta, Georgia
Loans comprise the majority of the assets acquired in each of these FDIC–assisted acquisitions and, with the
exception of Unity, 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 the Unity
acquisition, all loans, including consumer loans, are subject to loss share agreement with the FDIC.
68
Loss Share Agreements and Other FDIC-Assisted Acquisition Matters
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 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 terms of the purchase and assumption agreements for these FDIC-assisted 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 directors, officers or employees of Unity,
Woodlands, Horizon, Chestatee, Oglethorpe, First Choice or Park Avenue.
The covered loans and covered foreclosed assets (collectively “covered 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,
2013
2012
(Dollars in thousands)
Covered loans .........................
FDIC loss share receivable .....
Covered foreclosed assets ......
Total .................................
$351,791
71,854
37,960
$461,605
$596,239
152,198
52,951
$801,388
FDIC clawback payable .........
$ 25,897
$ 25,169
69
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 years indicated.
Covered Loans
Unity
Woodlands
Horizon
Chestatee
Oglethorpe
(Dollars in thousands)
First
Choice
Park
Avenue
Total
At acquisition date:
Contractually
required principal
and interest ..........
Nonaccretable
$208,410
$315,103
$179,441
$181,523
$174,110
$260,178
$452,658
$1,771,423
difference............
(52,526)
(83,933)
(52,388)
(47,538)
(67,300)
(86,876)
(124,899)
(515,460)
Cash flows
expected to be
collected ..............
Accretable
155,884
231,170
127,053
133,985
106,810
173,302
327,759
1,255,963
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
December 31, 2011 .
Accretion ................
Transfers to
covered
foreclosed assets ..
Payments received ..
Charge-offs .............
Other activity, net ...
Carrying value at
December 31, 2012 .
Accretion ................
Transfers to
covered
foreclosed assets ..
Payments received ..
Charge-offs .............
Other activity, net ...
Carrying value at
$ 96,360
6,360
$131,775
10,031
$ 79,798
5,768
$ 74,701
5,708
$ 64,391
5,665
$131,923
9,915
$227,974
18,373
$ 806,922
61,820
(4,077)
(21,144)
(4,422)
(228)
72,849
5,994
(3,065)
(22,844)
(3,732)
(234)
(4,543)
(28,777)
(8,332)
(420)
99,734
7,383
(4,621)
(36,171)
(4,207)
(79)
(3,731)
(14,888)
(3,714)
(40)
63,193
4,591
(4,528)
(18,835)
(2,717)
(238)
(3,299)
(18,205)
(2,089)
(148)
56,668
4,108
(1,219)
(30,774)
(2,510)
(197)
(4,065)
(15,425)
(2,117)
(356)
48,093
4,015
(5,783)
(17,337)
(1,303)
(93)
(4,742)
(41,756)
(4,008)
(251)
(8,563)
(71,592)
(1,410)
(161)
91,081
7,141
164,621
11,890
(2,819)
(29,990)
(3,150)
(297)
(12,721)
(73,998)
(5,550)
(558)
(33,020)
(211,787)
(26,092)
(1,604)
596,239
45,122
(34,756)
(229,949)
(23,169)
(1,696)
December 31, 2013 .
$ 48,968
$ 62,039
$ 41,466
$ 26,076
$ 27,592
$ 61,966
$ 83,684
$ 351,791
70
The following table presents a summary of the carrying value and type of covered loans as of the dates indicated.
Covered Loan Portfolio
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 ..........................
2013
$111,053
163,707
47,743
11,150
9,166
342,819
8,719
111
142
$351,791
December 31,
2012
2011
(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
2010
$132,108
214,435
102,099
9,643
10,709
468,994
17,999
1,248
1,227
$489,468
The following table presents the carrying value of covered loans grouped by remaining maturities and by type at
December 31, 2013. 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
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 ..........................
1 Year
or Less
$ 33,994
75,035
34,335
7,673
6,201
157,238
3,346
61
3
$160,648
Over 1
Through
5 Years
Over 5
Years
(Dollars in thousands)
$ 48,255
69,574
12,156
1,984
1,721
133,690
1,640
50
139
$135,519
$28,804
19,098
1,252
1,493
1,244
51,891
3,733
-
-
$55,624
Total
$111,053
163,707
47,743
11,150
9,166
342,819
8,719
111
142
$351,791
71
The following table presents a summary, by acquisition, of changes in the accretable difference on covered loans
during the years indicated.
Accretable Difference on Covered Loans
Unity
Woodlands
Horizon
Chestatee
Oglethorpe
(Dollars in thousands)
First
Choice
Park
Avenue
Total
$10,614
(6,360)
$24,555
(10,031)
$24,432
(5,768)
$10,663
(5,708)
$17,338
(5,665)
$16,900
(9,915)
$47,147
(18,373)
$151,649
(61,820)
(159)
(719)
(364)
(1,220)
(190)
(1,418)
(448)
(811)
(700)
(1,291)
(455)
(1,529)
(1,679)
(3,507)
(3,995)
(10,495)
5,196
2
8,574
(5,994)
4,396
116
(618)
86
17,452
(7,383)
16,524
(4,591)
1,835
181
5,712
(4,108)
1,567
123
11,372
(4,015)
4,791
127
4,164
190
21,331
825
9,919
(7,141)
27,942
(11,890)
97,495
(45,122)
(620)
(738)
(276)
(688)
(97)
(2,486)
(101)
(2,206)
(394)
(721)
(41)
(1,671)
(1,732)
(7,260)
(3,261)
(15,770)
6,725
90
6,913
198
4,992
86
4,669
229
4,972
97
8,535
20
6,089
515
42,895
1,235
Accretable difference at
December 31, 2011 ...........
Accretion .........................
Adjustments to accretable
difference related 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 ...........
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
$ 4,195
$11,311
$ 9,621
$13,664
$ 77,472
December 31, 2013 ...........
$ 8,037
$16,216
$14,428
72
FDIC Loss Share Receivable
The following table presents a summary, by acquisition, of the FDIC loss share receivable as of the dates of
acquisition.
FDIC Loss Share Receivable
Unity
Woodlands
Horizon
Chestatee
Oglethorpe
(Dollars in thousands)
First
Choice
Park
Avenue
Total
At acquisition date:
Expected principal loss
on covered assets:
Covered loans ............
Covered foreclosed
assets .......................
Total expected
$50,354
$73,220
$40,537
$46,869
$62,890
$82,212
$113,872
$469,954
9,979
5,897
3,678
15,960
7,907
628
49,850
93,899
principal losses ............
60,333
79,117
44,215
62,829
70,797
82,840
163,722
563,853
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 ...........
80%
80%
80%
80%
80%
80%
80%
80%
48,266
63,294
35,372
50,263
56,638
66,272
130,978
451,083
(4,119)
(7,428)
(6,283)
(4,204)
(5,535)
(6,268)
(14,724)
(48,561)
$44,147
$55,866
$29,089
$46,059
$51,103
$60,004
$116,254
$402,522
(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.
73
The following table presents a summary, by acquisition, of the activity within the FDIC loss share receivable during the
years indicated.
FDIC Loss Share Receivable
Unity
Woodlands
Horizon
Chestatee
Oglethorpe
(Dollars in thousands)
First
Choice
Park
Avenue
Total
$27,575
793
(12,945)
$29,177
1,108
(14,433)
$21,757
680
(8,948)
$29,382
725
(22,301)
$37,720
1,310
(13,062)
$48,442
1,485
(29,870)
$84,992
2,473
(42,438)
$279,045
8,574
(143,997)
(2,394)
(3,377)
(1,335)
(2,122)
(4,918)
(6,208)
(12,657)
(33,011)
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
carrying value ..................
Increases in FDIC loss
share receivable for:
Charge-offs on covered
loans ............................
3,170
Write downs of covered
foreclosed assets .........
1,591
Expenses on covered
assets reimbursable by
FDIC ...........................
Other activity, net ..............
Carrying value at
1,537
491
6,417
1,193
1,726
562
2,297
450
1,360
598
1,589
1,858
1,276
755
1,627
294
1,318
(293)
3,151
278
1,028
3,181
19,279
8,845
1,097
(457)
3,064
429
11,378
2,085
December 31, 2012 .............
19,818
22,373
16,859
11,162
23,996
17,918
40,072
152,198
Accretion income
(amortization expense) ....
Cash received from FDIC ..
Reductions of FDIC loss
share receivable for
payments on covered
loans in excess of
carrying value ..................
Increases in FDIC loss
share receivable for:
Charge-offs on covered
(210)
(7,459)
339
(9,648)
163
(9,839)
379
(4,259)
993
(9,029)
2,307
(11,145)
4,449
(28,890)
8,420
(80,269)
(2,786)
(4,094)
(4,723)
(6,123)
(6,369)
(3,605)
(9,596)
(37,296)
loans ............................
2,125
3,324
Write downs of covered
foreclosed assets .........
1,161
563
Expenses on covered
assets reimbursable by
FDIC ...........................
Other activity, net ..............
Carrying value at
1,140
103
1,588
(114)
2,506
137
1,049
(421)
2,104
303
373
(251)
961
16
2,635
394
4,200
2,360
17,855
4,934
1,215
(1,664)
1,177
(345)
3,427
(1,265)
9,969
(3,957)
December 31, 2013 .............
$13,892
$14,331
$ 5,731
$ 3,688
$10,119
$ 9,336
$14,757
$ 71,854
74
Covered Foreclosed Assets
The following table presents a summary, by acquisition, of covered foreclosed assets, as of the dates of acquisition,
and activity within covered foreclosed assets during the years indicated.
Covered Foreclosed Assets
Unity
Woodlands
Horizon
Chestatee
(Dollars in thousands)
Oglethorpe
First
Choice
Park
Avenue
Total
At acquisition date:
Balance on acquired
bank’s books .............
Total expected losses ..
Discount for net
present value of
expected cash flows ..
Fair value at
$20,304
(9,979)
$12,258
(5,897)
$8,391
(3,678)
$31,647
(15,960)
$16,554
(7,907)
$2,773
(628)
$91,442
(49,850)
$183,369
(93,899)
(1,466)
(1,332)
(1,030)
(2,281)
(1,562)
(474)
(10,412)
(18,557)
acquisition date .........
$ 8,859
$ 5,029
$3,683
$13,406
$ 7,085
$1,671
$31,180
$70,913
Carrying value at
December 31, 2011 ......
Transfers from
$10,272
$14,435
$3,677
$ 9,677
$7,132
$2,224
$25,490
$72,907
covered loans ............
4,077
4,543
3,731
3,299
4,065
4,742
8,563
33,020
Sales of covered
foreclosed assets .......
(4,467)
(9,304)
(4,285)
(7,111)
(4,063)
(3,038)
(11,719)
(43,987)
Write downs of
covered foreclosed
assets ........................
Carrying value at
(1,695)
(1,624)
(585)
(1,654)
(337)
(344)
(2,750)
(8,989)
December 31, 2012 ......
Transfers from
8,187
covered loans ............
3,065
Sales of covered
8,050
4,621
2,538
4,528
4,211
1,219
6,797
3,584
19,584
52,951
5,783
2,819
12,721
34,756
foreclosed assets .......
(5,823)
(5,251)
(3,129)
(3,102)
(8,399)
(3,350)
(16,900)
(45,954)
Write downs of
covered foreclosed
assets ........................
Carrying value at
(1,449)
(529)
(135)
(324)
(51)
(424)
(881)
(3,793)
December 31, 2013 ...... $ 3,980
$ 6,891
$ 3,802
$ 2,004
$ 4,130
$2,629
$14,254
$37,960
The following table presents a summary of the carrying value and type of covered foreclosed assets as of the dates
indicated.
Covered Foreclosed Assets
December 31,
2013
2012
(Dollars in thousands)
Real estate:
Residential 1-4 family ............................
Non-farm/non-residential .......................
Construction/land development ..............
Agricultural ............................................
Multifamily residential ...........................
Total real estate ................................
Repossessions .................................................
Total covered foreclosed assets .......
$ 5,004
14,301
17,202
1,054
399
37,960
-
$37,960
$12,279
9,570
30,602
449
51
52,951
-
$52,951
75
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 years indicated.
FDIC Clawback Payable
Unity
Woodlands
Horizon
Chestatee
(Dollars in thousands)
Oglethorpe
First
Choice
Park
Avenue
Total
$2,612
$4,846
$2,380
$1,291
$1,721
$1,452
$24,344
$38,646
(1,046)
(1,905)
(919)
(499)
(664)
(560)
(9,399)
(14,992)
$1,566
$2,941
$1,461
$ 792
$1,057
$ 892
$14,945
$23,654
$1,709
79
$3,153
138
$1,552
73
$ 759
35
$1,099
53
$ 923
45
$15,450
776
$24,645
1,199
(144)
(305)
(157)
1,644
79
2,986
132
1,468
72
-
794
36
(69)
1,083
58
-
968
45
-
(675)
16,226
827
25,169
1,249
(93)
(82)
(120)
(79)
(50)
-
(97)
(521)
At acquisition date:
Estimated FDIC
clawback payable ........
Discount for net present
value on FDIC
clawback payable .......
Net present value of
FDIC clawback
payable at acquisition
date ............................
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 .........
Amortization expense ......
Changes in FDIC
clawback payable
related to changes in
expected losses on
covered assets ..............
Carrying value at
December 31, 2013 .........
$1,630
$3,036
$1,420
$ 751
$1,091
$1,013
$16,956
$25,897
Nonperforming Assets
Nonperforming assets consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days or more
past due, (3) 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 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, excluding purchased non-covered loans with evidence of credit
deterioration on the date of purchase and covered loans, 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 ALLL. 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.
76
The following table presents information, excluding purchased non-covered loans and covered assets, concerning
nonperforming assets, including nonaccrual loans and leases, TDRs, and foreclosed assets as of the dates indicated.
Nonperforming Assets
2013
2012
December 31,
2011
(Dollars in thousands)
2010
2009
Nonaccrual loans and leases ........................................................
Accruing loans and leases 90 days or more past due ...................
TDRs ...........................................................................................
Total nonperforming loans and leases..............................
(1)
Total nonperforming assets (2) ..........................................
Foreclosed assets not covered by FDIC loss share agreements
Nonperforming loans and leases to total loans and leases (2) ......
Nonperforming assets to total assets (2) .......................................
$ 8,737
-
-
8,737
11,851
$20,588
0.33%
0.43
$ 9,109
-
-
9,109
13,924
$23,033
0.43%
0.57
$12,206
-
1,000
13,206
31,762
$44,968
0.70%
1.17
$13,939
-
-
13,939
42,216
$56,155
0.75%
1.72
$23,604
-
-
23,604
61,148
$84,752
1.24%
3.06
(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, covered loans and covered foreclosed assets, except for their inclusion in total assets.
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 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, 2013 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 $7.0 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 $1.4 million of specific loan and lease loss allocations. These amounts do not include
the Company’s $46.2 million of impaired covered loans at December 31, 2013.
As of December 31, 2013 and 2012, 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 or since management’s most recent review of such portfolio’s performance. As a result the
Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback
payable, totaling $4.7 million during 2013, $6.2 million during 2012 and $0.3 million during 2011 for such loans. The
Company also recorded $4.7 million during 2013, $6.2 million during 2012 and $0.3 million in 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 $46.2 million of impaired covered
loans at December 31, 2013, $38.5 million of impaired covered loans at December 31, 2012 and $1.9 million of impaired
covered loans at December 31, 2011.
At December 31, 2013, 2012 and 2011, the Company had no purchased non-covered loans whose performance had
deteriorated subsequent to the determination of the Day 1 Fair Values resulting in such loan being deemed impaired.
77
The following table presents information concerning the geographic location of nonperforming assets, excluding
purchased non-covered loans and covered assets, at December 31, 2013. 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
Foreclosed
Assets
(Dollars in thousands)
Total
Nonperforming
Assets
Arkansas .................
Texas ......................
North Carolina ........
South Carolina ........
Georgia ...................
Florida ....................
Alabama .................
All other .................
Total ................
$7,473
266
-
972
9
1
15
1
$8,737
$ 6,278
616
3,299
1,237
68
95
209
49
$11,851
$13,751
882
3,299
2,209
77
96
224
50
$20,588
Allowance and Provision for Loan and Lease Losses
The Company’s ALLL was $42.9 million at December 31, 2013, compared to $38.7 million at December 31, 2012
and $39.2 million at December 31, 2011. The Company had no allowance for covered loans or purchased non-covered
loans at December 31, 2013, 2012 or 2011. The Company’s ALLL as a percentage of nonperforming loans and leases,
excluding covered loans and purchased non-covered loans, was 492% at December 31, 2013 compared to 425% at
December 31, 2012 and 297% at December 31, 2011. While the Company believes the current allowance is appropriate,
changing economic and other conditions may require future adjustments to the ALLL.
The amount of provision to the ALLL is based on the Company’s analysis of the adequacy of the ALLL utilizing
the criteria discussed in the Critical Accounting Policies caption of this Management’s Discussion and Analysis of Financial
Condition and Results of Operations. The provision for loan and lease losses for 2013 was $12.1 million, including $7.4
million for non-covered loans and leases and $4.7 million for covered loans, compared to $5.5 million for non-covered
loans and leases and $6.2 million for covered loans in 2012 and $11.5 million for non-covered loans and $0.3 million for
covered loans in 2011. The increase in the Company’s provision for non-covered loans and leases in 2013 compared to
2012 is primarily the result of provision necessary to cover the growth in the Company’s loan and lease portfolio, excluding
purchased non-covered loans and covered loans, during 2013, partially offset by the decrease in net charge-offs for this
portfolio in 2013 compared to 2012. The Company’s decrease in its provision for non-covered loan and lease losses in 2012
compared to 2011 was primarily due to the reduction of net charge-offs in 2012 compared to 2011. The Company’s
provision for covered loans for 2013, 2012 and 2011 was the amount needed to provide the net charge-offs of covered loans
whose performance had deteriorated from management’s performance expectations established in conjunction with the
determination of the Day 1 Fair Values or since management’s most recent review of such portfolio’s performance. As the
Company moves further from the acquisition dates of its covered loan portfolios, more covered loans have either (i)
exceeded the performance expectations established in determining the Day 1 Fair Values, resulting in a reversal of any
previous provision for such loans and then an adjustment to accretable yield, which has a positive impact on interest income
or (ii) deteriorated from the performance expectations established in determining the Day 1 Fair Values, resulting in partial
charge-offs of the carrying value of such covered loans of $4.7 million in 2013, $6.2 million in 2012 and $0.3 million in
2011.
78
The following table is an analysis of the ALLL for the years indicated. During each of the years indicated, the
Company had no charge-offs or provision expense for any of its purchased non-covered loans.
Analysis of the ALLL
Balance, beginning of period .............................................
Loans and leases charged off(1):
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 loans and leases previously charged off(1):
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 ...........................................
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 period .......................................................
Net charge-offs of non-covered loans and leases to
average non-covered loans and leases (2) .....................
Net charge-offs of total loans and leases, including
covered loans and purchased non-covered loans, to
total average loans and leases .....................................
ALLL to total loans and leases (1) .......................................
ALLL to nonperforming loans and leases (1) ......................
