T WENT Y FIFTEEN ANNUAL REPORT
A STRONG PLATFORM FOR
GROWTH & PROFITABILITY
Through a Combination of Organic
Growth and Acquisitions, We Now
Have 175 Offices in Nine States*
CALIFORNIA
02
This repor t contains for ward-looking statements and reflects management ’s current views of future
economic circumstances, industr y conditions, Company per formance and financial results. These for ward-
looking statements are subject to a number of factors and uncer tainties which could cause the Company ’s
actual results and experience to materially dif fer from anticipated results and expectations expressed in
such for ward-looking statements. A description of cer tain factors which may af fect operating results may
be found in this annual repor t under “Par t I—For ward-Looking Information” and under “Item 1A . Risk Factors.”
*As of Februar y 28, 2016
22
TEXAS
02
NEW YORK
ARKANSAS81
NORTH CAROLINA
25
SOUTH CAROLINA
02
03
ALABAMA
28
GEORGIA
10
FLORIDA
page ONE
02
NEW YORK
CALIFORNIA
02
ARKANSAS81
22
TEXAS
NORTH CAROLINA
25
SOUTH CAROLINA
03
ALABAMA
28
GEORGIA
02
10
FLORIDA
4
3
2
1
0
12000
9000
6000
3000
0
200
150
100
50
0
page T WO
A LONG-TERM PERSPECTIVE
The outstanding results we achieved in 2015 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)
$31.5
$0.47
$31.7
$31.7
$0.47
$0.47
$0.51
$34.5
$36.8
$0.54
$101.3
$91.2
$77.0
$1.52
$1.11
$1.26
$1.47
$64.0
$0.94
$182.3
$118.6
$2.09
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Over the past ten years, we have achieved compounded annual growth rates of 19.2% in net income and 16.1% in diluted earnings per
common share.
Loans and Leases, including Purchased Loans
(Millions)
$8,335
Deposits
(Millions)
$5,128
$2,692
$2,346
$2,754
$3,357
$1,677
$1,371
$1,871
$2,021 $1,904
$2,045
$2,057
$2,341 $2,029
$1,592
$3,717
$2,944
$3,101
$2,541
$7,971
$5,496
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Over the past ten years, our loans and leases, including
Over the past ten years, our deposits have grown at a
purchased loans, have grown at a compounded annual rate
compounded annual rate of 17.5%.
of 19.8%.
12000
9000
6000
3000
0
560
420
280
140
0
9.00
6.75
4.50
2.25
0.00
40
30
20
10
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.
page THREE
Net Interest Income
(Millions)
$382.2
$270.5
Service Charge Income
(Millions)
$28.7
$26.6
$21.6
$19.4
$18.1
$15.2
$118.3
$123.6
$98.7
$68.6 $70.7
$77.6
$168.7
$174.3
$174.3
$193.5
$12.2 $12.0
$12.4
$9.9
$10.2
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Net interest income has grown over the last ten years at a
Income from service charges on deposit accounts has grown
compounded annual rate of 18.7%.
at a compounded annual rate of 11.3% over the past ten years.
Trust Income
(Millions)
$5.9
$5.6
Mortgage Lending Income
(Millions)
$6.8
$5.6
$5.6
$5.2
$3.4
$3.2
$3.1
$3.5
$4.1
$2.6
$2.2
$1.9
$1.7
$3.9
$3.3
$3.3
$3.0
$2.9
$2.7
$2.2
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Over the past ten years, trust income has grown at a
Mortgage lending is a valuable service to our customers and
compounded annual rate of 13.4%.
an important source of non-interest income, but it is cyclical
in nature and varies with interest rate and housing market
conditions.
9.00
6.75
4.50
2.25
0.00
4
3
2
1
0
80
60
40
20
0
4
3
2
1
0
page F OUR
CONSISTENT QUALIT Y
2.500
1.875
1.250
0.625
0.000
5.00
3.75
2.50
1.25
0.00
Net Charge-Off Ratios
FDIC Insured Financial Institutions
Net Charge-Off Ratios
Bank of the Ozarks, Inc.
2.52%
2.55%
0.49%
0.11%
0.12%
0.59%
0.45%
0.39%
0.24%
1.75%
1.29%
1.55%
0.81%*
0.69%*
1.10%
0.69%
0.30%*
0.14%*
0.12%*
0.49%
0.42%
0.18%*
Nonperforming Loans & Leases/
Total Loans & Leases
Nonperforming
Assets/Total Assets††
1.24%
1.24%
0.76%
0.75%†
0.70%†
0.34%
0.35%
0.25%
0.53%†
0.43%†
0.33%†
0.20%†
0.81%
0.18%
0.24%
0.36%
3.06%
3.06%
3.07%†
2.67%†
1.88%†
1.22%†
0.87%†
0.37%†
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
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.
Source: Data from the FDIC Quar terly Banking Profile for 3Q15.
* E xcludes purchased loans and net charge-of fs related to such loans.
Efficiency Ratios
47.1% 46.3%
43.4%
42.3%
42.9%
41.6%
37.8%
46.6%
45.3%
45.3%
38.4%
38.4%
2015 EFFICIENCY RATIO
Loans & Leases Past Due 30 Days
or More/Total Loans & Leases
2.68%
1.99% 2.01%†
2.01%†
1.53%†
1.14%
0.60%
0.39%
0.73%†
0.79%†
0.45%†
0.28%†
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
We have worked hard to become one of the most efficient
bank holding companies in the nation.
5.00
3.75
2.50
1.25
0.00
5.00
3.75
2.50
1.25
0.00
page FIV E
Nonperforming Loans & Leases/
Total Loans & Leases
Nonperforming
Assets/Total Assets††
1.24%
1.24%
0.76%
0.75%†
0.70%†
0.34%
0.35%
0.25%
0.53%†
0.43%†
0.33%†
0.20%†
0.81%
0.18%
0.24%
0.36%
3.06%
3.06%
3.07%†
2.67%†
1.88%†
1.22%†
0.87%†
0.37%†
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Loans & Leases Past Due 30 Days
or More/Total Loans & Leases
2.68%
2.01%†
1.99% 2.01%†
1.53%†
1.14%
0.60%
0.39%
0.73%†
0.79%†
0.45%†
0.28%†
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Maintaining excellent asset quality has been an important fac-
tor in our historically strong growth in net income.
† E xcludes purchased loans except for their inclusion in total assets.
† † Ratios from 2010–2013 have been recalculated to include foreclosed
assets previously covered by FDIC loss share as nonper forming assets.
2.500
1.875
1.250
0.625
0.000
5.00
3.75
2.50
1.25
0.00
page SI X
EXECUTIVE OFFICERS
George Gleason
Chairman of the Board and
Chief Executive Officer
Dan Thomas
Vice Chairman, Chief Lending
Officer and President,
Real Estate Specialties Group
Greg McKinney
Chief Financial Officer and
Chief Accounting Officer
Tyler Vance
Chief Operating Officer and
Chief Banking Officer
Darrel Russell
Chief Credit Officer and
Chairman of the Directors’
Loan Committee
Ed Wydock
Chief Risk Officer
George Gleason has led the Company and its predecessors for 37 years.
Mr. Gleason purchased Bank of Ozark, which then had approximately $28
million in total assets, in 1979. Since then, the Company has grown roughly
353 times its 1979 size.
Dan Thomas has 31 years of experience in structuring, financing and
managing commercial real estate transactions. He joined Bank of the Ozarks
in 2003 and established the Real Estate Specialties Group, which handles
many of the Company’s larger and more complex real estate transactions.
The Real Estate Specialties Group has offices in Austin, Dallas and Houston,
Texas; Los Angles and San Francisco, California; Atlanta, Georgia and
New York, New York.
Greg McKinney joined the Company in 2003 and oversees all corporate
finance functions, mergers and acquisitions, the Company’s investment
portfolio, facilities, risk management and human resources. Mr. McKinney
has 24 years of accounting and financial reporting experience and is a
Certified Public Accountant (inactive).
Tyler Vance joined Bank of the Ozarks in 2006. He has 19 years of banking
experience and is a Certified Public Accountant (inactive). 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, public funds deposits,
deposit pricing and treasury management.
Darrel Russell has 35 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 and credit quality. Mr. Russell also
serves as Chairman of the Directors’ Loan Committee.
Ed Wydock joined Bank of the Ozarks in 2015. He has over 30 years
experience in the financial services industry and public accounting
profession, with a focus on risk management disciplines. Mr. Wydock
oversees the Company’s risk management operations, internal audit,
compliance, credit review, bank secrecy act administration, corporate
security, and community reinvestment initiatives. Additionally, he is
responsible for several Company-wide programs such as enterprise risk
management, stress testing, third party risk management, and business
resilience. Mr. Wydock is a Certified Public Accountant.
page SE V EN
Scott Hastings
President,
Leasing Division and
Corporate Loan
Specialties Group
Scott Hastings joined the Company in 2003 to establish a Leasing Division.
Mr. Hastings has 33 years of experience in leasing. Mr. Hastings was named
President of Corporate Loan Specialties Group in 2015.
Gene Holman
President, Mortgage Division
Gene Holman has 41 years of mortgage banking and real estate experience.
He joined the Company in 2004 as President of the Mortgage Division.
Jennifer Junker
Managing Director,
Trust and Wealth
Management Division
John Carter
Director of Community Bank
Lending and Chairman of the
Officers’ Loan Committee
Tim Hicks
Executive Vice President,
Corporate Finance
Jennifer Junker has 21 years of experience as a Trust and Wealth Management
professional. Ms. Junker joined the Company in 2015 as Managing Director of
the Trust and Wealth Management Division, which offers a wide array of
asset management and trust services for individuals, businesses and
government entities.
John Carter joined Bank of the Ozarks in 2009 and has 14 years of banking
experience. Mr. Carter is responsible for providing strategic leadership and
direction regarding sound loan growth initiatives throughout the Company’s
community bank footprint.
Tim Hicks joined the Company in 2009 and has 22 years of experience in
accounting, financial reporting, and mergers and acquisitions and is a Certified
Public Accountant. Mr. Hicks is responsible for leading the accounting and
finance functions for the Company’s acquired institutions, as well as
providing leadership in financial modeling for mergers and acquisitions and
other strategic initiatives of the Company.
page EIGHT
OTHER SENIOR MANAGEMENT TEAM MEMBERS
Helen W. Brown
General Counsel,
Corporate Finance
Julie Cripe
President,
South Texas Division
Artie Ford
President,
Glen and Wayne
Counties, Georgia
Tucker Hughes
Executive Vice President/
Managing Director, Real Estate
Specialties Group, Los Angeles
and San Francisco, California;
Austin, Texas
Dennis James
Director of Mergers
and Acquisitions
John Jenkins
Deputy Director of
Community Bank Lending,
Central and Northern Arkansas
Alan Jessup
Deputy Director of
Community Bank Lending,
South Arkansas, Georgia,
Florida and Alabama
Ed Jordan
President,
Piedmont Triad Market,
North Carolina
Don Keesee
President,
Western Arkansas Division
Ron Magby
President,
Hot Springs, Arkansas Market
Ross Mallioux
President,
Northwest Arkansas Division
Tom Mays
President,
Saline County, Arkansas Market
page NINE
Marc McCain
President,
South Arkansas Division
Paul Oberkirch
President,
Mobile, Alabama Area Market
Eddie Melton
President,
Franklin County, Arkansas
Mike Miller
President,
Savannah, Georgia Market
Brent Morgan
President,
Central Arkansas Division
Cayla Pinner
President,
Magnolia, Arkansas Market
Frank Posey
President,
South Georgia/
East Alabama Division
Michael J. Ptak
General Counsel
Keith Morris
President,
Special Assets Division
Lori Ross
President,
Arkadelphia, Arkansas Market
Chad Necessary
Chief Information Officer
Jeff Starke
Chief Technology Officer
page TEN
Matt Stewart
President,
North Arkansas Division
Chris Stringer
President,
North Texas Division
Anthony Swainey
President,
Metro Charlotte Division
Greg Wayne
President,
North Central Georgia Division
Randy Whitaker
President,
Northwest Georgia Division
Blake Whitley
President,
South Central Arkansas
Division
Kent Teague
President,
Carolina Foothills Market
Rick Wisdom
President,
Southwest and Coastal Divisions
Derrek Thomason
President,
Arkansas River Valley Division
Audwin Vaughn
President,
North Central Arkansas Division
Kerry J. Ward
President,
West Central Florida Division
Cindy V. Wolfe
President,
Carolinas Group and Deputy
Director of Community Bank
Lending, North Carolina
and South Carolina
Jared Wood
President,
Pope and Johnson
Counties, Arkansas
T WENT Y FIFTEEN FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the fiscal year ended December 31, 2015
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)
17901 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS
(Address of principal executive offices)
71-0556208
(I.R.S. Employer
Identification Number)
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
Common Stock, par value $0.01 per share
Name of Each Exchange on Which Registered
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 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
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 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 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.
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
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
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: $3,610,000,000.
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 January 29, 2016
90,695,203
Documents incorporated by reference: Portions of the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders,
scheduled to be held on May 16, 2016, are incorporated by reference into Part III of this Annual Report on Form 10-K.
BANK OF THE OZARKS, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 2015
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.
PART III.
Item 10.
Other Information
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
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Item 14.
PART IV.
Item 15.
Exhibit Index
Signatures
Page
2
3
20
33
33
34
34
35
37
39
82
84
135
135
137
138
138
138
138
138
139
140
143
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 we make with the Securities and Exchange Commission (“SEC” or “Commission”) and other oral and written
statements or reports made by us include certain forward-looking statements regarding our plans, expectations, thoughts, beliefs,
estimates, goals and outlook for the future 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 expressed 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 and other income from purchased 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; 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 the volume, yield and value of
our investment securities portfolio; availability of unused borrowings, the need to issue debt securities or additional equity and other
similar forecasts and statements of expectation. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,”
“future,” “goal,” “hope,” “intend,” “look,” “may,” “plan,” “potential,” “project,” “seek,” “should,” “target,” “trend,” “will,” “would,”
or the negative of these terms or other words of similar expressions identify forward-looking statements. We disclaim 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 these forward-looking statements
due to certain risks, uncertainties and assumptions. Certain factors that may affect our future results include, but are not limited to,
potential delays or other problems in implementing our growth, expansion and acquisition strategies 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 and/or close additional acquisitions; problems with, or additional
expenses related to, 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; 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 our 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; changes in
legal and regulatory requirements, including additional legal, financial and regulatory requirements to which we will be subject when
our total assets reach $10 billion; recently enacted and potential legislation and regulatory actions and the costs and expenses to
comply with new 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 maintaining cybersecurity; an
increase in the incidence or severity of fraud, illegal payments, security breaches or other illegal acts impacting us or our customers;
adoption of new accounting standards or changes in existing standards; and adverse results in current or future litigation or regulatory
examinations as well as other factors described in this Annual Report on Form 10-K and our other 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” 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 as an Arkansas corporation and is a bank holding
company registered under the Bank Holding Company Act of 1956. We own an Arkansas state chartered subsidiary bank, Bank of the
Ozarks (the “Bank”). At December 31, 2015, the Company, through the Bank, conducted operations through 174 offices, including 81
offices in Arkansas, 28 in Georgia, 25 in North Carolina, 22 in Texas, 10 in Florida, three in Alabama, two each in South Carolina and
New York and one in California. As of December 31, 2015, we own Ozark Capital Statutory Trust II, Ozark Capital Statutory Trust
III, Ozark Capital Statutory Trust IV and Ozark Capital Statutory Trust V (collectively, the “Ozark Trusts”), and, as a result of our
February 10, 2015 acquisition of Intervest Bancshares Corporation (“Intervest”), we own Intervest Statutory Trust II, Intervest
Statutory Trust III, Intervest Statutory Trust IV and Intervest Statutory Trust V (collectively, the “Intervest Trusts”; and together with
the Ozark Trusts, the “Trusts”). Each of the Trusts is a 100%-owned finance subsidiary business trust formed in connection with the
issuance of certain subordinated debentures and related trust preferred securities. We also own, 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, 2015, we had total assets of $9.88 billion, total loans and
leases, including purchased loans, of $8.33 billion, total deposits of $7.97 billion and total common stockholders’ equity of $1.46
billion. Net interest income for 2015 was $382 million, net income available to common stockholders was $182 million and diluted
earnings per common share were $2.09.
We provide 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. We also provide 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; ATMs; telephone banking; online and mobile
banking services including electronic bill pay and consumer mobile deposits; debit cards, gift cards and safe deposit boxes, among
other products and services. Through third party providers, we offer credit cards for consumers and businesses, processing of
merchant debit and credit card transactions, and full-service investment brokerage services. While we provide a wide variety of retail
and commercial banking services, we operate in only one segment. No revenues are derived from foreign countries and no single
external customer comprises more than 10% of our revenues.
Growth and Expansion
De Novo Growth
With five banking offices in 1994, we commenced an expansion strategy, via de novo branching, into selected Arkansas markets.
Since embarking on this strategy, we have added one or more new banking offices in most years.
In 1998 and 1999, we expanded into Arkansas’ then three largest cities, Little Rock, Fort Smith and North Little Rock. While
we opened a few additional de novo offices in smaller Arkansas communities, the majority of our 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, we opened a loan production office in Charlotte, North Carolina, which was subsequently converted to a retail banking
office in 2013. In 2003, we opened a loan production office in Dallas, Texas for our Real Estate Specialties Group, or RESG, which
was subsequently converted to a retail banking office in 2004. Our RESG originates and services most of our larger, more complex
real estate lending transactions. Subsequent to the opening of our initial RESG office in Dallas, we have opened additional RESG
loan production offices in Austin, Texas (2012); Atlanta, Georgia (2012); New York, New York (2013); Houston, Texas (2014); and
Los Angeles, California (2014). Our RESG offices have contributed significantly to our growth in non-purchased loans and leases in
recent years.
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We have continued our growth and de novo branching strategy. In 2014, in addition to opening RESG loan production offices in
Houston and Los Angeles, we also opened our third retail banking office in Bradenton, Florida and our first retail banking offices in
Cornelius, North Carolina and in Hilton Head Island, South Carolina. In 2015 we opened two additional loan production offices, one
in Little Rock, Arkansas and one in Greensboro, North Carolina, and we opened our fourth retail banking office in Houston, Texas.
We intend to continue our growth strategy in future years through the opening of additional branches and loan production offices
as our needs and resources permit. 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 we cannot
predict with certainty. We may increase or decrease our expected number of new office openings as a result of a variety of factors
including our financial results, changes in economic or competitive conditions, strategic opportunities or other factors.
Acquisitions
We have achieved substantial growth through a combination of organic growth and acquisitions, including traditional
acquisitions and acquisitions assisted by the Federal Deposit Insurance Corporation (“FDIC”). Since 2010, we have completed 13
acquisitions and in 2015, we announced two additional acquisitions, both of which are expected to close late in the first quarter or in
the second quarter of 2016.
FDIC-Assisted Acquisitions. During 2010 and 2011, we acquired substantially all of the assets and assumed substantially all of
the deposits and certain other liabilities of the following seven failed financial institutions in FDIC-assisted acquisitions:
March 2010, Unity National Bank (Cartersville, Georgia)
July 2010, Woodlands Bank (Bluffton, South Carolina)
September 2010, Horizon Bank (Bradenton, Florida)
December 2010, Chestatee State Bank (Dawsonville, Georgia)
January 2011, Oglethorpe Bank (Brunswick, Georgia)
April 2011, First Choice Community Bank (Dallas, Georgia)
April 2011, The Park Avenue Bank (Valdosta, Georgia)
Most of the loans and foreclosed assets acquired in each of these FDIC–assisted acquisitions were subject to loss share
agreements with the FDIC whereby we were indemnified against a portion of the losses on loans and foreclosed assets covered by
FDIC loss share agreements. During the fourth quarter of 2014, we entered into agreements with the FDIC terminating the loss share
agreements for all seven of the FDIC-assisted acquisitions. All rights and obligations of the parties under the FDIC loss share
agreements were eliminated under these termination agreements. Despite the termination of loss share with the FDIC, the terms of the
purchase and assumption agreements for each of these FDIC-assisted acquisitions continue to provide for the FDIC to indemnify us
against certain claims, including claims with respect to assets, liabilities or any affiliate not acquired or otherwise assumed by us and
with respect to claims based on any action by directors, officers or employees of each of these failed financial institutions.
Traditional Acquisitions. In December 2012, we completed our acquisition of Genala Banc, Inc. (“Genala”) and The Citizens
Bank, its wholly-owned bank subsidiary, for an aggregate of $13.4 million in cash and 847,232 shares of our common stock valued at
$14.1 million. This was our first traditional acquisition since 2003. Genala’s bank subsidiary operated one retail banking office in
Geneva, Alabama.
In July 2013, we completed our acquisition of The First National Bank of Shelby (“First National Bank”) in Shelby, North
Carolina for an aggregate of $8.4 million of cash and 2,514,770 shares of our common stock valued at $60.1 million. The First
National Bank acquisition expanded our service area in North Carolina by adding 14 retail banking offices in Shelby, North Carolina
and surrounding communities. In 2013 we closed one of the acquired offices in Shelby, North Carolina.
In March 2014, we completed our acquisition of Bancshares, Inc. (“Bancshares”) of Houston, Texas and OMNIBANK, N.A.,
its wholly-owned bank subsidiary, for an aggregate of $21.5 million in cash. The Bancshares acquisition expanded our service area
in South Texas by adding three retail banking offices in Houston and one retail banking office each in Austin, Cedar Park, Lockhart
and San Antonio.
In May 2014, we completed our acquisition of Summit Bancorp, Inc. (“Summit”) and Summit Bank, its wholly-owned bank
subsidiary, for an aggregate of $42.5 million in cash and 5,765,846 shares of our common stock valued at $166.4 million. The
Summit acquisition expanded our service area in central, south and western Arkansas by adding 23 retail banking locations and one
loan production office. During 2014 we closed eight Arkansas banking offices in locations where we had excess branch capacity, six
of which were acquired in the Summit acquisition, and we closed the loan production office acquired in the Summit acquisition.
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On February 10, 2015, we completed our acquisition of Intervest and its wholly-owned bank subsidiary, Intervest National Bank,
headquartered in New York, New York, whereby we acquired all of the outstanding common stock of Intervest in exchange for
6,637,243 shares of our common stock (plus cash in lieu of fractional shares) in a transaction valued at approximately $238.5 million.
The Intervest acquisition added seven retail banking offices including one in New York City, five in Clearwater, Florida and one in
Pasadena, Florida. During 2015 we closed one of the acquired offices in Clearwater, Florida.
On August 5, 2015, we completed our acquisition of Bank of the Carolinas Corporation (“BCAR”) and Bank of the Carolinas, its
wholly-owned bank subsidiary, whereby we acquired all of the outstanding BCAR common stock in exchange for an aggregate of
1,447,620 shares of our common stock (plus cash in lieu of fractional shares) in a transaction valued at approximately $65.4 million.
The BCAR acquisition expanded our operations in North Carolina by adding eight retail banking offices, including one office each in
Advance, Asheboro, Concord, Harrisburg, Landis, Lexington, Mocksville and Winston-Salem.
On October 19, 2015, we entered into a definitive agreement and plan of merger (the “C&S Agreement”) with Community &
Southern Holdings, Inc. (“C&S”) and its wholly-owned bank subsidiary Community & Southern Bank, whereby we expect to acquire
all of the outstanding common stock and equity awards of C&S in a transaction valued at approximately $799.6 million. C&S is
headquartered in Atlanta, Georgia and operates 47 retail banking offices throughout Georgia and one retail banking office in
Jacksonville, Florida. At December 31, 2015, C&S had approximately $4.2 billion in total assets, approximately $3.1 billion in total
loans, approximately $3.7 billion in total deposits and approximately $455 million in stockholders’ equity.
On November 9, 2015, we entered into a definitive agreement and plan of merger (the “C1 Agreement”) with C1 Financial, Inc.
(“C1”) and its wholly-owned bank subsidiary C1 Bank, whereby we expect to acquire all of the outstanding common stock of C1 in a
transaction valued at approximately $402.5 million. C1 is headquartered in St. Petersburg, Florida and operates 32 retail banking
offices on the west coast of Florida and in Miami-Dade and Orange Counties. At December 31, 2015, C1 had approximately $1.7
billion in total assets, approximately $1.4 billion in total loans, approximately $1.3 billion in total deposits and approximately $201
million in stockholders’ equity.
Future Growth Strategy
We expect to continue growing through both our de novo branching strategy and traditional acquisitions. With respect to de novo
branching strategy, future de novo branches are expected to be focused in states where we currently have banking offices and in larger
markets and metropolitan areas across the United States where we currently do not have offices and believe we can generate
significant growth from one or two strategically located offices in each such market. In 2016 we expect to open three retail banking
offices in Arkansas (Siloam Springs, Fayetteville and Springdale). Future RESG loan production offices are expected to be focused in
strategically important markets (most likely San Francisco in late February 2016 and offices in Seattle, Washington, D.C., Boston and
Chicago at later dates). With respect to traditional acquisitions, we are seeking acquisitions that are either immediately accretive to
book value, tangible book value and diluted earnings per share, or strategic in location, or both.
Lending and Leasing Activities
Administration of the Company’s lending function is the responsibility of our Chief Executive Officer (“CEO”), Chief Credit
Officer (“CCO”), Chief Lending Officer (“CLO”), our Director of Community Bank Lending (“Dir-CBL”) and certain other senior
lending officers. These officers perform their lending duties subject to the oversight and policy direction of our board of directors and
the directors’ loan committee. Loan or lease authority is granted to our CEO, CCO, CLO and Dir-CBL by the board of directors.
Other lending officers are granted authority by the directors’ loan committee on the recommendation of appropriate senior officers.
Loans and leases and aggregate loan and lease relationships exceeding $10 million (up to the limits established by our board of
directors) must be approved by the directors’ loan committee.
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.
Our 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 audit committee.
Our loan portfolio, including purchased loans, includes most types of real estate loans, consumer loans, commercial and
industrial loans, agricultural loans and other types of loans. While a significant portion of the properties collateralizing our loan
portfolio have historically been located within the trade areas of our offices, we have expanded the geographic distribution of our loan
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portfolio in recent years. Included in Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) included elsewhere in this Annual Report on Form 10-K is an analysis of our real estate loan portfolio based on
metropolitan statistical area or other geographic area in which the principal collateral is located. Our lease portfolio consists primarily
of small ticket direct financing commercial equipment leases. The equipment collateral securing our lease portfolio is located
throughout the United States.
Real Estate Loans. Our 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 our residential 1-4 family loans are home equity lines of credit.
We offer 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). A substantial portion of our loans, including most
of our real estate loans, have adjustable interest rates and many of such adjustable rate loans have established “floor” and “ceiling”
interest rates.
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 (“LTV”) 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. We
typically require 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. Included in MD&A to this
Annual Report on Form 10-K is an analysis of the weighted-average LTV and loan-to-cost ratios of our construction and development
loan portfolio.
Consumer Loans. Our 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. These consumer loans 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. Our 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. We offer a variety of commercial and industrial
loan arrangements, including term loans, balloon loans and lines of credit, including some loans guaranteed by the Small Business
Administration, 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, we
obtain as collateral a lien on furniture, fixtures, equipment, inventory, receivables or other assets. In 2014 we formed the Corporate
Loan Specialties Group (“CLSG”) for the purpose of acquiring Shared National Credits (“SNC”). SNC generally include syndicated
loans and loan commitments, letters of credit, commercial leases, and other forms of credit. At December 31, 2015, our SNC portfolio
totaled approximately $84 million.
Our leases are primarily equipment leases for commercial, industrial and professional purposes, have terms generally ranging up
to 60 months and are collateralized by a lien on the lessee’s interest in the leased property.