Year Ended December 31,
2013
2012
2011
2010
2009
(Dollars in thousands)
$38,738
$39,169
$40,230
$39,619
$29,512
(837)
(1,111)
(137)
(261)
(4)
(2,350)
(922)
(214)
(482)
(359)
(4,327)
106
122
174
14
4
420
433
104
33
144
1,134
(3,193)
(4,675)
(7,868)
7,400
4,675
12,075
$42,945
(1,312)
(1,226)
(466)
(997)
-
(4,001)
(1,323)
(732)
(361)
(219)
(6,636)
107
18
106
141
-
372
35
238
2
8
655
(5,981)
(6,195)
(12,176)
5,550
6,195
11,745
$38,738
(2,743)
(1,033)
(5,651)
(771)
-
(10,198)
(1,465)
(825)
(413)
(87)
(12,988)
64
16
30
-
-
110
142
166
5
4
427
(12,561)
(275)
(12,836)
11,500
275
11,775
$39,169
(872)
(1,702)
(4,037)
(301)
(133)
(7,045)
(6,937)
(1,196)
(478)
(1,108)
(16,764)
99
87
253
45
1
485
656
212
20
2
1,375
(15,389)
-
(15,389)
16,000
-
16,000
$40,230
(1,619)
(3,182)
(20,188)
(844)
(4,355)
(30,188)
(3,347)
(1,303)
(648)
(399)
(35,885)
99
147
82
-
1
329
566
183
67
47
1,192
(34,693)
-
(34,693)
44,800
-
44,800
$39,619
0.13%
0.30%
0.69%
0.81%
1.75%
0.26%
1.63%
492%
0.46%
1.83%
425%
0.49%
2.08%
297%
0.73%
2.17%
289%
1.75%
2.08%
168%
(1) Excludes purchased non-covered loans and covered loans.
(2) Excludes covered loans and net charge-offs related to covered loans.
79
The following table sets forth the sum of the amounts of the ALLL 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.
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, as of the dates 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 because all losses had been charged off on such loans
whose performance had deteriorated from management’s expectations established in conjunction with the deterioration of
the Day 1 Fair Values.
Allocation of the ALLL
2013
2012
% of
Loans
and
Leases(1)
% of
Loans
and
Leases(1)
Allowance
Allowance
December 31,
2011
% of
Loans
and
Leases(1)
Allowance
(Dollars in thousands)
2010
2009
% of
Loans
and
Leases(1)
% of
Loans
and
Leases(1)
Allowance
Allowance
Real estate:
Residential 1-4
family ...........
$ 4,701
9.5%
$ 4,820
12.9%
$ 3,848
13.8%
$ 2,999
14.3%
$ 3,600
14.9%
Non-farm/ non-
residential .....
Construction/
land development
Agricultural ......
Multifamily
residential .....
Commercial and
industrial ......
Consumer ...........
Direct financing
leases ............
Other ..................
Unallocated
allowance .....
Total .........
13,633
41.9
10,107
38.1
12,203
37.7
8,313
36.5
6,574
31.9
12,306
3,000
27.4
1.8
12,000
2,878
27.4
2.4
7.9
4.7
1.0
3.3
2.5
2,504
2,855
917
2,266
763
-
$42,945
6.7
7.6
1.4
3.2
0.3
2,030
3,655
1,015
2,050
183
-
$38,738
25.4
3.8
7.6
6.4
1.9
2.9
0.5
9,478
3,383
2,564
4,591
1,209
1,632
261
-
$39,169
10,565
2,569
26.8
4.4
11,585
750
31.5
4.5
1,320
4,142
2,051
1,726
201
6,344
$40,230
5.6
6.5
2.9
2.3
0.7
2.9
7.9
3.4
2.1
0.9
710
3,587
2,599
1,560
289
8,365
$39,619
(1) Excludes purchased non-covered loans and covered loans.
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, 2013 substandard loans and leases, excluding covered loans and purchased non-covered
loans, not designated as impaired, nonaccrual or 90 days past due, totaled $12.0 million, compared to $27.5 million at
December 31, 2012 and $28.1 million at December 31, 2011. No loans or leases were designated as doubtful or loss at
December 31, 2013, 2012 or 2011.
80
Administration of the Company’s lending function is the responsibility of the Chief Executive Officer (“CEO”), the
Chief Credit Officer (“CCO”), the Chief Lending Officer (“CLO”) and certain senior lenders. Such lenders perform their
lending duties subject to the oversight and policy direction of the Company’s and Bank’s board of directors and the
directors’ loan committee. Loan or lease authority is granted to the CEO, CCO and CLO by the board of directors. The loan
or lease authorities of other lending officers are granted by the directors’ loan committee on the recommendation of
appropriate senior officers.
Until February 18, 2013, loans and leases and aggregate loan and lease relationships exceeding $3 million up to the
limits established by the Company’s board of directors could be approved by the directors’ loan committee. Effective
February 18, 2013, the $3 million threshold was increased to $5 million. In conjunction with this increase, the Company’s
officers’ loan committee approves loans and leases and aggregate loan and lease relationships between $3 million and $5
million. At December 31, 2013 the directors’ loan committee consisted of five or more directors and three of the Bank’s
senior officers. The directors’ 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 ALLL 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 directors’ loan committee.
Investment Securities
At December 31, 2013, 2012 and 2011, 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 and First National Banker’s Bankshares, Inc.
(“FNBB”) shares which do not have readily determinable fair values and are carried at cost.
Investment Securities
2013
Amortized
Cost
Fair
Value
December 31,
2012
Amortized
Fair
Value
Cost
(Dollars in thousands)
2011
Amortized
Cost
Fair
Value
Obligations of states and political
subdivisions .................................
U.S. Government agency securities ..
Corporate obligations ........................
Other equity securities .......................
Total ...........................
$438,390
222,510
716
13,810
$675,426
$435,989
218,869
716
13,810
$669,384
$345,224
116,835
776
13,689
$476,524
$361,517
118,284
776
13,689
$494,266
$359,667
46,068
-
17,828
$423,563
$373,047
48,035
-
17,828
$438,910
The Company’s investment securities portfolio is reported at estimated fair value, which included gross unrealized
gains of $8.6 million and gross unrealized losses of $14.6 million at December 31, 2013; gross unrealized gains of $18.1
million and gross unrealized losses of $0.3 million at December 31, 2012; and gross unrealized gains of $16.3 million and
gross unrealized losses of $1.0 million at December 31, 2011. Management believes that all of its unrealized losses on
individual investment securities at December 31, 2013 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
81
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 following table presents the unaccreted discount and unamortized premium of the Company’s investment
securities as of the dates indicated.
Unaccreted Discount and Unamortized Premium
Amortized
Cost
Unaccreted
Discount
Unamortized
Premium
(Dollars in thousands)
Par
Value
December 31, 2013:
Obligations of states and political
subdivisions ....................................
U.S. Government agency securities ....
Corporate obligations .........................
Other equity securities ........................
Total ........................................
$438,390
222,510
716
13,810
$675,426
December 31, 2012:
Obligations of states and political
subdivisions ....................................
U.S. Government agency securities ....
Corporate obligations .........................
Other equity securities ........................
Total ........................................
$345,224
116,835
776
13,689
$476,524
$ 8,298
4,694
-
-
$12,992
$6,324
279
-
-
$6,603
$(3,447)
(4,436)
(18)
-
$(7,901)
$ (516)
(4,935)
(23)
-
$(5,474)
$443,241
222,768
698
13,810
$680,517
$351,032
112,179
753
13,689
$477,653
The Company recognized premium amortization, net of discount accretion, of $0.5 million during 2013, $0.2
million during 2012 and $0.4 million during 2011. 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 $0.2 million in 2013 from the sale of approximately $0.8
million of investment securities, compared to net gains of $0.5 million in 2012, which included $3.1 million of net gains
from the sale of approximately $40 million of its investment securities and an impairment charge of $2.6 million, and net
gains of $0.9 million from the sale of $94 million of investment securities in 2011. During 2013, 2012 and 2011,
respectively, investment securities totaling $86 million, $57 million and $31 million matured or were called by the issuer.
The Company purchased $141 million, $63 million and $13 million of investment securities during 2013, 2012 and 2011,
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.
82
The following table presents the types and estimated fair values of the Company’s investment securities at
December 31, 2013 based on credit ratings by one or more nationally-recognized credit rating agencies.
Credit Ratings of Investment Securities
AAA(1)
AA(2)
A(3)
BBB(4)
Non-Rated(5)
Total
(Dollars in thousands)
Obligations of states and
political subdivisions:
Arkansas ............................
Texas .................................
Alabama ............................
N. Carolina ........................
Pennsylvania .....................
Louisiana ...........................
New Hampshire .................
Maryland ...........................
Florida ...............................
Georgia ..............................
Kansas ...............................
Massachusetts ...................
West Virginia ....................
Wyoming ...........................
Montana ............................
Rhode Island .....................
Kentucky ...........................
Oklahoma ..........................
Washington .......................
Connecticut .......................
Missouri ............................
California ..........................
Iowa ..................................
Alaska ...............................
New Mexico ......................
New York ..........................
S. Carolina ........................
Tennessee ..........................
New Jersey ........................
N. Dakota ..........................
Mississippi ........................
Utah...................................
Colorado ...........................
U.S. Government agency
securities .............................
Corporate obligations .............
Other equity securities............
Total ..............................
Percentage of total .............
Cumulative percentage of total
$ -
1,135
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,321
-
-
-
1,617
-
1,764
-
-
1,769
-
-
-
-
-
-
-
-
-
$7,606
$ 72,948
27,649
697
8,464
6,550
4,899
6,386
6,054
4,740
1,454
-
2,891
-
-
3,257
2,356
-
-
-
-
-
-
-
-
-
-
-
1,567
1,078
-
-
645
-
218,869
-
-
$370,504
$13,078
24,743
1,724
-
-
-
-
-
-
2,234
-
-
-
-
-
-
3,127
-
-
2,664
-
-
2,509
-
-
-
-
-
-
-
1,010
-
366
-
716
-
$52,171
$ 6,877
18,997
4,465
-
1,009
1,975
-
-
1,234
301
5,566
-
3,167
3,268
-
-
-
1,732
-
-
-
970
-
-
1,796
1,783
-
-
-
1,026
-
-
-
-
-
-
$54,166
$142,108
14,807
2,443
-
-
-
-
-
-
1,865
-
1,840
1,349
-
-
878
-
-
2,734
-
2,633
-
-
470
-
-
-
-
-
-
-
-
-
-
-
13,810
$184,937
$235,011
87,331
9,329
8,464
7,559
6,874
6,386
6,054
5,974
5,854
5,566
4,731
4,516
3,268
3,257
3,234
3,127
3,053
2,734
2,664
2,633
2,587
2,509
2,234
1,796
1,783
1,769
1,567
1,078
1,026
1,010
645
366
218,869
716
13,810
$669,384
1.1%
1.1%
55.4%
56.5%
7.8%
64.3%
8.1%
72.4%
27.6%
100.0%
100.0%
(1)
(2)
(3)
(4)
(5)
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.
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.
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.
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.
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).
83
The following table reflects the expected maturity distribution of the Company’s investment securities, at fair
value, at December 31, 2013 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
securities collateralized by residential mortgages are allocated among various maturities based on an estimated repayment
schedule utilizing Bloomberg median prepayment speeds based on interest rate levels at December 31, 2013, 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
1 Year
Or
Less
Over 1
Through
5 Years
Over 5
Through
10 Years
Over
10
Years
(Dollars in thousands)
Obligations of states and political
subdivisions ....................................
U.S. Government agency securities ...
Corporate obligations .........................
Other equity securities (1) ...................
$ 8,351
20,653
-
-
Total ...................................... $29,004
$15,029
73,772
-
-
$88,801
$ 64,845
75,968
716
-
$141,529
$347,764
48,476
-
13,810
$410,050
Percentage of total .............................
Cumulative percentage of total ..........
4.3%
4.3%
13.3%
17.6%
21.1%
38.7%
61.3%
100.0%
Total
$435,989
218,869
716
13,810
$669,384
100.0%
Weighted-average yield – FTE ..........
4.40%
3.32%
4.01%
6.55%
5.49%
(1) Includes approximately $13.4 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 as of the dates indicated and their respective percentage of total deposits are reflected in the following table.
Deposits
2013
December 31,
2012
(Dollars in thousands)
2011
Non-interest bearing .............................
Interest bearing:
$ 746,320
20.0%
$ 578,528
18.6%
$ 447,214
15.2%
Transaction (NOW) ...........................
Savings and money market ................
Time deposits less than $100,000 ......
Time deposits of $100,000 or more ...
Total deposits ...........................
839,632
1,233,865
471,052
426,158
$3,717,027
22.6
33.2
12.7
11.5
100.0%
806,293
935,385
443,233
337,616
$3,101,055
26.0
30.2
14.3
10.9
100.0%
738,926
839,523
508,675
409,581
$2,943,919
25.1
28.5
17.3
13.9
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 75.9% of total deposits at December 31, 2013, compared to 74.8% at December 31,
2012 and 68.8% at December 31, 2011. Non-CD deposits totaled $2.82 billion at December 31, 2013, compared to $2.32
billion at December 31, 2012 and $2.03 billion at December 31, 2011. Non-interest bearing deposits comprised 20.0% of
total deposits at December 31, 2013, compared to 18.6% at December 31, 2012 and 15.2% at December 31, 2011.
84
At December 31, 2013, the Company had outstanding brokered deposits of $49 million compared to $47 million at
December 31, 2012 and $41 million at December 31, 2011.
The following table reflects the average balance and average rate paid for each deposit category shown for the
years indicated.
Average Deposit Balances and Rates
Year Ended December 31,
2012
2013
Average
Average
Balance
Rate
Paid
Average
Balance
Average
Rate
Paid
2011
Average
Average
Balance
Rate
Paid
(Dollars in thousands)
Non-interest bearing accounts ........
Interest bearing accounts:
Transaction (NOW) ....................
Savings and money market .........
Time deposits less than $100,000
Time deposits $100,000 or more
Total deposits .........................
$ 639,521
-
$ 492,299
-
$ 392,780
-
765,503
1,033,189
444,862
390,894
$3,273,969
0.13%
0.25
0.31
0.28
0.23
713,539
866,370
444,451
351,002
$2,867,661
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
The following table sets forth, by time remaining to maturity, time deposits of $100,000 and over as of the date
indicated.
Maturity Distribution of Time Deposits of $100,000 and Over
December 31, 2013
(Dollars in thousands)
3 months or less ........................................
Over 3 to 6 months ...................................
Over 6 to 12 months .................................
Over 12 months ........................................
Total ...................................................
$155,184
94,289
116,230
60,455
$426,158
The amount and percentage of the Company’s deposits by state of originating office, as of the date indicated, are
reflected in the following table.
Deposits by State of Originating Office
Deposits Attributable
to Offices In
2013
Amount
%
December 31,
2012
Amount
%
(Dollars in thousands)
2011
Amount
%
Arkansas.........................
Georgia ..........................
North Carolina ...............
Texas ..............................
Alabama .........................
Florida ............................
South Carolina ...............
Total ....................
$1,671,498
634,060
629,241
492,069
137,345
124,894
27,920
$3,717,027
45.0%
17.1
16.9
13.2
3.7
3.4
0.7
100.0%
$1,714,455
673,702
20,057
390,532
152,653
135,957
13,699
$3,101,055
55.3%
21.7
0.7
12.6
4.9
4.4
0.4
100.0%
$1,582,294
751,087
12,952
419,422
11,966
157,230
8,968
$2,943,919
53.6%
25.5
0.5
14.3
0.4
5.4
0.3
100.0%
85
Other Interest Bearing Liabilities
The Company also relies on other interest bearing liabilities to fund its lending and investing activities. Such
liabilities consist of repurchase agreements with customers, other borrowings (primarily FHLB-Dallas advances and, to a
lesser extent, FRB borrowings and federal funds purchased) and subordinated debentures.
The following table reflects the average balance and average rate paid for each category of other interest bearing
liabilities for the years indicated.
Average Balances and Rates of Other Interest Bearing Liabilities
Year Ended December 31,
2012
2013
Average
Average
Balance
Rate
Paid
Average
Balance
Average
Rate
Paid
2011
Average
Average
Balance
Rate
Paid
Repurchase agreements with
customers .....................................
Other borrowings (1)........................
Subordinated debentures ................
Total other interest bearing
(Dollars in thousands)
$ 39,056
289,615
64,950
0.08%
3.72
2.65
$ 34,776
291,678
64,950
0.13%
3.68
2.85
$ 39,638
296,195
64,950
0.44%
3.66
2.68
liabilities ..................................
$393,621
3.35
$391,404
3.22
$400,783
3.18
(1)
Included in other borrowings at December 31, 2013, 2012 and 2011 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.
86
Capital Resources
Capital Resources and Liquidity
Subordinated Debentures. At December 31, 2013, 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, 2013 and 2012 are presented in the following table.
Common Stockholders’ Equity and Tangible Common Stockholders’ Equity
December 31,
2013
2012
(Dollars in thousands)
Tangible common stockholders’ equity before
noncontrolling interest .........................................
Less: intangible assets ...............................................
$ 624,958
(19,158)
Total tangible common stockholders’ equity ...... $ 605,800
Total assets ............................................................... $4,787,068
(19,158)
Less: intangible assets ...............................................
Total tangible assets .......................................... $4,767,910
$ 507,664
(11,827)
$ 495,837
$4,040,207
(11,827)
$4,028,380
Common stockholders’ equity to total assets ............
Tangible common stockholders’ equity total
13.06%
12.57%
tangible assets ......................................................
12.71%
12.31%
Common Stock Dividend Policy. In 2013 the Company paid dividends of $0.72 per share. In 2012 and 2011 the
Company paid dividends of $0.50 per share and $0.37 per share, respectively. In 2013, the per share dividend was $0.15 in
the first quarter, $0.17 in the second quarter, $0.19 in the third quarter and $0.21 in the fourth quarter. 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. On January 2, 2014, the Company’s board of directors approved a dividend of $0.22
per common share that was paid on January 24, 2014. The determination of future dividends on the Company’s common
stock will depend on conditions existing at that time and approval of the Company’s board of directors. See note 17 to the
Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion of dividend
restrictions.
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 AFS investment securities, but including,
subject to limitations, trust preferred securities, certain types of preferred stock and other qualifying items) to risk-weighted
87
assets and (2) total capital (Tier 1 capital plus Tier 2 capital which includes the qualifying portion of the ALLL 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 as of
the dates indicated and are presented in the following table, followed by the capital ratios of the Bank, as of the dates
indicated.
Consolidated Capital Ratios
December 31,
2013
2012
(Dollars in thousands)
Tier 1 capital:
Common stockholders’ equity...............................................................................
Allowed amount of trust preferred securities ........................................................
Net unrealized losses (gains) on investment securities AFS .................................
Less goodwill and certain intangible assets ...........................................................
Total Tier 1 capital .....................................................................................
$ 624,958
63,000
3,672
(19,158)
672,472
Tier 2 capital:
Qualifying ALLL ..................................................................................................
Total risk-based capital ..............................................................................
42,945
$ 715,417
Risk-weighted assets ..................................................................................................
$4,185,142
Adjusted quarterly average assets – fourth quarter ....................................................
$4,763,746
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 .........................................................................................
14.12%
16.07
17.09
3.00%
4.00
8.00
5.00%
6.00
10.00
$ 507,664
63,000
(10,783)
(11,827)
548,054
37,820
$ 585,874
$3,026,495
$3,806,635
14.40%
18.11
19.36
3.00%
4.00
8.00
5.00%
6.00
10.00
(1) Regulatory authorities require institutions to operate at varying levels (ranging from 100-200 bps) above a minimum Tier 1
leverage ratio of 3% depending upon capitalization classification.