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Commercial and industrial loans and leases, including our SNC portfolio, 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 certain other types of loans and leases.
Agricultural (Non-Real Estate) Loans. Our 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.
Our agricultural (non-real estate) loans are generally secured by farm machinery, livestock, crops, vehicles or other agricultural-
related collateral. A portion of our 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
We offer 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 banking markets and deposit
categories due to different terms and conditions, individual deposit size, services rendered and rates paid by competitors on similar
deposit products. We act 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 pledging a portion of our
investment securities or a letter of credit.
Our deposits come primarily from within our trade area. As of December 31, 2015 we had $677 million in “brokered deposits,”
defined as deposits which, to our knowledge, have been placed with us by a person who acts as a broker in placing these deposits on
behalf of others or is otherwise deemed to be “brokered” by bank regulatory authority rules and regulations. Brokered deposits are
typically from outside our primary trade area, and such deposit levels may vary from time to time depending on competitive interest
rate conditions and other factors.
Other Banking Services
Mortgage Lending. We offer 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 our
larger banking offices located in Arkansas, Texas, Georgia, North Carolina, Florida and in certain of our other acquired offices. In
addition to long-term secondary market loans, we offer a small number of fixed rate loan products which balloon periodically,
typically every eight to nine years. We retain these loans in our loan portfolio.
Trust and Wealth Management Services. We offer a broad array of trust and wealth management services from our headquarters
in Little Rock, Arkansas, with additional staff in Bluffton, South Carolina, Texarkana, Texas and Charlotte and Shelby, North
Carolina. 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, 2015, total trust assets were approximately $1.85 billion compared to approximately $1.80 billion as of
December 31, 2014 and approximately $1.48 billion as of December 31, 2013.
Treasury Management Services. We offer 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. Our 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, wholesale lockbox services, remote deposit capture services, automated
credit line transfer, investment sweep accounts, reconciliation services, positive pay services, and account analysis.
Online and Mobile Banking. We offer online banking services for both personal and business customers. Through this service
customers can access their account information, pay bills, send funds electronically to other individuals, transfer funds, view images of
cancelled checks, change addresses, issue stop payment requests, receive detailed statements, receive account alerts electronically,
make mobile deposits and handle other banking business electronically from a laptop, desktop, tablet or smartphone. 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.
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Market Area and Competition
At December 31, 2015, we conducted banking operations through 174 offices, including 81 offices in Arkansas, 28 in Georgia,
25 in North Carolina, 22 in Texas, 10 in Florida, three in Alabama, two offices each in South Carolina and New York and one office
in California.
The banking industry in our market areas is highly competitive. In addition to competing with other commercial and savings
banks and savings and loan associations, we compete 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 our market areas 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, we face 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, we believe we will continue to be competitive
because of our expertise in real estate lending, our strong commitment to quality customer service, convenient local branches, active
community involvement and competitive products and pricing. The ability to access and use technology is an increasingly competitive
factor in the finance services industry. Technology is not only important with respect to delivery of financial services and protection
of the security of customer information but also in processing information. We must continually make technology investments to
remain competitive in the finance services industry.
Employees
At December 31, 2015, we employed 1,642 full-time equivalent employees. None of our employees was represented by any
union or similar group. We have not experienced any labor disputes or strikes arising from any organized labor groups. We believe
our employee relations are good.
Executive Officers of Registrant
The following is a list of our executive officers.
George Gleason, age 62, 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 53, Vice Chairman of the Company, President of the Bank’s RESG and Chief Lending Officer. Mr. Thomas
has served as Vice Chairman of the Company since 2013, President of RESG since 2005 and was appointed as the Chief Lending
Officer of the Bank in 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 47, 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 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,
leaving as a senior audit manager. Mr. McKinney is a C.P.A. (inactive) and holds a B.S. in Accounting from Louisiana Tech
University.
Tyler Vance, age 41, Chief Operating Officer and Chief Banking Officer. Prior to assuming the Chief Operating Officer title in
2013, Mr. Vance served as Chief Banking Officer since 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. (inactive) and holds a B.A. in Accounting from Ouachita Baptist University.
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Darrel Russell, age 62, Chief Credit Officer and Chairman of the Directors’ Loan Committee. Prior to assuming his role as Chief
Credit Officer and Chairman of the Directors’ Loan Committee in 2011, Mr. Russell served as President of the Bank’s Central
Division since 2001 and as Co-Chairman of the Directors’ 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.
John Carter, age 35, Director of Community Bank Lending and Chairman of the Officers Loan Committee. Prior to assuming
the title of Director of Community Bank Lending in February 2015, Mr. Carter served as the Deputy Director of Community Bank
Lending from January 2014 to January 2015. Mr. Carter joined the Company in August 2009 and served as a Vice President from
2009 to June 2010, a Senior Vice President from June 2010 to June 2011 and the Little Rock Market President from June 2011 to May
2014. Mr. Carter holds a B.S. in Economics and Finance from Arkansas Tech University and a Master of Business Administration
from the University of Arkansas at Little Rock.
Scott Hastings, age 58, President of the Bank’s Leasing and Corporate Loan Specialties Group. Mr. Hastings has been President
of the Bank’s Leasing Division since 2003 and President of the combined Leasing and Corporate Loan Specialties Group since July
2015. 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 at Little Rock.
Tim Hicks, age 43, Executive Vice President, Corporate Finance. Mr. Hicks joined the Company in 2009 and served as Senior
Vice President, Corporate Finance until assuming the role of Executive Vice President, Corporate Finance in 2012. From 2006 to
2009, Mr. Hicks served as director of investor relations and assistant treasurer of a publicly traded telecommunications company. Prior
to 2006, Mr. Hicks held various positions with a big-four public accounting firm, leaving as a senior audit manager. Mr. Hicks is a
C.P.A. and holds a B.A. in Business and Economics from Hendrix College.
Gene Holman, age 68, 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 over 40 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.
Jennifer Junker, age 45, Managing Director, Trust and Wealth Management since February 2015. Prior to joining the Bank, she
served as Fiduciary Director and then as Co-Leader of Trust Advisory Services and Trust Director for a national financial services
firm from 2011 through December 2014. From 2006 to 2011 she was in private practice as an attorney concentrating in trust
administration and high net worth estate planning. She also held the position of Senior Counsel for a national financial services firm
from 2000 through 2006, and as an associate attorney for two law firms in Florida and Minnesota concentrating on legal issues
involving trust and wealth management from 1995 through 2000. Ms. Junker holds a B.A. in English Literature and Communications
from Wake Forest University as well as a J.D. from the University of Florida, College of Law.
Ed Wydock, age 59, Chief Risk Officer since June 2015. Prior to joining the Bank, Mr. Wydock served as head of Enterprise
Risk Management and Chief Risk Officer for Susquehanna Bancshares, Inc. (NASDAQ: SUSQ) in Lititz, Pennsylvania from 2008
through May 2015 and as Chief Audit Executive from 2002 to 2008. Mr. Wydock has also held various positions in accounting and
risk management, most notably with PricewaterhouseCoopers LLP as a Director of Audit and Risk Advisory Services in Baltimore,
Maryland and Washington, D.C., serving clients in the financial services industry, and as Chief Audit Executive for CapitalOne Bank
in Chevy Chase, Maryland. Mr. Wydock is a C.P.A. and holds a B.S. degree in Accounting from Bloomsburg University
(Pennsylvania).
Messrs. Gleason, Thomas, McKinney, Vance and Wydock 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 our shareholders. Bank holding companies and
banks that fail to conduct their operations in a safe and sound manner 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 civil money penalties
and restrictions imposed on their operations. To the extent that the following information describes statutory and regulatory
9
provisions, it is qualified in its entirety by reference to those particular statutory and regulatory provisions. Any change in applicable
laws or regulations, and in their application by regulatory agencies, may have an adverse effect on our results of operation and
financial condition.
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 FRB.
Recent Legislative and Regulatory Initiatives to Address Current Financial and Economic Conditions
Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (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 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 affect 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. Implementation of the Dodd-Frank Act has had and will continue to have a broad impact on the financial services
industry by introducing significant regulatory and compliance changes including, among other things:
Changing the assessment base for federal deposit insurance from the amount of insured deposits to average consolidated total
assets less average tangible equity, 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%,
but 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.
Implementing certain corporate governance revisions that apply to all public companies, including regulations that require
publicly traded companies to give shareholders a non-binding advisory vote to approve executive compensation, commonly
referred to as a “say-on-pay” vote and an advisory role 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, commonly referred to as a “clawback” policy.
Centralizing responsibility for consumer financial protection by creating a new independent federal agency, the Consumer
Financial Protection Bureau (the “CFPB”), responsible for implementing federal consumer protection laws to be applicable to
all depository institutions, including the Company and the Bank.
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 “Volcker 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.
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Applying the same leverage and risk-based capital requirements to holding companies that apply to insured depository
institutions, including the phase out of the Company’s existing and acquired trust preferred securities from qualifying as Tier
1 capital should our total consolidated assets exceed $15 billion, although such securities will continue to be included in total
risk-based capital.
Limiting debit card interchange fees that financial institutions with $10 billion or more in assets are permitted to charge their
customers, commonly referred to as the “Durbin Amendment.”
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 the 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.
As discussed further throughout this section, many aspects of the Dodd-Frank Act continue to be subject to rulemaking and will
take effect over several additional years, making it difficult to anticipate the overall financial impact on us or across the industry. The
changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our
business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our
business. These changes may also require us to invest significant management attention and resources to evaluate and make any
changes necessary to comply with new statutory and regulatory requirements.
At December 31, 2015, our total assets were $9.88 billion. As we continue to grow, we will also need to comply with certain
additional requirements created by the Dodd-Frank Act that apply only to bank holding companies and banks with $10 billion or more
in total assets. Failure to comply with the new requirements would negatively impact our results of operations and financial condition
and could limit our growth or expansion activities. While we cannot predict what effect any presently contemplated or future changes
in the laws or regulations or their interpretations would have on us, such changes could be materially adverse to us and our investors.
Risk Committee. Publicly traded bank holding companies with $10 billion or more in total assets are required to establish a risk
committee responsible for oversight of enterprise-wide risk management practices. The committee must include at least one risk
management expert with experience in managing risk exposures of large, complex firms.
Stress Testing. Pursuant to the Dodd-Frank Act, any banking organization, including both a bank holding company and a
depository institution, with more than $10 billion in total consolidated assets and regulated by a federal financial regulatory agency is
required to conduct annual stress tests to ensure it has sufficient capital during periods of economic downturn. The FRB and FDIC
release stress-test scenarios on February 15 of each year, and banking organizations are required to submit the results of their tests to
the appropriate regulator by July 31. The results of each year’s stress tests are publicly disclosed following each banking
organization’s submission. A banking organization that crosses the $10 billion total average consolidated assets threshold for four
consecutive quarters must conduct its first annual company-run stress test in the calendar year after the year in which it crossed the
applicability threshold. Assuming we pass the $10 billion total average consolidated assets threshold in 2016, our first annual stress
test will be required for the year ending December 31, 2017 and must be submitted to the appropriate federal regulators by July 31,
2018. Almost all of our assets are held at the Bank. When the Company’s total assets pass this $10 billion threshold, it is very likely
that our banking subsidiary’s total assets will also pass this $10 billion threshold, and we will be required to conduct stress tests at
both the holding company and bank level. The Company’s capital ratios reflected in the stress test calculations will be an important
factor considered by our regulators in evaluating the capital adequacy of the Company and the Bank, in evaluating any proposed
acquisitions for approval and in determining whether proposed payments of dividends or stock repurchases may be an unsafe or
unsound practice.
Debit Interchange Fees. Section 1075 of the Dodd-Frank Act, often referred to as the Durbin Amendment, amends the federal
Electronic Fund Transfer Act to set standards for the pricing of interchange transaction fees on electronic debit transactions, called
“swipe fees.” FRB rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum
permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by
the value of the transaction. A debit card issuer may recover up to 1 cent of its debit card interchange fee if the card issuer develops
and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards. The FRB also has rules
governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or
prepaid product. Currently, we are not required to comply with the Durbin Amendment’s limitations on swipe fees due to an
exemption for debit card issuers which, together with their affiliates, parent companies, and subsidiaries have assets of less than $10
billion. Assuming our total consolidated assets pass the $10 billion threshold at December 31, 2016, we will have to comply with the
restrictions on swipe fees beginning on July 1, 2017 (i.e., the calendar year following the year in which we surpass the threshold).
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Losing the exemption from the Durbin Amendment’s requirements is expected to negatively affect the amount of revenue we receive
from swipe fees.
Prohibition on Propriety Trading and Certain Fund Relationships. On December 10, 2013, federal financial regulators released
final rules implementing Section 619 of the Dodd-Frank Act, also known as the Volcker Rule, which prohibits both bank holding
companies and banks from engaging in proprietary trading and from acquiring or retaining an ownership interest in, sponsoring, or
having certain relationships with a hedge fund or private equity fund. On December 18, 2014, the FRB granted a second one-year
extension of the Volcker Rule conformance period to July 21, 2016 for existing investments in and relationships with covered funds
(relationships existing prior to December 31, 2013). The FRB has also announced its intention to further extend the Volcker Rule
conformance period to July 21, 2017 to company ownership interests in and relationships with legacy covered funds. The final rules
are highly complex, and many aspects of their application remain uncertain. We do not currently anticipate that the Volcker Rule will
have a material effect on our operations since we do not engage in the businesses prohibited by the Volcker Rule. We may incur costs
if we are required to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any such costs are not
expected to be material. Because many of the effects of the Volcker Rule may become apparent only over several years as the federal
financial regulatory agencies apply the rule in practice, the precise financial impact of the rule on us, our customers or the financial
industry more generally cannot currently be determined.
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 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 our
preferred stock along with a warrant to purchase shares of our common stock. In November 2009, we 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. We are no longer a participant in the CPP or TARP programs.
Our issuance of preferred stock to Treasury made us 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 we received under the CPP was repaid to Treasury. Although we have not had
any Special Inspector General investigations concerning compliance with TARP, we remain subject to requests by the Special
Inspector General for documentation pertaining to our compliance with TARP requirements prior to our 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, we are no longer subject to the executive
compensation restrictions and related mandates imposed by EESA and the Recovery Act.
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 the 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. The MHA
program was initially scheduled to end on December 31, 2013 but has been extended through December 31, 2016.
Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the FDIC, have
promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides
that a bank has a concentration in commercial real estate lending if (1) total reported loans for construction, land development and
other land represent 100% or more of total capital or (2) total reported loans secured by multifamily and non-farm residential
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properties and loans for construction, land development and other land represent 300% or more of total capital and the bank’s
commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from
this second category. If a concentration is present, management must employ heightened risk management practices that address key
elements, including board and management oversight and strategic planning, portfolio management, development of underwriting
standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as
needed to support the level of commercial real estate lending.
The actions described above, 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, we expect that our regulatory
compliance costs will continue to increase over time.
Other Federal Legislation and Regulation
Bank Holding Company Act. We are 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 our activities and any companies controlled by our bank holding company to the activities of banking,
managing and controlling banks, furnishing or performing services for its 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 we own 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 8.0% or greater, common equity tier 1 capital ratio of 6.5% 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” means 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.” 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.
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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.
Pursuant to the Dodd-Frank Act, the FDIC amended its regulations to determine insurance assessments based on the average
consolidated assets less the average tangible equity of the insured depository institution during the assessment period. Since the
revised 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 revised
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. When the Bank passes the $10 billion total asset threshold, it will become subject to the assessment rate calculations for
larger banks, which will result in higher deposit insurance premiums.
The Dodd-Frank Act increased the minimum target DIF ratio to 1.35% of estimated insured deposits. In October 2010, the FDIC
adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020. The FDIC has
established a long-term target for the reserve ratio of 2.0%.
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 in Effect as of December 31, 2014. The FRB monitors the capital adequacy of 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, 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.”
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is
a company’s Tier 1 capital divided by its adjusted average total consolidated assets. Bank holding companies and FDIC-supervised
banks, such as the Company and the Bank, respectively, are required to maintain a minimum leverage ratio of 4.0%, unless a different
minimum is specified by an appropriate regulatory authority. In addition, for a depository institution to be considered “well-
capitalized” (the highest capital tier) under the regulatory framework for prompt corrective action, its leverage ratio must be at least
5.0%. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Compliance”
for further information on regulatory capital requirements.
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 we do not believe we currently have 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 Capital Adequacy Requirements Effective January 1, 2015. On July 9, 2013, the FDIC and other federal banking
regulators revised 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 “Basel III Rules”). The Basel III Rules became
effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). The Basel III Rules
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require the maintenance of minimum amounts and ratios of common equity tier 1 capital, tier 1 capital and total capital (as defined in
the regulations) to risk-weighted assets (as defined), and of tier 1 capital to adjusted quarterly average assets (as defined).
Under the Basel III Rules, common equity tier 1 capital consists of common stock and paid-in capital (net of treasury stock) and
retained earnings. Common equity tier 1 capital is reduced by goodwill, certain intangible assets, net of associated deferred tax
liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and
certain other items as specified by the Basel III Rules.
Tier 1 capital includes common equity tier 1 capital and certain additional tier 1 items as provided under the Basel III Rules. The
tier 1 capital for the Company consists of common equity tier 1 capital and $118 million of trust preferred securities. The Basel III
Rules include certain provisions that would require trust preferred securities to be phased out of qualifying tier 1 capital. Currently, the
Company’s trust preferred securities are grandfathered under the Basel III Rules and will continue to be included as tier 1 capital.
However, should the Company exceed $15 billion in total assets, the grandfather provisions applicable to its trust preferred securities
would no longer apply and such trust preferred securities would no longer be included as tier 1 capital, but would continue to be
included as total capital. The common equity tier 1 capital and the tier 1 capital are the same for the Bank.
Basel III 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. The Company and Bank made this opt-out election in the first quarter of 2015 to avoid significant variations
in the level of capital depending upon the impact of interest rate fluctuations on the fair value of our investment securities portfolio.
Total capital includes tier 1 capital and tier 2 capital. Tier 2 capital includes, among other things, the allowable portion of the
ALLL and any trust preferred securities that are excluded from tier 1 capital.
The Basel III Rules also changed the risk-weights of assets in an effort 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.
The Basel III Rules limit 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, tier 1 capital and total capital to risk-weighted
assets in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer will be
phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year by that amount until fully implemented
at 2.5% on January 1, 2019. When fully phased in on January 1, 2019, the Basel III Rules will require the Company and Bank to
maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation
buffer, which effectively results in a minimum ratio of 7.0% upon full implementation, (ii) a minimum ratio of tier 1 capital to risk-
weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer, which effectively results in a minimum ratio of 8.50% upon
full implementation, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus a 2.5% capital conservation
buffer, which effectively results in a minimum ratio of 10.5% upon full implementation and (iv) a minimum leverage ratio of 4.0%.
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.
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. In connection with the
Company’s pending merger with Community & Southern Holdings, Inc. (“C&S”), the Company submitted a declaration to elect to
become a financial holding company to the Federal Reserve Bank of St. Louis in December 2015. We expect the Federal Reserve to
act upon our election to be treated as a financial holding company at the same time it acts upon the bank holding company merger
application filed in connection with the C&S merger. The Company made this election because the pending C&S merger involves the
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acquisition of a captive insurance subsidiary. The Company does not currently intend to continue the operations of the captive
insurance subsidiary and expects to dissolve the entity as soon as permissible after the consummation of the C&S merger. As soon as
the captive insurance subsidiary is dissolved and the Company winds up its operations, the Company intends to file the appropriate
applications with the Federal Reserve requesting that it no longer be treated as a financial holding company.
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.
Cybersecurity. State and federal banking regulators have issued various policy statements emphasizing the importance of
technology risk management and supervision. Such policy statements indicate that financial institutions should design multiple layers
of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by
compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of
the financial institution. Such policy statements also indicate that a financial institution’s management is expected to maintain
sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s
operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes
to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or
its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject
to various regulatory sanctions, including financial penalties.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and
to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to
manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide
alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of
our defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in volume, and attackers
respond rapidly to changes in defensive measures. While to date, we have not experienced a significant compromise, significant data
loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service
providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures
related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and
sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based
products and services by us and our customers. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity.
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, consistent with the safe and sound operations of the banks. Failure to adequately meet these criteria
could impose additional requirements and limitations on us. These regulations also provide for regulatory assessment of a bank’s
record in meeting the needs of its service area when considering applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of another bank. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire
ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction. Additionally, a bank 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. Failure of a
financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply
with all of the relevant laws or regulations, could have serious legal, economic and reputational consequences for the institution,
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including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is
required or to prohibit such transactions even if approval is not required.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with
designated foreign countries, nationals and others which are administered by the Treasury’s Office of Foreign Assets Control. Failure
to comply with these sanctions could have serious legal, economic and reputational consequences, including causing applicable bank
regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required.
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 regulator retains exclusive enforcement authority over banks with $10 billion or less in total assets and their
affiliates. When we surpass this $10 billion asset threshold, we will be subject to examination by the CFPB with respect to our
consumer products and services.
The FDIC possesses comparable enforcement 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. The capital restoration plan will not be accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount.
Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s
assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank
regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to
submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior
FRB approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other
affiliates.
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. Our bank subsidiary generally undergoes FDIC and state examinations on a joint basis.
Reporting Obligations. As a bank holding company, we must file with the FRB an annual report and such additional information
as the FRB may require pursuant to the BHCA. Our bank subsidiary must submit to federal and state regulators annual audit reports
prepared by independent auditors. Our Annual Report on Form 10-K, which includes the report of our independent auditors, can be
used to satisfy this requirement. Our bank subsidiary must submit quarterly, to the FDIC, a Call Report. Our bank holding company
must submit quarterly, to the FRB, an FR Y-9C and an FR Y-9LP. We also file various other required reports with federal and state
regulators.
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Other Consumer Laws and Regulations. Our status as a registered bank holding company under the BHCA does not exempt us
from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws. We are subject to the jurisdiction of the SEC and of state securities regulatory authorities for
matters relating to the offer and sale of our securities.
Our loan operations are subject to certain federal laws applicable to credit transactions, including, among others:
the TILA, which governs disclosures of credit terms and costs to consumer borrowers, gives consumers the right to
cancel certain credit transactions, and defines requirements for servicing consumer loans secured by a dwelling;
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 Home Ownership and Equity Protection Act, which regulates the terms and disclosures of certain closed end home
mortgage loans that are not purchase money loans and includes loans classified as “high cost loans;”
the Electronic Fund Transfer Act, which regulates fees and other terms of electronic funds transactions;
the Fair and Accurate Credit Transactions Act of 2003, which permanently extended the national credit reporting
standards of the FCRA, and permits consumers, including our customers, 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.
Our loan operations are also subject to the many requirements governing mortgages and lending practices set forth in the Dodd-
Frank Act discussed above.
Our deposit operations are subject to several laws, including but not limited to:
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
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
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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.
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and
implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The
CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in Lending Act, the
Equal Credit Opportunity Act and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the
authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such
acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened
scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs
related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, the
Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial
products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and
to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The
CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank
Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential
enforcement actions could also adversely affect our business, financial condition or results of operations.
State Regulation
We are subject to examination and regulation by the Arkansas State Bank Department. Examinations of our bank subsidiary 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 our bank holding company in conjunction with its examination of our bank
subsidiary or in conjunction with the FRB’s examination of our bank holding company. The extent of such examination will depend
upon the complexity and level of debt owed by our bank holding company, and other various criteria as determined by the Arkansas
State Bank Department. We are 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 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
Lending Limits. The lending and investment authority of our subsidiary 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. Under Arkansas law, the
obligations of one borrower to a bank may not exceed 20% of the bank’s capital base. See also Note 19 to our Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K for a discussion of lending limits.
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 our cost of funds.
Payment of Dividends. Regulations of the FDIC and the Arkansas State Bank Department limit the ability of our bank
subsidiary to pay dividends to our bank holding 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 our bank
subsidiary can pay our bank holding company to 75% of its net profits after taxes for the current year plus 75% of its retained net
profits after taxes for the immediately preceding year.
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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, our bank subsidiary is sharply limited in making
extensions of credit to our bank holding company or any non-bank subsidiary, in investing in the stock or other securities of our bank
holding company or any non-bank subsidiary, in buying the assets of, or selling assets to, our bank holding company and/or in taking
such stock or securities as collateral for loans to any borrower. Our bank subsidiary 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 our bank holding 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.
Our bank subsidiary 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. Our bank subsidiary is
subject to restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and 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
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the U.S. 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. We 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 DIF and further modification of the coverage limit on deposits. During 2016, 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 our 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. We 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
We file periodic and current reports, proxy statements and other information with the SEC. All of our filings 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, such as the Company, that file
electronically with the SEC. The website address of the SEC is http://www.sec.gov. In addition, we make available, free of charge,
through the Investor Relations section of our Internet website at www.bankozarks.com our 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 we electronically file such reports with or furnish them to the SEC.
Also, our Corporate Governance Principles, Code of Ethics, committee charters and other corporate governance related policies are
available under the Investor Relations section on our website. References to our 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.
Item 1A. RISK FACTORS
An investment in shares of our common stock involves certain risks. The following risks and other information in this report or
incorporated in this report by reference, including our Consolidated Financial Statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” should be carefully considered before investing in shares
of our common stock. These risks may adversely affect our financial condition, results of operations or liquidity. Many of these risks
are out of our direct control, though efforts are made to manage those risks while optimizing financial results. These risks are not the
only ones we face. Additional risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial
may also adversely affect our business and operation. This Annual Report on Form 10-K is qualified in its entirety by all these risk
factors.
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RISKS RELATED TO OUR BUSINESS
Our profitability is dependent on our banking activities.
Because we are a bank holding company, our profitability is directly attributable to the success of our bank subsidiary. Our
banking activities compete with other banking institutions on the basis of products, 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. We rely on the profitability of our bank subsidiary and dividends received from our bank subsidiary for
payment of our operating expenses, satisfaction of our obligations and payment of dividends on shares of our common stock. As is the
case with other similarly situated financial institutions, our profitability 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 other factors.
We depend on key personnel for our success.
Our operating results and ability to adequately manage our growth and minimize loan and lease losses are highly dependent on
the services, managerial abilities and performance of our current executive officers and other key personnel. We have an experienced
management team that our board of directors believes is capable of managing and growing our business. We do not have employment
contracts with our executive officers and, except in limited cases pursuant to recent acquisitions, key personnel. Losses of or changes
in our current executive officers or other key personnel and their responsibilities may disrupt our business and could adversely affect
our financial condition, results of operations and liquidity. Additionally, our ability to retain our current executive officers and other
key personnel may be further impacted by existing and proposed legislation and regulations regarding incentive compensation that is
affecting the financial services industry. There can be no assurance that we will be successful in retaining our current executive
officers or other key personnel, or hiring additional key personnel to assist in executing our growth, expansion and acquisition
strategies.
Our operations are significantly affected by interest rate levels.
Our profitability is dependent to a large extent on net interest income, which is the difference between interest income earned on
loans, leases and investment securities and interest expense paid on deposits, other borrowings and subordinated debentures. Our
business 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 our control. An increase in market interest rates on loans is generally associated with a lower volume
of loan originations, which may reduce earnings. Following an increase in the general level of interest rates, our ability to maintain a
positive net interest spread is dependent on our ability to increase our loan and lease offering rates, replace loan and lease maturities
with new originations, minimize increases on our deposit rates, and maintain an acceptable level and mix of funding. Although we
have implemented procedures we believe will reduce the potential effects of changes in interest rates on our net interest income, these
procedures may not always be successful. Accordingly, changes in levels of market interest rates could materially and adversely affect
our net interest income and our net interest margin, asset quality, loan and lease origination volume, liquidity, and overall profitability.
We cannot assure you that we can minimize our interest rate risk.
We rely primarily on an earnings simulation model to analyze our interest rate risk and our sensitivity to interest rate changes.
This earnings simulation model projects a baseline net interest income and estimated changes to such baseline from changes in interest
rates and incorporates a number of assumptions, including, among others, (i) the expected exercise of call features on various assets
and liabilities, (ii) the expected rates at which rate sensitive assets and rate sensitive liabilities will reprice, (iii) the expected growth in
various interest earning assets and interest bearing liabilities and the expected interest rates on such new assets and liabilities, (iv) the
expected relative movements in different interest rate indices which are used as the basis for pricing or repricing various assets and
liabilities, (v) existing and expected contractual ceiling or floor rates on various assets and liabilities, and (vi) 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. These assumptions and inputs into our interest simulation model are difficult
to predict. Should these assumptions prove to be inaccurate, our interest simulation model results may not accurately project our
interest rate risk and our sensitivity to interest rate changes. As a result, we may incur increased or unexpected losses due to changes
in interest rates which could materially and adversely affect our net interest income, our net interest margin and our results of
operations.
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 U.S. 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 our net interest income and net interest
margin. Changes in the supply of money and credit can also materially decrease the value of financial assets we hold, such as debt
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securities. The FRB’s policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their
loans and leases. Changes in such policies are beyond our control and difficult to predict; consequently, the effect of these changes on
our 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 large number of our banking offices are located in south central and southeastern portions of the United States. As a result, our
financial condition and results of operations may be significantly impacted by changes in the economies of the south central and
southeastern states where we currently have most of our banking offices. Slowdown in economic activity in these areas, including
deterioration in housing markets or increases in unemployment and under-employment, may have a significant and disproportionate
effect on consumer and business confidence and the demand for our products and services, result in an increase in non-payment of
loans and leases and a decrease in collateral value, and significantly affect our deposit funding sources. Any of these events could
have an adverse effect on our 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 our loan and lease portfolio
were to decline materially, a significant part of our 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, we may not be able to realize the
value of the security anticipated when we originated the loan, which in turn could have an adverse effect on our allowance and
provision for loan and lease losses and our financial condition, results of operations and liquidity.
Most of our foreclosed assets are comprised of real estate properties. We carry these properties at their estimated fair values less
estimated selling costs. While we believe the carrying values for such assets are reasonable and appropriately reflect current market
conditions, there can be no assurance that the values of such assets will not further decline prior to sale or that the amount of proceeds
realized upon disposition of foreclosed assets will approximate the carrying value of such assets. If the proceeds from any such
dispositions are less than the carrying value of foreclosed assets, we will record a loss on the disposition of such assets, which in turn
could have an adverse effect on our results of operations.
We are subject to environmental liability risks.
A significant portion of our loan and lease portfolio is secured by real property. In the ordinary course of business, we 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, we have acquired a number of retail banking facilities and other real properties as a result
of acquisitions, any of which may contain hazardous or toxic substances. If hazardous or toxic substances are found, we may be liable
for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial
expenses and may materially reduce the affected property’s value or limit our 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 our exposure to
environmental liability. We have 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 of retail banking facilities, real property for future development of retail banking facilities or
any other real property, including any real property to be acquired in a merger and acquisition transaction. 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 our 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 –
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.
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Although we attempt to minimize our credit risk through prudent loan and lease underwriting procedures and by monitoring
concentrations of our loans and leases, there can be no assurance that these underwriting and monitoring procedures will reduce these
risks. Moreover, as we continue to expand into new markets, credit administration and loan and lease underwriting policies and
procedures may need to be adapted to local conditions. The inability to properly manage our credit risk or appropriately adapt our
credit administration and loan and lease underwriting policies and procedures to local market conditions or changing economic
circumstances could have an adverse effect on our allowance and provision for loan and lease losses and our financial condition,
results of operations and liquidity.
We make and hold a significant number of construction/land development, non-farm/non-residential and other real estate
loans in our loan and lease portfolio.
Our 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. Our real estate loans comprised 89.2% of our total loans and
leases at December 31, 2015. In addition, our construction/land development and non-farm/non-residential loans, which are subsets of
our real estate loans, comprised 34.5% and 37.8%, respectively, of our total loan and lease portfolio at December 31, 2015. 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. In particular, real estate construction, acquisition and development loans have certain risks not present in other
types of loans, including, among others, risks associated with construction cost overruns, project completion risk, general contractor
credit risk and risks associated with the ultimate sale, lease or use of the completed construction. If a decline in economic conditions
or other issues cause difficulties for our borrowers of these types of loans, if we fail to evaluate the credit of these loans accurately
when we underwrite them or if we do not continue to adequately monitor the performance of these loans, our lending portfolio could
experience delinquencies, defaults and credit losses that could have a material adverse effect on our business, financial condition or
results of operations. We believe we have established appropriate underwriting procedures for our real estate loans, including
construction/land development and non-farm/non-residential loans, and have established appropriate allowances for loan and lease
losses 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 our allowance for loan and lease losses, which could have an adverse effect on our
financial position, results of operations or liquidity.
We could experience deficiencies in our allowance for loan and lease losses.
We maintain an allowance for loan and lease losses, established through a provision for loan and lease losses charged to
expense, that represents our best estimate of probable losses inherent in our existing loan and lease portfolio. Although we believe that
we maintain our allowance for loan and lease losses at a level adequate to absorb losses in our loan and lease portfolio, estimates of
loan and lease losses are subjective and their accuracy may depend on the outcome of future events. Our experience in the banking
industry indicates that some portion of our loans and leases may only be partially repaid or may never be repaid at all. Loan and lease
losses occur for many reasons beyond our control. Accordingly, we may be required to make significant and unanticipated increases in
our allowance for loan and lease losses during future periods which could materially affect our financial position, results of operations
and liquidity. Additionally, bank regulatory authorities, as an integral part of their supervisory functions, periodically review our
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 our financial condition,
results of operations and liquidity. See also Recently Issued Accounting Pronouncements included in Note 1 to the Consolidated
Financial Statements, found elsewhere in this Annual Report on Form 10-K, for a discussion of proposed changes to how entities
measure and recognize credit impairment, including the effect on the allowance for loan and lease losses.
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 our investment securities. Interest rate volatility can
reduce unrealized gains or increase unrealized losses in our portfolio. Interest rates are highly sensitive to many factors including
monetary policies, domestic and international economic and political issues, and other factors beyond our control. Fluctuations in
interest rates can materially affect both the returns on and market value of our 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.
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Our investment securities portfolio consists of a number of securities whose trading markets are “not active.” As a result, we
utilize alternative methodologies for pricing these securities that include various estimates and assumptions. There can be no assurance
that we can sell these investment securities at the price derived by these methodologies, or that we can sell these investment securities
at all, which could have an adverse effect on our financial position, results of operation or liquidity.
We monitor the financial position of the various issues of investment securities in our portfolio, including each of the state and
local governments and other political subdivisions where we have exposure. To the extent we have securities in our 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 our financial condition, results of operations and liquidity.
Our recent results may not be indicative of our future results.
We may not be able to grow our business at the same rate of growth achieved in recent years or even grow our business at all.
Additionally, in the future we may not have the benefit of several factors that have been favorable to our 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 otherwise 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 our ability to expand our market presence and could adversely affect our 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. We have historically paid at or near the lowest applicable premium rate under the
FDIC’s insurance premium rate structure due to our sound financial position. However, should bank failures increase in the future,
FDIC insurance premiums may also increase. Additionally, when we exceed $10 billion in assets, the method for calculating our FDIC
assessments will change, and we expect our FDIC insurance premiums will increase as a result. Future increases of FDIC insurance
premiums or special assessments could have a material adverse effect on our business, financial condition or results of operations.
To successfully implement our growth strategy, we must expand our operations in both new and existing markets.
We intend to continue the expansion and development of our business by pursuing our growth and de novo branching strategy.
Accordingly, our 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 our growth strategy, we 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;
expand our loan portfolio while maintaining credit quality;
attract sufficient deposits and capital to fund anticipated loan and lease growth;
maintain adequate common equity and regulatory capital; and
maintain sufficient qualified staffing and infrastructure to support growth and compliance with increasing regulatory
requirements.
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 we open can be expected to negatively affect our operating results until those offices reach a size at which they
become profitable. We could also experience an increase in expenses if we encounter delays in opening any new banking offices.
Moreover, we cannot give any assurances that any new banking offices we open will be successful, even after they have become
established, or that we can hire and retain qualified bank management and staff to achieve our growth and profitability goals. If we do
not manage our growth effectively, our business, future prospects, financial condition, results of operations and liquidity could be
adversely affected.
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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
that we may be unable to satisfy current or future funding requirements and needs. Our ALCO and Investments Committee
(“ALCO”), which reports to the board of directors, has primary responsibility for oversight of our liquidity, funds management,
asset/liability (interest rate risk) position and investment portfolio functions.
The objective of managing liquidity risk is to ensure that our cash flow requirements resulting from depositor, borrower and
other creditor demands are met, as well as our operating cash needs, and that our cost of funding such requirements and needs is
reasonable. We maintain 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 we rely on deposits, repayments of
loans and leases and cash flows from our investment securities as our primary sources of funds. Our principal deposit sources include
consumer, commercial and public funds customers in our markets. We have used these funds, together with wholesale deposit sources
such as brokered deposits, along with Federal Home Loan Bank of Dallas (“FHLB”) 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 and
leases are a relatively stable source of funds but are subject to the borrowers’ and lessees’ ability to repay loans and leases, which can
be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting
business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement
weather, natural disasters and other factors. Furthermore, loans and leases generally are not readily convertible to cash. Accordingly,
we may be required from time to time to rely on secondary sources of liquidity to meet our loan, lease and deposit withdrawal
demands or otherwise fund operations. Such secondary sources include FHLB advances, brokered deposits, secured and unsecured
federal funds lines of credit from correspondent banks, FRB borrowings and/or accessing the capital markets.
We anticipate we will continue to rely primarily on deposits, repayments of loans and leases, and cash flows from our
investment securities to provide liquidity. Additionally, where necessary, the secondary sources of borrowed funds described above
will be used to augment our primary funding sources. If we are unable to access any of these secondary funding sources when needed,
we might be unable to meet our customers’ or creditors’ needs, which would adversely affect our financial condition, results of
operations, and liquidity.
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 us, and our bank subsidiary, to maintain adequate levels of capital to support
operations. At December 31, 2015, our bank holding company and our bank subsidiary regulatory capital ratios were at “well-
capitalized” levels under regulatory guidelines. However, our business strategy calls for continued growth in our existing banking
markets (through currently operating offices, opening additional offices and 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 our capital is increased through
retained earnings will reduce our capital ratios unless we continue to increase capital. If our 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 our capital ratios fall below “well-capitalized” levels, certain funding sources could become more costly or could
cease to be available to us until such time as capital is restored and maintained at a “well-capitalized” level. A higher assessment rate
resulting in an increase in FDIC insurance premiums, increased cost of funding or loss of funding sources could have an adverse effect
on our financial condition, results of operations and liquidity.
We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our
commitments and business needs. As a publicly traded company, a likely source of additional funds is the capital markets,
accomplished generally through the issuance of equity, including common stock, preferred stock, warrants, depository shares, stock
purchase contracts or stock purchase units, and the issuance of senior debt or subordinated debentures. Our ability to raise additional
capital, including senior debt or subordinated debentures, if needed, will depend, among other things, on conditions in the equity
and/or debt markets at that time, which are outside of our control, and our financial performance.
We cannot assure you that access to such capital and liquidity will be available to us on acceptable terms or at all. Any
occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of our
bank subsidiary or counterparties participating in the capital markets, may materially and adversely affect our capital costs and our
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ability to raise capital and/or debt and, in turn, our liquidity. If we cannot raise additional capital when needed, our ability to expand
through internal growth or acquisitions or to continue operations could be impaired.
We may be adversely affected by risks associated with completed, pending or any potential future acquisitions.
We plan to continue to grow our business organically. However, we have pursued and expect to pursue additional acquisition
opportunities in the future that we believe support our business strategy and may enhance our profitability. Acquisitions involve
numerous risks, including, among others:
incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential
transactions, resulting in our attention being diverted from the operation of our existing business;
using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the
target institution or assets;
the risk that the acquired business will not perform to our expectations;
difficulties, inefficiencies or cost overruns in integrating and assimilating the organizational cultures, operations,
technologies, services and products of the acquired business with ours;
the risk of key vendors not fulfilling our expectations or not accurately converting data;
entering geographic and product markets in which we have limited or no direct prior experience;
the potential loss of key employees, vendors, customers and deposits of acquired banks;
the potential for liabilities and claims arising out of the acquired businesses; and
the risk of not receiving required regulatory approvals or such approvals being restrictively conditional.
Acquisitions of financial institutions also involve operational risks and uncertainties, and acquired companies may have
unknown or contingent liabilities with no corresponding accounting allowance, exposure to unexpected asset quality problems that
require write downs or write-offs (as well as restructuring and impairment or other charges), difficulty retaining key employees and
customers and other issues that could negatively affect our business. We may not be able to realize any projected cost savings,
synergies or other benefits associated with any such acquisition we complete. Acquisitions may involve the payment of a premium
over book and market values and, therefore, some dilution of our tangible book value and net income per common share may occur in
connection with any future acquisition. Failure to successfully integrate the entities we acquire into our existing operations could
increase our operating costs significantly and have a material adverse effect on our business, financial condition and results of
operations.
We must generally satisfy a number of meaningful conditions prior to completing any acquisition, including, in certain cases,
federal and state regulatory approval. Bank regulators consider a number of factors when determining whether to approve a proposed
transaction, including the effect of the transaction on financial stability and the ratings and compliance history of all institutions
involved, including the CRA, examination results and anti-money laundering and Bank Secrecy Act compliance records of all
institutions involved. The process for obtaining required regulatory approvals has become substantially more difficult as a result of the
financial crisis, which could affect our future business. We may fail to pursue, evaluate or complete strategic and competitively
significant business opportunities as a result of our inability, or our perceived inability, to obtain any required regulatory approvals in
a timely manner or at all.
In addition, we face significant competition from numerous other financial services institutions, many of which will have greater
financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not
be available to us. There can be no assurance that we will be successful in identifying or completing our pending or any potential
future acquisitions.
Systems conversions of acquired banks may be difficult.
After we acquire a financial institution, the various operating systems must be converted, in most cases, to our 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. Our inability 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 us to reputational risk and adversely affecting our financial
condition, results of operations and liquidity.
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We face strong competition in our markets.
Competition in many of our banking markets is intense. We compete 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 us 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,
are privately-held and thus benefit from greater flexibility in adopting or modifying growth or operational strategies than we do. If we
fail to compete effectively for deposits, loans, leases and other banking customers in our markets, we could lose substantial market
share, suffer a slower growth rate or no growth and our financial condition, results of operations and liquidity could be adversely
affected.
The soundness of other financial institutions could adversely affect us.
Our 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.
We have 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 us to credit risk in the event of default of one or more counterparties and could have a material adverse
effect on our 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, we rely on information furnished by or on behalf of
customers, including financial statements, credit reports, tax returns and other financial information. We 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, tax returns or other financial information could
have an adverse effect on our business, financial condition and results of operations.
Reputational risk and social factors may impact our results.
Our ability to originate and maintain accounts is highly dependent upon consumer and other external perceptions of our business
practices and/or our financial health. Adverse perceptions regarding our business practices and/or financial health could damage our
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 our reputation. In
addition, adverse reputational effects on third parties with whom we have important relationships may also adversely affect our
reputation. Adverse effects on our reputation, or the reputation of the industry, may also result in greater regulatory and/or legislative
scrutiny, which may lead to laws or regulations that may change or constrain the manner in which we engage with our customers and
the products we offer. Adverse reputational effects or events may also increase litigation risk. Any of these factors could have an
adverse effect on our ability to achieve our business objectives and/or results of operations.
We may be subject to claims and litigation pertaining to fiduciary responsibility.
From time to time as part of our normal course of business, customers may make claims and take legal action against us based
on actions or inactions related to the fiduciary responsibilities of our bank subsidiary’s Trust and Wealth Management Division. If
such claims and legal actions are not resolved in a manner favorable to us, they may result in financial liability and/or adversely affect
our market perception or our products and services. Any financial liability or reputation damage could have a material adverse effect
on our business, which, in turn, could have a material adverse effect on our financial condition and 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 performance of our responsibilities. These claims are often referred to as “lender
liability” claims and are sometimes brought in an effort to produce or increase leverage against us in workout negotiations or debt
collection proceedings. Lender liability claims frequently assert one or more of the following allegations: 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 performance of our responsibilities are founded or unfounded, if such claims and legal
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actions are not resolved in a favorable manner, they may result in significant financial liability and/or adversely affect our market
perception, products and services, as well as potentially affecting customer demand for those products and services. Any financial
liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect
on our financial condition, 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. Our future success will depend, in part, upon our ability to address the needs of our 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 our
competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services to our customers.
Failure to successfully keep pace with technological change affecting the financial services industry could impair our ability to retain
or acquire new business and could have an adverse effect on our business, financial position, results of operations and liquidity.
We may not be able to protect our intellectual property, and we are subject to claims of third-party intellectual property
rights.
If we are unable to protect our intellectual property and proprietary technology, our competitors may be able to duplicate our
technology and products. To the extent that we do not effectively protect our proprietary intellectual property through patents or other
means, other parties, including former employees, with knowledge of our intellectual property may seek to exploit our intellectual
property for their own or others’ advantage. In addition, we may unintentionally infringe on claims of third-party patents, and we may
face intellectual property challenges from other parties. We may not be successful in defending against any such challenges or in
obtaining licenses to avoid or resolve any intellectual property disputes. Third-party intellectual rights, valid or not, may also impede
our deployment of the full scope of our products and service capabilities in all of the market areas in which we operate or market our
products and services. The intellectual property of an acquired business may be an important component of the value that we agree to
pay for such a business. Such acquisitions, however, are subject to the risks that the acquired business may not own the intellectual
property that we believe we are acquiring, that the intellectual property is dependent on licenses from third parties, that the acquired
business infringes on the intellectual property rights of others, or that the technology does not have the acceptance in the marketplace
that we may have anticipated.
We are subject to a variety of systems-failure and cyber security risks that could adversely affect our business and financial
performance.
Our internal operations are subject to certain risks, including, but not limited to, information systems failures and errors,
customer or employee fraud and catastrophic failures resulting from terrorist acts, data piracy or natural disasters. We maintain a
system of internal controls and security to mitigate the risks of many of these occurrences and maintain insurance coverage for certain
risks. However, should an event occur that is not prevented or detected by our internal controls, and is uninsured against or in excess
of applicable insurance limits, such occurrence could have an adverse effect on our business, financial condition, results of operations
and liquidity.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are
dependent upon the ability to protect our computer equipment against damage from fire, severe storm, power loss, telecommunications
failure or a similar catastrophic event. Any damage or failure of our computer systems or network infrastructure that causes an
interruption in operations could have an adverse effect on our financial condition, results of operations and liquidity.
In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure against
damage from physical break-ins, security breaches and other disruptive 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 our computer systems
and networks, which may result in significant liability and reputation risk to us, and may deter potential customers. Although we, with
the help of third-party service providers, intend to continue to actively monitor and, where necessary, implement improved security
technology and develop additional operational procedures to prevent damage or unauthorized access to our 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 we use to protect customer data. Any failure to maintain adequate security over our
customers’ personal and transactional information could expose us to reputational risk or consumer litigation, and could have an
adverse effect on our financial condition, results of operations and liquidity.
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Our 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, we
may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate
and remediate any information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that
support our businesses and customers, or cyber attacks or security breaches of the networks, systems or devices that customers use to
access our products and services, could result in customer attrition, regulatory fines, penalties or intervention, reputational damage,
reimbursement or other compensation costs, including litigation expense and/or additional compliance costs, any of which could
materially and adversely affect our business, results of operations or financial condition.
We rely on certain third-party vendors.
We are reliant upon certain third-party vendors to provide products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with applicable
contractual arrangements or service level agreements. We maintain 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, (iii) changes in existing products and services or the introduction of new products and services, and (iv) changes in the
vendor’s support for existing products and services. While we believe 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 our operations, which could have a material adverse effect on our business and our financial condition and results of
operations.
Reductions in interchange fees and the effects of the Durbin Amendment may reduce our non-interest income.
An interchange fee is a fee merchants pay to the interchange network in exchange for the use of the network’s infrastructure and
payment facilitation, and which is paid to debit, credit and prepaid card issuers, including the Company, to compensate them for the
costs associated with card issuance and operation. In the case of credit cards, this includes the risk associated with lending money to
customers. Merchants, trying to decrease their operating expenses, have sought to, and have had some success at, lowering
interchange rates. In particular, the Durbin Amendment to the Dodd-Frank Act limited the amount of interchange fees that may be
charged for debit and prepaid card transactions and is applicable to financial institutions whose total assets exceed $10 billion. We
estimate that had we been subject to the Durbin Amendment during 2015, our interchange fee revenue would have been reduced by
approximately $5.3 million. We also expect that our total assets will exceed $10 billion in 2016, which will subject us to the Durbin
Amendment and, as a result, reduce our interchange fee income.
Recent events and actions indicate a continuing focus on interchange fees by both regulators and merchants. Beyond pursuing
litigation, legislation and regulation, merchants are also pursuing alternate payment platforms as a means to lower payment processing
costs. To the extent interchange fees are further reduced, our non-interest income from those fees will be reduced, which could have a
material adverse effect on our business and results of operations. In addition, the payment card industry is subject to the operating
regulations and procedures set forth by payment card networks, and our failure to comply with these operating regulations, which may
change from time to time, could subject us to various penalties or fees or the termination of our license to use the payment card
networks, all of which could have a material adverse effect on our business, financial condition or results of operations.
Natural disasters may adversely affect us.
Our 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 our business, and could pose physical risks to our properties. Although our banking offices are geographically dispersed primarily
throughout the south central and southeastern portions of the United States and we maintain insurance coverages for such events, a
significant natural disaster in or near one or more of our markets could have a material adverse effect on our financial condition,
results of operations or liquidity.
RISKS ASSOCIATED WITH OUR INDUSTRY
We are subject to extensive government regulation that limits or restricts our activities and could adversely affect our
operations.
We 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
on shares of our common stock, 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 our operations. We are also subject to capital
guidelines established by regulators which require maintenance of adequate capital. Many of these regulations are intended to protect
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depositors, the public and the FDIC’s DIF rather than shareholders. Additionally, in order to conduct certain activities, including
acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or
obtained without conditions or on a timeframe acceptable to us.
The Sarbanes-Oxley Act of 2002 and the related rules and regulations issued by the SEC and NASDAQ, as well as numerous
other recently enacted statutes 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 our
external audit and maintaining our internal controls.
Government regulation greatly affects the business and financial results of all commercial banks and bank holding companies,
and increases our costs of complying with regulatory requirements. Additionally, the failure to comply with these various rules and
regulations could subject us to monetary penalties or sanctions or otherwise expose us to reputational risk and could adversely affect
our 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 under the section “Item 1─Business─Supervision
and Regulation” in this Annual Report on Form 10-K. The changes resulting from the Dodd-Frank Act may affect the profitability of
our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and
leverage requirements or otherwise adversely affect our business. In particular, the potential effect of the Dodd-Frank Act on our
operations and activities, both currently and prospectively, may include, among others:
a reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened
capital standards;
an increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank
holding companies, and higher deposit insurance premiums;
the limitation on our ability to raise qualifying regulatory capital through the use of trust preferred securities as these
securities may no longer be included in Tier 1 capital going forward; and
the limitations on our ability to offer certain consumer products and services due to anticipated stricter consumer
protection laws and regulations.
Examples of these provisions include, but are not limited to:
creation of the Financial Stability Oversight Council that may recommend to the FRB increasingly strict rules for capital,
leverage, liquidity, risk management and other requirements as companies grow in size and complexity;
application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most
bank holding companies;
changes to the assessment base used by the FDIC to assess insurance premiums from insured depository institutions and
increases to the minimum reserve ratio for the DIF with provisions to require institutions with total consolidated assets of
$10 billion or more to bear a greater portion of the costs associated with increasing the DIF’s reserve ratio;
establishment of the CFPB with broad authority to implement new consumer protection regulations and, for bank
holding companies with $10 billion or more in assets, to examine and enforce compliance with federal consumer laws;
implementation of risk retention rules for loans (excluding qualified residential mortgages) that are sold by a bank; and
amendment of the Electronic Fund Transfer Act to, among other things, give the FRB the authority to issue rules limiting
debit card interchange fees.
Further, we may be required to invest significant management attention and resources to evaluate and make any changes
necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act as we continue to grow and exceed
$10 billion in total assets. The Dodd-Frank Act created a new independent CFPB within the FRB. The CFPB is tasked with
establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of
providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes
governing products and services offered to bank consumers. For banking organizations with assets of $10 billion or more, the CFPB
has exclusive rulemaking and examination authority, and primary enforcement authority for most federal consumer financial laws. In
addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations
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promulgated by the CFPB. Compliance with any such new regulations will increase our cost of operations. Failure to comply with
these new requirements, among others, may negatively affect our results of operations and financial condition.
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 effect that such changes might have on our operations 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 effect on financial institutions may adversely affect our rights under contracts with such other
institutions and the way in which we conduct business in certain markets. The likelihood and impact of any future changes in these
accounting and financial reporting requirements and the effect these changes might have on our business and operations are also
impossible to determine at this time.
We will be subject to heightened regulatory requirements when we exceed $10 billion in assets.
Based on our historic organic growth rates, we expect that our total assets will exceed $10 billion during 2016. The Dodd-Frank
Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in
total assets, including compliance with portions of the FRB’s enhanced prudential oversight requirements and annual stress testing
requirements. In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with respect to various
federal consumer financial protection laws and regulations. Currently, our bank subsidiary is subject to regulations adopted by the
CFPB, but the FDIC is primarily responsible for examining our compliance with consumer protection laws and those CFPB
regulations. As a relatively new agency with evolving regulations and practices, there is uncertainty as to how the CFPB’s
examination and regulatory authority might affect our business.
Compliance with these requirements will necessitate that we hire additional compliance or other personnel, design and
implement additional internal controls, or incur other significant expenses, all of which could have a material adverse effect on our
business, financial condition or results of operations. Compliance with the annual stress testing requirements, part of which must be
publicly disclosed, may also be misinterpreted by the market generally or our customers and, as a result, may adversely affect our
stock price or our ability to retain our customers or effectively compete for new business opportunities.
Consumers may decide not to use community banks to complete their financial transactions.
Technology and other changes are allowing parties to complete, through alternative methods, financial transactions that
historically have involved community 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 online 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 our financial condition, results of operations
and liquidity.
RISKS ASSOCIATED WITH OUR COMMON STOCK
The price of our common stock 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 sell shares of our common stock at times and prices they find
attractive. Our 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 us;
news reports relating to trends, concerns and other issues in the financial services industry;
perceptions in the marketplace about us and/or our competitors;
new technology used, or services offered, by competitors;
31
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or
involving us or our competitors; and
changes in governmental regulations.
General market fluctuations, industry factors and general economic and political conditions and events such as economic
slowdowns, expected or incurred interest rate changes, credit loss trends and various other factors and events could adversely affect
the price of our common stock.
We cannot guarantee that we will pay dividends to common shareholders in the future.
Our shareholders are only entitled to receive such dividends as our board of directors may declare out of funds legally available
for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may
reduce or eliminate our common stock dividend in the future. Our ability to pay dividends to our shareholders is subject to the
restrictions set forth in Arkansas law, by our federal regulator, and by certain covenants contained in the indentures governing our
trust preferred securities.