Bank Capital Ratios
Stockholders’ equity – Tier 1 capital ............
Tier 1 leverage ratio .....................................
Tier 1 risk-based capital ratio .......................
Total risk-based capital ratio ........................
December 31,
2013
2012
(Dollars in thousands)
$655,793
$536,084
13.78%
15.69
16.72
14.13%
17.70
18.95
Basel III. On July 9, 2013, the FDIC and other federal banking regulators issued a final rule that will substantially
revise the risk-based capital requirements applicable to bank holding companies and insured depository institutions,
including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee
on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated
assets of $500 million or more and top-tier savings and loan holding companies.
88
The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets),
increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and
assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to
certain commercial real estate facilities that finance the acquisition, development or construction of real property.
The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year
transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2
capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain
deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be
required to be deducted from capital, subject to a two-year transition period. Finally, the new rules allow for insured
depository institutions to make a one-time election not to include most elements of accumulated other comprehensive
income in regulatory capital and instead effectively use the existing treatment under the general risk-based capital rules.
Insured depository institutions must make their accumulated other comprehensive income opt-out election in the first
Consolidated Reports of Condition and Income, Consolidated Financial Statements for Bank Holding Companies and Parent
Company Only Financial Statements for Large Bank Holding Companies reports that are filed for the first quarter of 2015.
The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and
other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate
acquisition, development and construction loans and the unsecured portion of non-residential mortgage loans that are 90
days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a
commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up
from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk
weights (from 0% to up to 600%) for equity exposures.
Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization
does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in
addition to the amount necessary to meet its minimum risk-based capital requirements.
The final rule becomes effective on January 1, 2015. The capital conservation buffer requirement will be phased in
beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on
January 1, 2019.
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
89
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, 2013 the Company had substantial unused borrowing availability. This availability was primarily
comprised of the following four options: (1) $619 million of available blanket borrowing capacity with the FHLB-Dallas,
(2) $138 million of investment securities available to pledge for federal funds or other borrowings, (3) $144 million of
available unsecured federal funds borrowing lines and (4) up to $95 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 and 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 secondary sources of borrowed funds described above
will be used to augment the Company’s primary funding sources.
On October 30, 2013, the FDIC and other federal banking regulators issued a notice of proposed rule that seeks to
establish a quantitative liquidity requirement consistent with the liquidity coverage ratio outlined in Basel III. The rule is
limited to insured depository institutions with total consolidated assets greater than $250 billion or more than $10 billion in
foreign exposures, and to any consolidated insured depository subsidiaries of one of these companies that has total
consolidated assets of $10 billion or more.
Sources and Uses of Funds. Operating activities provided net cash of $50 million in 2013, used net cash of $15
million in 2012 and provided net cash of $21 million in 2011. 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 used $75 million in 2013 and provided $188 million in 2012 and $793 million in 2011. Net
non-covered loans and leases used $545 million in 2013, $219 million in 2012 and $53 million in 2011. Payments received
on purchased non-covered loans provided $71 million in 2013, $3 million in 2012 and $26 million in 2011. Net activity in
the Company’s investment securities portfolio used $55 million in 2013, provided $37 million in 2012 and provided $112
million in 2011. The Company received $57 million of cash, net of amounts paid, in its acquisition of First National Bank in
2013. The Company received $29 million of cash, net of amounts paid, in its acquisition of Genala in 2012 and received
$365 million of cash in connection with its three FDIC-assisted acquisitions in 2011. Payments received on covered loans
provided $230 million in 2013, $212 million in 2012 and $206 million in 2011, and payments received from the FDIC
under loss share agreements provided $80 million in 2013, $144 million in 2012 and $109 million in 2011. Other loss share
activity provided $85 million in 2013, $22 million in 2012 and $8 million in 2011. Purchases of premises and equipment
used $10 million in 2013, $46 million in 2012 and $21 million in 2011. The Company purchased $59 million of BOLI in
2012 (none in 2013 or 2011). Proceeds from sales of other assets provided $13 million in 2013, $65 million in 2012 and
$42 million in 2011.
Financing activities provided $13 million in 2013 and used $23 million in 2012 and $804 million in 2011. The
Company’s net changes in deposit accounts provided $15 million in 2013 and $14 million in 2012 and used $712 million in
2011. The Company’s net repayments of other borrowings and repurchase agreements with customers provided $17 million
in 2013 and used $24 million in 2012 and $84 million in 2011. The Company paid common stock cash dividends of $25
million in 2013, $17 million in 2012 and $13 million in 2011. Proceeds and current tax benefits on exercise of stock options
provided $7 million in 2013, $6 million in 2012 and $5 million in 2011.
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Contractual Obligations. The following table presents, as of December 31, 2013, 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
Through
3 Years
Over 3
Through
5 Years
(Dollars in thousands)
Time deposits (1) ........................................... $ 728,335
Deposits without a stated maturity (2) ............
2,819,843
Repurchase agreements with customers (1) ....
40,195
Other borrowings (1) ......................................
11,770
Subordinated debentures (1) ...........................
1,865
1,123
Lease obligations ..........................................
35,432
Other obligations ..........................................
Total contractual obligations ................ $3,638,563
$116,548
-
-
21,691
3,398
1,825
6,934
$150,396
$ 22,244
-
-
278,566
3,398
961
1,861
$307,030
Over
5
Years
$ 300
-
-
20,688
75,477
983
33,815
$131,263
Total
$ 867,427
2,819,843
40,195
332,715
84,138
4,892
78,042
$4,227,252
(1)
(2)
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, 2013. 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.
Includes interest accrued and unpaid through December 31, 2013.
Off-Balance Sheet Commitments. The following table details the amounts and expected maturities of significant
off-balance sheet commitments as of December 31, 2013. Commitments to extend credit do not necessarily represent future
cash requirements as these commitments may expire without being drawn.
Off-Balance Sheet Commitments
1 Year
or
Less
Over 1
Through
3 Years
Over 3
Through
5 Years
(Dollars in thousands)
Over
5
Years
Total
Commitments to extend credit (1) ..................... $169,127
4,265
Standby letters of credit ...................................
Total commitments ................................. $173,392
$920,735
365
$921,100
$107,366
-
$107,366
$24,430
-
$24,430
$1,221,658
4,630
$1,226,288
(1) Includes commitments to extend credit under mortgage interest rate locks of $12.2 million that expire in one year or less.
Growth and Expansion
The Company is continuing its growth and de novo branching strategy. In 2012, the Company opened loan
production offices for its RESG in Austin, Texas and Atlanta, Georgia, and it opened additional retail banking offices in
The Colony and Southlake, both of which are in the metro-Dallas area, and in Mobile, Alabama. In March 2013, the
Company converted its Charlotte, North Carolina loan production office to a full-service retail banking office. In July 2013,
the Company opened a loan production office for its RESG in New York, New York, and in August 2013, the Company
relocated from a leased facility to a bank-owned facility in Bradenton, Florida.
On January 2, 2014, the Company opened a loan production office for its RESG in Houston, Texas, and on
February 24, 2014, it opened a RESG loan production office in Los Angeles, California. On February 26, 2014, the
Company relocated its Savannah, Georgia office from a leased facility to a bank-owned facility. In the first quarter of 2014,
the Company expects to open a third retail banking office in Bradenton, Florida, and in the second quarter of 2014, the
Company expects to open a retail banking office in Cornelius, North Carolina.
91
Opening new offices is subject to local banking market conditions, availability of suitable sites, hiring qualified
personnel, obtaining regulatory and other approvals and many other conditions and contingencies that the Company cannot
predict with certainty. The Company may increase or decrease its expected number of new office openings 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 2013 the Company spent $10 million on capital expenditures for premises and equipment. The Company’s
capital expenditures for 2014 are expected to be in the range of $12 million to $20 million, including progress payments on
construction projects expected to be completed in 2014 and 2015, 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 acquisitions, if any, and other factors.
On December 31, 2012 the Company completed its acquisition of Genala whereby Genala merged into the
Company in a transaction valued at $27.5 million. The Company paid $13.4 million of cash and issued 423,616 shares of its
common stock valued at $14.1 million in exchange for all outstanding shares of Genala common stock. This was the
Company’s first traditional acquisition since 2003. Genala was the holding company for The Citizens Bank, which operated
one banking office in Geneva, Alabama. Simultaneous with the closing of the transaction, The Citizens Bank was merged
into the Bank.
On July 31, 2013, the Company completed its acquisition of First National Bank, whereby First National Bank
merged with and into the Bank in a transaction valued at $68.5 million. The Company paid $8.4 million of cash and
issued 1,257,385 shares of its common stock valued at $60.1 million in exchange for all outstanding shares of First
National Bank common stock. The Company also acquired certain real property from parties related to First National
Bank and on which certain First National Bank offices are located for $3.8 million. The acquisition of First National Bank
expanded the Company’s service area in North Carolina by adding 14 offices in Shelby, North Carolina and the
surrounding communities. On September 24, 2013 the Company closed one of the acquired offices in Shelby, North
Carolina.
On December 9, 2013, the Company entered into a definitive agreement and plan of merger (“Bancshares
Agreement”) with Bancshares, Inc. (“Bancshares”) and its wholly-owned bank subsidiary OMNIBANK, N.A., which
operates seven offices in Texas, including Houston (3), San Antonio, Austin, Cedar Park and Lockhart. Under the terms of
the Bancshares Agreement, the Company will pay approximately $23 million in cash for all outstanding shares of
Bancshares common stock, subject to potential adjustments. Completion of the transaction, which is subject to certain
closing conditions, is expected to close in March 2014.
On January 30, 2014, the Company entered into a definitive agreement and plan of merger (“Summit
Agreement”) with Summit Bancorp, Inc. (“Summit”) and its wholly-owned bank subsidiary, Summit Bank, in a transaction
valued at approximately $216 million. Summit Bank operates 24 banking offices in central and southwestern Arkansas.
Under the terms of the Summit Agreement, each outstanding share of common stock of Summit will be converted, at the
election of each Summit 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 80% of the merger consideration paid to Summit shareholders will consist of shares of the Company’s common
stock. The number of Company shares to be issued will be determined based on Summit shareholder elections and the
Company’s 10-day average closing stock price as of the fifth business day prior to the closing date, subject to a minimum
agreed value of $43.58 per share and a maximum agreed value of $72.63 per share. Upon the closing of the transaction,
Summit will merge with and into the Company and Summit Bank will merge with and into the Bank. Completion of the
transaction is subject to certain closing conditions, including receipt of customary federal and state regulatory approvals
and the approval of the shareholders of Summit. The transaction is expected to close during the second quarter of 2014.
The Company expects to continue growing through both its de novo branching strategy and traditional acquisitions.
With respect to its de novo branching strategy, future de novo branches are expected to be focused in the seven states in
which the Company has retail banking offices, including Arkansas, Georgia, North Carolina, Texas, Florida, Alabama and
South Carolina. With respect to traditional acquisitions, the Company is focusing primarily on opportunities in the seven
states in which it operates retail banking offices and secondarily on opportunities in surrounding states, primarily Oklahoma,
Kansas, Missouri, Tennessee and Virginia. The Company is seeking acquisitions that are either immediately accretive to
book value, tangible book value, net income and diluted earnings per share, or strategic in location, or both.
92
Recently Issued Accounting Standards
See Note 1 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a
discussion of certain recently issued accounting pronouncements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
93
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, 2014. 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)
% Change in
Projected Baseline
Net Interest Income
+400
+300
+200
+100
-100
-200
-300
-400
4.5%
2.9
1.4
0.5
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.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes presented elsewhere in this report have been prepared in
accordance with 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.
94
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 2013 and 2012 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, 2013. 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, 2013 and 2012 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2013, 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, 2013, based on
criteria established in Internal Control-Integrated Framework issued in 1992 by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 28, 2014, expressed an unqualified opinion thereon.
Atlanta, Georgia
February 28, 2014
/s/ Crowe Horwath LLP
95
BANK OF THE OZARKS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2013
2012
(Dollars in thousands, except per share amounts)
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:
$ 195,094
881
195,975
669,384
2,632,565
372,723
351,791
(42,945)
3,314,134
71,854
245,472
11,851
37,960
14,359
143,473
19,158
63,448
$4,787,068
$ 746,320
2,073,497
897,210
3,717,027
53,103
280,895
64,950
25,897
16,768
4,158,640
$ 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
Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares
outstanding at December 31, 2013 and 2012
Common stock; $0.01 par value; 50,000,000 shares authorized; 36,855,852
and 35,271,724 shares issued and outstanding at December 31, 2013 and
2012, 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
-
-
369
143,385
484,876
(3,672)
624,958
3,470
628,428
$4,787,068
353
73,043
423,485
10,783
507,664
3,442
511,106
$4,040,207
See accompanying notes to the consolidated financial statements.
96
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Interest income:
Loans and leases
Purchased non-covered loans
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
BOLI income
Accretion of FDIC loss share receivable, net of amortization of
FDIC clawback payable
Other income from loss share and purchased non-covered loans, 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
Earnings attributable to noncontrolling interest
Net income available to common stockholders
Basic earnings per common share
Diluted earnings per common share
Year Ended December 31,
2011
2012
(Dollars in thousands, except per share amounts)
2013
$129,419
14,808
45,122
$115,108
254
61,820
$112,551
732
66,135
6,838
15,933
33
212,153
6,103
31
10,780
1,720
18,634
193,519
12,075
181,444
21,644
5,626
4,096
4,529
7,171
13,153
161
9,386
1,061
5,110
71,937
64,825
18,710
42,534
126,069
127,312
40,149
87,163
(28)
$ 87,135
$ 2.42
$ 2.41
2,949
15,807
8
195,946
8,982
47
10,723
1,848
21,600
174,346
11,745
162,601
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
110,999
33,935
77,064
(20)
$ 77,044
$ 2.22
$ 2.21
3,013
16,702
36
199,169
17,686
174
10,835
1,740
30,435
168,734
11,775
156,959
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
See accompanying notes to the consolidated financial statements.
97
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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
2013
Year Ended December 31,
2012
(Dollars in thousands)
2011
$87,163
$77,064
$101,303
(23,623)
9,266
2,852
(1,118)
16,555
(6,494)
included in net income
(161)
(457)
(933)
Tax effect of reclassification of gains and losses on investment securities
AFS included in net income
Total other comprehensive income (loss)
Total comprehensive income
63
(14,455)
$72,708
179
1,456
$78,520
366
9,494
$110,797
See accompanying notes to the consolidated financial statements.
98
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Balances – December 31, 2010
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income
Common stock dividends
paid, $0.37 per share
Issuance of 262,500 shares of
common stock for exercise
of stock options
Excess tax benefit on exercise
and forfeiture 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
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
(Dollars in thousands, except per share amount)
$341
-
$45,107
-
$275,074
101,303
-
-
-
3
-
-
-
1
-
-
-
4,029
482
1,528
-
(1)
18
-
(12,661)
-
-
-
-
-
$ (167)
-
-
9,494
-
-
-
-
-
-
Non-
controlling
Interest
$3,415
-
(18)
-
-
-
-
-
25
-
Total
$323,770
101,303
-
9,494
(12,661)
4,032
482
1,528
25
-
-
$345
-
$51,145
-
$363,734
-
$9,327
-
$3,422
-
$427,973
See accompanying notes to the consolidated financial statements.
99
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Balances – December 31, 2011
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income
Common stock dividends
paid, $0.50 per share
Issuance of 267,300 shares of
common stock for exercise
of stock options
Excess tax benefit on
exercise and forfeiture 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
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Treasury
Comprehensive
Stock
Income (Loss)
(Dollars in thousands, except per share amount)
Retained
Earnings
$345
-
$51,145
-
$363,734
77,064
-
-
-
3
-
-
-
1
-
-
-
-
3,976
1,538
2,607
-
(342)
-
(20)
-
(17,293)
-
-
-
-
-
-
$9,327
-
-
1,456
-
-
-
-
-
-
-
$ -
-
-
-
-
-
-
-
(341)
341
-
Non-
controlling
Interest
$3,422
-
20
-
-
-
-
-
-
-
-
Total
$427,973
77,064
-
1,456
(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.
100
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
(Dollars in thousands)
Treasury
Stock
Non-
controlling
Interest
Total
$353
-
$73,043
-
$423,485
87,163
$10,783
-
$ -
-
$3,442
-
$511,106
87,163
-
-
-
3
-
-
-
1
-
-
-
-
4,271
3,173
4,487
-
(1,371)
-
12
59,782
(28)
-
-
(14,455)
(25,744)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,370)
1,370
-
-
28
-
-
-
-
-
-
-
-
-
-
(14,455)
(25,744)
4,274
3,173
4,487
(1,370)
-
-
59,794
Balances – December 31, 2012
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income
Common stock dividends paid,
$0.72 per share
Issuance of 271,500 shares of
common stock for exercise
of stock options
Excess tax benefit on exercise
and forfeiture of stock
options and vesting of
common stock under
restricted stock plan
Stock-based compensation
expense
Repurchase of 27,957 shares
of common stock under
restricted stock plan
Issuance of 109,800 shares of
unvested common stock
under restricted stock plan
Forfeiture of 26,600 shares of
unvested common stock
under restricted stock plan
Issuance of 1,257,385 shares
of common stock for
acquisition of The First
National Bank of Shelby,
net of issuance costs of
$285,000
Balances – December 31, 2013
$369
$143,385
$484,876
$(3,672)
$ -
$3,470
$628,428
See accompanying notes to the consolidated financial statements.
101
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation
Amortization
Earnings attributable to noncontrolling interest
Provision for loan and lease losses
Provision for losses on foreclosed assets
Writedown of other assets
Net amortization of investment securities AFS
Net gains on investment securities AFS
Originations of mortgage loans held for sale
Proceeds from sales of mortgage loans held for sale
Accretion of covered loans
Accretion of purchased non-covered loans
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
Excess 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 provided (used) 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 of loans and leases
Payments received on purchased non-covered loans
Payments received on covered loans
Payments received from FDIC under loss share agreements
Other net decreases in covered assets and FDIC loss share receivable
Purchases of premises and equipment
Proceeds from sales of other assets
Purchase of BOLI
Cash (invested in) received from unconsolidated investments and noncontrolling interest
Net cash proceeds received in merger and acquisition transactions
Net cash (used) provided by investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Net proceeds from (repayments of) other borrowings
Net increase (decrease) in repurchase agreements with customers
Proceeds from exercise of stock options
Excess tax benefit on exercise of stock option 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 provided (used) by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
Year Ended December 31,
2012
2011
2013
(Dollars in thousands)
$ 87,163
$ 77,064
$ 101,303
7,196
2,805
(28)
12,075
1,352
379
515
(161)
(209,284)
230,391
(45,122)
(14,808)
(7,171)
(9,386)
(1,061)
(10,148)
(4,529)
(3,173)
4,487
(34)
8,653
49
50,160
999
85,959
(141,454)
(545,361)
70,925
229,949
80,269
84,900
(10,106)
13,123
-
(1,108)
56,786
(75,119)
15,354
132
17,148
4,274
3,173
(1,370)
(25,744)
12,967
(11,992)
207,967
$195,975
6,761
2,037
(20)
11,745
1,713
-
190
(457)
(252,998)
234,539
(61,820)
(254)
(7,375)
(6,809)
(2,403)
(7,808)
(2,767)
(1,538)
2,607
887
3,792
(12,784)
(15,698)
43,177
57,342
(63,064)
(219,209)
3,135
211,787
143,997
21,915
(46,099)
64,750
(59,000)
323
28,542
187,596
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)
(732)
(10,141)
(3,738)
(65,708)
11,866
(2,307)
(870)
1,528
1,551
13,637
14,844
20,588
94,676
31,052
(13,453)
(52,829)
26,345
205,788
109,001
8,122
(21,138)
41,847
-
(1,795)
365,394
793,010
(711,568)
(73,111)
(11,262)
4,032
870
-
(12,661)
(803,700)
9,898
49,029
$ 58,927
See accompanying notes to the consolidated financial statements.