Our principal business operations are conducted through our bank subsidiary. Cash available to pay dividends to our common
shareholders is derived primarily, if not entirely, from dividends paid by our bank subsidiary. The ability of our bank subsidiary to pay
dividends, as well as our ability to pay dividends to our common shareholders, will continue to be subject to and limited by the results
of operations of our bank subsidiary and by certain legal and regulatory restrictions. Further, any lenders making loans to us may
impose financial covenants that may be more restrictive than regulatory requirements with respect to our payment of dividends to
common shareholders. Accordingly, there can be no assurance that we will continue to pay dividends to our common shareholders in
the future. See Note 19 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a
discussion of dividend restrictions.
Certain state and/or federal laws may deter potential acquirers 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 us. 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 shares of our common stock. 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 acquirer, 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.
The holders of our subordinated debentures have rights that are senior to those of our common shareholders and any future
debt or preferred equity securities we may offer may adversely affect the market price of our common stock.
At December 31, 2015, we had an aggregate of $118 million of floating rate subordinated debentures and related trust preferred
securities outstanding. We guarantee payment of the principal and interest on the trust preferred securities, and the subordinated
debentures are senior to shares of our common stock. As a result, we must make payments on the subordinated debentures (and the
related trust preferred securities) before any dividends can be paid on shares of our common stock and, in the event of our bankruptcy,
dissolution or liquidation, the holders of the subordinated debentures would receive a distribution from our available assets before any
distributions could be made to the holders of common stock. We have the right to defer distributions on our subordinated debentures
and the related trust preferred securities for up to five years, during which time no dividends may be paid to holders of our common
stock.
We may from time to time issue debt securities, which would be senior to our common stock upon liquidation, and/or preferred
equity securities, which may be senior to our common stock for purposes of dividend distributions or upon liquidation, borrow money
through other means, or issue preferred stock. Our board of directors is authorized to issue one or more classes or series of preferred
stock from time to time without any action on the part of our shareholders. Our board of directors also has the power, without
shareholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights,
dividend rights, and preferences over our common stock with respect to dividends or upon our dissolution, winding-up and liquidation
and other terms. If we issue preferred stock in the future that has a preference over our common stock with respect to the payment of
dividends or upon our liquidation, dissolution, or winding up, or if we issue preferred stock with voting rights that dilute the voting
32
power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely
affected.
Our common stock trading volume may not provide adequate liquidity for investors.
Although shares of our 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 we have no control. Given the daily average trading volume of our common stock, significant sales of our
common stock in a brief period of time, or the expectation of these sales, could cause a decline in the price of our common stock.
Future issuances of additional equity securities could result in dilution of existing stockholders’ equity ownership.
We may determine from time to time to issue additional equity securities to raise additional capital, support growth, or, as we
have in recent years, to make acquisitions. Further, we may issue stock options, grant restricted stock awards or other stock grants to
retain, compensate and/or motivate our employees and directors. These issuances of our securities could dilute the voting and
economic interests of existing shareholders.
Our common stock is not an insured deposit.
Shares of our common stock are not a bank deposit and, therefore, losses in value are not insured by the FDIC, any other deposit
insurance fund or by any other public or private entity. Investment in shares of our common stock is inherently risky for the reasons
described in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, 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.
Item 2.
PROPERTIES
Our principal executive office is located at 17901 Chenal Parkway in Little Rock, Arkansas. At December 31, 2015, we
conducted banking operations in 174 offices in nine states. Such banking offices include both owned and leased facilities.
The following table sets forth specific information about our facilities, by state, at December 31, 2015.
Banking Facility
Owned
Leased
Total
72 (1)
25
22
18
9
3
2
—
—
151
9 (2)
3 (3)
3
4 (4)
1
—
—
2 (5)
1 (6)
23
81
28
25
22
10
3
2
2
1
174
State
Arkansas
Georgia
North Carolina
Texas
Florida
Alabama
South Carolina
New York
California
Total
(1) Includes our principal executive offices in Little Rock.
(2) Includes loan production offices in Little Rock and Benton.
(3) Includes a loan production office in Atlanta.
(4) Includes loan production offices in Austin and Houston.
(5) Includes a loan production office in New York City.
(6) Includes a loan production office in Los Angeles.
33
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, Case No. CV-2011-777. In addition, on December 21, 2012, the Bank was served with a summons and
complaint filed on December 20, 2012, in the Circuit Court of Pulaski County, Arkansas, Ninth Division, styled Audrey Muzingo v.
Bank of the Ozarks, Case No. 60 CV-12-6043. The complaint in each case alleges that the Company and/or 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. 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. On
September 18, 2013, 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 May 15, 2014, the Arkansas Supreme Court
vacated the Arkansas Court of Appeals’ decision, reversing and remanding the case to the trial court to determine, in the first instance,
whether there is a valid agreement to arbitrate disputes between the named plaintiffs and the Bank.
On October 30, 2014, the trial court issued an order once again denying the Company and Bank’s motion to dismiss and to
compel arbitration, finding that the Consumer Deposit Account Agreement containing the arbitration provision was not enforceable
because of a lack of mutual agreement and lack of mutual obligation. The Company and Bank have appealed the trial court’s ruling to
the Arkansas Supreme Court on an interlocutory basis. A ruling from the Arkansas Supreme Court is expected in the first quarter of
2016.
The Plaintiff in the Muzingo case has agreed to stay the proceedings in that case pending the outcome of the appeal in the
Walker case. The Company and the Bank believe the Plaintiffs’ claims in each of these cases are unfounded and subject to meritorious
defenses and intend to vigorously defend against these claims.
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, 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.
34
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 December
31, 2015, the Company had approximately 1,100 holders of record. At December 31, 2015 the closing price of our common stock was
$49.46 per share. The following table sets forth for each quarter of 2015 and 2014, the high and low sales price of our common stock
and the cash dividends declared per share.
Year Ended December 31,
First quarter
Second quarter
Third quarter
Fourth quarter
High
$
38.22 $
48.68
46.90
54.96
32.35 $
36.31
37.96
41.71
2015
Low
Cash
Dividend High
0.130 $
0.135
0.140
0.145
0.550
35.24 $
34.84
35.00
37.00
2014
Low
Cash
Dividend
0.110
0.115
0.120
0.125
0.470
27.76 $
27.51
30.52
29.14
$
Our principal business operations are conducted through our bank subsidiary. Cash available to pay dividends to our common
shareholders is derived primarily, if not entirely, from dividends paid by our bank subsidiary. The ability of our bank subsidiary to pay
dividends, as well as our ability to pay dividends to our common shareholders, will continue to be subject to and limited by the results
of operations of our bank subsidiary and by certain legal and regulatory restrictions. Further, any lenders making loans to us may
impose financial covenants that may be more restrictive than regulatory requirements with respect to the payment of dividends to
common shareholders. Accordingly, there can be no assurance that we will continue to pay dividends to our common shareholders in
the future. See Note 19 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further
discussion of dividend restrictions.
The graph below shows a comparison for the period commencing December 31, 2010 through December 31, 2015 of the
cumulative total stockholder returns (assuming reinvestment of dividends) for our common stock, the S&P Midcap 400 Index and the
NASDAQ Financial Index, assuming a $100 investment on December 31, 2010.
Cumulative Return Comparison
$600
$500
$400
$300
$200
$100
$0
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
OZRK (Bank of the Ozarks, Inc.)
MID (S&P Midcap 400 Index)
NDF (NASDAQ Financial Index)
OZRK (Bank of the Ozarks, Inc.)
MID (S&P Midcap 400 Index)
NDF (NASDAQ Financial Index)
12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015
486
159 $
$
166
116 $
$
166
105 $
$
272 $
154 $
149 $
138 $
99 $
90 $
100 $
100 $
100 $
369 $
169 $
156 $
35
There were no sales of unregistered securities during the period covered by this report that have not been previously disclosed in
our quarterly reports on Form 10-Q or our current reports on Form 8-K.
During the fourth quarter of 2015, we repurchased shares of our common stock in connection with equity incentive plan awards,
as indicated in the following table.
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
Average
Price Per
Share
—
51.37
—
51.37
—
—
—
—
—
—
—
—
Total
Number
of Shares
Repurchased
—
133,492 (1) $
—
133,492
$
October 1, 2015 to October 31, 2015
November 1, 2015 to November 30, 2015
December 1, 2015 to December 31, 2015
Total
(1)
213,200 shares of our common stock issued to certain of our senior officers under our Amended and Restated Restricted Stock and Incentive
Plan vested on November 5, 2015 and were no longer subject to the vesting restriction or substantial risk of forfeiture. We withheld 133,492 of
such shares to satisfy federal and state tax withholding requirements related to the vesting of these shares.
36
Item 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data is derived from our audited financial statements as of and for the five years
ended December 31, 2015 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
Net income available to common stockholders
Common share and per common share data:
Earnings – diluted
Book value
Tangible book value(1)
Dividends
Weighted-average diluted shares outstanding (thousands)
End of period shares outstanding (thousands)
Balance sheet data at period end:
Total assets
Non-purchased loans and leases
Purchased loans
Allowance for loan and lease losses
FDIC loss share receivable
Foreclosed assets
Investment securities
Deposits
Repurchase agreements with customers
Other borrowings
Subordinated debentures
Total common stockholders’ equity
Loan and lease, including purchased loans, to deposit ratio
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
Return on average tangible common stockholders’
equity(1)
Net interest margin – FTE
Efficiency ratio
Common stock dividend payout ratio
Asset quality ratios:
Net charge-offs to average loans and leases(2)
Nonperforming loans and leases to total loans and leases(3)
Nonperforming assets to total assets(3)
Allowance for loan and lease losses as a percentage of:
Non-purchased loans and leases(3)
Nonperforming loans and leases(3)
Capital ratios at period end:
Tier 1 leverage
Common equity tier 1
Tier 1 risk-based capital
Total risk-based capital
$
$
$
2015
Year Ended December 31,
2014
2012
2013
(Dollars in thousands, except per share amounts)
2011
409,719 $
27,568
382,151
19,415
105,015
190,982
182,253
2.09 $
16.16
14.48
0.55
87,348
90,612
291,449 $
20,955
270,494
16,915
84,883
166,015
118,606
1.52 $
11.37
10.04
0.47
78,060
79,924
212,153 $
18,634
193,519
12,075
76,039
126,069
91,237
1.26 $
8.53
8.27
0.36
72,702
73,712
195,946 $
21,600
174,346
11,745
62,860
114,462
77,044
1.10 $
7.18
7.03
0.25
69,776
70,544
199,169
30,435
168,734
11,775
117,083
122,531
101,321
1.47
6.16
5.98
0.19
68,964
68,928
9,879,459 $
6,528,634
1,806,037
60,854
—
22,870
602,348
7,971,468
65,800
204,540
117,685
1,464,631
104.56 %
6,766,499 $
3,979,870
1,147,947
52,918
—
37,775
839,321
5,496,382
65,578
190,855
64,950
908,390
93.29 %
4,791,170 $
2,632,565
724,514
42,945
71,854
49,811
669,384
3,717,027
53,103
280,895
64,950
629,060
90.32 %
4,040,207 $
2,115,834
637,773
38,738
152,198
66,875
494,266
3,101,055
29,550
280,763
64,950
507,664
88.80 %
3,841,651
1,880,483
811,721
39,169
279,045
104,669
438,910
2,943,919
32,810
301,847
64,950
424,551
91.45 %
$
8,621,334 $
1,217,475
14.12 %
5,913,807 $
786,430
13.30 %
4,270,052 $
560,351
13.12 %
3,779,831 $
458,595
12.13 %
3,755,291
374,664
9.98 %
2.11 %
14.97
17.02
5.19
38.45
25.83
0.18 %
0.20
0.37
0.91 %
452 %
14.96 %
10.79
11.62
12.12
2.01 %
15.08
16.64
5.52
45.35
30.46
0.12 %
0.53
0.87
1.33 %
251 %
12.92 %
N/A
11.74
12.47
2.14 %
16.28
16.73
5.63
45.32
29.55
0.14 %
0.33
1.22
1.63 %
492 %
14.19 %
N/A
16.15
17.18
2.04 %
16.80
17.25
5.91
46.58
22.44
0.30 %
0.43
1.88
1.83 %
425 %
14.40 %
N/A
18.11
19.36
2.70 %
27.04
27.79
5.84
41.56
12.50
0.69 %
0.70
3.07
2.08 %
297 %
12.06 %
N/A
17.67
18.93
(1)
The calculations of tangible book value per common share and return on average tangible common stockholders’ equity and the reconciliations to U.S. generally
accepted accounting principles are included elsewhere in this Annual Report on Form 10-K.
Excludes purchased loans and net charge-offs related to such loans.
Excludes purchased loans, except for their inclusion in total assets.
(2)
(3)
N/A Ratio not applicable for year indicated.
37
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.
2015 – Three Months Ended
March 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share amounts)
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 stockholders
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
91,455 $ 100,103 $ 103,484 $ 114,677
(8,158 )
(5,966 )
106,519
85,489
(5,211 )
(6,315 )
30,540
29,067
(51,646 )
(50,184 )
(28,741 )
(18,139 )
(6 )
(24 )
51,455
39,894 $
0.48 $
0.47 $
(6,347 )
93,756
(4,308 )
23,270
(43,724 )
(24,190 )
(28 )
44,776 $
0.52 $
0.51 $
(7,097 )
96,387
(3,581 )
22,138
(45,428 )
(23,385 )
(3 )
46,128 $
0.53 $
0.52 $
0.58
0.57
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 stockholders
Basic earnings per common share
Diluted earnings per common share
March 31
June 30
Sept. 30
Dec. 31
2014 – Three Months Ended
$
$
$
$
57,057 $
(4,661 )
52,396
(1,304 )
20,360
(37,454 )
(8,730 )
8
25,276 $
0.34 $
0.34 $
(Dollars in thousands)
69,760 $
(4,959 )
64,801
(5,582 )
17,388
(37,878 )
(12,251 )
8
26,486 $
0.35 $
0.34 $
80,083 $
(5,462 )
74,621
(3,687 )
19,248
(42,523 )
(15,579 )
13
32,093 $
0.40 $
0.40 $
84,549
(5,874 )
78,675
(6,341 )
27,887
(48,158 )
(17,300 )
(11 )
34,752
0.44
0.43
38
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The following is a discussion of our financial condition at December 31, 2015 and 2014 and our results of operations for each of
the years in the three-year period ended December 31, 2015. The purpose of this management’s discussion and analysis of financial
condition and results of operations (“MD&A”) is to focus on information about our financial condition and results of operations that is
not otherwise apparent from the Consolidated Financial Statements and footnotes. This discussion should be read in conjunction with
the disclosure regarding “Forward-Looking Statements” in Part I as well as the risks discussed under “Item 1A. Risk Factors,” and our
Consolidated Financial Statements and notes thereto included under “Item 8. Financial Statements and Supplementary Data.”
Bank of the Ozarks, Inc. (“Company”) is a bank holding company whose primary business is commercial banking conducted
through our wholly-owned state chartered bank subsidiary – Bank of the Ozarks (the “Bank”). Our results of operations depend
primarily on net interest income, which is the difference between the interest income from earning assets, such as loans and leases and
investments, and the interest expense incurred on interest bearing liabilities, such as deposits, borrowings and subordinated
debentures. We also generate non-interest income, including service charges on deposit accounts, mortgage lending income, trust
income, bank owned life insurance (“BOLI”) income, other income from purchased loans, gains and losses on investment securities
and from sales of other assets, and gains on merger and acquisition transactions.
Our non-interest expense consists primarily of employee compensation and benefits, net occupancy and equipment expense and
other operating expenses. Our results of operations are significantly affected by our provision for loan and lease losses and our
provision for income taxes.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States, or
GAAP, requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated
Financial Statements. Our determination of (i) the provisions to and the adequacy of the allowance for loan and lease losses
(“ALLL”), (ii) the fair value of our investment securities portfolio, (iii) the fair value of foreclosed assets 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 our other significant accounting policies. Accordingly, we consider the determination of (i) provisions to and the
adequacy of the ALLL, (ii) the fair value of our investment securities portfolio, (iii) the fair value of foreclosed assets 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 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 we believe 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, we subjectively assess 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. We also utilize a peer group analysis and a
historical analysis to validate the overall adequacy of our 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 we have otherwise determined a specific reserve is appropriate, no portion of our
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.
Our internal grading system assigns grades to all non-purchased loans and leases, except residential 1-4 family loans, consumer
loans and certain other loans, with each grade being assigned an allowance allocation percentage. 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 our internal loan review process. These risk elements considered in our
determination of the appropriate grade for individual loans and leases include the following, among others: (1) for non-farm/non-
39
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, the age,
condition, value, nature and marketability of collateral and, for certain loans, the marketability of such loans in any secondary market;
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 we consider 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, we consider, among other factors, historical loss percentages over various time periods and a variety of subjective
criteria.
Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. As
provided for under GAAP, we have up to 12 months following the date of the acquisition to finalize the fair values of acquired assets
and assumed liabilities. Once we have finalized the fair values of acquired assets and assumed liabilities within this 12-month period,
we consider such values to be the day 1 fair values (“Day 1 Fair Values”).
For purchased loans, we segregate this portfolio into loans that contain evidence of credit deterioration on the date of acquisition
and loans that do not contain evidence of credit deterioration on the date of acquisition. Purchased 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 our expectations 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 loans are graded by management at the time of purchase. The grade on these purchased loans is reviewed
regularly as part of the ongoing assessment of such loans. To the extent that current information indicates it is probable that we 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, 2015, we had established an ALLL totaling $1.2 million for our purchased loan portfolio. Such ALLL was
based on our historical charge-off analysis of the purchased loan portfolio and reflects our estimate of probable incurred losses in the
purchased loan portfolio that had not previously been charged off. At December 31, 2014, we had no ALLL for our purchased loan
portfolio as we had determined that all losses had been charged off on purchased loans where we had determined it was probable that
we would be unable to collect all amounts according to the contractual terms thereof (for purchased loans without evidence of credit
deterioration at date of acquisition) or whose performance had deteriorated from management’s expectations established in
conjunction with the determination of Day 1 Fair Values (for purchased loans with evidence of credit deterioration at date of
acquisition).
The accrual of interest on non-purchased loans and leases and purchased loans without evidence of credit deterioration at the
date of acquisition is discontinued when, in our opinion, the borrower or lessee may be unable to meet payments as they become due.
We generally place a loan or lease, excluding purchased loans with evidence of credit deterioration on the date of acquisition, 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. We 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 we reasonably expect 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) we
have granted a concession to the borrower are considered troubled debt restructurings (“TDRs”) and are included in impaired loans
40
and leases. Income on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs which continue to
accrue interest, is recognized on a cash basis when and if actually collected.
All loans and leases deemed to be impaired are evaluated individually. We consider a loan or lease, excluding purchased loans
with evidence of credit deterioration at the date of acquisition, to be impaired when based on current information and events, it is
probable that we will be unable to collect all amounts due according to the contractual terms thereof. We consider a purchased loan
with evidence of credit deterioration at the date of acquisition 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 our nonaccrual loans and leases, excluding
purchased loans with evidence of credit deterioration at the date of acquisition, and all TDRs are considered impaired. The majority of
our 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, we compare estimated discounted cash flows to the current investment in the loan or lease. To the extent that our current
investment in a particular loan or lease exceeds the estimated net collateral value or the 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. Our practice is to
charge off any estimated loss as soon as management is able to identify and reasonably quantify such potential loss. Accordingly, only
a small portion of our ALLL is needed for potential losses on nonperforming loans.
We also maintain an allowance for certain non-purchased loans and leases not considered impaired where (i) the customer is
continuing to make regular payments, although payments may be past due, (ii) there is a reasonable basis to believe the customer may
continue to make regular payments, although there is also an elevated risk that the customer may default, and (iii) the collateral or
other repayment sources are likely to be insufficient to recover the current investment in the loan or lease if a default occurs. We
evaluate 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, we assume 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 our current investment in a particular
loan or lease evaluated for the need for such allowance exceeds its net collateral value, such excess is considered allocated allowance
for purposes of the determination of the ALLL.
We also include specific ALLL allocations for qualitative factors including, (i) general economic and business conditions,
(ii) trends that could affect collateral values and (iii) expectations regarding the current business cycle. We may also consider other
qualitative factors in future periods for additional ALLL allocations.
Changes in the criteria used in this evaluation or the availability of new information could cause our ALLL to be increased or
decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to our
ALLL based on their judgment and estimates.
Fair value of the investment securities portfolio. We determine the appropriate classification of investment securities at the time
of purchase and reevaluate such designation as of each balance sheet date. At December 31, 2015 and 2014, we classified all of our
investment securities as available for sale (“AFS”).
Investment securities AFS 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). We utilize independent third parties as our principal pricing sources for determining
fair value of investment securities which are measured on a recurring basis. As a result, we receive estimates of fair values from at
least two independent pricing sources for the majority of our individual securities within our 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 we receive for our investment securities are reviewed and approved on a quarterly basis by our Investment Portfolio
Manager and our Chief Financial Officer.
Declines in the fair value of investment securities below their amortized cost are reviewed at least quarterly 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. We also assess whether we have 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
41
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 our 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 our financial condition, results of operations and liquidity.
Fair value of foreclosed assets. Repossessed personal properties and real estate acquired through or in lieu of foreclosure,
excluding purchased foreclosed assets, 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. Purchased foreclosed assets are initially recorded at Day
1 Fair Values. In estimating such Day 1 Fair Values, we consider a number of factors including, among others, appraised value,
estimated selling price, estimated holding periods and net present value (calculated using discount rates ranging from 8.0% to
9.5% per annum) of cash flows expected to be received.
Valuations of all foreclosed assets are periodically reviewed by management with the carrying value of such assets adjusted
through non-interest expense to the then estimated fair value, generally based on third party appraisals, broker price opinions or other
valuations of the property, net of estimated selling costs, if lower, until disposition.
Fair value of assets acquired and liabilities assumed pursuant to business combination transactions. Purchased loans are
initially recorded at fair value on the date of acquisition. Purchased loans that contain evidence of credit deterioration on the date of
acquisition are carried at the net present value of expected future proceeds. All other purchased 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 loans, we individually evaluate substantially all loans acquired in the transaction. For
those purchased loans without evidence of credit deterioration, we evaluate 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 loan is not specifically reviewed, such loan is
assumed to have characteristics similar to the characteristics of the aggregate acquired portfolio of purchased loans. The grade for each
purchased loan without evidence of credit deterioration is reviewed subsequent to the date of acquisition any time a loan is renewed or
extended or at any time information becomes available to us 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 we will collect all amounts
according to the contractual terms thereof, such loan is not considered impaired and is not individually considered in the determination
of the required ALLL. To the extent that current information indicates it is probable that we 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 ALLL.
In determining the Day 1 Fair Values of purchased loans without evidence of credit deterioration at the date of acquisition, we
include (i) no carryover 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 is accreted into earnings as
a yield adjustment, using the effective yield method, over the remaining life of each loan.
Purchased loans that contain evidence of credit deterioration on the date of acquisition are individually evaluated 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 loans with evidence of credit deterioration, we consider 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 loans with evidence of credit deterioration, we calculate 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 our 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 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.
42
The accretable difference on purchased 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, we used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan.
We separately monitor purchased loans with evidence of credit deterioration on the date of acquisition and periodically review
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 us 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. We separately review the
performance of the portfolio of purchased 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 our initial
expectations established in conjunction with the determination of the Day 1 Fair Values or since our most recent review of such
portfolio’s performance. To the extent that a loan is performing in accordance with or exceeding our 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, nonperforming or impaired loan, and is not considered in the determination
of the required ALLL. For any loan that is exceeding our 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 our expectation established in conjunction with the determination of the Day 1 Fair Values, such
loan is rated FV88, is included in certain of our credit quality metrics, is considered an impaired loan, and is considered in the
determination of the required level of ALLL; however, in accordance with GAAP, we continue to accrete into earnings income on
such loans. 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.
The Day 1 Fair Values of investment securities acquired in business combinations are generally based on quoted market prices,
broker quotes, comprehensive interest rate tables or pricing matrices, or a combination thereof. Additionally, these valuations may
include certain unobservable inputs. The Day 1 Fair Values of assumed liabilities in business combinations are generally the amounts
payable by us 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 limitation”) of the Internal Revenue Code (“IRC”). In determining the section 382 limitation associated with a business
combination, we 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 our determination that some portion of acquired 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 the section 382 limitation, a deferred tax asset 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 our initial
estimates and assumptions regarding the expected utilization of acquired net operating loss carryforwards or the expected settlement
or recovery of acquired assets with built-in losses subject to the section 382 limitation, an increase or decrease of the deferred tax asset
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 asset valuation allowance will be recorded as an adjustment to
deferred income tax expense (benefit).
43
Analysis of Results of Operations
General
The table below shows total assets, investment securities AFS, non-purchased loans and leases, purchased loans, deposits,
common stockholders’ equity, net income available to common stockholders, diluted earnings per common share, book value per
common share and tangible book value per common share as of and for the years indicated and the percentage of change year over
year.
Total assets
Investment securities AFS
Non-purchased loans and leases
Purchased loans
Deposits
Common stockholders’ equity
Net income available to common stockholders
Diluted earnings per common share
Book value per common share
Tangible book value per common share(1)
2015
December 31,
2014
2015 from
2014 from
2013
2014
2013
% Change
(Dollars in thousands, except per share amounts)
$ 9,879,459 $ 6,766,499 $ 4,791,170
602,348 839,321 669,384
6,528,634 3,979,870 2,632,565
1,806,037 1,147,947 724,514
7,971,468 5,496,382 3,717,027
1,464,631 908,390 629,060
91,237
182,253 118,606
1.26
1.52
8.53
11.37
8.27
10.04
2.09
16.16
14.48
46.0 %
(28.2 )
64.0
57.3
45.0
61.2
53.7
37.5
42.1
44.2
41.2 %
25.4
51.2
58.4
47.9
44.4
30.0
20.6
33.3
21.4
(1)
The calculation of our tangible book value per common share and the reconciliation to GAAP is included elsewhere in this MD&A.
Highlights of 2015 include the following:
Growth in non-purchased loans and leases of 64.0% to $6.53 billion at December 31, 2015;
Growth in total assets of 46.0% to $9.88 billion at December 31, 2015;
Growth in deposits of 45.0% to $7.97 billion at December 31, 2015;
Net income available to common stockholders of $182.3 million for 2015, a 53.7% increase from net income available to
common stockholders for 2014;
Return on average assets of 2.11% for 2015, our sixth consecutive year of achieving returns on average assets in excess
of 2.00%;
Returns on average common stockholders’ equity and average tangible common stockholders’ equity of 14.97% and
17.02%, respectively, (the calculation of our return on average tangible common stockholders’ equity and the
reconciliation to GAAP are included elsewhere in this MD&A);
An efficiency ratio (non-interest expense divided by the sum of net interest income, on a fully taxable equivalent basis,
and non-interest income) of 38.4% for 2015;
A net charge-off ratio for total loans and leases of 0.17% for 2015;
Excluding purchased loans, our ratio of nonperforming loans and leases to total loans and leases was 0.20% at December
31, 2015; and our ratio of nonperforming assets to total assets was 0.37% at December 31, 2015;
On February 10, 2015, we completed our acquisition of Intervest Bancshares Corporation (“Intervest”);
On August 5, 2015, we completed our acquisition of Bank of the Carolinas Corporation (“BCAR”).
On December 8, 2015, we completed the sale of 2,098,436 shares of our common stock in a registered direct offering to
certain investors that resulted in net proceeds of approximately $110 million;
On October 19, 2015, we entered into a definitive agreement and plan of merger (the “C&S Agreement”) with
Community & Southern Holdings, Inc. (“C&S”) and its wholly-owned bank subsidiary Community & Southern Bank,
whereby we expect to acquire all of the outstanding common stock and equity awards of C&S in a transaction valued at
approximately $799.6 million; and
44
On November 9, 2015, we entered into a definitive agreement and plan of merger (the “C1 Agreement”) with C1
Financial, Inc. (“C1”) and its wholly-owned bank subsidiary C1 Bank, whereby we expect to acquire all of the
outstanding common stock of C1 in a transaction valued at approximately $402.5 million.
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 $9.6 million in 2015, $10.7 million in 2014 and $8.6 million
in 2013. 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.
2015 compared to 2014
Net interest income for 2015 increased 39.3% to $391.7 million compared to $281.2 million for 2014. Net interest margin
decreased 33 basis points (“bps”) to 5.19% for 2015 compared to 5.52% for 2014. The increase in net interest income was primarily
the result of the growth in average earning assets, which increased 48.3% to $7.55 billion for 2015 compared to $5.09 billion for
2014. The decrease in net interest margin for 2015 compared to 2014 was primarily due to the 39 bps decrease in yield on average
earning assets, partially offset by a five bps decrease in rates paid on interest bearing liabilities.
Yields on average earning assets decreased to 5.55% for 2015 compared to 5.94% for 2014 primarily due to decreases in yield
on our non-purchased loan and lease portfolio, our purchased loan portfolio and our aggregate investment securities portfolio. The
yield on our portfolio of non-purchased loans and leases decreased 10 bps to 5.00% for 2015 compared to 5.10% for 2014. This
decrease was primarily attributable to the extremely low interest rate environment experienced in recent years and continued pricing
competition from many of our competitors. Assuming the current low interest rate environment and pricing competition from many of
our competitors continues, we expect yields on our non-purchased loan and lease portfolio will continue to decrease. We have also
continued to increase the percentage of variable rate loans in our non-purchased loan and lease portfolio in an effort to lower our
interest rate risk. At December 31, 2015, variable rate loans comprised 79.0% of our non-purchased loans and leases compared to
72.9% at December 31, 2014. We expect to continue to increase the percentage of variable rate loans in our non-purchased loan and
lease portfolio. The yield on our purchased loan portfolio decreased 170 bps to 7.24% for 2015 compared to 8.94% for 2014. This
decrease was primarily attributable to the loans acquired in our Summit Bancorp, Inc. (“Summit”) and Intervest acquisitions, many of
which did not contain evidence of credit deterioration on the date of acquisition and were priced at a lower yield compared to the then
existing yield on our purchased loan portfolio. This decrease in yield on purchased loans was partially offset by an increase in yield
on certain purchased loans with evidence of credit deterioration on the date of acquisition due to upward revisions, during 2014 and
2015, of estimated cash flows as a result of recent evaluations of the expected performance of such loans. The yield on our aggregate
investment securities portfolio for 2015 decreased 12 bps compared to 2014. This decrease in the yield on our aggregate investment
securities portfolio was primarily the result of (i) a change in the composition of our investment securities portfolio to include a larger
percentage of lower yielding taxable investment securities, which comprised 46.2% of the total average balance of investment
securities in 2015 compared to 40.8% in 2014, and (ii) the low interest rate environment which has resulted in many issuers of
investment securities, particularly tax-exempt municipal securities, calling higher-rate investment securities and refinancing such
securities at lower interest rates. Assuming this low interest rate environment continues, we would expect additional higher-rate tax-
exempt investment securities to be called by their issuers and be refinanced at lower interest rates, likely resulting in continued
decreases of the yield on our tax-exempt investment securities portfolio. Additionally, during the fourth quarter of 2015, we sold
approximately $167 million of our investment securities portfolio in an effort to reduce that portfolio’s exposure to possible rising
interest rates and to maintain our total assets below $10 billion at December 31, 2015. To the extent we do not purchase investment
securities to replace those securities sold in the fourth quarter of 2015, our interest income on our aggregate investment securities
portfolio for 2016 is expected to decrease compared to 2015.
The overall decrease in rates on average interest bearing liabilities, which decreased five bps for 2015 compared to 2014, was
primarily due to a shift in the composition of total interest bearing liabilities to include a larger percentage of interest bearing deposits,
partially offset by an increase in rates on interest bearing deposits, particularly time deposits. Interest bearing deposits, which
generally have lower rates than most of our other interest bearing liabilities, comprised 93.8% of total average interest bearing
liabilities for 2015 compared to 89.9% for 2014. The increase in interest bearing deposits as a percentage of total interest bearing
liabilities was due, in part, to interest bearing deposits assumed in our Summit and Intervest acquisitions and growth in interest bearing
deposits. The increase in rates on interest bearing deposits, which increased eight bps for 2015 compared to 2014, is primarily due to
a shift in the composition of interest bearing deposits to a larger percentage of time deposits, primarily as a result of our Intervest
acquisition. The average balance of time deposits increased from 30.0% of total average interest bearing deposits for 2014 to 37.4%
for 2015. Additionally, throughout much of 2014 and 2015, we increased deposit pricing, including the pricing of time deposits, in
several target markets to fund growth in loans and leases. To the extent we have future growth in loans and leases, we would expect
45
to increase deposit pricing in certain target markets to fund such growth. Any such increase in deposit pricing is expected to result in
increased deposit costs in future periods.
Our other borrowing sources include (i) repurchase agreements with customers (“repos”), (ii) other borrowings comprised
primarily of Federal Home Loan Bank of Dallas (“FHLB”) advances, and, to a lesser extent, Federal Reserve Bank (“FRB”)
borrowings and federal funds purchased, and (iii) subordinated debentures. The rates on repos increased one bps in 2015 compared to
2014. The rates on our other borrowing sources decreased 49 bps for 2015 compared to 2014. During 2015, we prepaid $150 million
of fixed rate callable FHLB advances with a weighted average interest rate of 3.85%. The weighted average interest rate on our
remaining $40 million of fixed rate callable FHLB advances is 2.85%. The rates paid on our subordinated debentures, which are tied
to a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically, increased 68 bps in 2015 compared to
2014. This increase in rates on our subordinated debentures is primarily due to the $52.2 million of subordinated debentures assumed
in our Intervest acquisition, which, net of amortization of the discount of the purchase accounting adjustments, had a weighted average
interest rate of 4.27% at December 31, 2015.
The increase in average earning assets for 2015 compared to 2014 was due, in part, to an increase in the average balance of non-
purchased loans and leases which increased $1.71 billion, or 53.6%, to $4.90 billion for 2015 compared to $3.19 billion for 2014 as
we continued to experience strong growth in our originations of non-purchased loans and leases. Additionally the average balance of
purchased loans increased $763 million, or 69.5%, to $1.86 billion for 2015 compared to $1.10 billion for 2014, primarily as a result
of the acquisition of Intervest.
2014 compared to 2013
Net interest income for 2014 increased 39.1% to $281.2 million compared to $202.1 million for 2013. Net interest margin
decreased 11 bps to 5.52% for 2014 compared to 5.63% for 2013. The increase in net interest income was primarily the result of the
growth in average earning assets, which increased 41.8% to $5.09 billion for 2014 compared to $3.59 billion for 2013. The decrease in
net interest margin for 2014 compared to 2013 was primarily due to the 21 bps decrease in yield on average earning assets, partially
offset by an 11 bps decrease in rates paid on interest bearing liabilities.
Yields on average earning assets decreased to 5.94% for 2014 compared to 6.15% for 2013. The yield on our portfolio of non-
purchased loans and leases decreased 38 bps to 5.10% for 2014 compared to 5.48% for 2013. This decrease was primarily attributable
to the extremely low interest rate environment experienced in recent years and increased pricing competition from many of our
competitors. The yield on our aggregate investment securities portfolio for 2014 decreased 43 bps compared to 2013. This decrease in
the yield on our aggregate investment securities portfolio was primarily the result of (i) a change in the composition of our investment
securities portfolio to include a larger percentage of lower yielding taxable investment securities, which comprised 40.8% of the total
average balance of investment securities in 2014 compared to 36.1% in 2013, and (ii) the low interest rate environment which has
resulted in many issuers of investment securities, particularly tax-exempt municipal securities, calling higher-rate investment
securities and refinancing such securities at lower interest rates. Assuming this low interest rate environment continues, we expect
additional higher-rate tax-exempt investment securities to be called by their issuers and be refinanced at lower interest rates, likely
resulting in continued decreases of the yield on our tax-exempt investment securities portfolio. The yield on our purchased loan
portfolio decreased nine bps to 8.94% for 2014 compared to 9.03% for 2013. This decrease was primarily attributable to the loans
acquired in our Summit acquisition, many of which did not contain evidence of credit deterioration on the date of acquisition and were
priced at a lower yield compared to the then existing yield on our purchased loan portfolio. This decrease in yield on purchased loans
was partially offset by the increase in yield on certain purchased loans with evidence of credit deterioration on the date of acquisition
due to upward revisions of estimated cash flows as a result of recent evaluations of the expected performance of such loans.
The overall decrease in rates on average interest bearing liabilities was primarily due to a shift in the composition of interest
bearing liabilities. During 2014 the average balance of interest bearing deposits, which are generally one of our cheapest interest
bearing funding sources, increased to 89.9% of total average interest bearing liabilities compared to 87.0% in 2013. The rate paid on
our average interest bearing deposits of 23 bps for 2014 was unchanged compared to 2013. However, such rates have increased in
recent quarters, increasing from 21 bps in the second quarter to 23 bps in the third quarter and 27 bps in the fourth quarter of 2014 as
we have increased deposit pricing in several target markets to fund growth in non-purchased loans and leases. To the extent we have
future growth in non-purchased loans and leases, we may again increase deposit pricing in certain target markets to fund such
growth. Any such increase in deposit pricing is likely to result in increased deposit costs in future periods.
Our other borrowing sources include (i) repos, (ii) other borrowings comprised primarily of FHLB advances, and, to a lesser
extent, FRB borrowings and federal funds purchased, and (iii) subordinated debentures. The rates on repos increased one bps in 2014
compared to 2013. The rates on our other borrowing sources, which consist primarily of fixed rate callable FHLB advances, increased
six bps for 2014 compared to 2013. During the fourth quarter of 2014, we prepaid $90 million of fixed rate callable FHLB advances
with a weighted average interest rate of 4.13%. At December 31, 2014, the weighted average interest rate on our remaining $190
46
million of fixed rate callable FHLB advances is approximately 3.64%. The rates paid on our subordinated debentures, which are tied
to a spread over the 90-day LIBOR and reset periodically, decreased four bps in 2014 compared to 2013.
The increase in average earning assets for 2014 compared to 2013 was due, in part, to an increase in the average balance of non-
purchased loans and leases of 35.0% to $3.19 billion for 2014 compared to $2.36 billion for 2013. Additionally the average balance of
purchased loans increased 65.6% to $1.10 billion for 2014 compared to $663 million for 2013, primarily as a result of the acquisitions
of Bancshares, Inc. (“Bancshares”) and Summit. The average balances of aggregate investment securities increased 42.0% to $798
million for 2014 compared to $562 million for 2013, primarily as a result of the investment securities acquired in the Summit
acquisition.
The following table sets forth certain information relating to our 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 balances of
investment securities are computed based on amortized cost adjusted for unrealized gains and losses on investment securities AFS and
other-than-temporary impairment writedowns. The yields on investment securities include amortization of premiums and accretion of
discounts. The average balance of non-purchased loans and leases includes non-purchased loans and leases on which we have
discontinued accruing interest. The yields on non-purchased loans and leases and purchased loans without evidence of credit
deterioration at date of acquisition include late fees and amortization of certain deferred fees, origination costs and, for such purchased
loans, accretion or amortization of any purchase accounting yield adjustment. The yields on purchased loans with evidence of credit
deterioration at date of acquisition 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. The interest expense on subordinated debentures assumed in the Intervest transaction includes the
amortization of purchase accounting adjustments, using the level yield method, over the estimated holding period of approximately
eight years.
47
Average Consolidated Balance Sheets and Net Interest Analysis
2015
Average
Balance
Income/
Expense
Yield/
Rate
Year Ended December 31,
2014
Average
Balance
(Dollars in thousands)
Income/
Expense
Yield/
Rate
2013
Average
Balance
Income/
Expense
Yield/
Rate
$
2,902 $
41 1.40 % $
4,897 $
56 1.15 % $
1,108 $
33 2.96 %
363,254 13,131 3.61 325,611 11,125 3.42 202,783
6,838 3.37
422,983 26,406 6.24 472,310 29,983 6.35 359,068 24,512 6.83
4,898,552 244,978 5.00 3,189,308 162,812 5.10 2,362,827 129,470 5.48
1,862,102 134,745 7.24 1,098,851 98,212 8.94 663,490 59,930 9.03
7,549,793 419,301 5.55 5,090,977 302,188 5.94 3,589,276 220,783 6.15
1,071,541
$ 8,621,334
680,776
$ 4,270,052
822,830
$ 5,913,807
$ 3,557,037 $ 7,969 0.22 % $ 2,564,250 $ 5,424 0.21 % $ 1,798,692 $ 3,636 0.20 %
ASSETS
Interest earning assets:
Interest earning deposits and federal
funds sold
Investment securities:
Taxable
Tax-exempt – FTE
Non-purchased loans and
leases – FTE
Purchased loans
Total earning assets – FTE
Non-interest earning assets
Total assets
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest bearing
transaction
Time deposits of $100,000 or
more
Other time deposits
1,244,879
6,375 0.51 558,389
3,372 0.38 541,938
880,189
Total interest bearing deposits 5,682,105 17,716 0.31 3,664,577
1,632 0.29 390,894
1,510 0.28 444,862
8,566 0.23 2,634,448
1,108 0.28
1,359 0.31
6,103 0.23
Repurchase agreements with
customers
Other borrowings
Subordinated debentures
Total interest bearing
liabilities
Non-interest bearing liabilities:
73,995
187,608
111,409
76 0.10
31 0.08
6,111 3.26 281,829 10,642 3.78 289,615 10,780 3.72
1,720 2.65
3,665 3.29
1,693 2.61
55 0.09
39,056
64,950
63,869
64,950
6,055,117 27,568 0.46 4,075,225 20,956 0.51 3,028,069 18,634 0.62
Non-interest bearing deposits
Other non-interest bearing liabilities
Total liabilities
Common stockholders’ equity
Noncontrolling interest
Total liabilities and
stockholders’ equity
Net interest income – FTE
Net interest margin – FTE
1,301,574
43,819
7,400,510
1,217,475
3,349
989,073
59,557
5,123,855
786,430
3,522
639,521
38,653
3,706,243
560,351
3,458
$ 8,621,334
$ 5,913,807
$ 4,270,052
$ 391,733
$ 281,232
$ 202,149
5.19 %
5.52 %
5.63 %
48
The following table reflects how changes in the volume of interest earning assets and interest bearing liabilities and changes in
interest rates have affected our 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
2015 over 2014
Yield/
Rate
Volume
Net
Change
(Dollars in thousands)
Volume
2014 over 2013
Yield/
Rate
Net
Change
Increase (decrease) in:
Interest income – FTE:
Interest earning deposits and federal funds
sold
Investment securities:
Taxable
Tax-exempt – FTE
Non-purchased loans and leases – FTE
Purchased loans
Total interest income – FTE
Interest expense:
Savings and interest bearing transaction
Time deposits of $100,000 or more
Other time deposits
Repurchase agreements with customers
Other borrowings
Subordinated debentures
Total interest expense
Increase (decrease) in net interest income – FTE
Non-Interest Income
$
(27 ) $
12 $
(15 ) $
43 $
(20 ) $
23
1,361
(3,080 )
85,478
55,231
138,963
2,006
645
(3,577 )
(497 )
82,166
(3,312 )
(18,698 )
36,533
(21,850 ) 117,113
4,197
7,189
42,191
38,911
92,531
90
(1,718 )
(8,849 )
(629 )
(11,126 )
4,287
5,471
33,342
38,282
81,405
2,224
3,516
1,295
10
(3,224 )
1,529
5,350
1,788
524
151
24
(138 )
(27 )
2,322
$ 133,613 $ (23,112 ) $ 110,501 $ 90,424 $ (11,341 ) $ 79,083
321
1,227
567
11
(1,307 )
443
1,262
2,545
4,743
1,862
21
(4,531 )
1,972
6,612
1,619
490
271
21
(294 )
—
2,107
169
34
(120 )
3
156
(27 )
215
Our non-interest income consists primarily of service charges on deposit accounts, mortgage lending income, trust income,
BOLI income, other income from purchased loans, net gains on investment securities, gains on sales of other assets and gains on
merger and acquisition transactions.
2015 compared to 2014
Non-interest income for 2015 increased 23.7% to $105.0 million compared to $84.9 million for 2014. Non-interest income for
2015 included $2.3 million of tax-exempt income from BOLI death benefits, $5.5 million of gains on sales of investment securities
and $6.3 million of gains on sales of certain purchased loans. Non-interest income for 2014 included $4.7 million of tax-exempt
bargain purchase gain on our Bancshares acquisition and $8.0 million of gain on termination of our FDIC loss share agreements.
Service charges on deposit accounts increased 7.9% to $28.7 million in 2015 compared to $26.6 million in 2014. This increase
was primarily due to growth in the number of transaction accounts and the addition of deposit customers from our Summit acquisition,
and, to a lesser extent, our Intervest and BCAR acquisitions.
Mortgage lending income increased 31.4% to $6.8 million in 2015 compared to $5.2 million in 2014. The volume of
originations of mortgage loans available for sale increased 25.5% to $255 million in 2015 compared to $203 million in 2014.
Trust income increased 5.6% to $5.9 million in 2015 compared to $5.6 million in 2014. This increase in trust income was
primarily due to growth in both corporate and personal trust income.
BOLI income increased 94.5% to $10.1 million in 2015 compared to $5.2 million in 2014 primarily due to the $2.3 million in
BOLI death benefits received and $100 million of BOLI purchased in 2015, including $85 million in May and $15 million in
49
November. In January 2016, we purchased an additional $42 million of BOLI. BOLI income in the form of increases in cash
surrender value help to offset a portion of employee benefit costs.
Other income from purchased loans was $26.1 million in 2015 compared to $14.8 million in 2014. Other income from
purchased loans consists primarily of income recognized on purchased loan prepayments and payoffs that are not considered yield
adjustments. Because other income from purchased loans may be significantly affected by loan payments and payoffs, this income
item may vary significantly from period to period.
Net gains on investment securities were $5.5 million in 2015 from the sale of approximately $197 million of investment
securities, compared to net gains of $0.1 million in 2014 from the sale of approximately $56 million of investment securities. During
2015, proceeds totaling approximately $203 million from the sales of investment securities were used to prepay $150 million of our
highest rate callable FHLB advances. These transactions were executed for various reasons, including to reduce interest rate risk, to
increase secondary sources of liquidity, to more efficiently allocate capital, and to help maintain our total assets below $10 billion at
December 31, 2015.
Gains on sales of other assets were $14.8 million in 2015 compared to $6.0 million in 2014. Included in gains on sales of other
assets in 2015 was $6.3 million of gains on the sale of approximately $13 million of certain purchased loans.
In 2014 we recorded a tax-exempt bargain purchase gain of $4.7 million on our Bancshares acquisition. We had no bargain
purchase gain in 2015.
During 2014, we entered into agreements with the FDIC terminating the loss share agreements for all seven of our FDIC-
assisted acquisitions, resulting in a gain of $8.0 million included in “other” non-interest expense in 2014. All rights and obligations of
the parties under the FDIC loss share agreements, including the clawback provisions, were eliminated under these termination
agreements. As a result, all recoveries, gains, charge-offs, losses and expenses related to assets previously covered under loss share
are recognized entirely by us and contributed, in part, to the increases in other income from purchased loans and gains on sales of
other assets in 2015 compared to 2014.
2014 compared to 2013
Non-interest income for 2014 increased 11.6% to $84.9 million compared to $76.1 million for 2013. Non-interest income for
2014 included $4.7 million of tax-exempt bargain purchase gain on our Bancshares acquisition and $8.0 million of gain on termination
of our FDIC loss share agreements. Non-interest income for 2013 included $5.2 million of tax-exempt bargain purchase gain on our
acquisition of The First National Bank of Shelby (“First National Bank”).
Service charges on deposit accounts increased 22.9% to $26.6 million in 2014 compared to $21.6 million in 2013. This increase
was primarily due to growth in the number of transaction accounts and the addition of deposit customers from recent acquisitions.
Mortgage lending income decreased 7.8% to $5.2 million in 2014 compared to $5.6 million in 2013. Originations of mortgage
loans for sale, including both originations for home purchases and refinancings of existing mortgages, decreased 5.6% to $203 million
in 2014 compared to $209 million in 2013. Mortgage originations for home purchases were 68% of 2014 origination volume
compared to 52% in 2013. Refinancing of existing mortgages accounted for 32% of 2014 origination volume compared to 48% in
2013.
Trust income increased 36.5% to $5.6 million in 2014 compared to $4.1 million in 2013. This increase in trust income was
primarily due to new trust customers added as a result of our acquisitions, primarily our First National Bank acquisition.
BOLI income increased 14.5% to $5.2 million in 2014 compared to $4.5 million in 2013 primarily due to the BOLI acquired in
the First National Bank and Summit acquisitions.
Net gains on investment securities were $0.1 million in 2014 from the sale of approximately $55.6 million of investment
securities, compared to net gains of $0.2 million in 2013 from the sale of approximately $0.8 million of investment securities.
Gains on sales of other assets were $6.0 million in 2014 compared to $9.4 million in 2013. The gains on sales of other assets for
both 2014 and 2013 were primarily due to gains on sales of purchased foreclosed assets. Because the Day 1 Fair Values of purchased
foreclosed assets include a net present value component, which is not accreted into income over the expected holding period of such
assets, the sale of purchased foreclosed assets has typically resulted in gains on such sales.
50
Accretion of our FDIC loss share receivable, net of amortization of our FDIC clawback payable resulted in net expense of $0.6
million in 2014 compared to $7.2 million of income during 2013. During the fourth quarter of 2014, we entered into agreements with
the FDIC terminating the loss share agreements for all seven of our FDIC-assisted acquisitions, resulting in a gain of $8.0 million
included in “other” non-interest income. All rights and obligations of the parties under the FDIC loss share agreements, including the
clawback provisions, have been eliminated under these termination agreements.
Other income from purchased loans was $14.8 million in 2014 compared to $13.2 million in 2013. Other income from
purchased loans consists primarily of income recognized on purchased loan prepayments and payoffs that are not considered yield
adjustments. Because other income from purchased loans may be significantly affected by loan payments and payoffs, this income
item may vary significantly from period to period.
On March 5, 2014, we completed our Bancshares acquisition in a transaction valued at $21.5 million. This acquisition resulted
in a tax-exempt bargain purchase gain of $4.7 million in 2014.
On July 31, 2013, we completed our First National Bank acquisition in a transaction valued at $68.5 million. This acquisition
resulted in a tax-exempt bargain purchase gain of $5.2 million in 2013.
The following table presents non-interest income for the years indicated.
Non-Interest Income
Service charges on deposit accounts
Mortgage lending income
Trust income
Bank owned life insurance income
(Amortization) accretion of FDIC loss share receivable, net
of FDIC clawback payable
Other income from purchased 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
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
28,698 $
6,817
5,903
10,084
—
26,126
5,481
14,753
—
7,153
105,015 $
26,609 $
5,187
5,592
5,184
(611 )
14,803
144
6,023
4,667
17,285
84,883 $
21,644
5,626
4,096
4,529
7,171
13,153
161
9,386
5,163
5,110
76,039
Non-interest expense consists of salaries and employee benefits, net occupancy and equipment expense and other operating
expenses.
2015 compared to 2014
Non-interest expense for 2015 increased 15.0% to $191.0 million compared to $166.0 million for 2014. Non-interest expense
for 2015 included $8.9 million in penalties from prepaying $150 million of our highest cost fixed-rate callable FHLB advances, $2.2
million of severance cost associated with the elimination of the New York lending operations acquired in our Intervest acquisition,
which we refer to as Stabilized Properties Group (or SPG), and the consolidation of the remaining servicing team of the SPG into our
Real Estate Specialties Group (“RESG”), approximately $6.7 million of acquisition-related as systems conversion expenses and $1.0
million of software and contract termination charges. Non-interest expense for 2014 included $8.1 million of FHLB prepayment
penalties, approximately $4.7 million of acquisition-related and systems conversion expenses, and $5.6 million of software and
contract termination charges. Our efficiency ratio for 2015 was 38.4% compared to 45.3% for 2014. Our “core” efficiency ratio for
2015 was 35.7% compared to 41.6% for 2014. The calculation of our “core” efficiency ratio and the reconciliation to GAAP is
included in the following tables in the MD&A.
51
Salaries and employee benefits, our largest component of non-interest expense, increased 14.4% to $88.0 million in 2015 from
$76.9 million in 2014. We had 1,642 full-time equivalent employees at December 31, 2015, an increase of 11.0% from 1,479 full-time
equivalent employees at December 31, 2014.
Net occupancy and equipment expense increased 29.6% to $31.2 million in 2015 compared to $24.1 million in 2014. At
December 31, 2015, we had 174 offices, including 81 in Arkansas, 28 in Georgia, 25 in North Carolina, 22 in Texas, 10 in Florida,
three in Alabama, two offices each in South Carolina and New York and one office in California. At December 31, 2014, we had 159
offices, including 81 in Arkansas, 28 in Georgia, 21 in Texas, 17 in North Carolina, five in Florida, three in Alabama, two in South
Carolina and one office each in New York and California.
Other operating expenses increased 10.4% to $71.8 billion in 2015 compared to $65.0 million in 2014, primarily as a result of
(i) $12.6 million of professional and outside services expense in 2015, compared to $10.8 million in 2014, (ii) $5.1 million of FDIC
and state assessments and insurance expense in 2015, compared to $3.3 million in 2014, (iii) $8.9 million of loan collection and
repossession expenses and writedowns of foreclosed assets in 2015 compared to $4.6 million in 2014 and (iv) $6.7 million in
amortization of intangibles in 2015 compared to $5.0 million in 2014. These increases were partially offset by decreases in software
expense to $2.6 million in 2015 compared to $5.0 million in 2014 and a decrease in “other” non-interest expense to $8.7 million in
2015 compared to $12.0 million in 2014. The increases in professional and outside services, FDIC and state assessments and
insurance expense and amortization of intangibles is primarily the result of our acquisitions of Intervest and BCAR and, to a lesser
extent, our pending acquisitions of C&S and C1. The increase in loan collection and repossession expenses and writedowns of
foreclosed assets was due, in part, to the termination in late 2014 of all loss share agreements with the FDIC. The decrease in software
expense was primarily attributable to the reduced run rate associated with our conversion to a new core banking systems in 2014. The
decrease in “other” is primarily due to $5.6 million of contract termination costs in 2014 that were directly attributable to the core
systems conversion.
2014 compared to 2013
Non-interest expense for 2014 increased 31.7% to $166.0 million compared to $126.1 million for 2013. Our efficiency ratio for
2014 was 45.35% compared to 45.32% for 2013.
Salaries and employee benefits, our largest component of non-interest expense, increased 18.6% to $76.9 million in 2014 from
$64.8 million in 2013. We had 1,479 full-time equivalent employees at December 31, 2014, an increase of 20.9% from 1,223 full-time
equivalent employees at December 31, 2013.
Net occupancy and equipment expense for 2014 increased 28.8% to $24.1 million in 2014 compared to $18.7 million in 2013.