102
Bank of the Ozarks, Inc.
Notes to Consolidated Financial Statements
December 31, 2013, 2012 and 2011
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, 2013, the Company had 131 offices, including 66 in Arkansas, 28 in Georgia, 15 in North
Carolina, 13 in Texas, four in Florida, three in Alabama, and one office each in South Carolina and New York.
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.
Cash and cash equivalents – For cash flow purposes, cash and cash equivalents include cash on hand, amounts due
from banks and interest earning 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, 2013 and 2012, the Company
has classified all of its investment securities as available for sale (“AFS”).
AFS investment securities are stated at estimated fair value, with the unrealized gains and losses determined on a
specific identification basis. Such unrealized gains and losses, net of tax, are reported as a separate component of
stockholders’ equity and included in other comprehensive income (loss). The Company utilizes independent third parties as
its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As
103
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 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, 2013 and 2012, the Company owned stock in the Federal Home Loan Bank of Dallas (“FHLB-
Dallas”) and First National Banker’s Bankshares, Inc. (“FNBB”), which 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.
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.
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 recorded 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.
104
Mortgage loans held for sale are included in the Company’s loans and leases and totaled $15.3 million and $36.4
million, respectively, at December 31, 2013 and 2012. 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, 2013 and 2012, 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 $12.8 million and $18.1 million at December 31, 2013
and 2012, 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 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 covered
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 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 covered 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 increases in expected cash
flows will result in an adjustment to accretable yield, which would have a positive impact on interest income. Subsequent
decreases in expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in
expected cash flows following any previous decrease 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. Any such increase or decrease in expected cash flows
will result in a corresponding adjustment of the FDIC loss share receivable or the accretion thereof and the FDIC clawback
payable or the amortization thereof 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
105
loans. In determining the net present value of the expected cash flows for purposes of establishing the Day 1 Fair Values,
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, 2013, 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
2.4 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 the performance of the portfolio of covered loans on an annual
basis, 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 or since management’s most recent review of such portfolio’s performance. To the extent that a
loan is performing in accordance with or exceeding management’s expectation established in conjunction with the
determination of the Day 1 Fair Values, such loan is rated FV1, 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. For any loan that is exceeding management’s performance expectation established in conjunction with the
determination of Day 1 Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance. 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 FV2, is included in certain of the Company’s credit quality
metrics, is 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.
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 non-FDIC-assisted acquisitions 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. To the
extent that any purchased non-covered loan is not specifically reviewed, such loan is assumed to have characteristics similar
to the characteristics of the aggregate acquired portfolio. 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 current information indicates it is probable that the Company will collect all amounts according to the
contractual terms thereof, such loan is not considered impaired and is not considered in the determination of the required
ALLL. 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.
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 a yield adjustment, 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
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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 increases in expected cash flows will result in an adjustment to
accretable yield, which will have a positive impact on interest income. Subsequent decreases in expected cash flows will
generally result in a provision for loan and lease losses. Subsequent increases in expected cash flows following any previous
decreases 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.
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
for purposes of establishing the Day 1 Fair Values, 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 the performance of the
portfolio of purchased non-covered loans with evidence of credit deterioration on an annual basis, 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 or since
management’s most recent review of such portfolio’s performance. 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 FV66, 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. For any
loan that is exceeding management’s performance expectation established in conjunction with the determination of Day 1
Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance. 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 88, is included in certain of the Company’s credit quality metrics, is 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.
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 initially
measured at Day 1 Fair Values, the FDIC loss share receivable is also initially 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 Day 1 Fair Values 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 and the accretion (or amortization) thereof is adjusted periodically to reflect changes in expectations of
discounted cash flows, expense reimbursements under the loss share agreements and other factors. The Company is
accreting (or amortizing) its FDIC loss share receivable over the shorter of (i) the contractual term of the indemnification
agreement (ten years for the single family loss share agreements, and five years for the non-single family loss share
agreements) or (ii) the remaining life of the indemnified asset.
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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, generally over
ten years, 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 balance of the FDIC clawback payable and the amortization thereof are adjusted periodically to reflect changes in
expected losses on covered assets and the impact of such changes on the clawback payable and other factors.
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 collectability 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 ALLL 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.
The Company’s internal grading system assigns one of nine grades, to all loans and leases, with each grade being
assigned an allowance allocation percentage, except residential 1-4 family loans, consumer loans, purchased non-covered
loans, covered loans, and certain other loans. The grade for each graded individual loan or lease is determined by the
account officer and other approving officers at the time of 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. The risk elements considered by management in its
determination of the appropriate grade for individual loans and leases include the following, among others: (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.
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Residential 1-4 family, consumer loans and certain other 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,
consumer loans and certain other 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 ALLL. 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 ALLL. 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 is 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 thereof, such loan is considered in the determination of the required level of ALLL and may result in an
allowance allocation or a charge-off.
At December 31, 2013 and 2012, 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, excluding purchased non-covered loans with evidence of credit
deterioration on the date of purchase and covered loans, 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 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 ALLL. 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, 2013, 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 with evidence of credit deterioration at the date of puchase 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. 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
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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 ALLL or is charged off as a reduction of the ALLL.
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
ALLL.
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 ALLL 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, 2013 or 2012.
The Company also includes specific ALLL allocations for qualitative factors including, among other factors, (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 ALLL 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 ALLL to be
increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may
require adjustments to the ALLL based on their judgment and estimates.
The accrual of interest on loans and leases, excluding purchased non-covered loans with evidence of credit
deterioration at the date of purchase 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 at the date of purchase 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.
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Foreclosed assets covered by FDIC loss share agreements – Foreclosed assets covered by FDIC loss share
agreements, or covered foreclosed assets, are initially 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 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 for purposes of
establishing the Day 1 Fair Values. Valuations of these assets are periodically reviewed by management with the carrying
value of such assets adjusted through non-interest income 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 on sales 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 (generally 8% to 10%) 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.
As a result of recording, at fair value, acquired assets and assumed liabilities pursuant to business combinations,
differences in amounts reported for financial statement purposes and their related basis for federal and state income tax
purposes are created. Such differences are recorded as deferred tax assets and liabilities using enacted tax rates in effect for
the year or years in which the differences are expected to be recovered or settled. Business combination transactions may
result in the acquisition of net operating loss carryforwards and other assets with built-in losses, the realization of which are
subject to limitations pursuant to section 382 (“section 382 limitations”) of the Internal Revenue Code (“IRC”). In
determining the section 382 limitation associated with a business combination, management must make a number of
estimates and assumptions regarding the ability to utilize acquired net operating loss carryforwards and the expected timing
of future recoveries or settlements of acquired assets with built-in losses. To the extent that information available as of the
date of acquisition results in a determination by management that some portion of net operating loss carryforwards cannot
be utilized or assets with built-in losses are expected to be settled or recovered in future periods in which the ability to
realize the benefits will be subject to section 382 limitations, a deferred tax valuation allowance is established for the
estimated amount of the deferred tax assets subject to the section 382 limitation. To the extent that information becomes
available, during the first 12 months following the consummation of a business combination transaction, that results in
changes in management’s initial estimates and assumptions regarding the expected utilization of net operating loss
carryforwards or the expected settlement or recovery of acquired assets with built-in losses subject to section 382
limitations, an increase or decrease of the deferred tax valuation allowance will be recorded as an adjustment to bargain
purchase gain or goodwill. To the extent that such information becomes available 12 months or more after the
consummation of a business combination transaction, or additional information becomes available during the first 12
months as a result of changes in circumstances since the date of the consummation of a business combination transaction, an
increase or decrease of the deferred tax valuation allowance will be recorded as an adjustment to deferred income tax
expense (benefit).
In connection with the acquisition of The First National Bank of Shelby (“First National Bank”), management
determined that net operating loss carryforwards and other assets with built-in losses are expected to be settled or otherwise
recovered in future periods where the realization of such benefits would be subject to section 382 limitations. Accordingly,
as of the date of acquisition and at December 31, 2013, the Company had established a deferred tax valuation allowance of
approximately $4.1 million to reflect its assessment that the realization of the benefits from the settlement or recovery of
certain of these acquired assets and net operating losses are expected to be subject to section 382 limitations. To the extent
that additional information becomes available, management may be required to adjust its estimates and assumptions
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regarding the realization of the benefits associated with these acquired assets by adjusting this deferred tax valuation
allowance.
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 2010.
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, 2013 and 2012. The Company performed its annual impairment test of
goodwill as of September 30, 2013. 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, 2013 and 2012, less accumulated amortization of $119,000 and
$107,000 at December 31, 2013 and 2012, 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 $20.6 million and $10.4 million at December 31, 2013 and 2012,
respectively, less accumulated amortization of $6.8 million and $3.9 million at December 31, 2013 and 2012, respectively.
The aggregate amount of amortization expense for the Company’s core deposit and bank charter intangibles is
expected to be $3.1 million in 2014; $2.8 million in 2015, $2.0 million in 2016, $1.7 million in 2017 and $1.7 million in
2018.
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, 2013, 2012
and 2011, the Company recognized $4.5 million, $2.6 million and $1.5 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.
112
Recent accounting pronouncements – In February 2013, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated
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 was for reporting periods beginning January 1,
2013. The adoption of these provisions did not have a material impact on the Company’s financial position, results of
operations or liquidity, but did increase the Company’s disclosures regarding amounts reclassified out of accumulated other
comprehensive income.
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 were effective
January 1, 2013 and did not have a material impact on the Company’s financial position, results of operations, 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 requires 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 is 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 is 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 are being applied
prospectively beginning January 1, 2013. The adoption of these provisions did not have a material change on the accounting
for the Company’s loss share receivable from the FDIC under its loss share agreements.
In January 2014, the FASB issued ASU 2014-04 “Receivables – Troubled Debt Restructurings by Creditors (Sub
topic 310-04) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.”
The provisions of this ASU clarify when an insubstance foreclosure occurs and require a creditor to reclassify a coll teralized
consumer mortgage loan to real estate owned upon obtaining legal title to the real estate collateral, or a deed in lieu of
foreclosure, or similar legal agreement that is voluntarily provided by the borrower to satisfy the loan. The ASU is effective
for reporting periods beginning January 1, 2014. The proposed provisions of ASU 2014-04 are not expected to have a
material impact on the Company’s financial position, results of operations, or liquidity.
a
Reclassifications and recasts – Certain reclassifications of prior years’ amounts have been made to conform with
the 2013 financial statements presentation. These reclassifications had no impact on prior years’ net income, as previously
reported.
113
2. Acquisitions
Non-FDIC-Assisted Acquisitions
On December 9, 2013, the Company entered into a definitive agreement and plan of merger (“Bancshares
Agreement”) with Bancshares, Inc. (“Bancshares”) headquartered in Houston, Texas and OMNIBANK, N.A., its wholly-
owned bank subsidiary which operates seven offices in Texas, including three offices in Houston and one office each in San
Antonio, Austin, Cedar Park and Lockhart. At December 31, 2013, Bancshares reported approximately $285 million in
total assets, approximately $165 million in loans and approximately $254 million in deposits.
Under the terms of the Bancshares Agreement, which has been unanimously approved by both the Company’s and
Bancshares’ board of directors and the Bancshares stockholders, the Company will pay aggregate cash consideration of
approximately $23 million for all outstanding shares of Bancshares common stock, subject to certain conditions and
potential adjustments. Completion of the transaction is subject to certain closing conditions.
On July 31, 2013, the Company completed the First National Bank acquisition whereby First National Bank
merged with and into the Company’s wholly-owned bank subsidiary in a transaction valued at $68.5 million. The Company
issued 1,257,385 shares of its common stock valued at $60.1 million, plus $8.4 million in cash in exchange for all
outstanding shares of First National Bank common stock. The Company also acquired certain real property from parties
related to First National Bank and on which certain First National Bank offices are located for $3.8 million in cash.
The acquisition of First National Bank expanded the Company’s service area in North Carolina by adding 14
offices in Shelby, North Carolina and the surrounding communities. On September 24, 2013 the Company closed one of the
acquired offices in Shelby, North Carolina.
114
The following table provides a summary of the assets acquired and liabilities assumed as recorded by First
National Bank, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair
value, and the resultant fair values of those assets and liabilities as recorded by the Company. 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
assumed liabilities. The fair value adjustments and the resultant fair values shown in the following table continue to be
evaluated by management and may be subject to further adjustment.
As Recorded by
First National
Bank
July 31, 2013
Fair Value
Adjustments
(Dollars in thousands)
As Recorded
by the
Company
Assets acquired:
Cash and due from banks ...................................
Investment securities ..........................................
Loans and leases ................................................
Allowance for loan losses ..................................
Premises and equipment .....................................
Foreclosed assets ................................................
Accrued interest receivable ................................
BOLI ..................................................................
Core deposit intangible asset ..............................
Deferred income taxes ........................................
Other ..................................................................
Total assets acquired ..................................
Liabilities assumed:
Deposits ..............................................................
Repurchase agreements with customers ..............
Accrued interest payable and other liabilities .....
Total liabilities assumed ............................
Net assets acquired ................................................
Consideration paid:
Cash ...................................................................
Common stock ...................................................
Total consideration paid ............................
Gain on acquisition ................................................
Explanation of fair value adjustments
$ 69,285
149,943
432,250
(13,931)
14,318
3,073
1,234
14,812
-
12,179
4,277
687,440
595,668
6,405
1,296
603,369
$ 84,071
$ -
(599)
(44,183)
13,931
5,064
(915)
(110)
-
10,136
12,325
(251)
(4,602)
4,950
-
1,164
6,114
$(10,716)
a
b
b
c
d
e
f
g
e
h
i
$ 69,285
149,344
388,067
-
19,382
2,158
1,124
14,812
10,136
24,504
4,026
682,838
600,618
6,405
2,460
609,483
73,355
(12,215)
(60,079)
(72,294)
$ 1,061
a- Adjustment reflects the fair value adjustment based on the Company’s pricing of the acquired investment securities portfolio.
b- Adjustment reflects the fair value adjustment 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 adjustment based on the Company’s evaluation of the premises and equipment acquired.
d- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired foreclosed assets.
e- Adjustment reflects the fair value adjustment based on the Company’s evaluation of accrued interest receivable and other assets.
f- Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.
g- This adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting
purposes and their basis for federal income tax purposes. Management has determined that acquired net operating loss
carryforwards and other acquired assets with built-in losses are expected to be settled or otherwise recovered in future periods
where the realization of such benefits would be subject to section 382 limitations. Accordingly, as of the date of acquisition, the
Company had established a deferred tax valuation allowance of approximately $4.1 million to reflect its assessment that the
realization of the benefits from the settlement or recovery of certain of these acquired assets and net operating losses are
expected to be subject to section 382 limitations. To the extent that additional information becomes available, management may
be required to adjust its estimates and assumptions regarding the realization of the benefits associated with these acquired assets
by adjusting this deferred tax valuation allowance.
h- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired deposits.
i- Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly
attributable to the acquisition of First National Bank.
115
Beginning August 1, 2013, First National Bank operations are included in the Company’s consolidated results of
operations and contributed $11.8 million in net interest income and $5.3 million in net income for the year ended December
31, 2013. The following unaudited supplemental pro forma information is presented to show the estimated results assuming
First National Bank was acquired as of the beginning of each period presented, adjusted for estimated potential costs
savings. These pro forma results are not necessarily indicative of the operating results that the Company would have
achieved had it completed the acquisition as of January 1, 2012 or 2013 and should not be considered as representative of
future operating results.
Year Ended
December 31,
2013
2012
(Dollars in thousands, except per
share amounts)
Net interest income – pro-forma (unaudited)
Net income – pro-forma (unaudited)
EPS – Diluted – pro-forma (unaudited)
$211,815
$ 94,052
$ 2.55
$206,905
$ 89,659
$ 2.48
On December 31, 2012, the Company completed its acquisition of Genala Banc, Inc. (“Genala”) whereby Genala
merged with and into the Company in a transaction valued at $27.5 million. The Company paid $13.4 million of cash and
issued 423,616 shares of its common stock valued at $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.
116
A summary of the assets acquired and liabilities assumed in the Genala acquisition is as follows:
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 ...................................
Gain in acquisition .......................................................
As Recorded by
Genala
December 31, 2012
Fair Value
Adjustments
(Dollars in thousands)
As recorded by
the Company (1)
$ 41,938
85,291
43,401
(1,247)
426
652
1,220
-
482
172,163
142,652
391
143,043
$ 29,120
a
b
b
c
d
e
f
g
$ -
2,344
(3,785)
1,247
590
(342)
-
1,656
(26)
1,684
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 adjustment 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 adjustment based on the Company’s evaluation of the premises and equipment
acquired.
d- Adjustment reflects the fair value adjustment 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.
117
FDIC-Assisted Acquisitions
During 2010 and 2011, the Company, through the Bank, acquired substantially all of the assets and assumed
substantially all of the deposits and certain other liabilities of seven failed financial institutions in FDIC-assisted
acquisitions. A summary of each acquisition is as follows:
Date of FDIC-
Assisted Acquisition
March 26, 2010
July 16, 2010
September 10, 2010
December 17, 2010
January 14, 2011
April 29, 2011
April 29, 2011
Failed Financial Institution
Unity National Bank (“Unity”)
Woodlands Bank (“Woodlands”)
Horizon Bank (“Horizon”)
Chestatee State Bank (“Chestatee”)
Oglethorpe Bank (“Oglethorpe”)
First Choice Community Bank (“First Choice”)
The Park Avenue Bank (“Park Avenue”)
Location
Cartersville, Georgia
Bluffton, South Carolina
Bradenton, Florida
Dawsonville, Georgia
Brunswick, Georgia
Dallas, Georgia
Valdosta, Georgia
Loans comprise the majority of the assets acquired in each of these FDIC-assisted acquisitions and, with the
exception of Unity, 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 the Unity
acquisition, all loans, including consumer loans, are subject to loss share agreement with the FDIC.
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 acquisition, 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 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 these FDIC-assisted 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.
118
3. Covered Loans, FDIC Loss Share Receivable, Covered Foreclosed Assets and FDIC Clawback Payable
A summary of covered loans, the FDIC loss share receivable, covered foreclosed assets and the FDIC clawback
payable is as follows:
December 31,
2013
2012
(Dollars in thousands)
Covered loans ................................................
FDIC loss share receivable ............................
Covered foreclosed assets ..............................
Total ........................................................
$351,791
71,854
37,960
$461,605
$596,239
152,198
52,951
$801,388
FDIC clawback payable .................................
$ 25,897
$ 25,169
Covered Loans
The following table presents a summary of the carrying value and type of covered loans.
December 31,
2013
2012
(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 ..........................