At December 31, 2014, we had 159 offices, including 81 in Arkansas, 28 in Georgia, 21 in Texas, 17 in North Carolina, five in
Florida, three in Alabama, two in South Carolina and one office each in New York and California. At December 31, 2013, we 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.
Other operating expenses increased 52.9% to $65.0 million in 2014 compared to $42.5 million in 2013, primarily as a result of
(i) $8.1 million of FHLB prepayment penalty resulting from prepaying $90 million of our highest cost fixed rate callable FHLB
advances; (ii) $10.8 million of professional and outside services expense in 2014, compared to $6.7 million in 2013, (iii) $5.0 million
of amortization of intangibles in 2014 compared to $2.8 million in 2013 and (iv) increases in “other” expenses of $4.7 million. The
increases in professional and outside services expense and “other” expense in 2014 compared to 2013 is primarily related to our
conversion of our core banking systems, including contract termination costs of approximately $5.6 million directly attributable to
these systems conversion.
52
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
Amortization of intangibles
FHLB prepayment penalty
Other
Total non-interest expense
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
87,953 $
31,248
76,884 $
24,102
64,825
18,710
3,950
5,948
2,805
12,594
2,635
3,047
1,308
3,795
2,665
5,068
3,803
6,660
8,853
8,650
190,982 $
4,090
4,765
3,029
10,765
4,987
3,023
898
2,380
1,485
3,276
1,299
4,996
8,062
11,974
166,015 $
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
126,069
$
We use the core efficiency ratio, which is a non-GAAP financial measure, to better evaluate the efficiency of our operations.
This core efficiency ratio excludes certain revenues and expenses that we deem to be “non-core.” We believe our core efficiency ratio
provides useful supplemental information that contributes to a better understanding of our financial results. This non-GAAP measure
should not be viewed as a substitute for financial results determined in accordance with GAAP, nor is it necessarily comparable to
non-GAAP measures presented by other companies. The reconciliation of our core efficiency ratio to the most directly comparable
GAAP financial measure is included in the following table.
53
Core Efficiency Ratio
Non-interest expense
Non-core adjustments:
FHLB prepayment penalties
SPG severance costs
Software and contract termination charges
Acquisition-related and systems conversion expenses
Other non-core expenses
Total non-interest expense-adjusted
Net interest income-FTE
Non-interest income
Total revenue-FTE
Non-core adjustments:
BOLI death benefits
Gains on sales of investment securities
Gains on sales of purchased loans
Gains on termination of FDIC loss share
Gains on merger and acquisition transactions
Total revenue-adjusted
GAAP efficiency ratio
Core efficiency ratio
Income Taxes
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
190,982 $
166,015 $
126,069
(8,853 )
(2,228 )
(965 )
(6,700 )
—
172,236 $
391,733 $
105,015
496,748
(2,259 )
(5,482 )
(6,274 )
—
—
482,733 $
(8,062 )
—
(5,587 )
(4,749 )
(606 )
147,011 $
281,232 $
84,883
366,115
—
(144 )
—
(7,996 )
(4,667 )
353,308 $
—
—
—
(1,441 )
—
124,628
202,149
76,039
278,188
—
(161 )
—
—
(5,163 )
272,864
38.45 %
35.68 %
45.35 %
41.61 %
45.32 %
45.67 %
$
$
$
Our provision for income taxes was $94.5 million in 2015 compared to $53.9 million in 2014 and $40.1 million in 2013. Our
effective income tax rates were 34.2% for 2015, 31.2% for 2014 and 30.6% for 2013. The increase in the effective tax rate for 2015
compared to 2014 is primarily the result of a decrease in tax-exempt income as a percent of total income. The effective tax rates for
all periods were also affected by various other factors including amounts of non-taxable income and non-deductible expenses. A
reconciliation between the statutory federal income tax rates and our effective income tax rates for the years ended December 31,
2015, 2014 and 2013 is included in Note 14 to the Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Analysis of Financial Condition
Loan and Lease Portfolio
At December 31, 2015, our total loan and lease portfolio was $8.33 billion, an increase of 62.5% from $5.13 billion at
December 31, 2014. As of December 31, 2015, our total loan and lease portfolio consisted of 89.2% real estate loans, 3.5%
commercial and industrial loans, 0.4% consumer loans, 1.8% direct financing leases and 5.1% other loans. Real estate loans, our
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.
54
The amount and type of total loans and leases outstanding are reflected in the following table.
Loan and Lease Portfolio
2015
2014
December 31,
2013
(Dollars in thousands)
2012
2011
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
94,358
580,325
795,933
65,864
231,713
$ 737,206 $ 638,958 $ 491,694 $ 443,622 $ 463,093
3,146,413 2,008,430 1,420,769 1,100,852 1,078,522
638,978
2,873,398 1,511,614
95,262
95,223
158,025
253,590
7,431,700 4,507,815 3,005,973 2,455,561 2,433,880
150,428
41,120
54,745
12,031
$ 8,334,671 $ 5,127,817 $ 3,354,079 $ 2,753,607 $ 2,692,204
157,721
33,148
86,321
70,916
291,803
35,232
147,735
428,201
356,532
40,937
115,475
107,058
183,633
34,125
68,022
12,266
685,813
73,330
151,944
Included in “other” loans at December 31, 2015, 2014 and 2013 (none at December 31, 2012 or 2011) are loans totaling $394
million, $61 million and $32 million, respectively, that were originated to acquire promissory notes from non-depository financial
institutions and are typically collateralized by an assignment of the promissory note and all related note documents including
mortgages, deeds of trust, etc. While the loans are considered “other” loans in accordance with FDIC Call Report instructions, we
underwrite these lending transactions based on the fundamentals of the underlying collateral, repayment sources and guarantors,
among others, consistent with other similar lending transactions.
The amount and type of our real estate loans at December 31, 2015 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 in that state or MSA exceed $10 million.
New York:
New York–Newark–Jersey City,
NY–NJ–PA MSA
All other New York(1)
Total New York
Arkansas:
Little Rock–North Little Rock–Conway,
AR MSA
Hot Springs, AR MSA
Fayetteville–Springdale–Rogers,
AR–MO MSA
Fort Smith, AR–OK MSA
Southern Arkansas(2)
Western Arkansas(3)
Northern Arkansas(4)
All other Arkansas(1)
Total Arkansas
Geographic Distribution of Real Estate Loans
Residential
1-4 Family
Non-Farm/
Non-
Residential
Construction/
Land
Development Agricultural
(Dollars in thousands)
Multifamily
Residential
Total
$
— $ 753,760 $ 631,348 $
—
631,348
500
14,066
500 767,826
— $ 194,868 $ 1,579,976
—
14,566
—
— 194,868 1,594,542
149,710 292,131
99,632
54,971
78,985
15,743
14,516
1,021
25,420 560,762
4,135 175,502
15,280
23,725
33,768
21,108
34,125
19,091
71,891
60,426
24,984
41,663
12,445
20,429
351,778 623,601
26,600
6,439
3,662
9,697
4,573
7,630
153,329
4,029
2,872
21,042
5,184
12,863
12,679
74,206
1,968 119,768
7,988 101,450
85,370
1,914
78,376
724
67,187
3,181
62,835
3,006
48,336 1,251,250
55
Geographic Distribution of Real Estate Loans (continued)
Texas:
Dallas–Fort Worth–Arlington, TX MSA
Houston–The Woodlands–Sugar Land,
TX MSA
Austin–Round Rock, TX MSA
San Antonio–New Braunfels, TX MSA
Texarkana, TX–AR MSA
College Station–Bryan, TX MSA
Corpus Christi, TX MSA
All other Texas(1)
Total Texas
North Carolina/South Carolina:
Charlotte–Concord–Gastonia, NC–SC MSA
Winston–Salem, NC MSA
North Carolina Foothills(5)
Myrtle Beach–Conway–North Myrtle Beach,
SC–NC MSA
Raleigh, NC MSA
Greensboro–High Point, NC MSA
Wilmington, NC MSA
Charleston–North Charleston, SC MSA
Columbia, SC MSA
Hilton Head Island–Bluffton–Beaufort,
SC MSA
All other North Carolina(1)
All other South Carolina(1)
Total North Carolina / South Carolina
California:
Los Angeles–Long Beach–Anaheim, CA MSA
San Francisco–Oakland–Hayward, CA MSA
Sacramento–Roseville–Arden–Arcade, CA MSA
Riverside–San Bernardino–Ontario, CA MSA
Oxnard–Thousand Oaks–Ventura, CA MSA
San Jose–Sunnyvale–Santa Clara, CA MSA
All other California(1)
Total California
Florida:
Miami–Fort Lauderdale–West Palm Beach,
FL MSA
Tampa–St. Petersburg–Clearwater, FL MSA
Orlando–Kissimmee–Sanford, FL MSA
Jacksonville, FL MSA
Tallahassee, FL MSA
North Port–Sarasota–Bradenton, FL MSA
Crestview–Fort Walton Beach–Destin, FL MSA
Sebring, FL MSA
Gainesville, FL MSA
Lakeland–Winter Haven, FL MSA
Deltona–Daytona Beach–Ormond Beach, FL MSA
Palm Bay–Melbourne–Titusville, FL MSA
All other Florida(1)
Total Florida
Residential
1-4 Family
Non-Farm/
Non-
Residential
Construction/
Land
Development Agricultural
(Dollars in thousands)
Multifamily
Residential
Total
22,397
96,892
288,638
—
21,227 429,154
6,264
11,189
1,288
10,109
—
—
1,588
52,645
22,232
4,821
10,637
1,525
7,180
24,111
52,835 220,043
127,989
153,123
37,942
2,030
—
10,515
5,224
625,461
—
—
—
940
—
—
243
1,183
51,326 238,224
— 186,544
45,245
24,732
18,691
17,695
31,813
92,576 992,098
1,194
1,016
17,166
—
647
69,084 133,955
39,349
49,679
23,435
37,781
77,376
9,507
4,231
299
—
2,205
11,659 292,373
99,666
69,062
1,131
1,410
4,026
505
17,980
5,142
1,192
—
15,347
9,318
19,834
21,829
4,690
4,960
23,945
32,331
1,627
6,358
6,627
12,480
—
—
255
440
—
—
24
32
2,154
3
5,530
—
43,342
42,186
41,850
33,772
18,039
17,440
3,920
16,892
4,121
5,676
43,687
7,354
210,322 329,434
1,047
29,114
9,583
214,226
—
1,590
—
4,789
3,006
1,501
4,106
13,649
92,784
25,164
30,556 789,327
— 242,947
64,231
—
—
—
12,821
—
—
—
36,274
—
—
4,918
— 361,191
174,474
39,063
65,188
47,932
47,291
8,370
11,599
393,917
—
—
—
—
—
—
—
—
— 417,421
— 103,294
65,188
—
60,753
—
47,291
—
44,644
—
—
16,517
— 755,108
3,081
9,753
4,697
542
—
8,691
2,937
—
—
—
312
4,669
8,455
95,216
34,257
22,698
43,186
—
15,397
181
22,008
—
16,014
15,681
4,442
92,089
43,137 361,169
99,261
2,667
20,663
255
36,992
11,919
23,333
—
19,904
3,175
478
—
502
219,149
—
—
—
15
—
—
216
—
—
—
—
—
1,026
1,257
15,275 212,833
66,118
19,441
48,115
57
45,889
1,891
36,992
—
36,242
235
26,667
—
22,025
17
19,904
—
19,210
21
16,471
—
4,382
13,493
2,883 104,955
44,202 668,914
56
Geographic Distribution of Real Estate Loans (continued)
Georgia:
Atlanta–Sandy Springs–Roswell, GA MSA
Savannah, GA MSA
Brunswick, GA MSA
Valdosta, GA MSA
All other Georgia(1)
Total Georgia
Tennessee:
Nashville–Davidson–Murfreesboro–Franklin,
TN MSA
Memphis, TN–MS–AR MSA
All other Tennessee(1)
Total Tennessee
Colorado:
Denver–Aurora–Lakewood, CO MSA
Boulder, CO MSA
All other Colorado(1)
Total Colorado
Illinois:
Chicago–Naperville–Elgin, IL–IN–WI MSA
All other Illinois(1)
Total Illinois
Arizona:
Phoenix–Mesa–Scottsdale, AZ MSA
All other Arizona(1)
Total Arizona
Residential
1-4 Family
Non-Farm/
Non-
Residential
Construction/
Land
Development Agricultural
(Dollars in thousands)
Multifamily
Residential
Total
20,098 129,679
37,390
5,959
3,836
11,169
2,309
7,108
35,095
12,412
56,746 208,309
61,520
—
624
580
6,954
69,678
3,558
—
—
464
7,084
11,106
15,997 230,852
43,349
15,629
11,177
62,931
18,099 363,938
—
—
716
1,386
116
432
95
643
67,069
5,048
4,671
76,788
12
—
1,407
1,419
13,068
—
—
13,068
21,212
—
1,102
22,314
36,033
27,192
23,777
87,002
2,228
—
2,228
1,911
1,403
3,314
85,343
9,783
95,126
—
—
—
42,954
2,650
45,604
50,649
—
50,649
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,503
—
88,397
15,983
5,868
10,503 110,248
49,113
—
27,192
—
—
25,184
— 101,489
89,482
—
—
11,186
— 100,668
—
—
—
93,603
2,650
96,253
Seattle–Tacoma–Bellevue, WA MSA
—
—
90,221
—
—
90,221
Las Vegas–Henderson–Paradise, NV MSA
—
—
21,990
—
38,436
60,426
Pennsylvania:
Philadelphia–Camden–Wilmington, PA–NJ–DE–
MD MSA
All other Pennsylvania(1)
Total Pennsylvania
Washington DC / Maryland:
Washington–Arlington–Alexandria, DC–VA–
MD–WV MSA
All other Maryland(1)
Total Washington DC / Maryland
Missouri:
St. Louis, MO–IL MSA
All other Missouri(1)
Total Missouri
—
118
118
—
7,147
7,147
—
—
—
—
—
—
52,371
—
52,371
52,371
7,265
59,636
—
1,766
1,766
—
508
508
4,294
1,452
5,746
418
8,601
9,019
45,096
1,420
46,516
12,437
4,999
17,436
—
—
—
—
—
—
49,390
4,638
54,028
—
941
941
19,355
—
19,355
32,210
15,049
47,259
Portland–Vancouver–Hillsboro, OR–WA MSA
—
—
27,458
—
17,077
44,535
Alabama:
Mobile, AL MSA
All other Alabama(1)
Total Alabama
4,371
8,776
13,147
17,467
2,391
19,858
882
3,330
4,212
—
600
600
1,898
3,475
5,373
24,618
18,572
43,190
57
Geographic Distribution of Real Estate Loans (continued)
Residential
1-4 Family
Non-Farm/
Non-
Residential
Construction/
Land
Development Agricultural
(Dollars in thousands)
Multifamily
Residential
Total
Minneapolis–St. Paul–Bloomington, MN MSA
—
—
40,986
—
—
40,986
Urban Honolulu, HI MSA
—
—
32,634
—
—
32,634
Providence–Warwick, RI–MA MSA
—
26,363
—
—
—
26,363
Oklahoma
Ohio
Utah:
Salt Lake City, UT MSA
All other Utah(1)
Total Utah
Connecticut
All other states(6)
463
1,997
15,342
276
4,008
22,086
—
11,092
8,617
—
—
19,709
—
—
—
13,094
3,621
16,715
—
—
—
—
—
—
—
—
—
13,094
3,621
16,715
—
12,237
—
—
694
12,931
1,596
25,892
5,787
—
3,871
37,146
Total Real Estate Loans
$ 737,206 $ 3,146,413 $ 2,873,398 $ 94,358 $ 580,325 $ 7,431,700
(1)
(2)
(3)
(4)
(5)
(6)
These geographic areas include all MSA and non-MSA areas that are not separately reported.
This geographic area includes the following counties in southern Arkansas: Clark, Columbia, Hempstead and Hot Spring.
This geographic area includes the following counties in western Arkansas: Johnson, Logan, Pope and Yell.
This geographic area includes the following counties in northern Arkansas: Baxter, Boone, Marion, Newton, Searcy and Van Buren.
This geographic area includes the following counties in the North Carolina foothills: Cleveland, Lincoln and Rutherford.
Includes all states not separately presented above.
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
Retail, including shopping centers and strip centers
Churches and schools
Office, including medical offices
Office warehouse, warehouse and mini-storage
Gasoline stations and convenience stores
Hotels and motels
Restaurants and bars
Manufacturing and industrial facilities
Nursing homes and assisted living centers
Hospitals, surgery centers and other medical
Golf courses, entertainment and recreational facilities
Other non-farm/non-residential(1)
Total
2015
Amount
$
557,528
164,011
996,793
225,417
47,196
373,272
72,784
53,092
58,498
88,180
18,182
491,460
$ 3,146,413
December 31,
%
(Dollars in thousands)
Amount
2014
%
17.7 % $
5.2
31.7
7.2
1.5
11.9
2.3
1.7
1.8
2.8
0.6
15.6
346,925
104,746
621,729
169,176
47,465
328,507
43,084
76,897
52,409
54,469
16,729
146,294
100.0 % $ 2,008,430
17.3 %
5.2
31.0
8.4
2.4
16.4
2.1
3.8
2.6
2.7
0.8
7.3
100.0 %
(1)
Includes non-farm/non-residential loans collateralized by other miscellaneous real property, including loans where the collateral is “mixed use” real property.
58
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
December 31,
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
2015
Amount
$
237,138
Amount
%
(Dollars in thousands)
8.3 % $
272,197
2014
%
494,704
172,268
17.2
6.0
322,698
133,137
18.0 %
21.3
8.8
33,120
1.1
25,482
1.7
26,538
130,966
809,063
969,601
$ 2,873,398
0.9
4.6
28.2
33.7
19,664
75,252
354,966
308,218
100.0 % $ 1,511,614
1.3
5.0
23.5
20.4
100.0 %
Many of our construction and development loans provide for the use of interest reserves. When we underwrite construction and
development loans, we consider 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, we determine the required borrower cash equity contribution and the maximum amount we are
willing to loan. In the vast majority of cases, we require 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 our funding the loan later as the project progresses, and accordingly, we typically fund the majority
of the construction period interest through loan advances. However, when we initially determine the borrower’s cash equity
requirement, we typically require 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 2015, we advanced construction period interest
totaling approximately $57.6 million on construction and development loans. While we advanced these sums as part of the funding
process, we believe 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, 2015 was $7.38 billion, of which $2.47 billion was outstanding at December 31, 2015 and $4.91
billion remained to be advanced. The weighted average loan-to-cost on such loans, assuming such loans are ultimately fully advanced,
will be approximately 50%, which means that the weighted average cash equity contributed on such loans, assuming such loans are
ultimately fully advanced, will be approximately 50%. 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 44%.
59
The following table reflects total loans and leases grouped by remaining maturities at December 31, 2015 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. Because income on
purchased loans with evidence of credit deterioration on the date of acquisition 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.
Loan and Lease Maturities
1 Year or
Less
Over 1
Through
5 Years
Over
5 Years
Total
(Dollars in thousands)
Real estate
Commercial and industrial
Consumer
Direct financing leases
Other
Total
Fixed rate
Floating rate (not at a floor or ceiling rate)
Floating rate (at floor rate)
Floating rate (at ceiling rate)
Total
$ 1,505,728 $ 4,964,684 $
140,839
24,637
85,092
292,213
961,288 $ 7,431,700
291,803
35,232
147,735
428,201
$ 1,788,952 $ 5,507,465 $ 1,038,254 $ 8,334,671
99,812
7,701
59,380
116,331
51,152
2,894
3,263
19,657
$
737,191 $ 2,975,273
486,758 $ 1,751,324 $
118,131 3,214,122
613,577 2,482,414
182,932 2,145,276
688,617 1,273,727
—
—
$ 1,788,952 $ 5,507,465 $ 1,038,254 $ 8,334,671
—
—
The following table reflects total loans and leases as of December 31, 2015 grouped by expected amortizations, expected
paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing schedule approximates our 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. For non-purchased loans and leases and purchased loans without evidence of credit deterioration on the
date of acquisition, the table below reflects the earliest contractual repricing period. For purchased loans with evidence of credit
deterioration at the date of acquisition, the table below reflects estimated cash flows based on the most recent evaluation of each
individual loan. Because income on purchased loans with evidence of credit deterioration on the date of acquisition 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.
Loan and Lease Cash Flows or Repricing
Fixed rate
Floating rate (not at a floor or ceiling rate)(1)
Floating rate (at floor rate)(1)
Floating rate (at ceiling rate)
Total
Percentage of total
Cumulative percentage of total
1 Year or
Less
Over 1
Through
2 Years
Over 3
Over 2
Through
Through
5 Years
3 Years
(Dollars in thousands)
$ 646,693 $ 578,478 $ 605,386 $ 690,539 $ 454,177 $ 2,975,273
601 3,214,122
3,209,135
1,902
1,144 2,145,276
2,078,507 13,614 10,356 41,655
—
—
—
$ 5,934,335 $ 593,601 $ 616,717 $ 734,096 $ 455,922 $ 8,334,671
Over 5
Years
1,509
975
—
—
—
Total
71.2 %
71.2 %
7.1 %
78.3 %
7.4 %
85.7 %
8.8 %
94.5 %
5.5 %
100.0 %
100.0 %
(1) We have included a floor rate in many of our non-purchased loans and leases. As a result of such floor rates, loans and leases may 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 effect of all interest rate floors and ceilings in loans and leases.
60
At December 31, 2015, approximately 95% of our floating rate loans are tied to three major benchmark interest rates, the 1-
month LIBOR, 3-month LIBOR and Wall Street Journal Prime interest rate. The following table is a summary of our floating rate loan
portfolio and contractual interest rate indices.
Contractual Interest Rate Index
1-month LIBOR
3-month LIBOR
Wall Street Journal Prime
Other contractual interest rate indices
Total
Contractual Indices of Floating Rate Loans
Floating Rate
(at floor rate)
Floating Rate
(not at a floor
or ceiling rate)
Floating Rate
(at ceiling rate)
Total Floating
Rate
(Dollars in thousands)
$
642,033 $ 2,234,086 $
548,075
576,946
345,309
725,678
86,652
200,619
$ 2,145,276 $ 3,214,122 $
— $ 2,876,119
— 1,125,021
— 1,070,987
—
287,271
— $ 5,359,398
While changes in these contractual interest rate indices are typically affected by changes in the federal funds rate, the effect on
our floating rate loan portfolio may not be immediate and proportional to changes in the federal funds rate.
Purchased Loans
The amount of unpaid principal balance, the valuation discount and the carrying value of purchased loans, as of the dates
indicated, are reflected in the following table.
Purchased Loans
Loans without evidence of credit deterioration at date of
acquisition:
Unpaid principal balance
Valuation discount
Carrying value
Loans with evidence of credit deterioration at date of
acquisition:
Unpaid principal balance
Valuation discount
Carrying value
Total carrying value
2015
December 31,
2014
(Dollars in thousands)
2013
$
1,613,563 $
(24,312 )
1,589,251
889,218 $
(17,751 )
871,467
344,065
(11,972 )
332,093
284,410
(67,624 )
216,786
1,806,037 $
374,001
(97,521 )
276,480
1,147,947 $
546,234
(153,813 )
392,421
724,514
$
61
We completed our Intervest acquisition on February 10, 2015. On the date of acquisition, the purchased loans were categorized
into loans without evidence of credit deterioration at date of acquisition and loans with evidence of credit deterioration at date of
acquisition. 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 loans without evidence of credit deterioration at date of acquisition in
the Intervest acquisition.
Fair Value Adjustments for Purchased
Loans Without Evidence of Credit Deterioration
at Date of Intervest Acquisition
Risk Category
FV 33
FV 44
FV 55
Total
February 10, 2015, as recast
Unpaid
Principal
Balance
Fair
Value
Adjustment
Day 1
Fair Value
$
83,210 $
804,604
155,702
$ 1,043,516 $
(Dollars in thousands)
(690 ) $
(10,961 )
(3,290 )
82,520
793,643
152,412
(14,941 ) $ 1,028,575
Weighted
Average
Fair Value
Adjustment
(in bps)
83
136
211
143
The following grades are used for purchased loans without evidence of credit deterioration at 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.
The following table is a summary of the loans acquired in the Intervest acquisition with evidence of credit deterioration at the
date of acquisition in the Intervest acquisition.
Fair Value Adjustment for Purchased Loans
With Evidence of Credit Deterioration at
Date of Intervest Acquisition
Contractually required principal and interest
Non-accretable difference
Cash flows expected to be collected
Accretable difference
Day 1 Fair Value at date of acquisition
February 10, 2015,
as recast
(Dollars in thousands)
$
$
75,424
(13,286 )
62,138
(8,173 )
53,965
During the second and fourth quarters of 2015, we revised our initial estimates and assumptions regarding the recovery of certain
loans acquired in our Intervest acquisition. As a result of these recasts, we increased the Day 1 Fair Values of acquired loans by $8.0
million.
62
The following table presents a summary, during the years indicated, of the activity of our purchased loans with evidence of
credit deterioration at the date of acquisition.
Purchased Loan Activity
With Evidence of Credit Deterioration
At Date of Acquisition
Balance – beginning of year
Accretion
Purchased loans acquired
Transfer to foreclosed assets
Net payments received
Loans sold
Net charge-offs
Other activity, net
Balance – end of year
Nonperforming Assets
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
276,480 $
37,677
71,996
(7,886 )
(148,175 )
(12,601 )
(1,815 )
1,110
216,786 $
392,421 $
46,466
40,035
(42,306 )
(151,559 )
—
(8,654 )
77
276,480 $
602,994
46,788
39,757
(35,608 )
(235,520 )
—
(24,324 )
(1,666 )
392,421
Nonperforming assets consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days or more past due,
(3) troubled debt structurings (“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 loans are not included in the following table as nonperforming assets, except for
their inclusion in total assets, but are analyzed and discussed elsewhere in this MD&A.
The accrual of interest on non-purchased loans and leases and purchased loans without evidence of credit deterioration at the
date of acquisition is discontinued when, in management’s opinion, the borrower or lessee may be unable to meet payments as they
become due. We generally place a loan or lease, excluding purchased loans with evidence of credit deterioration on the date of
acquisition, 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. We 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 we reasonably expect 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) we have granted a concession to the borrower are considered TDRs and are included in impaired loans and leases.
Income on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs which continue to accrue
interest, is recognized on a cash basis when and if actually collected.
63
The following table presents information, excluding purchased loans, concerning nonperforming assets, including nonaccrual
loans and leases, TDRs, and foreclosed assets as of the dates indicated.
Nonaccrual loans and leases
Accruing loans and leases 90 days or more past due
TDRs
Total nonperforming loans and leases
Foreclosed assets(1)
Total nonperforming assets(2)
Nonperforming loans and leases to total loans and
leases(2)
Nonperforming assets to total assets(2)
Nonperforming Assets
2015
2014
December 31,
2013
(Dollars in thousands)
2012
2011
$
13,194 $
—
—
13,194
22,870
36,064 $
$
21,085 $
—
—
21,085
37,775
58,860 $
8,737 $
—
—
8,737
49,811
58,548 $
9,109 $
12,206
—
—
—
1,000
13,206
9,109
66,875 104,669
75,984 $ 117,875
0.20 %
0.37
0.53 %
0.87
0.33 %
1.22
0.43 %
1.88
0.70 %
3.07
(1) Repossessed personal properties and real estate acquired through or in lieu of foreclosure, excluding purchased foreclosed assets, 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. Purchased foreclosed assets are initially recorded at Day 1 Fair Values. 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 loans, 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, we
seek 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, we evaluate 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, 2015, we had reduced the carrying value of our loans and leases deemed impaired (all of which were included
in nonaccrual loans and leases) by $7.8 million to the estimated fair value of such loans and leases of $9.3 million. The adjustment to
reduce the carrying value of impaired loans and leases to estimated fair value consisted of $6.5 million of partial charge-offs and $1.3
million of specific loan and lease loss allocations. These amounts do not include our $8.1 million of impaired purchased loans at
December 31, 2015.
The following table is a summary of activity within foreclosed assets during the periods indicated.
Activity Within Foreclosed Assets
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
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
37,775 $
19,347
(31,923 )
(3,803 )
1,474
22,870 $
49,811 $
55,984
(68,211 )
(6,533 )
6,724
37,775 $
66,875
44,220
(58,297 )
(5,145 )
2,158
49,811
64
The following table is a summary of the amount and type of foreclosed assets as of the dates indicated.
Foreclosed Assets
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Total real estate
Commercial and industrial
Consumer
Foreclosed assets
December 31,
2015
2014
(Dollars in thousands)
$
$
3,030 $
7,174
11,858
492
—
22,554
316
—
22,870 $
7,909
17,305
10,998
728
772
37,712
56
7
37,775
The following table presents information concerning the geographic location of nonperforming assets, excluding purchased
loans, at December 31, 2015. 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
Arkansas
Georgia
North Carolina
Florida
South Carolina
Texas
Alabama
All other
Total
Nonperforming
Loans and
Leases
Foreclosed
Assets and
Repossessions
(Dollars in thousands)
Total
Nonperforming
Assets
$
$
10,947 $
33
1,462
66
1
389
32
264
13,194 $
10,419 $
5,609
3,781
1,550
634
242
490
145
22,870 $
21,366
5,642
5,243
1,616
635
631
522
409
36,064
The following table is a summary, as of the dates indicated, of impaired purchased loans.
Impaired Purchased Loans
Impaired purchased loans without evidence of credit
deterioration at date of acquisition (rated FV 77)
Impaired purchased loans with evidence of credit
deterioration at date of acquisition (rated FV 88)
Total impaired purchased loans
$
Impaired purchased loans to total purchased loans
2015
2014
December 31,
2013
(Dollars in thousands)
2012
2011
$
771 $
748 $
— $
— $
—
7,283
8,054 $
0.45 %
13,292
14,040 $
1.22 %
46,179
46,179 $
6.37 %
38,463
38,463 $
6.03 %
1,854
1,854
0.23 %
65
As of December 31, 2015, 2014 and 2013, we had identified purchased loans where we had determined it was probable that we
would be unable to collect all amounts according to the contractual terms thereof (for purchased loans without evidence of credit
deterioration at date of acquisition) or the expected performance of such loans had deteriorated from our performance expectations
established in conjunction with the determination of the Day 1 Fair Values or since our most recent review of such portfolio’s
performance (for purchased loans with evidence of credit deterioration at date of acquisition). As a result, we recorded net charge-offs
totaling $2.5 million during 2015, $3.2 million during 2014, and $4.7 million during 2013 for such loans. We also recorded $2.5
million during 2015, $3.2 million during 2014, and $4.7 million during 2013 of provision for loan and lease losses to cover these
charge-offs. Also, we recorded $1.2 million of additional provision in 2015 (none in 2014 or 2013) to absorb probable incurred losses
in our purchased loan portfolio that had not previously been charged off. Additionally, we transferred certain of these purchased loans
to foreclosed assets. As a result of these actions, we had $8.1 million of impaired purchased loans at December 31, 2015, $14.0
million of impaired purchased loans at December 31, 2014, and $46.2 million of impaired purchased loans at December 31, 2013.
Allowance and Provision for Loan and Lease Losses
Our ALLL was $60.9 million at December 31, 2015 compared to $52.9 million at December 31, 2014 and $42.9 million at
December 31, 2013. At December 31, 2015, we allocated $1.2 million of ALLL to our purchased loan portfolio. At December 31,
2014 and 2013 we had no ALLL for our purchased loan portfolio because all losses on purchased loans had been previously charged
off. Excluding purchased loans, our ALLL as a percentage of nonperforming loans and leases was 452% at December 31, 2015,
compared to 251% at December 31, 2014 and 492% at December 31, 2013. Our practice is to charge off any estimated loss as soon as
we are able to identify and reasonably quantify such potential loss. Accordingly, only a small portion of our ALLL is needed for
potential losses on nonperforming loans. While we believe 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 our analysis of the adequacy of the ALLL utilizing the criteria discussed in
the Critical Accounting Policies caption of this MD&A. The provision for loan and lease losses for 2015 was $19.4 million, including
$15.7 million for non-purchased loans and leases and $3.7 million for purchased loans, compared to $16.9 million in 2014, including
$13.7 million for non-purchased loans and leases and $3.2 million for purchased loans, and $12.1 million in 2013, including $7.4
million for non-purchased loans and leases and $4.7 million for purchased loans. The increase in our provision for non-purchased
loans and leases in 2015 compared to 2014 and in 2014 compared to 2013 was primarily the result of provision necessary to cover the
growth in our loan and lease portfolio during 2015 and 2014. Our provision for purchased loans for 2015 included $1.2 million of
provision to cover probable incurred losses within our purchased loan portfolio and $2.5 million of provision to provide for the net
charge-offs of purchased loans. Our provision for purchased loans for 2014 and 2013 was the amount needed to provide for the net
charge-offs of purchased loans.
66
The following table is an analysis of the ALLL for the periods indicated.
Analysis of the ALLL
2015
2014
Balance, beginning of period
Non-purchased loans and leases charged off:
Real estate:
$
52,918 $
Year Ended December 31,
2013
2012
(Dollars in thousands)
38,738
$
$
39,169
42,945
2011
$
40,230
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-purchased loans and leases
charge off
Recoveries of non-purchased loans and leases previously
charged off:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Total real estate
Commercial and industrial
Consumer
Direct financing leases
Other
Total recoveries
Net non-purchased loans and leases charged off
Purchased loans charged off
Recoveries of purchased loans previously charged off
Net purchased loans charged off
Net charge-offs – total loans and leases
Provision for loan and lease losses:
Non-purchased loans and leases
Purchased loans
Total provision
Balance, end of period
ALLL allocated to non-purchased loans and leases
ALLL allocated to purchased loans
Total ALLL
ALLL to total loans and leases(1)
ALLL to nonperforming loans and leases(1)
(794 )
(857 )
(2,760 )
(27 )
(228 )
(4,666 )
(2,762 )
(148 )
(1,041 )
(1,474 )
(577 )
(1,357 )
(638 )
(214 )
—
(2,786 )
(720 )
(222 )
(602 )
(793 )
(837 )
(1,111 )
(137 )
(261 )
(4 )
(2,350 )
(922 )
(214 )
(482 )
(359 )
(1,312 )
(1,226 )
(466 )
(997 )
—
(4,001 )
(1,323 )
(732 )
(361 )
(219 )
(2,743 )
(1,033 )
(5,651 )
(771 )
—
(10,198 )
(1,465 )
(825 )
(413 )
(87 )
(10,091 )
(5,123 )
(4,327 )
(6,636 )
(12,988 )
86
15
83
—
—
184
299
54
27
563
1,127
(8,964 )
(2,982 )
467
(2,515 )
(11,479 )
15,700
3,715
19,415
60,854 $
59,654 $
1,200
60,854 $
0.91 %
452 %
$
$
$
135
33
11
14
—
193
808
80
49
266
1,396
(3,727 )
(3,288 )
73
(3,215 )
(6,942 )
106
122
174
14
4
420
433
104
33
144
1,134
(3,193 )
(4,675 )
—
(4,675 )
(7,868 )
107
18
106
141
—
372
35
238
2
8
655
(5,981 )
(6,195 )
—
(6,195 )
(12,176 )
13,700
3,215
16,915
52,918
52,918
—
52,918
$
$
7,400
4,675
12,075
42,945
42,945
—
42,945
$
$
5,550
6,195
11,745
38,738
38,738
—
38,738
$
$
$
1.33 %
251 %
$
1.63 %
492 %
$
1.83 %
425 %
64
16
30
—
—
110
142
166
5
4
427
(12,561 )
(275 )
—
(275 )
(12,836 )
11,500
275
11,775
39,169
39,169
—
39,169
2.08 %
297 %
(1)
Excludes purchased loans and the ALLL allocated to purchased loans.
67
The following is a summary of our net charge-off ratios for the periods indicated.
Net Charge-Off Ratios
Net charge-offs of non-purchased loans and leases to
total average non-purchased loans and leases(1)
Net charge-offs of purchased loans to
total average purchased loans
Net charge-offs of loans and leases to
total average loans and leases
2015
Year Ended December 31,
2013
2012
2014
2011
0.18 %
0.12 %
0.14 %
0.30 %
0.69 %
0.14
0.29
0.17
0.16
0.70
0.26
0.86
0.46
0.04
0.49
(1)
Excludes purchased loans and net charge-offs related to such loans.
The following table sets forth the sum of the amounts of the ALLL as of the dates indicated. These allowance amounts have
been computed using our internal grading system, specific impairment analyses, specific special reserve analyses and qualitative factor
allocations. The amounts shown are not necessarily indicative of the actual future losses that may occur within particular categories.
Prior to December 31, 2015, we had no allocation of our allowance to purchased loans because all losses had been charged off on
purchased loans where we had determined it was probable that we would be unable to collect all amounts according to the contractual
terms thereof (for purchased loans without evidence of credit deterioration at date of acquisition) or whose performance had
deteriorated from our expectations established in conjunction with the deterioration of the Day 1 Fair Values (for purchased loans with
evidence of credit deterioration at date of acquisition).
Allocation of the ALLL
2015
2014
% of
Loans
and
Leases(1)
Allowance
% of
Loans
and
Leases(1)
Allowance
December 31,
2013
% of
Loans
and
Leases(1)
Allowance
(Dollars in thousands)
2012
2011
% of
Loans
and
Leases(1)
Allowance
% of
Loans
and
Leases(1)
Allowance
$ 8,672
5.4 % $ 5,482
7.1 % $ 4,701
9.5 % $ 4,820 12.9 % $ 3,848 13.8 %
16,796 30.8
17,190 37.8
13,633 41.9
10,107 38.1
12,203 37.7
15,960 35.5
1.2
2,558
5.3
2,147
7.2
4,873
0.6
818
2.9
2,989
2.4
901
12,306 27.4
1.8
3,000
7.9
2,504
4.7
2,855
1.0
917
3.3
2,266
2.5
763
12,000 27.4
2.4
2,878
6.7
2,030
7.6
3,655
1.4
1,015
3.2
2,050
0.3
183
9,478 25.4
3.8
3,383
7.6
2,564
6.4
4,591
1.9
1,209
2.9
1,632
0.5
261
52,918
—
$ 52,918
42,945
—
$ 42,945
38,738
—
$ 38,738
39,169
—
$ 39,169
ALLL for non-purchased
loans and leases:
Real estate:
Residential 1-4 family
Non-farm/ non-
residential
Construction/ land
development
Agricultural
Multifamily residential
18,176 43.3
3,388
1.1
3,031
6.8
Commercial and industrial 2,574
3.5
707
0.4
Consumer
3,835
2.3
Direct financing leases
2,475
6.4
Other
Total ALLL for non-
purchased loans and leases 59,654
1,200
ALLL for purchased loans
$ 60,854
Total ALLL
(1)
Excludes purchased loans.
We maintain 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 and the qualitative factor allocations, helps us assess the
overall quality of the loan and lease portfolio and the adequacy of our ALLL. 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
68
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, 2015 substandard loans and
leases, excluding purchased loans, not designated as impaired, nonaccrual or 90 days past due, totaled $1.5 million, compared to $11.7
million at December 31, 2014 and $12.0 million at December 31, 2013. No loans or leases were designated as doubtful or loss at
December 31, 2015, 2014 or 2013.
Administration of our lending function is the responsibility of the Chief Executive Officer (“CEO”), Chief Credit Officer
(“CCO”), Chief Lending Officer (“CLO”), Director of Community Bank Lending (“Dir-CBL”) and certain other lenders. Such
officers and lenders perform their lending duties subject to the oversight and policy direction of our board of directors and the
directors’ loan committee. Loan or lease authority is granted to the CEO, CCO, CLO and Dir-CBL 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.
Loans and leases and aggregate loan and lease relationships exceeding $10 million up to the limits established by our board of
directors must be approved by the directors’ loan committee. The directors’ loan committee consists of five or more directors and
three of our senior lenders. At least quarterly the board of directors reviews summary reports of past due loans and leases, internally
classified and watch list loans and leases, activity in the Company’s ALLL and various other loan and lease reports.
Our compliance and loan review officers are responsible for our bank subsidiary’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 that 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 our
audit committee.
Investment Securities
At December 31, 2015, 2014 and 2013, we classified all of our investment securities portfolio as available for sale. Accordingly,
our investment securities are reported at estimated fair value 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 estimated fair value of investment securities as of the dates indicated. Our
holdings of “other equity securities” include FHLB and First National Banker’s Bankshares, Inc. (“FNBB”) shares which do not have
readily determinable fair values and are carried at cost.
Investment Securities
2015
December 31,
2014
2013
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Other equity securities
Total
Amortized
Cost
Amortized
Cost
Estimated
Fair
Value
Estimated
Fair
Amortized
Cost
Value
(Dollars in thousands)
$ 415,095 $ 427,278 $ 555,335 $ 573,209 $ 438,390 $ 435,989
146,265 146,950 245,854 251,233 222,510 218,869
716
654
—
—
13,810
14,225
$ 589,490 $ 602,348 $ 816,068 $ 839,321 $ 675,426 $ 669,384
3,562
1,038
23,530
654
—
14,225
3,562
1,028
23,530
716
—
13,810
Estimated
Fair
Value
Our investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $14.0 million
and gross unrealized losses of $1.2 million at December 31, 2015; gross unrealized gains of $24.4 million and gross unrealized losses
of $1.2 million at December 31, 2014; and gross unrealized gains of $8.6 million and gross unrealized losses of $14.6 million at
December 31, 2013. We believe that all of the unrealized losses on individual investment securities at December 31, 2015, 2014 and
2013 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of our investments. Accordingly,
we consider these unrealized losses to be temporary in nature. We do 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.
69
The following table presents the unaccreted discount and unamortized premium of our investment securities as of the dates
indicated.
Unaccreted Discount and Unamortized Premium
December 31, 2015:
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Other equity securities
Total
December 31, 2014:
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
Other equity securities
Total
Amortized
Cost
Unaccreted
Discount
Unamortized
Premium
(Dollars in thousands)
Par
Value
$
$
$
$
415,095
146,265
3,562
1,038
23,530
589,490
555,335
245,854
654
14,225
816,068
$
$
$
$
6,165
227
25
—
—
6,417
7,976
3,916
—
—
11,892
$
$
$
$
(4,747 ) $
(4,363 )
(9 )
—
—
(9,119 ) $
(7,662 ) $
(3,953 )
(13 )
—
(11,628 ) $
416,513
142,129
3,578
1,038
23,530
586,788
555,649
245,817
641
14,225
816,332
We recognized premium amortization, net of discount accretion, of $0.4 million during 2015, $0.6 million during 2014 and $0.5
million during 2013. Any premium amortization or discount accretion is considered an adjustment to the yield of our investment
securities.
We had net gains of $5.5 million in 2015 from the sale of approximately $197 million of investment securities, compared to net
gains of $0.1 million in 2014 from the sale of approximately $56 million of investment securities and net gains of $0.2 million in 2013
from the sale of approximately $1 million of investment securities. Investment securities totaling $160 million in 2015, $103 million
in 2014 and $86 million in 2013 matured or were called by the issuer. We purchased investment securities totaling $92 million in
2015, $56 million in 2014 and $141 million in 2013.
We invest in securities we believe offer good relative value at the time of purchase, and we will, from time to time, reposition
our investment securities portfolio. In making decisions to sell or purchase securities, we consider credit quality, call features, maturity
dates, relative yields, current market factors, interest rate risk and other relevant factors. During 2015 we used proceeds from the sales
of investment securities to prepay $150 million of our highest rate callable FHLB advances. These transactions were executed for
various reasons, including to reduce interest rate risk, to increase secondary sources of liquidity, to more efficiently allocate capital
and to help maintain our total assets below $10 billion at December 31, 2015.
70
The following table presents the types and estimated fair values of our investment securities at December 31, 2015 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)
(Dollars in thousands)
Non-Rated(5)
Total
Obligations of states and political
subdivisions
U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Other equity securities
Total
Percentage of total
Cumulative percentage of total
$
$
16,947 $ 137,040 $
— 146,950
—
—
—
—
—
—
16,947 $ 283,990 $
47.1 %
49.9 %
2.8 %
2.8 %
91,424 $
—
3,562
—
—
94,986 $
15.8 %
65.7 %
13,277 $ 168,590 $ 427,278
146,950
3,562
1,028
23,530
13,277 $ 193,148 $ 602,348
—
—
1,028
23,530
—
—
—
—
2.2 %
67.9 %
32.1 %
100.0 %
100.0 %
(1)
(2)
(3)
(4)
(5)
Includes securities rated Aaa by Moody’s, AAA by Fitch or 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 Fitch or 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 Fitch or 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 Fitch or 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 we have ignored such
credit enhancement. For these securities, we have performed our own evaluation of the security and/or the underlying issuer and believe 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 Fitch or
S&P or a comparable rating by other nationally-recognized credit rating agencies).
The following table reflects the expected maturity distribution of our investment securities, at estimated fair value, at
December 31, 2015 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, 2015, and (3) callable investment securities for which the Company has received
notification of call are included in the maturity category in which the call occurs or is expected to occur. Actual maturities will differ
from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties. The weighted-average yields – FTE are calculated based on the coupon rate and amortized cost for such securities and do
not include any projected discount accretion or premium amortization.
Expected Maturity Distribution of Investment Securities
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Other equity securities(1)
Total
Percentage of total
Cumulative percentage of total
Weighted-average yield – FTE
1 Year
Or Less
Over 1
Through 5
Years
Over 5
Through
10 Years
(Dollars in thousands)
Over 10
Years
Total
$
$
25,525 $
15,082
—
—
—
40,607 $
6.7 %
6.7 %
4.45 %
41,324 $ 102,361 $ 258,068 $ 427,278
24,311 146,950
58,443
3,562
2,975
—
1,028
1,028
—
23,530
23,530
—
99,767 $ 152,062 $ 309,912 $ 602,348
49,114
587
—
—
16.6 %
23.3 %
3.41 %
25.2 %
48.5 %
4.27 %
51.5 %
100.0 %
5.25 %
100.0 %
4.77 %
(1)
Includes approximately $23.1 million of FHLB stock which has historically paid quarterly dividends at a variable rate approximating the
federal funds rate.
71
Deposits
Our lending and investing activities are funded primarily by deposits. On February 10, 2015, we assumed $1.18 billion of
deposits as a result of our acquisition of Intervest, and on August 5, 2015, we assumed $289 million of deposits as a result of our
acquisition of BCAR. On May 16, 2014, we assumed $970 million of deposits as a result of our acquisition of Summit. Additionally,
we continued to grow our existing deposit base to fund growth of our non-purchased loans and leases. Excluding deposits acquired in
acquisitions, our deposits increased $1.00 billion in 2015 and $554 million in 2014. 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
2015
December 31,
2014
(Dollars in thousands)
2013
Non-interest bearing
Interest bearing:
Transaction (NOW)
Savings and money market
Time deposits less than $100,000
Time deposits of $100,000 or more
Total deposits
$ 1,515,482
19.0 % $ 1,145,454
20.8 % $ 746,320
20.0 %
1,398,104
2,619,400
921,680
1,516,802
$ 7,971,468
17.5 1,031,255
32.9 1,861,734
11.6 660,711
19.0 797,228
100.0 % $ 5,496,382
18.8 839,632
33.9 1,233,865
12.0 471,052
14.5 426,158
100.0 % $ 3,717,027
22.6
33.2
12.7
11.5
100.0 %
The increase in our time deposits, which comprised 30.6% of total deposits at December 31, 2015 compared to 26.5% at
December 31, 2014, is primarily the result of deposits assumed in our Intervest acquisition. At December 31, 2015, we had
outstanding brokered deposits of $677 million, compared to $210 million at December 31, 2014 and $49 million at December 31,
2013.
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
2015
Average
Balance
Average
Rate
Paid
Year Ended December 31,
2014
Average
Rate
Average
Balance
Paid
(Dollars in thousands)
2013
Average
Balance
Average
Rate
Paid
$ 1,301,574
— $ 989,073
— $ 639,521
—
1,226,592
2,330,445
880,189
1,244,879
$ 6,983,679
0.19 % 979,500
0.24 1,584,750
0.38 541,938
0.51 558,389
0.31 $ 4,653,650
0.13 % 765,503
0.34 1,033,189
0.28 444,862
0.29 390,894
0.23 $ 3,273,969
0.13 %
0.25
0.31
0.28
0.23
Non-interest bearing
Interest bearing:
Transaction (NOW)
Savings and money market
Time deposits less than $100,000
Time deposits of $100,000 or more
Total deposits
72
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
3 months or less
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
Total
December 31,
2015
(Dollars in thousands)
$
$
331,408
172,706
400,092
612,596
1,516,802
The amount and percentage of our deposits by state of originating office, as of the dates indicated, are reflected in the following
table.
Deposits by State of Originating Office
Deposits Attributable to Offices In
Amount
%
Amount
%
Amount
%
2015
December 31,
2014
2013
Arkansas
Texas
North Carolina
Florida
Georgia
New York
Alabama
South Carolina
Total
(Dollars in thousands)
$ 3,783,703
1,312,538
838,361
739,955
722,675
399,933
110,283
64,020
$ 7,971,468
47.5 % $ 2,912,291
16.5 996,908
10.5 599,184
9.3 141,266
9.1 675,801
—
5.0
1.4 124,469
46,463
0.7
100.0 % $ 5,496,382
53.0 % $ 1,671,498
18.1 492,069
10.9 629,241
2.6 124,894
12.3 634,060
—
—
2.3 137,345
27,920
0.8
100.0 % $ 3,717,027
45.0 %
13.2
16.9
3.4
17.1
—
3.7
0.7
100.0 %
Other Interest Bearing Liabilities
We also rely on other interest bearing liabilities to fund our lending and investing activities. Such liabilities consist of
repurchase agreements with customers, other borrowings (primarily FHLB advances and, to a lesser extent, FRB borrowings and
federal funds purchased) and subordinated debentures.
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
Repurchase agreements with customers
Other borrowings(1)
Subordinated debentures
Total other interest bearing liabilities
2015
Average
Balance
Average
Rate
Paid
Year Ended December 31,
2014
Average
Rate
Average
Balance
Paid
(Dollars in thousands)
2013
Average
Balance
Average
Rate
Paid
$ 73,995
187,608
111,409
$ 373,012
0.10 % $ 63,869
3.26 281,829
3.29 64,950
2.64 $ 410,648
0.09 % $ 39,056
3.78 289,615
2.61 64,950
3.02 $ 393,621
0.08 %
3.72
2.65
3.18
(1)
Included in other borrowings at December 31, 2014 are FHLB advances that contain quarterly call features and mature as follows: 2017, $20
million at 3.16% weighted-average rate; and 2018, $20 million at 2.53% weighted-average rate.
73
The decrease in other borrowings during 2015 compared to 2014 was due to our prepaying of $30 million in FHLB borrowings
during the first quarter of 2015 and $120 million of FHLB borrowings during the fourth quarter of 2015. The increase in subordinated
debentures is due to $52.2 million (net of purchase accounting adjustments) of subordinated debentures assumed in the Intervest
transaction.
Capital Resources and Liquidity
Capital Resources
Subordinated Debentures. We own eight 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”), Ozark Capital Statutory
Trust V (“Ozark V”) (collectively, the “Ozark Trusts”), and as a result of our Intervest acquisition, Intervest Statutory Trust II
(“Intervest II”), Intervest Statutory Trust III (“Intervest III”), Intervest Statutory Trust IV (“Intervest IV”) and Intervest Statutory Trust
V (“Intervest V”), (collectively, the “Intervest Trusts”; and together with Ozark Trusts, the “Trusts”). At December 31, 2015, we had
the following issues of trust preferred securities and subordinated debentures owed to the Trusts.
Subordinated
Debentures Owed
to Trust
Unamortized
Discount at
December 31,
2015
Carrying Value
of Subordinated
Debentures at
December 31,
2015
(Dollars in thousands)
Trust
Preferred
Securities
of the
Trusts
Contractual
Interest Rate at
December 31,
2015
Final Maturity Date
Ozark II
Ozark III
Ozark IV
Ozark V
Intervest II
Intervest III
Intervest IV
Intervest V
$
$
14,433 $
14,434
15,464
20,619
15,464
15,464
15,464
10,310
121,652 $
— $
—
—
—
(633 )
(733 )
(1,334 )
(1,267 )
(3,967 ) $
14,433 $
14,434
15,464
20,619
14,831
14,731
14,130
9,043
117,685 $
14,000
14,000
15,000
20,000
15,000
15,000
15,000
10,000
118,000
3.51 % September 29, 2033
3.27 September 25, 2033
2.60 September 28, 2034
2.11 December 15, 2036
3.48 September 17, 2033
3.32 March 17, 2034
2.97 September 20, 2034
2.16 December 15, 2036
On February 10, 2015, in conjunction with the Intervest acquisition, the Company acquired the Intervest Trusts with outstanding
subordinated debentures totaling $56.7 million and related trust preferred securities totaling $55.0 million. On the date of such
acquisition, the Company recorded the assumed subordinated debentures owed to the Intervest Trusts at estimated fair value of $52.2
million, based on an independent third party valuation, to reflect a current market interest rate for comparable obligations. The fair
value adjustment of $4.5 million is being amortized, using a level-yield methodology over the estimated holding period of
approximately eight years, as an increase in interest expense of the subordinated debentures owed to the Intervest Trusts.
Our 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 us additional regulatory capital to support our expected future growth and expansion. See “Capital Compliance–
Regulatory Capital” elsewhere in the MD&A for a discussion of our trust preferred securities and their continued inclusion in, or
exclusion from, our regulatory capital in future periods.
We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our
commitments and business needs. As a publicly traded company, a likely source of additional funds is the capital markets, which can
provide us with funds through the public issuance of equity, both common and preferred stock, and the issuance of senior debt and/or
subordinated debentures. We have an effective shelf registration statement on file with the SEC which provides us increased flexibility
and more efficient access to the public debt and equity markets if needed. Our ability to raise additional capital, if needed, will depend
on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance.
74
Common Stockholders’ Equity and Non-GAAP Financial Measures. We use non-GAAP financial measures, specifically
tangible common stockholders’ equity, tangible common stockholders’ equity to total tangible assets, tangible book value per common
share and return on average tangible common stockholders’ equity as important measures of the strength of our capital and our ability
to generate earnings on tangible common equity invested by our shareholders. We believe presentation of these non-GAAP financial
measures provides useful supplemental information that contributes to a proper understanding of our financial results and capital
levels. These non-GAAP disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP,
nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations
of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following tables.