$111,053
163,707
47,743
11,150
9,166
342,819
8,719
111
142
$351,791
$152,348
288,104
105,087
19,690
10,701
575,930
18,496
176
1,637
$596,239
119
The following table presents a summary, by FDIC-assisted acquisition, of covered loans acquired as of the dates of
acquisition and activity within covered loans during the years indicated.
Unity
Woodlands
Horizon
Chestatee
Oglethorpe
(Dollars in thousands)
First
Choice
Park
Avenue
Total
At acquisition
date:
Contractually
required
principal and
interest .............
Nonaccretable
$208,410
$315,103
$179,441
$181,523
$174,110
$260,178
$452,658
$1,771,423
difference .........
(52,526)
(83,933)
(52,388)
(47,538)
(67,300)
(86,876)
(124,899)
(515,460)
Cash flows
expected to
be collected ......
Accretable
155,884
231,170
127,053
133,985
106,810
173,302
327,759
1,255,963
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
December 31,
2011 ......................
Accretion ............
Transfers to
covered
foreclosed
assets ..............
Payments
received ..........
Charge-offs .........
Other activity,
net ...................
Carrying value at
December 31,
2012 ......................
Accretion ............
Transfers to
covered
foreclosed
assets ..............
Payments
received ..........
Charge-offs .........
Other activity,
net ...................
$96,360
6,360
$131,775
10,031
$ 79,798
5,768
$ 74,701
5,708
$64,391
5,665
$131,923
9,915
$227,974
18,373
$806,922
61,820
(4,077)
(4,543)
(3,731)
(3,299)
(4,065)
(4,742)
(8,563)
(33,020)
(21,144)
(4,422)
(28,777)
(8,332)
(14,888)
(3,714)
(18,205)
(2,089)
(15,425)
(2,117)
(41,756)
(4,008)
(71,592)
(1,410)
(211,787)
(26,092)
(228)
(420)
(40)
(148)
(356)
(251)
(161)
(1,604)
72,849
5,994
99,734
7,383
63,193
4,591
56,668
4,108
48,093
4,015
91,081
7,141
164,621
11,890
596,239
45,122
(3,065)
(4,621)
(4,528)
(1,219)
(5,783)
(2,819)
(12,721)
(34,756)
(22,844)
(3,732)
(36,171)
(4,207)
(18,835)
(2,717)
(30,774)
(2,510)
(17,337)
(1,303)
(29,990)
(3,150)
(73,998)
(5,550)
(229,949)
(23,169)
(234)
(79)
(238)
(197)
(93)
(297)
(558)
(1,696)
Carrying value at
December 31,
2013 ...................... $ 48,968
$ 62,039
$ 41,466
$ 26,076
$ 27,592
$61,966
$ 83,684
$351,791
120
The following table presents a summary, by FDIC-assisted acquisition, of changes in the accretable difference on
covered loans during the years indicated.
Unity
Woodlands
Horizon
Chestatee
Oglethorpe
(Dollars in thousands)
First
Choice
Park
Avenue
Total
$10,614
(6,360)
$24,555
(10,031)
$24,432
(5,768)
$10,663
(5,708)
$17,338
(5,665)
$16,900
(9,915)
$47,147
(18,373)
$151,649
(61,820)
(159)
(719)
(364)
(1,220)
(190)
(1,418)
(448)
(811)
(700)
(1,291)
(455)
(1,529)
(1,679)
(3,507)
(3,995)
(10,495)
5,196
2
8,574
(5,994)
(620)
(738)
6,725
90
4,396
116
17,452
(7,383)
(618)
86
16,524
(4,591)
1,835
181
5,712
(4,108)
1,567
123
11,372
(4,015)
4,791
127
9,919
(7,141)
4,164
190
21,331
825
27,942
(11,890)
97,495
(45,122)
(276)
(688)
(97)
(2,486)
(101)
(2,206)
(394)
(721)
(41)
(1,671)
(1,732)
(7,260)
(3,261)
(15,770)
6,913
198
4,992
86
4,669
229
4,972
97
8,535
20
6,089
515
42,895
1,235
Accretable difference at
December 31, 2011 ........
Accretion........................
Adjustments to accretable
difference due to:
Transfers to covered
foreclosed assets ....
Covered loans paid off
Cash flow revisions as
a result of renewals
and/or modifications
Other, net ...................
Accretable difference at
December 31, 2012 ........
Accretion........................
Adjustments to accretable
difference due to:
Transfers to covered
foreclosed assets ....
Covered loans paid off
Cash flow revisions as
a result of renewals
and/or modifications
Other, net ...................
Accretable difference at
December 31, 2013 ........
$ 8,037
$16,216
$14,428
$ 4,195
$11,311
$9,621
$13,664
$77,472
121
FDIC Loss Share Receivable
The following table presents a summary, by FDIC-assisted acquisition, of the FDIC loss share receivable as of the
dates of acquisition.
Unity
Woodlands
Horizon
Chestatee
Oglethorpe
(Dollars in thousands)
First
Choice
Park
Avenue
Total
At acquisition date:
Expected principal
loss on covered
assets:
Covered loans ....
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 ......
$50,354
$73,220
$40,537
$46,869
$62,890
$82,212
$113,872
$469,954
9,979
5,897
3,678
15,960
7,907
628
49,850
93,899
60,333
79,117
44,215
62,829
70,797
82,840
163,722
563,853
80%
80%
80%
80%
80%
80%
80%
80%
48,266
63,294
35,372
50,263
56,638
66,272
130,978
451,083
(4,119)
(7,428)
(6,283)
(4,204)
(5,535)
(6,268)
(14,724)
(48,561)
$44,147
$55,866
$29,089
$46,059
$51,103
$60,004
$116,254
$402,522
(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.
122
The following table presents a summary, by FDIC-assisted acquisition, of the activity within the FDIC-loss share
receivable during the years indicated.
Unity
Woodlands
Horizon
Chestatee
(Dollars in thousands)
Oglethorpe
First
Choice
Park
Avenue
Total
$27,575
793
$29,177
1,108
$21,757
680
$29,382
725
$37,720
1,310
$48,442
1,485
$84,992
2,473
$279,045
8,574
(12,945)
(14,433)
(8,948)
(22,301)
(13,062)
(29,870)
(42,438)
(143,997)
(2,394)
(3,377)
(1,335)
(2,122)
(4,918)
(6,208)
(12,657)
(33,011)
3,170
6,417
2,297
1,589
1,627
3,151
1,028
19,279
1,591
1,193
450
1,858
294
278
3,181
8,845
1,537
491
1,726
562
1,360
598
1,276
755
1,318
(293)
1,097
(457)
3,064
429
11,378
2,085
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 carrying
value ..........................
Increase in FDIC loss
share receivable for:
Charge-offs of
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
Accretion income
(amortization
expense) ....................
Cash received from
FDIC .........................
Reductions of FDIC
loss share receivable
for payments on
covered loans in
excess of carrying
value ..........................
Increase in FDIC loss
share receivable for:
Charge-offs of
covered loans ......
Write downs of
covered
foreclosed assets .
Expenses on covered
assets reimbursable
by FDIC ....................
Other activity, net ..........
Carrying value at
(210)
339
163
379
993
2,307
4,449
8,420
(7,459)
(9,648)
(9,839)
(4,259)
(9,029)
(11,145)
(28,890)
(80,269)
(2,786)
(4,094)
(4,723)
(6,123)
(6,369)
(3,605)
(9,596)
(37,296)
2,125
3,324
2,506
2,104
961
2,635
4,200
17,855
1,161
563
137
303
16
394
2,360
4,934
1,140
103
1,588
(114)
1,049
(421)
373
(251)
1,215
(1,664)
1,177
(345)
3,427
(1,265)
9,969
(3,957)
December 31, 2013 .......
$13,892
$14,331
$ 5,731
$ 3,688
$10,119
$ 9,336
$14,757
$71,854
123
Foreclosed Assets Covered by FDIC Loss Share Agreements
The following table presents a summary, by FDIC-assisted 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 years indicated.
Unity
Woodlands
Horizon
Chestatee
Oglethorpe
(Dollars in thousands)
First
Choice
Park
Avenue
Total
At acquisition date:
Balance on acquired
bank’s books ....... $20,304
(9,979)
Total expected losses
Discount for net
$12,258
(5,897)
$8,391
(3,678)
$31,647
(15,960)
$16,554
(7,907)
$2,773
(628)
$91,442
(49,850)
$183,369
(93,899)
present value of
expected cash
flows ....................
Fair value at
(1,466)
(1,332)
(1,030)
(2,281)
(1,562)
(474)
(10,412)
(18,557)
acquisition date ....
$ 8,859
$ 5,029
$3,683
$13,406
$ 7,085
$1,671
$31,180
$ 70,913
Carrying value at
December 31, 2011 ..
Transfers from
$10,272
$14,435
$3,677
$ 9,677
$ 7,132
$2,224
$25,490
$ 72,907
covered loans .......
4,077
4,543
3,731
3,299
4,065
4,742
8,563
33,020
Sales of covered
foreclosed assets ...
(4,467)
(9,304)
(4,285)
(7,111)
(4,063)
(3,038)
(11,719)
(43,987)
Writedowns of
covered
foreclosed assets ...
Carrying value at
December 31, 2012 ..
Transfers from
covered loans .......
3,065
Sales of covered
(1,695)
(1,624)
(585)
(1,654)
(337)
(344)
(2,750)
(8,989)
8,187
8,050
4,621
2,538
4,528
4,211
1,219
6,797
5,783
3,584
19,584
52,951
2,819
12,721
34,756
foreclosed assets ....
(5,823)
(5,251)
(3,129)
(3,102)
(8,399)
(3,350)
(16,900)
(45,954)
Writedowns of
covered
foreclosed assets ...
Carrying value at
December 31, 2013 ..
(1,449)
(529)
(135)
(324)
(51)
(424)
(881)
(3,793)
$ 3,980
$ 6,891
$3,802
$ 2,004
$ 4,130
$2,629
$14,524
$ 37,960
The following table presents a summary of the carrying value and type of covered foreclosed assets.
December 31,
2013
2012
(Dollars in thousands)
Real estate:
Residential 1-4 family ............................
Non-farm/non-residential .......................
Construction/land development ..............
Agricultural ............................................
Multifamily residential ...........................
Total real estate ................................
Repossessions ................................................
Total covered foreclosed assets .......
$ 5,004
14,301
17,202
1,054
399
37,960
-
$37,960
$12,279
9,570
30,602
449
51
52,951
-
$52,951
124
FDIC Clawback Payable
The following table presents a summary, by FDIC-assisted acquisition, of the FDIC clawback payable as of the
dates of acquisition and activity within the FDIC clawback payable during the years indicated.
Unity
Woodlands
Horizon
Chestatee
(Dollars in thousands)
Oglethorpe
First
Choice
Park
Avenue
Total
At acquisition date:
Estimated FDIC
clawback payable ....
$2,612
$4,846
$2,380
$1,291
$1,721
$1,452
$24,344
$38,646
Discount for net
present value on
FDIC clawback
payable ....................
Net present value of
FDIC clawback
payable at
acquisition date .......
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 .......
Amortization expense .
Changes in FDIC
clawback payable
related to changes in
expected losses on
covered assets .........
Carrying value at
December 31, 2013 .......
(1,046)
(1,905)
(919)
(499)
(664)
(560)
(9,399)
(14,992)
$1,566
$2,941
$1,461
$ 792
$1,057
$ 892
$14,945
$23,654
$1,709
79
$3,153
138
$1,552
73
$ 759
35
$1,099
53
$ 923
45
$15,450
776
$24,645
1,199
(144)
1,644
79
(305)
(157)
2,986
132
1,468
72
-
794
36
(69)
1,083
58
-
968
45
-
(675)
16,226
827
25,169
1,249
(93)
(82)
(120)
(79)
(50)
-
(97)
(521)
$1,630
$3,036
$1,420
$ 751
$1,091
$1,013
$16,956
$25,897
125
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 and FNBB shares
which do not have readily available fair values and are carried at cost.
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair
Value
December 31, 2013:
Obligations of states and political
subdivisions ........................................
U.S. Government agency securities .........
Corporate obligations ..............................
Other equity securities ............................
Total investment securities AFS ......
$438,390
222,510
716
13,810
$675,426
December 31, 2012:
Obligations of states and political
subdivisions ........................................
U.S. Government agency securities .........
Corporate obligations ..............................
Other equity securities ............................
Total investment securities AFS ......
$345,224
116,835
776
13,689
$476,524
$6,230
2,352
-
-
$8,582
$16,586
1,466
-
-
$18,052
$ (8,631)
(5,993)
-
-
$(14,624)
$(293)
(17)
-
-
$(310)
$435,989
218,869
716
13,810
$669,384
$361,517
118,284
776
13,689
$494,266
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.
Less than 12 Months
Estimated
Fair Value
Unrealized
Losses
12 Months or More
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Total
Estimated
Fair Value
Unrealized
Losses
December 31, 2013:
Obligations of states and
political subdivisions .............
$132,568
$ 7,237
$10,823
$1,394
$143,391
$ 8,631
U.S. Government agency
securities ................................
Total temporarily impaired
127,274
5,993
-
-
127,274
5,993
investment securities ........
$259,842
$13,230
$10,823
$1,394
$270,665
$14,624
December 31, 2012:
Obligations of states and
political subdivisions .............
$14,085
U.S. Government agency
securities ................................
Total temporarily impaired
14,320
investment securities ........
$28,405
$188
17
$205
$7,324
$105
$21,409
-
-
14,320
$7,324
$105
$35,729
$293
17
$310
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, 2013 and 2012, 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.
126
A maturity distribution of investment securities AFS reported at amortized cost and estimated fair value as of
December 31, 2013 is as follows:
Amortized
Cost
Estimated
Fair Value
(Dollars in thousands)
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 ...............................................
$ 28,844
88,370
143,046
415,166
$675,426
$ 29,004
88,801
141,529
410,050
$669,384
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 securities and municipal housing authority securities backed by residential mortgages are
allocated among various maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment
speeds and interest rate levels at December 31, 2013. 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:
Sales proceeds.............................................................
$999
2013
Year Ended December 31,
2012
(Dollars in thousands)
$43,177
2011
$94,676
Gross realized gains ...................................................
Gross realized losses ..................................................
Other-than-temporary impairment charges .................
Net gains on investment securities .......................
$161
-
-
$161
$ 3,075
(15)
(2,603)
$ 457
$ 1,044
(111)
-
$ 933
Investment securities with carrying values of $510.7 million and $317.1 million at December 31, 2013 and 2012,
respectively, were pledged to secure public funds and trust deposits and for other purposes required or permitted by law.
At December 31, 2013 and 2012, the Company had no holdings of investment securities of any one issuer in an
amount greater than 10% of total common stockholders’ equity.
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,
2013
2012
(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 .................................................
Direct financing leases .............................
Other ........................................................
Total loans and leases ......................
$ 249,556
1,104,114
722,557
45,196
208,337
2,329,760
124,068
26,182
86,321
66,234
$2,632,565
127
9.5%
41.9
27.4
1.8
7.9
88.5
4.7
1.0
3.3
2.5
100.0%
$ 272,052
807,906
578,776
50,619
141,243
1,850,596
159,804
29,781
68,022
7,631
$2,115,834
12.9%
38.1
27.4
2.4
6.7
87.5
7.6
1.4
3.2
0.3
100.0%
The above table includes deferred fees, net of deferred costs, that totaled $3.0 million and $1.7 million at
December 31, 2013 and 2012, respectively. Direct financing leases are presented net of unearned income totaling $10.1
million and $8.4 million at December 31, 2013 and 2012, respectively.
Loans and leases on which the accrual of interest has been discontinued aggregated $8.7 million and $9.1 million at
December 31, 2013 and 2012, respectively. Interest income collected and recognized during 2013, 2012 and 2011 for
nonaccrual loans and leases at December 31, 2013, 2012 and 2011 was $0.2 million, $0.2 million and $0.4 million,
respectively. Under the original terms, these loans and leases would have reported $0.6 million, $0.7 million and $1.2
million of interest income during 2013, 2012 and 2011, respectively.
The following table is a summary of the purchased non-covered loan portfolio, by principal category.
December 31,
2013
2012
(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 ................................................
$131,085
152,948
25,633
9,518
17,210
336,394
24,934
6,855
4,540
$372,723
35.2%
41.0
6.9
2.6
4.6
90.3
6.7
1.8
1.2
100.0%
$19,222
4,842
1,950
3,021
-
29,035
5,333
4,168
2,998
$41,534
46.3%
11.7
4.7
7.3
-
70.0
12.8
10.0
7.2
100.0%
6. Allowance for Loan and Lease Losses (“ALLL”) and Credit Quality Indicators
Allowance for Loan and Lease Losses
The following table is a summary of activity within the ALLL.
2013
Year Ended December 31,
2012
(Dollars in thousands)
2011
Balance – beginning of year .....................................................
Non-covered loans and leases charged off ................................
Recoveries of non-covered loans and leases previously
charged off ...........................................................................
Net non-covered loans and leases charged off ..........................
Covered loans charged off, net .................................................
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 .....................................................
$38,738
(4,327)
1,134
(3,193)
(4,675)
(7,868)
7,400
4,675
12,075
$42,945
$39,169
(6,636)
655
(5,981)
(6,195)
(12,176)
5,550
6,195
11,745
$38,738
$40,230
(12,988)
427
(12,561)
(275)
(12,836)
11,500
275
11,775
$39,169
As of December 31, 2013 and 2012, the Company identified covered loans 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 $4.7 million for
such loans during 2013 and $6.2 million for such loans during 2012. The Company also recorded $4.7 million during 2013
and $6.2 million during 2012 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
128
actions, the Company had $46.2 million and $38.5 million of impaired covered loans at December 31, 2013 and 2012,
respectively.
As of and for the years ended December 31, 2013 and 2012, the Company had no impaired purchased non-covered
loans and recorded no charge-offs, partial charge-offs or provision for such loans.
The following table is a summary of the Company’s ALLL for the years indicated.
Ending
Balance
$ 4,701
13,633
12,306
3,000
2,504
2,855
917
2,266
763
-
-
$42,945
$ 4,820
10,107
12,000
2,878
2,030
3,655
1,015
2,050
183
-
-
$38,738
Beginning
Balance
Charge-offs
Recoveries
(Dollars in thousands)
Provision
Year ended December 31, 2013:
Real estate:
Residential 1-4 family .................
Non-farm/non-residential ............
Construction/land development ...
Agricultural .................................
Multifamily residential ................
Commercial and industrial .............
Consumer .......................................
Direct financing leases ...................
Other ..............................................
Covered loans ................................
Purchased non-covered loans .........
Total ...............................
Year ended 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 ...............................................
Covered loans .................................
Purchased non-covered loans ..........
Total ................................
$ 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
$ 106
122
174
14
4
433
104
33
144
-
-
$1,134
$ 107
18
106
141
-
35
238
2
8
-
-
$655
$ 612
4,515
269
369
474
(311)
12
665
795
4,675
-
$12,075
$ 2,177
(888)
2,882
351
(534)
352
300
777
133
6,195
-
$11,745
$ (837)
(1,111)
(137)
(261)
(4)
(922)
(214)
(482)
(359)
(4,675)
-
$(9,002)
$ (1,312)
(1,226)
(466)
(997)
-
(1,323)
(732)
(361)
(219)
(6,195)
-
$(12,831)
129
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 the dates indicated.
Allowance for Loan and Lease 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
Total
ALLL
Individually
Evaluated
Impaired
Loans and
Leases
(Dollars in thousands)
December 31, 2013:
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, 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 ..............................
$ 438
15
2
229
-
652
3
-
2
$1,341
$ 518
53
7
254
-
649
-
-
2
$1,483
$ 4,263
13,618
12,304
2,771
2,504
2,203
914
2,266
761
$41,604
$ 4,302
10,054
11,993
2,624
2,030
3,006
1,015
2,050
181
$37,255
$ 4,701
13,633
12,306
3,000
2,504
2,855
917
2,266
763
$42,945
$ 4,820
10,107
12,000
2,878
2,030
3,655
1,015
2,050
183
$38,738
$4,047
2,159
236
883
-
686
50
-
26
$8,087
$2,906
2,898
542
985
-
761
33
-
22
$8,147
All Other
Loans and
Leases
Total
Loans and
Leases
$ 245,509
1,101,955
722,321
44,313
208,337
123,382
26,132
86,321
66,208
$2,624,478
$ 269,146
805,008
578,234
49,634
141,243
159,043
29,748
68,022
7,609
$2,107,687
$ 249,556
1,104,114
722,557
45,196
208,337
124,068
26,182
86,321
66,234
$2,632,565
$ 272,052
807,906
578,776
50,619
141,243
159,804
29,781
68,022
7,631
$2,115,834
130
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 indicated.
Principal
Balance
Net
Charge-offs
to Date
Principal
Balance,
Net of
Charge-offs
(Dollars in thousands)
Weighted
Average
Carrying
Value
Specific
Allowance
As of and year ended December 31,
2013:
Impaired loans and leases for which there
is a related ALLL:
Real estate:
Residential 1-4 family ........................
Non-farm/non-residential ...................
Construction/land development ..........
Agricultural ........................................
Commercial and industrial(1) ................
Consumer .............................................
Other .....................................................
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 ........................................
Multi-family ........................................
Commercial and industrial ...................
Consumer ............................................
Other .....................................................
Total impaired loans and leases
without a related ALLL....................
Total impaired loans and leases ................
As of and year ended December 31,
2012:
Impaired loans and leases for which there
is a related ALLL:
Real estate:
Residential 1-4 family ........................
Non-farm/non-residential ...................
Construction/land development ..........
Agricultural ........................................
Commercial and industrial(1) .................
Consumer .............................................
Other .....................................................
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 ...................
Total impaired loans and leases ................
$ 3,609
121
38
511
2,016
178
40
6,513
2,939
3,234
300
426
133
85
39
31
7,187
$13,700
$ 1,887
204
711
599
1,473
243
527
5,644
1,550
4,267
837
801
443
31
159
8,088
$13,732
$(1,692)
(75)
(22)
(42)
(1,405)
(156)
(25)
(3,417)
(808)
(1,120)
(81)
(12)
(133)
(10)
(12)
(20)
(2,196)
$(5,613)
$ (219)
(1)
(660)
(40)
(911)
(240)
(517)
(2,588)
(312)
(1,572)
(346)
(375)
(244)
(1)
(147)
(2,997)
$(5,585)
$1,917
46
16
469
611
22
15
3,096
2,131
2,114
219
414
-
75
27
11
4,991
$8,087
$1,668
203
51
559
562
3
10
3,056
1,238
2,695
491
426
199
30
12
5,091
$8,147
$ 438
15
2
229
652
3
2
1,341
-
-
-
-
-
-
-
-
-
$1,341
$ 518
53
7
254
649
-
2
1,483
-
-
-
-
-
-
-
-
$1,483
$1,638
93
17
514
578
10
10
2,860
1,541
4,344
303
404
124
172
24
9
6,921
$9,781
$1,622
234
38
291
620
8
24
2,837
1,721
2,432
600
374
426
31
13
5,597
$8,434
(1) Includes $66,000 and $95,000 at December 31, 2013 and 2012, respectively, of specific allowance related to the unfunded
portion of an unexpired letter of credit for a previous customer of the Bank.
Management has determined that certain of the Company’s impaired loans and leases do not require any specific
allowance at December 31, 2013 and 2012 because (i) management’s analysis of such individual loans and leases resulted in
no impairment or (ii) all identified impairment on such loans and leases has previously been charged off.
131
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, 2013, 2012 and 2011 was not
material.
Credit Quality Indicators
Loans and Leases, Excluding Purchased Non-Covered Loans and Covered Loans
The following table is a summary of credit quality indicators for the Company’s total loans and leases.
Satisfactory
Moderate
Watch
(Dollars in thousands)
Substandard
Total
December 31, 2013:
Real estate:
Residential 1-4 family (1) ...............
Non-farm/non-residential ..............
Construction/land development.....
Agricultural ...................................
Multifamily residential ..................
Commercial and industrial .................
Consumer (1) .......................................
Direct financing leases .......................
Other (1) ..............................................
Total ........................................
December 31, 2012:
Real estate:
Residential 1-4 family (1) ...............
Non-farm/non-residential ..............
Construction/land development.....
Agricultural ...................................
Multifamily residential ..................
Commercial and industrial .................
Consumer (1) .......................................
Direct financing leases .......................
Other (1) ..............................................
Total ........................................
$ 239,940
916,304
550,436
21,647
177,144
87,568
25,574
85,363
63,799
$2,167,775
$ 263,737
649,494
395,821
25,854
112,360
121,898
29,079
66,657
6,116
$1,671,016
$ -
128,624
144,435
11,098
30,029
33,071
-
955
2,237
$350,449
$ -
109,429
130,057
12,105
24,092
31,338
-
1,365
1,204
$309,590
$ 3,140
52,388
23,574
9,788
391
1,664
230
-
119
$91,294
$ 3,146
38,231
37,069
9,509
4,009
3,950
424
-
239
$96,577
$ 6,476
6,798
4,112
2,663
773
1,765
378
3
79
$23,047
$ 5,169
10,752
15,829
3,151
782
2,618
278
-
72
$38,651
$ 249,556
1,104,114
722,557
45,196
208,337
124,068
26,182
86,321
66,234
$2,632,565
$ 272,052
807,906
578,776
50,619
141,243
159,804
29,781
68,022
7,631
$2,115,834
(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 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.
132
The following table is an aging analysis of past due loans and leases.
30-89 Days
Past Due (1)
90 Days
or More (2)
Total
Past Due
Current (3)
Total
(Dollars in thousands)
December 31, 2013:
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, 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 .......................................
$ 4,228
2,093
235
517
773
418
261
-
18
$ 8,543
$ 3,656
3,284
868
952
312
1,091
425
-
9
$10,597
$2,004
1,867
153
540
-
31
78
-
24
$4,697
$1,160
2,524
329
570
-
185
57
-
-
$4,825
$ 6,232
3,960
388
1,057
773
449
339
-
42
$13,240
$ 4,816
5,808
1,197
1,522
312
1,276
482
-
9
$15,422
$ 243,324
1,100,154
722,169
44,139
207,564
123,619
25,843
86,321
66,192
$2,619,325
$ 267,236
802,098
577,579
49,097
140,931
158,528
29,299
68,022
7,622
$2,100,412
$ 249,556
1,104,114
722,557
45,196
208,337
124,068
26,182
86,321
66,234
$2,632,565
$ 272,052
807,906
578,776
50,619
141,243
159,804
29,781
68,022
7,631
$2,115,834
(1) Includes $0.8 million and $1.0 million of loans and leases on nonaccrual status at December 31, 2013 and 2012,
respectively.
(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, 2013 and 2012.
(3) Includes $3.2 million and $3.3 million of loans and leases on nonaccrual status at December 31, 2013 and 2012,
respectively.
133
Covered Loans
The following table is a summary of credit quality indicators for the Company’s covered loans.
Total
Covered
Loans
FV 2
(Dollars in thousands)
FV 1
December 31, 2013:
Real estate:
Residential 1-4 family ..................
Non-farm/non-residential .............
Construction/land development ....
Agricultural ..................................
Multifamily residential .................
Commercial and industrial .................
Consumer ...........................................
Other ..................................................
Total ........................................
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 ........................................
$105,218
138,573
33,475
10,807
8,709
8,582
106
142
$305,612
$146,687
271,705
90,321
18,937
9,871
18,495
123
1,637
$557,776
$ 5,835
25,135
14,267
343
457
137
5
-
$46,179
$ 5,661
16,399
14,766
753
830
1
53
-
$38,463
$111,053
163,708
47,742
11,150
9,166
8,719
111
142
$351,791
$152,348
288,104
105,087
19,690
10,701
18,496
176
1,637
$596,239
134
The following table is an aging analysis of past due covered loans.
30-89 Days
Past Due
90 Days
or More
Total
Past Due
(Dollars in thousands)
Current
December 31, 2013:
Real estate:
Residential 1-4 family......................
Non-farm/non-residential ................
Construction/land development .......
Agricultural .....................................
Multifamily residential ....................
Commercial and industrial ....................
Consumer ..............................................
Other .....................................................
Total .............................................
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 .............................................
$ 5,341
6,954
2,173
237
375
605
10
-
$15,695
$ 9,539
18,476
6,693
1,063
-
901
29
-
$36,701
$12,409
32,462
20,914
1,328
3,240
2,001
-
-
$72,354
$ 20,958
55,753
42,604
3,338
3,345
4,133
5
-
$130,136
$17,750
39,416
23,087
1,565
3,615
2,606
10
-
$88,049
$ 30,497
74,229
49,297
4,401
3,345
5,034
34
-
$166,837
$ 93,303
124,292
24,655
9,585
5,551
6,113
101
142
$263,742
$121,851
213,875
55,790
15,289
7,356
13,462
142
1,637
$429,402
Total
Covered
Loans
$111,053
163,708
47,742
11,150
9,166
8,719
111
142
$351,791
$152,348
288,104
105,087
19,690
10,701
18,496
176
1,637
$596,239
At December 31, 2013 and 2012, 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 or exceed management’s expectations established in
conjunction with the determination of the Day 1 Fair Values.
135
Purchased Non-Covered Loans
The following table is a summary of credit quality indicators for the Company’s purchased non-covered loans.
December 31, 2013:
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 .............................
December 31, 2012:
Real estate ...............................
Residential 1-4 family .........
Non-farm/non-residential ....
Construction/land
development ....................
Agricultural .........................
Total real estate ............
Commercial and industrial.......
Consumer ...............................
Other .......................................
Total .............................
FV 33
$27,111
42,193
5,930
1,547
3,531
80,312
9,592
1,013
1,202
$92,119
$ 3,400
420
438
784
5,042
576
857
222
$ 6,697
Purchased Non-Covered Loans Without
Evidence of Credit Deterioration at Acquisition
FV 55
FV 44
FV 36
(Dollars in thousands)
FV 77
Purchased Non-
Covered Loans With
Evidence of Credit
Deterioration at
Acquisition
FV 66
FV 88
Total
Purchased
Non-Covered
Loans
$ 32,259
72,621
8,106
6,619
5,565
125,170
9,730
141
2,897
$137,938
$ 7,363
1,370
659
826
10,218
1,802
231
110
$ 12,361
$21,035
20,685
2,137
823
5,268
49,948
2,250
171
157
$52,526
$ 4,937
2,680
130
710
8,457
1,788
79
107
$10,431
$35,733
1,191
4,553
164
959
42,600
1,879
4,794
237
$49,510
$ 921
10
134
164
1,229
384
1,341
2,336
$ 5,290
$ -
-
-
-
-
-
-
-
-
$ -
$ -
-
-
-
-
-
-
-
$ -
$14,947
16,258
4,907
365
1,887
38,364
1,483
736
47
$40,630
$ 2,601
362
589
537
4,089
783
1,660
223
$ 6,755
$ -
-
-
-
-
-
-
-
-
$ -
$ -
-
-
-
-
-
-
-
$ -
$131,085
152,948
25,633
9,518
17,210
336,394
24,934
6,855
4,540
$372,723
$ 19,222
4,842
1,950
3,021
29,035
5,333
4,168
2,998
$ 41,534
The following grades are used for purchased non-covered loans without evidence of credit deterioration at the date
of acquisition.
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.
136
The following grades are used for purchased non-covered loans with evidence of credit deterioration at the date of
acquisition.
FV 66 – Loans in this category are performing in accordance with or exceeding management’s performance
expectations established in conjunction with the Day 1 Fair Values.
FV 88 – Loans in this category have deteriorated from management’s performance expectations established in
conjunction with the determination of Day 1 Fair Values.
The following table is an aging analysis of past due purchased non-covered loans.
30-89 Days
Past Due
90 Days
or More
Total
Past Due
Current
(Dollars in thousands)
December 31, 2013:
Real estate:
Residential 1-4 family ..............
Non-farm/non-residential .........
Construction/land development
Agriculture ...............................
Multifamily residential .............
Commercial and industrial .............
Consumer .......................................
Other ..............................................
Total
December 31, 2012:
Real estate:
Residential 1-4 family ..............
Non-farm/non-residential .........
Construction/land development
Agriculture ...............................
Commercial and industrial .............
Consumer .......................................
Other ..............................................
Total .....................................
$ 6,615
4,886
265
134
421
614
411
-
$13,346
$ 2,322
319
148
272
855
431
434
$ 4,781
$ 4,703
5,779
4,045
25
1,225
388
237
33
$16,435
$ 1,594
205
322
904
2,589
1,295
259
$ 7,168
$11,318
10,665
4,310
159
1,646
1,002
648
33
$29,781
$ 3,916
524
470
1,176
3,444
1,726
693
$11,949
$119,767
142,283
21,323
9,359
15,564
23,932
6,207
4,507
$342,942
$ 15,306
4,318
1,480
1,845
1,889
2,442
2,305
$ 29,585
Total
Purchased
Non-Covered
Loans
$131,085
152,948
25,633
9,518
17,210
24,934
6,855
4,540
$372,723
$ 19,222
4,842
1,950
3,021
5,333
4,168
2,998
$ 41,534
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 years indicated.
2011
2013
Year Ended December 31,
2012
(Dollars in thousands)
$31,762
9,047
(25,482)
(1,713)
310
$13,924
$13,924
9,464
(12,343)
(1,352)
2,158
$11,851
$42,216
10,676
(11,719)
(9,525)
114
$31,762
Balance – beginning of year ....................................................
Loans and other assets transferred into foreclosed assets ........
Sales of foreclosed assets ........................................................
Writedowns of foreclosed assets .............................................
Foreclosed assets acquired in acquisitions...............................
Balance – end of year ..............................................................
137
The following table is a summary of the amount and type of foreclosed assets not covered by FDIC loss share
agreements.
Real estate:
December 31,
2013
2012
(Dollars in thousands)
Residential 1-4 family .......................................................................
Non-farm/non-residential...................................................................
Construction/land development .........................................................
Agricultural........................................................................................
Multifamily residential ......................................................................
Total real estate ............................................................................
Commercial and industrial ....................................................................
Consumer ..............................................................................................
Foreclosed assets not covered by FDIC loss share agreements.....
$ 1,604
4,380
5,359
222
211
11,776
75
-
$11,851
$ 2,863
2,481
8,072
378
-
13,794
102
28
$13,924
8. Premises and Equipment
The following table is a summary of premises and equipment.
December 31,
2013
2012
(Dollars in thousands)
Land ................................................................................................
Construction in process ...................................................................
Buildings and improvements ...........................................................
Leasehold improvements .................................................................
Equipment .......................................................................................
Gross premises and equipment .................................................
Accumulated depreciation ...............................................................
Premises and equipment, net ...........................................................
$ 75,770
2,781
154,640
5,048
56,526
294,765
(49,293)
$245,472
$ 72,499
2,498
135,840
5,158
51,548
267,543
(41,789)
$225,754
The Company capitalized $0.1 million of interest on construction projects during each of the years ended
December 31, 2013, 2012 and 2011. Included in occupancy expense is rent of $1.4 million, $1.6 million and $2.0 million
incurred under noncancelable operating leases in 2013, 2012 and 2011, 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, 2013 are as follows: $1.1 million in 2014, $1.0 million in
2015, $0.8 million in 2016, $0.6 million in 2017, $0.4 million in 2018 and $1.0 million thereafter. Rental income
recognized for leases of buildings and premises under operating leases was $1.1 million during 2013, $1.2 million during
2012 and $1.1 million during 2011.
9. Deposits
The following table is a summary of the scheduled maturities of time deposits.
December 31,
2013
2012
(Dollars in thousands)
Up to one year .................................................................
Over one to two years ......................................................
Over two to three years ....................................................
Over three to four years ...................................................
Over four to five years .....................................................
Thereafter ........................................................................
Total time deposits ................................................
$742,069
107,395
25,217
12,107
10,138
284
$897,210
$684,118
65,138
25,425
3,366
2,188
614
$780,849
The aggregate amount of time deposits with a minimum denomination of $100,000 was $426.2 million and $337.6
million at December 31, 2013 and 2012, respectively.
138
10. Borrowings
Short-term borrowings with original maturities less than one year include FHLB-Dallas advances, Federal Reserve
Bank (“FRB”) borrowings and federal funds purchased. The following table is a summary of information relating to these
short-term borrowings.
Average annual balance ..............................................
December 31 balance .................................................
Maximum month-end balance during year .................
Interest rate:
Weighted-average – year ........................................
Weighted-average – December 31 ..........................
December 31,
2013
2012
(Dollars in thousands)
$ 8,767
-
60,775
$10,900
-
58,925
0.27%
-
0.36%
-
At both December 31, 2013 and 2012, the Company had fixed rate FHLB-Dallas advances with original maturities
exceeding one year of $280.9 million and $280.8 million, respectively. These fixed rate advances bear interest at rates
ranging from 0.89% to 4.54% at December 31, 2013, 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, 2013,
the Bank had $619 million of unused FHLB-Dallas borrowing availability.
The following table is a summary of aggregate annual maturities and weighted-average interest rates of FHLB-
Dallas advances with an original maturity of over one year as of December 31, 2013.
Maturity
Amount
(Dollars in thousands)
2014
2015
2016
2017
2018
Thereafter
Total
$ 40
41
28
260,030
20,154
602
$280,895
Weighted-
Average
Interest Rate
2.78%
2.80
3.53
3.89
2.53
4.54
3.80
Included in the above table are $280.0 million of FHLB-Dallas advances that contain quarterly call features. The
following table is a summary of the weighted-average interest rates and maturity dates of such callable advances as of
December 31, 2013.
Amount
Weighted-
Average
Interest Rate
(Dollars in thousands)
Callable quarterly .... $260,000
20,000
Callable quarterly ....
Total ................. $280,000
3.90%
2.53
3.80
Maturity
2017
2018
139
11. Subordinated Debentures
At December 31, 2013 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
(Dollars in thousands)
Interest Rate at
December 31, 2013
Final Maturity
Date
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
3.20%
3.15
2.47
1.85
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, 2013 and 2012, 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, 2013 and 2012, the sole assets of the Trusts were the respective adjustable rate debentures and the liabilities
of the respective Trusts were the 2003 Securities, the 2004 Securities and the 2006 Securities. At both December 31, 2013
and 2012, the Trusts had aggregate common equity of $1.9 million and did not have any restricted net assets. 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.
140
12. Income Taxes
The following table is a summary of the components of the provision (benefit) for income taxes.
2013
Year Ended December 31,
2012
(Dollars in thousands)
2011
Current:
Federal ...............................................................
State ...................................................................
Total current ...............................................................
Deferred:
Federal ...............................................................
State ...................................................................
Total deferred .............................................................
Provision for income taxes .........................................
$43,750
6,547
50,297
(8,689)
(1,459)
(10,148)
$40,149
$37,254
4,489
41,743
(6,384)
(1,424)
(7,808)
$33,935
$33,360
4,982
38,342
10,230
1,636
11,866
$50,208
The following table is a summary of the reconciliation between the statutory federal income tax rate and effective
income tax rate for the years indicated.
Year Ended December 31,
2012
2013
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 ..........................
35.0%
2.6
(4.4)
(1.2)
(0.5)
31.5%
35.0%
1.8
(5.0)
(0.8)
(0.4)
30.6%
2011
35.0%
2.8
(3.8)
(0.5)
(0.4)
33.1%
Income tax benefits from the exercise of stock options and vesting of common stock under the Company’s
restricted stock plan in the amount of $3.2 million, $1.5 million and $0.9 million in 2013, 2012 and 2011, respectively, were
recorded as an increase to additional paid-in capital.
At December 31, 2013, current income taxes receivable of $3.0 million were included in other assets. At
December 31, 2012, current income taxes payable of $2.8 million were included in other liabilities.
141
The following table is a summary of 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.
Deferred tax assets:
Allowance for loan and lease losses ....................................
Differences in amounts reflected in financial statements
and income tax basis of purchased non-covered loans ...
Stock-based compensation .................................................
Deferred compensation ........................................................
Foreclosed assets .................................................................
Investment securities AFS ...................................................
Differences in amounts reflected in financial statements
and income tax basis of assets acquired and liabilities
assumed in FDIC-assisted acquisitions ..........................
Acquired net operating losses ..............................................
Other, net .............................................................................
Total gross deferred tax assets ......................................................
Less valuation allowance ....................................................
Net deferred tax asset ...................................................................
Deferred tax liabilities:
Accelerated depreciation on premises and equipment .........
Investment securities AFS ...................................................
Differences in amounts reflected in financial statements
and income tax basis of assets acquired and liabilities
assumed in FDIC-assisted acquisitions ..........................
Acquired intangible assets ...................................................
Other, net .............................................................................
Total gross deferred tax liabilities ................................................
December 31,
2013
2012
(Dollars in thousands)
$16,576
$16,227
17,167
2,400
1,775
3,165
5,056
3,424
7,509
3,858
60,930
(4,102)
56,828
17,459
-
-
4,227
-
21,686
-
1,831
1,767
3,258
-
-
-
-
23,083
-
23,083
14,196
8,083
8,810
639
246
31,974
Net deferred tax assets (liabilities) ...............................................
$35,142
$(8,891)
The net operating losses were acquired from the First National Bank transaction and totaled $19.0 million, of
which $11.5 million expires in 2032 and $7.5 million expires in 2033.
At December 31, 2013, the Company had established a deferred tax valuation allowance of approximately $4.1
million to reflect its assessment that the realization of the benefits from the settlement or recovery of certain of these
acquired assets and net operating losses are expected to be subject to section 382 limitations.
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 IRC. 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 IRC. During 2012, the Company 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 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 IRC section 401(k)(3)
or the average contribution percentage test described in IRC 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. Certain other statutory limitations with respect to the Company's contribution under the 401(k)
Plan also apply. Matching contributions made by the Company prior to the 401(k) Plan becoming a Safe Harbor CODA vest
over six years and are held in trust until distributed pursuant to the terms of the 401(k) Plan.
142
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 2013, 2012 and 2011 of $1.8 million, $0.9 million and $0.8 million, respectively.
The Company also maintains the Bank of the Ozarks, Inc. Deferred Compensation Plan (the “Plan”), which is an
unfunded deferred compensation arrangement for the group of employees designated as key employees, including certain of
the Company’s executive officers. 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. During 2012, the Company had 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. Effective January 1, 2013, the Plan was amended such that the Company
no longer makes any contribution to the Plan for the benefit of each participant or otherwise. Amounts deferred under the
Plan are invested in certain approved investments (excluding securities of the Company or its affiliates). Company
contributions to the Plan in 2012 and 2011 totaled $122,000 and $123,000, respectively, with no contributions to the Plan in
2013. At December 31, 2013 and 2012, the Company had Plan assets, along with an equal amount of liabilities, totaling
$3.9 million and $4.2 million, respectively, recorded on the accompanying consolidated balance sheet.
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 2013, 2012 and 2011, respectively, the Company accrued $180,000, $161,000 and $148,000 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, 2013 were issued with a vesting period of three years and expire seven years after issuance. At
December 31, 2013 there were 428,400 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 2,000 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 2,000 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.
143
The following table summarizes stock option activity for both the employee and non-employee director stock
option plans for the year ended December 31, 2013.
Weighted-
Average
Exercise
Price/Share
Weighted-
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding – January 1, 2013 ........
Granted ............................................
Exercised .........................................
Forfeited ..........................................
Outstanding – December 31, 2013 ..
Fully vested and exercisable at
December 31, 2013 .....................
Expected to vest in future periods ....
Fully vested and expected to vest at
December 31, 2013 (2) ...................
Options
957,150
263,000
(271,500)
(65,350)
883,300
239,300
515,960
$22.12
48.79
15.74
26.92
31.67
$19.61
755,260
$30.91
5.5
4.3
5.4
$22,011 (1)
$ 8,850(1)
$19,394(1)
(1) Based on closing price of $ 56.59 per share on December 31, 2013.
(2) At December 31, 2013 the Company estimates that options to purchase 128,040 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 2013, 2012 and 2011 was
$7.7 million, $4.4 million and $2.2 million, respectively.
Options to purchase 263,000 shares, 268,550 shares and 235,200 shares, respectively, were granted during 2013,
2012 and 2011 with a weighted-average grant date fair value of $11.22, $9.58, and $7.30, respectively. The fair value for
each option grant is estimated on the date of grant using the Black-Scholes option pricing model.
The following table is a summary of the weighted-average assumptions used in the Black-Scholes option pricing
model for the years indicated.
Risk-free interest rate .....................................
Expected dividend yield .................................
Expected stock volatility ................................
Expected life (years) .......................................
Year Ended December 31,
2012
0.71%
1.87%
40.6%
5.0
2013
1.30%
1.85%
30.2%
5.0
2011
1.15%
1.68%
40.1%
5.0
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 total fair value of options to purchase shares of the Company’s common stock that vested during 2013, 2012
and 2011 was $1.2 million, $0.5 million and $0.7 million, respectively. Stock-based compensation expense for stock options
included in non-interest expense was $1.7 million, $1.1 million and $0.8 million for 2013, 2012 and 2011, respectively.
Total unrecognized compensation cost related to nonvested stock-based compensation was $3.6 million at December 31,
2013 and is expected to be recognized over a weighted-average period of 2.3 years.
The Company has a restricted stock plan that permits issuance of up to 800,000 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
144
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, 2013 there were
387,550 shares available for future grants under this plan.
The following table summarizes non-vested restricted stock activity for the year ended December 31, 2013.
Outstanding – January 1, 2013 .....................
Granted .........................................................
Forfeited .......................................................
Earned and issued .........................................
Outstanding – December 31, 2013 ...............
Weighted-average grant date fair value ........
Shares
295,250
109,800
(26,600)
(70,400)
308,050
$35.97
Restricted stock awards of 109,800 shares, 128,150 shares and 95,700 shares, respectively, were granted during
2013, 2012 and 2011 with a weighted-average grant date fair value of $49.59, $31.86 and $23.69, 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 $2.8 million, $1.6 million and $0.8 million for 2013, 2012 and 2011, respectively. Unrecognized compensation expense
for nonvested restricted stock awards was $7.9 million at December 31, 2013 and is expected to be recognized over a
weighted-average period of 2.4 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 primarily 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.
At December 31, 2013, the Company had outstanding commitments to extend credit, excluding mortgage interest
rate lock commitments, totaling $1.21 billion. While many of these commitments are expected to be disbursed within the
next 12 months, the following table shows the contractual maturities of outstanding commitments to extend credit at
December 31, 2013.
Contractual Maturities at
December 31, 2013
Maturity
Amount
(Dollars in thousands)
2014
2015
2016
2017
2018
Thereafter
Total
$ 156,942
128,397
499,279
293,059
107,366
24,430
$1,209,473
145
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, 2013 and 2012 is $4.6 million and $19.1 million, respectively. The Company holds collateral to
support letters of credit when deemed necessary. The total of collateralized commitments at December 31, 2013 and 2012
was $4.4 million and $18.9 million, respectively.
16. Related Party Transactions
The Company has, 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 ..........................................
2013
$ 2,526
15,680
(12,273)
1,068
$ 7,001
Year Ended December 31,
2012
(Dollars in thousands)
$ 2,150
19,778
(19,447)
45
$ 2,526
2011
$ 3,374
16,978
(18,202)
-
$ 2,150
The Company had outstanding commitments to extend credit to related parties totaling $5.8 million and $10.6
million at December 31, 2013 and 2012, respectively.
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, 2013 and 2012 the Company’s and
the Bank’s Tier 1 and total capital ratios and their Tier 1 leverage ratios exceeded minimum requirements.
146
The following table is a summary of the actual and required regulatory capital amounts and ratios of the Company
and the Bank as of the dates indicated.
Required
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
(Dollars in thousands)
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
December 31, 2013:
Total capital (to risk-
weighted assets):
Company .....................
Bank ............................
$715,417
698,738
17.09%
16.72
$334,799
334,348
8.00%
8.00
$418,499
417,935
10.00%
10.00
Tier 1 capital (to risk-
weighted assets):
Company .....................
Bank ............................
672,472
655,793
16.07
15.69
167,400
167,174
4.00
4.00
251,100
250,761
6.00
6.00
Tier 1 leverage (to average
assets):
Company .....................
Bank ............................
672,472
655,793
14.12
13.78
142,912
142,788
3.00
3.00
238,187
237,979
5.00
5.00
December 31, 2012:
Total capital (to risk-
weighted assets):
Company .....................
Bank ............................
$585,874
573,926
19.36%
18.95
$242,120
242,263
8.00%
8.00
$302,650
302,829
10.00%
10.00
Tier 1 capital (to risk-
weighted assets):
Company .....................
Bank ............................
548,054
536,084
18.11
17.70
121,060
121,132
4.00
4.00
181,590
181,697
6.00
6.00
Tier 1 leverage (to average
assets):
Company .....................
Bank ............................
548,054
536,084
14.40
14.13
114,199
113,812
3.00
3.00
190,332
189,687
5.00
5.00
As of December 31, 2013 and 2012, 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.
In July 2013, the Federal Reserve Board and other United States (“U.S.”) banking regulatory agencies approved a
final rule to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision (“Basel III”)
that establishes a new capital framework for U. S. Banking organizations. When implemented on January 1, 2015, Basel III
will increase existing risk-based capital requirements, introduce new requirements, and change various capital component
definitions.
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, 2013 and 2012, respectively, $43.9 million and $40.4 million were available
for payment of dividends by the Bank without the approval of regulatory authorities.
147
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 $67 million and $56
million, respectively, at December 31, 2013 and 2012.
The Bank is required by bank regulatory agencies to maintain certain minimum balances of cash or deposits
primarily with the FRB. At December 31, 2013 and 2012, these required balances aggregated $12.8 million and $10.1
million, respectively.
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.
148
The following table sets forth the Company’s assets that are accounted for at fair value. At December 31, 2013
and 2012, the Company had no liabilities that were accounted for at fair value.
December 31, 2013:
Investment securities AFS(1):
Obligations of state and political
subdivisions .....................................
U.S. Government agency 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, 2012:
Investment securities AFS(1):
Obligations of state and political
subdivisions .....................................
U.S. Government agency 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 ..............
Level 1
Level 2
Level 3
(Dollars in thousands)
Total
$ -
-
-
-
-
-
$417,307
218,869
716
636,892
-
-
$ 18,682
-
-
18,682
8,087
46,179
$435,989
218,869
716
655,574
8,087
46,179
-
-
11,851
11,851
-
$ -
-
$636,892
37,960
$122,759
37,960
$759,651
$ -
-
-
-
-
-
$332,107
43,522
776
376,405
-
-
$ 29,410
74,762
-
104,172
6,664
38,463
$361,517
118,284
776
480,577
6,664
38,463
-
-
13,924
13,924
-
$ -
-
$376,405
52,951
$216,174
52,951
$592,579
(1) Does not include $13.8 million at December 31, 2013 and $13.7 million at December 31, 2012 of shares of FHLB-Dallas and
FNBB stock that do not have readily determinable fair values and are carried at cost.
149
The following table presents information related to Level 3 non-recurring fair value measurements at December 31,
2013.
Description
Fair Value at
December 31, 2013
Technique
Unobservable Inputs
Impaired non-covered
loans and leases
$ 8,087
(Dollars in thousands)
Third party
appraisal(1) or
discounted cash flows
Impaired covered loans
$46,179
Foreclosed assets not
covered by FDIC loss
share agreements
Foreclosed assets covered
by FDIC loss share
agreements
$11,851
$37,960
Third party
appraisal(1) and/or
discounted cash flows
Third party
appraisal(1), broker
price opinions and/or
discounted cash flows
Third party
appraisal(1), 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
2. Discount rate
1. Management discount
based on asset
characteristics and market
conditions
2. Discount rate
3. Holding period
1. Management discount
based on asset
characteristics and market
conditions
2. Discount rate
3. Holding period
(1) The Company utilizes valuation techniques consistent with the market, cost, and income approaches, or a combination
thereof in determining fair value.
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. 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 has determined that certain of its investment securities had a limited to non-existent trading market
at December 31, 2013 and 2012. 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 $18.7 million and $23.1 million at December 31,
2013 and 2012, 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, 2013 and 2012, the third party pricing matrices valued the
Company’s total portfolio of private placement bonds at $18.7 million and $23.8 million, respectively, which was equal to
the par value of the private placement bonds at December 31, 2013 and exceeded the lower of the matrix pricing or par
150
value of the private placement bonds by $0.7 million at December 31, 2012. Accordingly, at December 31, 2013 and 2012
the Company reported the private placement bonds at $18.7 million and $23.1 million, respectively.
Impaired non-covered loans and leases – Fair values are measured on a non-recurring basis based on the
underlying collateral value of the impaired loan or lease, reduced for 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 $7.0 million and $7.1 million, respectively, to the estimated fair value of
$6.7 million, for such loans and leases at December 31, 2013 and 2012. These adjustments to reduce the carrying value of
impaired loans and leases to estimated fair value at December 31, 2013 and 2012 consisted of $5.6 million and $5.6 million,
respectively, of partial charge-offs and $1.4 million and $1.5 million, respectively, of specific loan and lease loss
allocations.
Impaired covered loans – Impaired covered loans are measured at fair value on a non-recurring basis. As of
December 31, 2013 and 2012, the Company had identified covered loans 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 $4.7 million for 2013 and $6.2
million for 2012 for such loans. The Company also recorded $4.7 million for 2013 and $6.2 million for 2012 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 $46.2 million and
$38.5 million of impaired covered loans at December 31, 2013 and 2012, respectively.
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 (generally 8% to 10%) 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 initially 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 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 for purposes of
establishing the Day 1 Fair Values. Valuations of these assets are periodically reviewed by management with the carrying
value of such assets adjusted through non-interest income 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.
151
The following table presents additional information for the periods indicated 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
(Dollars in thousands)
Balances – December 31, 2011 ....................................
Total realized gains/(losses) included in earnings .....
Total unrealized gains/(losses) included in other
comprehensive income ..........................................
Paydowns and maturities ...........................................
Acquired in Genala acquisition .................................
Sales ..........................................................................
Transfers in and/or out of Level 3 .............................
Balances – December 31, 2012 ....................................
Total realized gains/(losses) included in earnings .....
Total unrealized gains/(losses) included in other
comprehensive income ..........................................
Paydowns and maturities ...........................................
Sales ..........................................................................
Transfers in and/or out of Level 3 .............................
Balances – December 31, 2013 ....................................
$ 24,192
-
359
(1,150)
81,121
(350)
-
$104,172
-
(1,941)
(32,762)
-
(50,787)
$ 18,682
During 2013 and 2012, there were no transfers of assets or liabilities measured at fair value between Level 1 and
Level 2 fair value hierarchy.
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. 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 $13.8 million and $13.7 million at
December 31, 2013 and 2012 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.
152
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, 2013 and 2012.
The fair values of certain of these instruments were calculated by discounting expected cash flows, which contain
numerous uncertainties and involve significant judgments by management. Fair value is the estimated amount at which
financial assets or liabilities could be exchanged in a current transaction between willing parties other than in a forced or
liquidation sale. Because no market exists for certain of these financial instruments and because management does not
intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values
at which the respective financial instruments could be sold individually or in the aggregate.
The following table presents the estimated fair values of the Company’s financial instruments.
Fair
Value
Hierarchy
Carrying
Amount
December 31,
2013
2012
Estimated
Fair
Value
Carrying
Amount
(Dollars in thousands)
Estimated
Fair
Value
Financial assets:
Cash and cash equivalents .....................
Investment securities AFS .....................
Loans and leases, net of ALLL ..............
FDIC loss share receivable ...................
Level 1
Levels 2 and 3
Level 3
Level 3
$ 195,975
669,384
3,314,134
71,854
$ 195,975
669,384
3,286,600
71,770
$ 207,967
494,266
2,714,869
152,198
$ 207,967
494,266
2,683,896
152,565
Financial liabilities:
Demand, savings and money market
account deposits.................................
Time deposits .......................................
Repurchase agreements with customers
Other borrowings ..................................
FDIC clawback payable........................
Subordinated debentures ......................
Level 1
Level 2
Level 1
Level 2
Level 3
Level 2
$2,819,817
897,210
53,103
280,895
25,897
64,950
$2,819,817
897,708
53,103
319,650
25,897
30,974
$2,320,206
780,849
29,550
280,763
25,169
64,950
$2,320,206
781,784
29,550
328,881
25,169
30,523
153
20. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
2013
Year Ended December 31,
2012
(Dollars in thousands)
2011
Cash paid during the period for:
Interest .........................................................................................
Taxes ...........................................................................................
$18,929
49,453
$22,540
49,888
$32,202
18,448
Supplemental schedule of non-cash investing and financing
activities:
Loans transferred to foreclosed assets not covered by FDIC
loss share agreements ............................................................
9,464
9,047
10,676
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 investment
securities AFS .......................................................................
Common stock issued in merger and acquisition transactions .
Unsettled AFS investment security purchases ..........................
2,942
34,756
(23,784)
60,079
917
12,710
33,020
2,395
14,123
2,513
675
29,014
15,622
-
-
21. Other Operating Expenses
The following table is a summary of other operating expenses.
2013
Year Ended December 31,
2012
(Dollars in thousands)
2011
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 and other assets ....................
Amortization of intangible assets ..................................
Other ..............................................................................
Total other operating expenses .............................
$ 3,297
3,419
2,205
6,690
5,400
2,236
695
1,875
1,036
4,381
1,203
2,805
7,292
$42,534
$ 3,195
3,374
4,089
4,401
3,265
2,705
703
1,505
871
6,135
1,713
2,037
5,648
$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
154
22. Earnings Per Common Share (“EPS”)
The following table sets forth the computation of basic and diluted EPS.
Year Ended December 31,
2013
2011
2012
(In thousands, except per share amounts)
Numerator:
Distributed earnings allocated to common
stockholders................................................................
$25,744
$17,293
$ 12,661
Undistributed earnings allocated to common
stockholders................................................................
Net earnings allocated to common stockholders ...
61,391
$87,135
59,751
$77,044
88,660
$101,321
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 ..........
35,955
246
34,637
251
36,201
34,888
34,260
222
34,482
Basic EPS .........................................................................
$ 2.42
$ 2.22
$ 2.96
Diluted EPS ......................................................................
$ 2.41
$ 2.21
$ 2.94
Options to purchase 238,050 shares, 257,350 shares and 213,400 shares, respectively, of the Company’s common
stock at a weighted-average exercise price of $49.59 per share, $31.86 per share and $23.69 per share, respectively, were
outstanding during 2013, 2012 and 2011, 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. Subsequent Event
On January 30, 2014, the Company entered into a definitive agreement and plan of merger (the “Summit
Agreement”) with Summit Bancorp, Inc. (“Summit”), and its wholly-owned bank subsidiary Summit Bank, headquartered in
Arkadelphia, Arkansas, whereby the Company will acquire all of the outstanding common stock of Summit in a transaction
valued at approximately $216.0 million.
Under the terms of the Summit Agreement, each outstanding share of common stock of Summit will be converted,
at the election of each Summit 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 80% of the merger consideration paid to Summit shareholders will consist of shares of the Company’s common
stock. The number of Company shares to be issued will be determined based on Summit shareholder elections and the
Company’s 10-day average closing stock price as of the fifth business day prior to the closing date, subject to a minimum
agreed value of $43.58 per share and a maximum agreed value of $72.63 per share. Upon the closing of the transaction,
Summit will merge into the Company and Summit Bank will merge into the Bank. Completion of the transaction is subject
to certain closing conditions, including receipt of customary regulatory approvals and the approval of the shareholders of
Summit.
155
24. 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
December 31,
2013
2012
(Dollars in thousands)
Assets:
Cash .........................................................................................
Investment in consolidated bank subsidiary .............................
Investment in unconsolidated Trusts ........................................
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 ...................
$ 13,044
670,187
1,950
1,092
3,873
$690,146
$ 72
166
-
64,950
65,188
369
143,385
484,876
(3,672)
624,958
$690,146
$ 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
Condensed Statements of Income
2013
Year Ended December 31,
2012
(Dollars in thousands)
2011
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 .................................................................................
$34,000
52
-
24
34,076
1,720
7,716
9,436
24,640
3,956
58,539
$87,135
$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
156
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income .............................................................................
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of Bank ............................
Deferred income tax benefit ................................................
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 ...........................
Cash paid in merger and acquisition transactions, net of cash
required ..............................................................................
Net cash used by investing activities ...........................................
Cash flows from financing activities:
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
$87,135
$77,044
$101,321
(58,539)
(566)
4,487
(3,173)
844
30,188
-
(8,707)
(8,707)
(53,840)
(396)
2,607
(1,538)
1,319
25,196
67
(13,223)
(13,156)
(91,219)
(177)
1,528
(870)
2,445
13,028
(532)
-
(532)
Proceeds from exercise of stock options ................................
4,274
3,979
4,032
Tax benefits 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 ...................................................
Cash - beginning of year .............................................................
Cash - end of year .......................................................................
3,173
(1,370)
(25,744)
(19,667)
1,814
11,230
$13,044
1,538
(341)
(17,293)
(12,117)
(77)
11,307
$11,230
870
-
(12,661)
(7,759)
4,737
6,570
$ 11,307
157
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation as of the end of the period covered by this report was carried out under the supervision and with the
participation of the Company’s management, including the Company’s Chairman and Chief Executive Officer and its Chief
Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of the Company’s
“disclosure controls and procedures,” which are defined under SEC rules as controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within required time periods. Based upon that
evaluation, the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer and Chief Accounting
Officer concluded that the Company’s disclosure controls and procedures were effective.
(b) Internal Control over Financial Reporting.
Changes in Internal Control Over Financial Reporting
The Company’s management, including the Company’s Chairman and Chief Executive Officer and its Chief
Financial Officer and Chief Accounting Officer, have evaluated any changes in the Company’s internal control over
financial reporting that occurred during the Company’s fourth quarter ended December 31, 2013 and have concluded that
there was no change during the Company’s fourth quarter ended December 31, 2013 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting.
158
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
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, 2013,
based on criteria established in Internal Control-Integrated Framework issued in 1992 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 accounting principles generally accepted in the United States. 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 2013, 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, 2013, 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, 2013 and 2012 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, 2013, and our report dated February 28, 2014, expressed an unqualified opinion
thereon.
Atlanta, Georgia
February 28, 2014
/s/ Crowe Horwath LLP
159
Report of Management on the Company’s Internal Control Over Financial Reporting
February 28, 2014
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 and, even when effective, can provide only reasonable assurance with respect to financial statement
preparation and presentation. 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,
2013, based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated
Framework” issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted,
management excluded from its assessment the operations of The First National Bank of Shelby acquisition made during
2013, which is described in Note 2 to the Consolidated Financial Statements. The assets acquired in this acquisition and
excluded from management’s assessment on internal control over financial reporting comprised approximately 8.1% of total
consolidated assets at December 31, 2013. Based on this assessment, management has concluded that the Company’s
internal control over financial reporting was effective as of December 31, 2013, 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.
/s/ George Gleason
George Gleason
Chairman and Chief Executive Officer
/s/ Greg McKinney
Greg McKinney
Chief Financial Officer and Chief Accounting Officer
Item 9B. OTHER INFORMATION
None.
160
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 401 of Regulation S-K regarding directors is incorporated herein by this
reference to the Company’s Proxy Statement to be filed with the SEC within 120 days of the Company’s fiscal year-end.
The information required by Item 405, Item 407(c)(3), Item 407 (d)(4) and Item 407 (d)(5) of Regulation S-K is
incorporated herein by this reference to the Company’s Proxy Statement to be filed with the SEC within 120 days of the
Company’s fiscal year-end.
In accordance with Item 406 of Regulation S-K, the Company has adopted a code of ethics that applies to certain
Company executives. The code of ethics is posted on the Company’s Internet website at www.bankozarks.com under
“Investor Relations.”
Item 11. EXECUTIVE COMPENSATION
The information required by Item 402, Item 407 (e)(4) and Item 407 (e)(5) of Regulation S-K is incorporated
herein by this reference to the Company’s Proxy Statement to be filed with the SEC within 120 days of the Company’s fiscal
year-end.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
The information required by Item 201(d) and Item 403 of Regulation S-K is incorporated herein by this reference
to the Company’s Proxy Statement to be filed with the SEC within 120 days of the Company’s fiscal year-end.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 404 and Item 407(a) is incorporated herein by this reference to the Company’s
Proxy Statement to be filed with the SEC within 120 days of the Company’s fiscal year-end.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 9(e) of Schedule 14A regarding audit fees, audit committee pre-approval
policies, and related information is incorporated herein by this reference to the Company’s Proxy Statement to be filed with
the SEC within 120 days of the Company’s fiscal year-end.
161
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List the following documents filed as a part of this report:
(1) The consolidated financial statements of the Registrant.
Reference is made to Part II, Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules.
Reference is made to Part II, Item 6 of this Annual Report on Form 10-K.
(3) Exhibits.
See Item 15(b) to this Annual Report on Form 10-K.
(b) Exhibits.
The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index at the end of this Item 15.
(c) Financial Statement Schedules.
See Part IV, Item 15(a)(2) of this Annual Report on Form 10-K.
162
The following exhibits are filed with this report or are incorporated by reference to previously filed material.
EXHIBIT INDEX
Exhibit No.
2.1
2.2
2.3
3.1
3.2
3.3
3.4
4.1
Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks and The First National Bank
of Shelby, dated as of January 24, 2013 (previously filed as Exhibit 2.1 to the Company’s current report on Form
8-K, as amended, filed with the Commission on January 25, 2013, and incorporated herein by this reference).
Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules to this agreement have not been filed with this
exhibit. The schedules contain various items relating to the business of and the representations and warranties made
by The First National Bank of Shelby. The Registrant agrees to furnish supplementally any omitted schedule to the
Commission upon request.
Amendment No. 1 to the Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks and
The First National Bank of Shelby, dated as of February 5, 2013 (previously filed as Exhibit 2(b) to the Company’s
Annual Report on Form 10-K filed with the Commission on February 29, 2013, and incorporated herein by this
reference).
Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks, Summit Bancorp, Inc. and
Summit Bank, dated as of January 30, 2014 (previously filed as Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed with the Commission on January 30, 2014, and incorporated herein by this reference). Pursuant to
Item 601(b)(2) of Regulation S-K, certain schedules to this agreement have not been filed with this exhibit. The
schedules contain various items relating to the business of and the representations and warranties made by Summit
Bancorp, Inc. and Summit Bank. The Registrant agrees to furnish supplementally any omitted schedule to the
Commission upon request.
Amended and Restated Articles of Incorporation of the Registrant, dated May 22, 1997 (previously filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1 filed with the Commission on May 22, 1997, as
amended, Commission File No. 333-27641, and incorporated herein by this reference).
Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant dated December
9, 2003 (previously filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the Commission
on March 12, 2004 for the year ended December 31, 2003, and incorporated herein by this reference).
Articles of Amendment to the Amended and Restated Articles of Incorporation of Bank of the Ozarks, Inc., dated
December 10, 2008 (previously filed as Exhibit 3.1 to the Company’s current report on Form 8-K filed with the
Commission on December 10, 2008, and incorporated herein by this reference).
Amended and Restated By-Laws of the Registrant, dated December 11, 2007 (previously filed as Exhibit 3(ii) to
the Company's current report on Form 8-K filed with the Commission on December 11, 2007, and incorporated
herein by this reference).
Instruments defining the rights of security holders, including indentures. The Registrant hereby agrees to furnish to
the Commission upon request copies of instruments defining the rights of holders of long-term debt of the
Registrant and its consolidated subsidiaries; no issuance of debt exceeds ten percent of the assets of the Registrant
and its subsidiaries on a consolidated basis.
10.1* Bank of the Ozarks, Inc. Stock Option Plan, as amended April 17, 2007 (previously filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q filed with the Commission for the period ended March 31, 2007, and
incorporated herein by this reference).
10.2* Third Amended and Restated Bank of the Ozarks, Inc. Non-Employee Director Stock Option Plan as Amended and
Restated as of April 15, 2013, filed herewith.
10.3* Form of Indemnification Agreement between the Registrant and its directors and its executive officers (previously
filed as Exhibit 10.1 to the Company's current report on Form 8-K filed with the Commission on April 21, 2011,
and incorporated herein by this reference).
163
10.4* Bank of the Ozarks, Inc. Deferred Compensation Plan, dated January 1, 2005 (previously filed as Exhibit 10 (iii)
(A) to the Company’s current report on Form 8-K filed with the Commission on December 14, 2004, and
incorporated herein by this reference).
10.5* Bank of the Ozarks, Inc. 2009 Restricted Stock Plan, as amended on August 21, 2012 (previously filed as Exhibit
10.1(b)(i) to the Company’s current report on Form 8-K filed with the Commission on August 23, 2012, and
incorporated herein by this reference).
10.6* Amendment to the Bank of the Ozarks, Inc. 2009 Restricted Stock Plan, as amended, effective as of April 15,
2013, filed herewith.
10.7* Supplemental Executive Retirement Plan for George G. Gleason, II, effective May 4, 2010 by and among Bank of
the Ozarks, George G. Gleason, II and Bank of the Ozarks, Inc. (previously filed as Exhibit 10.1 to the Company’s
current report on Form 8-K filed with the Commission on May 7, 2010, and incorporated herein by reference).
10.8* Executive Life Insurance Agreement for George G. Gleason, II, effective May 4, 2010 by and among Bank of the
Ozarks, George G. Gleason, II and Bank of the Ozarks, Inc. (previously filed as Exhibit 10.2 to the Company’s
current report on Form 8-K filed with the Commission on May 7, 2010, and incorporated herein by reference).
10.9* Split Dollar Insurance Agreement, effective as of May 4, 2010 between Bank of the Ozarks and Bank of the
Ozarks as Trustee of the Linda and George Gleason Insurance Trust (previously filed as Exhibit 10.3 to the
Company’s current report on Form 8-K filed with the Commission on May 7, 2010, and incorporated herein by
reference).
10.10* Split Dollar Insurance Agreement, effective as of May 4, 2010 between Bank of the Ozarks and George G.
Gleason, II (previously filed as Exhibit 10.4 to the Company’s current report on Form 8-K filed with the
Commission on May 7, 2010, and incorporated herein by reference).
10.11* Split Dollar Designation by Bank of the Ozarks, dated as of May 4, 2010 in respect of George G. Gleason, II as the
insured (previously filed as Exhibit 10.5 to the Company’s current report on Form 8-K filed with the Commission
on May 7, 2010, and incorporated herein by reference).
10.12* Form of Notice of Grant of Restricted Stock and Award Agreement, as amended on August 21, 2012 (previously
filed as Exhibit 10-1(b)(ii) to the Company’s current report on Form 8-K filed with the Commission on August 23,
2012, and incorporated herein by this reference).
10.13* Form of stock option agreement for non-employee directors, filed herewith.
10.14* Form of stock option agreement for executive officers, filed herewith.
21
List of Subsidiaries of the Registrant, filed herewith.
23.1
Consent of Crowe Horwath, LLP, filed herewith.
31.1
Certification of Chairman and Chief Executive Officer, filed herewith.
31.2
Certification of Chief Financial Officer and Chief Accounting Officer, filed herewith.
32.1
32.2
Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
Certification of Chief Financial Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
164
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Definition Linkbase
101.LAB XBRL Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
_______________________
*Management contract or a compensatory plan or arrangement.
165
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BANK OF THE OZARKS, INC.
By:
/s/ George Gleason
________________________________________________
Chairman and Chief Executive Officer
Date:
February 28, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ George Gleason
_____________________________
George Gleason
Chairman of the Board, Chief Executive Officer
and Director
February 28, 2014
/s/ Dan Thomas
_____________________________
Dan Thomas
Vice Chairman, President –Real Estate
Specialties Group and Chief Lending Officer
and Director
February 28, 2014
/s/ Greg McKinney
_____________________________
Greg McKinney
Chief Financial Officer and
Chief Accounting Officer
February 28, 2014
/s/ Jean Arehart
Jean Arehart
Director
February 28, 2014
/s/ Nicholas Brown
Director
February 28, 2014
Nicholas Brown
/s/ Richard Cisne
____________________________
Richard Cisne
/s/ Robert East
____________________________
Robert East
/s/ Catherine B. Freedberg
____________________________
Catherine B. Freedberg
Director
February 28, 2014
Director
February 28, 2014
Director
February 28, 2014
166
/s/ Linda Gleason
____________________________
Linda Gleason
/s/ Peter Kenny
____________________________
Peter Kenny
/s/ Henry Mariani
____________________________
Henry Mariani
/s/ Robert Proost
Robert Proost
/s/ R. L. Qualls
R. L. Qualls
Director
February 28, 2014
Director
February 28, 2014
Director
February 28, 2014
Director
February 28, 2014
Director
February 28, 2014
/s/ John Reynolds
Director
February 28, 2014
John Reynolds
/s/ Sherece West-Scantlebury
Director
February 28, 2014
Sherece West-Scantlebury
167
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-32173 on Form S-8 pertaining to the Bank
of the Ozarks, Inc. Stock Option Plan, Registration Statement No. 333-74577 on Form S-8 pertaining to the Bank of the
Ozarks, Inc. 401K Retirement Savings Plan, Registration Statement No. 333-32175 on Form S-8 pertaining to the Bank of
the Ozarks, Inc. Non-employee Director Stock Option Plan, Registration Statement No. 333-68596 on Form S-8 pertaining
to the Bank of the Ozarks, Inc. Stock Option Plan, Registration Statement No. 333-183909 on Form S-8 pertaining to the
Bank of the Ozarks, Inc. Stock Option Plan, and in Registration Statement No. 333-183910 on Form S-8 pertaining to the
Bank of the Ozarks, Inc. 2009 Restricted Stock Plan of our reports dated February 28, 2014 with respect to the consolidated
financial statements of Bank of the Ozarks, Inc. and the effectiveness of internal control over financial reporting, which
reports appear in this Annual Report on Form 10-K of Bank of the Ozarks, Inc. for the year ended December 31, 2013.
Atlanta, Georgia
February 28, 2014
/s/ Crowe Horwath LLP
CERTIFICATIONS
I, George Gleason, certify that:
Exhibit 31.1
1. I have reviewed this report on Form 10-K of Bank of the Ozarks, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date:
February 28, 2014
/s/ George Gleason
George Gleason
Chairman and Chief Executive Officer
I, Greg McKinney, certify that:
1. I have reviewed this report on Form 10-K of Bank of the Ozarks, Inc.;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date:
February 28, 2014
/s/ Greg McKinney
Greg McKinney
Chief Financial Officer and Chief Accounting Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report of Bank of the Ozarks, Inc. (the Company) on Form 10-K for the period ended
December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, George Gleason, Chairman
and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
February 28, 2014
/s/ George Gleason
George Gleason
Chairman and Chief Executive Officer
In accordance with SEC Release No. 34-47986, this Exhibit 32.1 is furnished to the SEC as an accompanying document and is not
deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section,
nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the accompanying Annual Report of Bank of the Ozarks, Inc. (the Company) on Form 10-K for the period ended
December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Greg McKinney, Chief
Financial Officer and Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
February 28, 2014
/s/ Greg McKinney
Greg McKinney
Chief Financial Officer and Chief Accounting Officer
In accordance with SEC Release No. 34-47986, this Exhibit 32.2 is furnished to the SEC as an accompanying document and is not
deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section,
nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
Our Board of Directors’ outstanding
leadership and vision have moved
the Company forward and created
a solid foundation for strong
future growth and profitability.
Board of Directors
Standing, left to right:
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, Little Rock, Arkansas
Jean Arehart
Retired Banker, Newport, Arkansas
John Reynolds
Pathologist and Laboratory Director—Memorial Hospital, Bainbridge, Georgia
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 and Chief Executive Officer—Winthrop Rockefeller Foundation, Little Rock, Arkansas
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
Peter Kenny
Chief Executive Officer—Clearpool Group, New York, New York
Nicholas Brown
President and Chief Executive Officer—Southwest Power Pool, Little Rock, Arkansas
Catherine B. Freedberg, Ph.D.
Former Lecturer—Harvard University, Department of Art and Architecture, Washington, D.C.
Dan Thomas
Vice Chairman and Chief Lending Officer, President—Real Estate Specialties Group,
Bank of the Ozarks, Inc., Dallas, Texas
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Little Rock, Arkansas
(501) 978-2265, Fax (501) 320-4078
NASDAQ: OZRK • www.bankozarks.com
For additional information, contact:
Investor Relations, Bank of the Ozarks, Inc.
P.O. Box 8811
Little Rock, Arkansas 72231-8811
Independent Auditors:
Crowe Horwath LLP, Certified Public Accountants
3399 Peachtree Road N.E., Suite 700
Atlanta, Georgia 30326-2832
Transfer Agent:
Bank of the Ozarks Trust and Wealth Management Division
P.O. Box 8811
Little Rock, Arkansas 72231-8811
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com