Tangible Common Stockholders’ Equity and the
Calculation of the Ratio of Total Tangible Common
Stockholders’ Equity to Total Tangible Assets
Total common stockholders’ equity before noncontrolling
interest
Less intangible assets:
Goodwill
Core deposit and bank charter intangibles, net of
accumulated amortization
Total intangibles
Total tangible common stockholders’ equity
Total assets
Less intangible assets:
Goodwill
Core deposit and bank charter intangibles, net of
accumulated amortization
Total intangibles
Total tangible assets
Ratio of total common stockholders’ equity to total assets
Ratio of total tangible common stockholders’ equity to total
tangible assets
2015
December 31,
2014
(Dollars in thousands)
2013
$
1,464,631 $
908,390 $
629,060
(125,442 )
(78,669 )
(5,243 )
(26,898 )
(152,340 )
1,312,291 $
9,879,459 $
(26,907 )
(105,576 )
802,814 $
6,766,499 $
(13,915 )
(19,158 )
609,902
4,791,170
(125,442 )
(78,669 )
(5,243 )
(26,898 )
(152,340 )
9,727,119 $
14.83 %
(26,907 )
(105,576 )
6,660,923 $
13.42 %
(13,915 )
(19,158 )
4,772,012
13.13 %
$
$
$
13.49 %
12.05 %
12.78 %
Calculation of the Ratio of Tangible Book
Value per Common Share
2015
December 31,
2014
(In thousands, except per share amounts)
2013
Total common stockholders’ equity before noncontrolling
interest
Less intangible assets:
Goodwill
Core deposit and bank charter intangibles, net of
accumulated amortization
Total intangibles
Total tangible common stockholders’ equity
Common shares outstanding
Book value per common share
Tangible book value per common share
*Adjusted to give effect to 2-for-1 stock split on June 23, 2014.
75
$
1,464,631 $
908,390 $
629,060
(125,442 )
(78,669 )
(5,243 )
(26,898 )
(152,340 )
1,312,291 $
90,612
16.16 $
14.48 $
(26,907 )
(105,576 )
802,814 $
79,924
11.37 $
10.04 $
$
$
$
(13,915 )
(19,158 )
609,902
73,712 *
8.53 *
8.27 *
Calculation of Return on Average
Tangible Common Stockholders’ Equity
Net income available to common stockholders
Average common stockholders’ equity before noncontrolling
interest
Less average intangible assets:
Goodwill
Core deposit and bank charter intangibles, net of
accumulated amortization
Total average intangibles
Average tangible common stockholders’ equity
Return on average common stockholders’ equity
Return on average tangible common stockholders’ equity
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
182,253 $
118,606 $
91,237
$
1,217,475 $
786,430 $
560,351
(118,013 )
(51,793 )
(5,243 )
$
(28,660 )
(146,673 )
1,070,802 $
14.97 %
17.02 %
(21,651 )
(73,444 )
712,986 $
15.08 %
16.64 %
(9,661 )
(14,904 )
545,447
16.28 %
16.73 %
Common Stock Dividend Policy. In 2015 we paid dividends of $0.55 per common share, compared to $0.47 per common share
in 2014 and $0.36 per common share in 2013. On January 4, 2016, our board of directors approved a dividend of $0.15 per common
share that was paid on January 22, 2016 to shareholders of record on January 15, 2016. The determination of future dividends on our
common stock will depend on conditions existing at that time and approval of our board of directors. See Note 19 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. 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.
The FDIC and other federal banking regulators revised 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 “Basel III Rules”). The Basel III Rules became effective for the Company and the Bank on
January 1, 2015 (subject to a phase-in period for certain provisions). The Basel III Rules require the maintenance of minimum
amounts and ratios of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets, and of tier 1 capital to
adjusted quarterly average assets.
Under the Basel III Rules, common equity tier 1 capital consists of common stock and paid-in capital (net of treasury stock) and
retained earnings. Common equity tier 1 capital is reduced by goodwill, certain intangible assets, net of associated deferred tax
liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and
certain other items as specified by the Basel III Rules.
Tier 1 capital includes common equity tier 1 capital and certain additional tier 1 items as provided under the Basel III Rules. Our
tier 1 capital consists of common equity tier 1 capital and our $118 million of trust preferred securities issued by the Trusts. The Basel
III Rules include certain provisions that would require trust preferred securities to be phased out of qualifying tier 1 capital. Currently,
our trust preferred securities are grandfathered under the Basel III Rules and will continue to be included as tier 1 capital. However,
should we exceed $15 billion in total assets, the grandfather provisions applicable to its trust preferred securities would no longer
apply and such trust preferred securities would no longer be included as tier 1 capital, but would continue to be included as total
capital. The common equity tier 1 capital and the tier 1 capital are the same for our bank subsidiary.
76
Basel III 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. We made this opt-out election for the first quarter of 2015 to avoid significant variations in the level of capital
depending upon the impact of interest rate fluctuations on the fair value of our investment securities portfolio.
Total capital includes tier 1 capital and tier 2 capital. Tier 2 capital includes, among other things, the allowable portion of the
ALLL and any trust preferred securities that are excluded from tier 1 capital.
The Basel III Rules also changed the risk-weights of assets in an effort 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.
The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective capital amounts
by risk-weighted assets. The leverage ratio is calculated by dividing tier 1 capital by adjusted quarterly average total assets.
The Basel III Rules limit 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, tier 1 capital and total capital to risk-weighted
assets in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer will be
phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year by the same amount until fully
implemented at 2.5% on January 1, 2019. When fully phased in on January 1, 2019, the Basel III Rules will require us and our
subsidiary bank to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5%
capital conservation buffer, which effectively results in a minimum ratio of 7.0% upon full implementation, (ii) a minimum ratio of
tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer, which effectively results in a minimum
ratio of 8.5% upon full implementation, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus a 2.5%
capital conservation buffer, which effectively results in a minimum ratio of 10.5% upon full implementation and (iv) a minimum
leverage ratio of at least 4.0%. Additionally, in order to be considered well-capitalized under the Basel III rules, we must maintain (i)
a ratio common equity tier 1 capital to risk-weighted assets of at least 6.5%, (ii) a ratio of tier 1 capital to risk-weighted assets of at
least 8.0%, (iii) a ratio of total capital to risk-weighted assets of at least 10.0%, and (iv) a leverage ratio of at least 5.0%.
Prior to January 1, 2015, federal and state regulatory agencies required us and our subsidiary 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%. In order to be considered well capitalized under the rules in effect prior to January 1, 2015, we had to maintain
tier 1 and total capital to risk-weighted assets of 6.0% and 10.0%, respectively, and a leverage ratio of 5.0%. Tier 1 capital consisted
of common equity, retained earnings, certain types of preferred stock, qualifying minority interest and trust preferred securities,
subject to limitations, and excluded goodwill and various intangible assets. Total capital included 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.
77
The following table presents actual and required capital ratios as of December 31, 2015 for the Company and the Bank under the
Basel III Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31,
2015 based on the current phase-in provisions of the Basel III Rules and the minimum required capital levels as of January 1, 2019
when the Basel III Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt
corrective action regulations, as amended to reflect the changes under the Basel III Rules.
Actual
Capital
Amount
Ratio
Minimum Capital
Required – Basel
III
Phase-In Schedule
Capital
Amount Ratio
Minimum Capital
Required – Basel III
Fully Phased-In
Capital
Amount
(Dollars in thousands)
Ratio
Required to be
Considered Well
Capitalized
Capital
Amount
Ratio
December 31, 2015:
Tier 1 leverage to average assets:
Company
Bank
Common equity tier 1 to risk-
weighted assets:
Company
Bank
Tier 1 capital to risk-weighted assets:
Company
Bank
Total capital to risk-weighted assets:
$ 1,417,940 14.96 % $ 379,116 4.00 % $ 379,116 4.00 %
1,385,192 14.62 378,900 4.00 378,900 4.00 $ 473,625 5.00 %
N/A N/A
1,316,373 10.79 549,200 4.50 854,311 7.00
N/A N/A
1,385,192 11.36 548,840 4.50 853,752 7.00 792,769 6.50
1,417,940 11.62 732,267 6.00 1,037,378 8.50
N/A N/A
1,385,192 11.36 731,787 6.00 1,036,698 8.50 975,716 8.00
Company
Bank
1,478,794 12.12 976,356 8.00 1,281,467 10.50
N/A N/A
1,446,046 11.86 975,716 8.00 1,280,627 10.50 1,219,645 10.00
The following table is a summary of the actual and required regulatory capital amounts and ratios as of December 31, 2014 for
the Company and the Bank under the regulatory capital rates then in effect.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
(Dollars in thousands)
Amount
Required
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 851,681
824,120
12.92 % $ 197,711
197,465
12.52
3.00 % $ 329,518
3.00 329,108
5.00 %
5.00
904,600
877,038
12.47
12.10
580,425
580,259
8.00 725,532
8.00 725,324
10.00
10.00
851,682
824,120
11.74
11.37
290,213
290,130
4.00 435,319
4.00 435,194
6.00
6.00
December 31, 2014:
Tier 1 leverage (to average assets):
Company
Bank
Total capital (to risk-weighted assets):
Company
Bank
Tier 1 capital (to risk-weighted assets):
Company
Bank
Liquidity
General. 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 we may be unable to satisfy current or future funding requirements and needs. The ALCO and Investments Committee
(“ALCO”), which reports to our board of directors, has primary responsibility for oversight of our liquidity, funds management,
asset/liability (interest rate risk) position and investment portfolio functions.
78
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 our operating cash needs, and the cost of funding such requirements and needs is reasonable. We
maintain 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 we rely on deposits, repayments of loans and leases, and cash flows
from of our investment securities as our primary sources of funds. Our principal deposit sources include consumer, commercial and
public funds customers in our markets. We have used these funds, together with wholesale deposit sources such as brokered deposits,
along with FHLB advances, federal funds purchased and other sources of short-term borrowings, to make loans and leases, acquire
investment securities and other assets and to fund continuing operations.
Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns
available to customers on alternative investments, general economic and market conditions and other factors. Loan and lease
repayments are a relatively stable source of funds but are subject to the borrowers’ and lessees’ ability to repay the loans and leases,
which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events
affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs,
inclement weather, natural disasters and other factors. Furthermore, loans and leases generally are not readily convertible to cash.
Accordingly, we 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 wholesale deposit sources, FHLB
advances, secured and unsecured federal funds lines of credit from correspondent banks, FRB borrowings and/or accessing the capital
markets.
At December 31, 2015, we had substantial unused borrowing availability. This availability was primarily comprised of the
following four options: (1) $2.56 billion of available blanket borrowing capacity with the FHLB, (2) $164 million of investment
securities available to pledge for federal funds or other borrowings, (3) $170 million of available unsecured federal funds borrowing
lines and (4) up to $143 million of available borrowing capacity from borrowing programs of the FRB.
We anticipate we will continue to rely primarily on deposits, repayments of loans and leases and cash flows from our investment
securities to provide liquidity, as well as other funding sources as appropriate. Additionally, where necessary, the secondary funding
sources described above will be used to augment our primary funding sources.
Sources and Uses of Funds. Operating activities provided net cash of $201 million in 2015, $97 million in 2014 and $59 million
in 2013. 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. The increase in net cash provided by operating activities for 2015 compared to 2014
and for 2014 compared to 2013 is primarily due to growth in our net income from $91.3 million in 2013 to $118.6 million in 2014 to
$182.3 million in 2015.
Investing activities used net cash of $1.33 billion in 2015, $565 million in 2014 and $84 million in 2013. The increase in net
cash used by investing activities in 2015 compared to 2014 and in 2014 compared to 2013 is primarily the result of growth in our non-
purchased loans and leases, which used $2.58 billion in 2015, compared to $1.37 billion in 2014 and $545 million in 2013. The use of
cash as a result of growth in our non-purchased loan and lease portfolio was partially offset by cash provided by net activity in our
investment securities portfolio, which provided $270 million in 2015 and $103 million in 2014, but used $54 million in 2013.
Additionally, we received net payments on purchased loans totaling $719 million in 2015, $468 million in 2014 and $292 million in
2013, and we received net cash in merger and acquisition transactions totaling $300 million in 2015, $122 million in 2014 and $57
million in 2013.
Financing activities provided net cash of $1.07 billion in 2015, $422 million in 2014 and $13 million in 2013. The increase in
net cash provided by financing activities is primarily the result of growth of our deposits to fund our lending activities. Our deposits
provided $1.00 billion in 2015, $554 million in 2014 and $15 million in 2013. In addition, during 2015, we received proceeds of $110
million from the sale of 2,098,436 shares of our common stock.
79
Contractual Obligations. The following table presents, as of December 31, 2015, 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)
Over
5 Years
Total
Time deposits(1)
Deposits without a stated maturity(2)
Repurchase agreements with customers(1)
Other borrowings(1)
Subordinated debentures(1)
Lease obligations
Other obligations
Total contractual obligations
$ 1,431,420 $ 887,328 $ 114,989 $
—
5,533,060
—
65,800
505
164,320
7,118
3,559
5,497
3,718
10,029
37,787
7,000 $ 2,440,737
— 5,533,060
65,800
—
207,063
555
184,467
166,672
24,347
8,789
78,704
11,513
$ 7,239,664 $ 961,847 $ 138,138 $ 194,529 $ 8,534,178
—
—
41,683
7,118
6,343
19,375
(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, 2015. 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, 2015.
Off-Balance Sheet Commitments. The following table details the amounts and expected maturities of significant off-balance
sheet commitments as of December 31, 2015. Commitments to extend credit do not necessarily represent future cash requirements as
these commitments may expire without being drawn.
Commitments to extend credit(1)
Standby letters of credit
Total commitments
Off-Balance Sheet Commitments
1 Year
or Less
Over 1
Through 3
Years
Over 3
Through 5
Years
(Dollars in thousands)
$ 361,820 $ 4,309,688 $ 1,072,110 $
—
$ 371,521 $ 4,316,488 $ 1,072,110 $
9,701
6,800
Over
5 Years
Total
76,369 $ 5,819,987
16,501
76,369 $ 5,836,488
—
(1)
Includes commitments to extend credit under mortgage interest rate locks of $15.7 million that expire in one year or less.
Growth and Expansion
De Novo Growth. In 2014, we opened loan production offices for our RESG in Houston, Texas and Los Angeles, California. We
also opened retail banking offices in Bradenton, Florida, Cornelius, North Carolina and Hilton Head Island, South Carolina. In 2015,
we opened two loan production offices, one in Little Rock, Arkansas and one in Greensboro, North Carolina, and we opened our
fourth retail banking office in Houston, Texas. In 2016, we expect to open a loan production office for our RESG in San Francisco,
California, and we expect to open retail banking offices in Siloam Springs, Arkansas, Fayetteville, Arkansas and Springdale,
Arkansas.
We intend to continue our growth and de novo branching strategy in the future years through the opening of additional branches
and loan production offices as our needs and resources permit. 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 we cannot predict with certainty. We may increase or decrease our expected number of new office openings as a
result of a variety of factors including our financial results, changes in economic or competitive conditions, strategic opportunities or
other factors.
During 2015 we spent $16.8 million on capital expenditures for premises and equipment. Our capital expenditures for 2016 are
expected to be in the range of $28 million to $42 million, including progress payments on construction projects expected to be
80
completed in 2016 and 2017, 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.
Acquisitions. We have shown substantial growth through a combination of organic growth and acquisitions. Since 2010, we
have completed 13 acquisitions, including seven FDIC-assisted transactions, and in 2015, we announced two additional acquisitions,
both of which are expected to close late in the first quarter of 2016 or in the second quarter of 2016.
In December 2012, we completed our acquisition of Genala Banc, Inc. (“Genala”) and The Citizens Bank, its wholly-owned
bank subsidiary, for an aggregate of $13.4 million in cash and 847,232 shares of our common stock valued at $14.1 million. This was
our first traditional acquisition since 2003. Genala operated one retail banking office in Geneva, Alabama.
In July 2013, we completed our acquisition of The First National Bank of Shelby (“First National Bank”) in Shelby, North
Carolina for an aggregate of $8.4 million of cash and 2,514,770 shares of our common stock valued at $60.1 million. The First
National Bank acquisition expanded our service area in North Carolina by adding 14 retail banking offices in Shelby, North Carolina
and surrounding communities. In 2013 we closed one of the acquired offices in Shelby, North Carolina.
In March 2014, we completed our acquisition of Bancshares, Inc. (“Bancshares”) of Houston, Texas and OMNIBANK, N.A.,
its wholly-owned bank subsidiary, for an aggregate of $21.5 million in cash. The Bancshares acquisition expanded our service area
in South Texas by adding three retail banking offices in Houston and one retail banking office each in Austin, Cedar Park, Lockhart
and San Antonio.
In May 2014, we completed our acquisition of Summit Bancorp, Inc. (“Summit”) and Summit Bank, its wholly-owned bank
subsidiary, for an aggregate of $42.5 million in cash and 5,765,846 shares of our common stock valued at $166.4 million. The
Summit acquisition expanded our service area in central, south and western Arkansas by adding 23 banking locations and one loan
production office in nine Arkansas counties. During 2014 we closed eight Arkansas banking offices in locations where we had excess
branch capacity, six of which were acquired in the Summit acquisition, and we closed the loan production office acquired in the
Summit acquisition.
On February 10, 2015, we completed our acquisition of Intervest and its wholly-owned bank subsidiary Intervest National Bank,
headquartered in New York, New York, whereby we acquired all of the outstanding common stock of Intervest in exchange for
6,637,243 shares of our common stock (plus cash in lieu of fractional shares) in a transaction valued at approximately $238.5 million.
The Intervest acquisition added seven retail banking offices including one in New York City, five in Clearwater, Florida and one in
Pasadena, Florida. During the third quarter of 2015, we closed one of the acquired offices in Clearwater, Florida. During the fourth
quarter of 2015, we eliminated the New York lending operations acquired in the Intervest acquisition, which we refer to as Stabilized
Properties Group (or SPG), and consolidated the remaining servicing team of the SPG into our Real Estate Properties Group.
On August 5, 2015, we completed our acquisition of Bank of the Carolinas Corporation (“BCAR”) and its wholly-owned bank
subsidiary Bank of the Carolinas for an aggregate of 1,447,620 shares of our common stock (plus cash in lieu of fractional shares) in a
transaction valued at approximately $65.4 million. The BCAR acquisition expanded our operations in North Carolina by adding eight
retail banking offices, including one office each in Advance, Asheboro, Concord, Harrisburg, Landis, Lexington, Mocksville and
Winston-Salem.
On October 19, 2015, we entered into a definitive agreement and plan of merger (the “C&S Agreement”) with Community and
Southern Holdings, Inc. (“C&S”) and its wholly-owned bank subsidiary Community & Southern Bank, whereby we expect to acquire
all of the outstanding common stock and equity awards of C&S in a transaction valued at approximately $799.6 million. C&S is
headquartered in Atlanta, Georgia and operates 47 retail banking offices throughout Georgia and one retail banking office in
Jacksonville, Florida. At December 31, 2015, C&S had approximately $4.2 billion in total assets, approximately $3.1 billion in total
loans, approximately $3.7 billion in total deposits and approximately $460 million in stockholders’ equity. The closing of the C&S
transaction, which is expected to occur late in the first quarter or in the second quarter of 2016, is subject to certain closing conditions,
including receipt of customary regulatory approvals.
On November 9, 2015, we entered into a definitive agreement and plan of merger (the “C1 Agreement”) with C1 Financial, Inc.
(“C1”) and its wholly-owned bank subsidiary C1 Bank, whereby we expect to acquire all of the outstanding common stock of C1 in a
transaction valued at approximately $402.5 million. C1 is headquartered in St. Petersburg, Florida and operates 32 retail banking
offices on the west coast of Florida and in Miami-Dade and Orange Counties. At December 31, 2015, C1 had approximately $1.7
billion in total assets, approximately $1.4 billion in total loans, approximately $1.3 billion in total deposits and approximately $201
million in stockholders’ equity. The closing of the C1 transaction, which is expected to occur late in the first quarter or in the second
81
quarter of 2016, is subject to certain closing conditions, including receipt of customary regulatory approvals and the approval of C1
shareholders.
Future Growth Strategy. We expect to continue growing through both our de novo branching strategy and traditional
acquisitions. With respect to de novo branching strategy, future de novo branches are expected to be focused in states where we
currently have banking offices and in larger markets and metropolitan areas across the United States where we currently do not have
offices and believe we can generate significant growth from one or two strategically located offices in each such market. Future RESG
loan production offices are expected to be focused in strategically important markets (most likely San Francisco in late February and
offices in Seattle, Washington, D.C., Boston and Chicago at later dates). With respect to traditional acquisitions, we are seeking
acquisitions that are either immediately accretive to book value, tangible book value and diluted earnings per share, or strategic in
location, or both.
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
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Forward-Looking
Information” and other cautionary statements set forth elsewhere in this report.
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 indices. Interest rate risk management is the responsibility of our ALCO.
We regularly review our 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 our 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 our 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. We rely primarily on the
results of this model in evaluating our 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 indices 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 our expected changes in net interest income resulting from interest rate changes. We
model our change in net interest income assuming interest rates go up 100 bps, up 200 bps, up 300 bps, up 400 bps, up 500 bps, down
100 bps, down 200 bps, down 300 bps, down 400 bps and down 500 bps. Based on current conditions, we believe that modeling a
change in net interest income assuming rates go down 100 bps, down 200 bps, down 300 bps, down 400 bps and down 500 bps is not
meaningful. For purposes of this model, we have assumed that the change in interest rates phases in over a 12-month period. While we
believe this model provides a reasonably accurate projection of our 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.
82
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, 2016. 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)
+500
+400
+300
+200
+100
-100
-200
-300
-400
-500
% Change in
Projected Baseline
Net Interest Income
16.3%
12.9
9.6
6.2
3.0
Not meaningful
Not meaningful
Not meaningful
Not meaningful
Not meaningful
In the event of a shift in interest rates, we 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 our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our 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.
83
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, 2015 and 2014 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, 2015. 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, 2015 and 2014 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States
of America.
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, 2015, based on the criteria established in the
Internal Control-Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 19, 2016, expressed an unqualified opinion thereon.
Atlanta, Georgia
February 19, 2016
/s/ Crowe Horwath LLP
84
BANK OF THE OZARKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks
Interest earning deposits
Cash and cash equivalents
Investment securities – available for sale (“AFS”)
Non-purchased loans and leases
Purchased loans
Allowance for loan and lease losses
Net loans and leases
Premises and equipment, net
Foreclosed assets
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
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
$
$
$
December 31,
2015
2014
(Dollars in thousands, except
per share amounts)
89,122 $
1,866
90,988
602,348
6,528,634
1,806,037
(60,854 )
8,273,817
296,238
22,870
25,499
300,427
152,340
114,932
9,879,459 $
1,515,482 $
4,017,504
2,438,482
7,971,468
65,800
204,540
117,685
52,172
8,411,665
147,751
2,452
150,203
839,321
3,979,870
1,147,947
(52,918 )
5,074,899
273,591
37,775
20,192
182,052
105,576
82,890
6,766,499
1,145,454
2,892,989
1,457,939
5,496,382
65,578
190,855
64,950
36,892
5,854,657
Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding
at December 31, 2015 and 2014
Common stock; $0.01 par value; 125,000,000 shares authorized; 90,612,388
and 79,924,350 shares issued at December 31, 2015 and 2014, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock, at cost, 133,492 and 72,268 shares at December 31, 2015 and
December 31, 2014, respectively
Total stockholders’ equity before noncontrolling interest
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
—
—
906
755,995
706,628
7,959
(6,857 )
1,464,631
3,163
1,467,794
9,879,459 $
799
324,354
571,454
14,132
(2,349 )
908,390
3,452
911,842
6,766,499
See accompanying notes to the Consolidated Financial Statements.
85
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
2015
Year Ended December 31,
2014
(Dollars in thousands, except per share amounts)
2013
$
244,638 $
134,745
162,567 $
98,212
129,419
59,930
Interest income:
Non-purchased loans and leases
Purchased 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
(Amortization) accretion of Federal Deposit Insurance
Corporation ("FDIC") loss share receivable, net of FDIC clawback
payable
Other income from purchased 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
$
$
$
13,131
17,164
41
409,719
17,716
76
6,111
3,665
27,568
382,151
19,415
362,736
28,698
6,817
5,903
10,084
—
26,126
5,481
14,753
—
7,153
105,015
87,953
31,248
71,781
190,982
276,769
94,455
182,314
(61 )
182,253 $
2.10 $
2.09 $
11,125
19,489
56
291,449
8,566
54
10,642
1,693
20,955
270,494
16,915
253,579
26,609
5,187
5,592
5,184
(611 )
14,803
144
6,023
4,667
17,285
84,883
76,884
24,102
65,029
166,015
172,447
53,859
118,588
18
118,606 $
1.53 $
1.52 $
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
5,163
5,110
76,039
64,825
18,710
42,534
126,069
131,414
40,149
91,265
(28 )
91,237
1.27
1.26
See accompanying notes to the Consolidated Financial Statements.
86
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
182,314 $
118,588 $
91,265
Unrealized gains and losses on investment securities AFS
Tax effect of unrealized gains and losses on investment securities AFS
Reclassification of gains and losses on investment securities AFS
included in net income
Tax effect of reclassification of gains and losses on investment
securities AFS included in net income
Total other comprehensive income (loss)
Total comprehensive income
(4,491 )
1,711
29,164
(11,272 )
(23,623 )
9,266
(5,481 )
(144 )
(161 )
2,088
(6,173 )
176,141 $
56
17,804
136,392 $
63
(14,455 )
76,810
$
See accompanying notes to the Consolidated Financial Statements.
87
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Retained
Income (Loss)
Earnings
(Dollars in thousands, except per share amount)
Treasury
Stock
Non-controlling
Interest
Total
Balances – December 31, 2012
$
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income (loss)
Common stock dividends
paid, $0.36 per share
Issuance of 543,000 shares
of common stock for
exercise of stock options
Excess tax benefit on
exercise and forfeiture of
stock options and vesting
of restricted common
stock
Stock-based compensation
expense
Repurchase of 55,914
shares of common stock
Issuance of 219,600 shares
of unvested restricted
common stock
Forfeiture of 53,200 shares
of unvested restricted
common stock
Issuance of 2,514,770
shares of common stock
for acquisition of The
First National Bank of
Shelby, net of issuance
costs of $285,000
Balances – December 31, 2013
$
706 $
—
72,690 $ 423,485 $
91,265
—
10,783 $
—
— $
—
3,442 $ 511,106
91,265
—
—
—
(28 )
—
—
28
—
—
—
—
(14,455 )
—
—
(14,455 )
—
—
(25,744 )
—
—
—
(25,744 )
5
4,269
—
—
—
—
4,274
—
3,173
—
—
—
—
3,173
—
4,487
—
—
—
—
4,487
—
—
—
—
(1,370 )
—
(1,370 )
1
(1,371 )
—
—
1,370
—
—
—
—
—
—
—
—
—
25
—
737 $ 143,017 $ 488,978 $
59,769
—
(3,672 ) $
—
— $
—
59,794
3,470 $ 632,530
See accompanying notes to the Consolidated Financial Statements.
88
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Retained
Income (Loss)
Earnings
(Dollars in thousands, except per share amount)
Treasury
Stock
Non-controlling
Interest
Total
737 $ 143,017 $ 488,978 $
— 118,588
—
(3,672 ) $
—
— $
—
3,470 $ 632,530
— 118,588
—
—
18
—
—
(18 )
—
—
—
—
17,804
—
—
17,804
—
—
(36,130 )
—
—
—
(36,130 )
4
4,723
—
—
—
—
4,727
—
4,682
—
—
—
—
4,682
—
5,675
—
—
—
—
5,675
—
—
—
—
—
—
—
—
—
—
—
(2,349 )
—
(2,349 )
Balances – December 31, 2013
$
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income
Common stock dividends
paid, $0.47 per share
Issuance of 452,000 shares
of common stock for
exercise of stock options
Excess tax benefit on
exercise and forfeiture of
stock options and vesting
of restricted common
stock
Stock-based compensation
expense
Forfeiture of 5,200 shares
of unvested restricted
common stock
Repurchase of 72,268
shares of common stock
Issuance of 5,765,846
shares of common stock
for acquisition of Summit
Bancorp, Inc., net of
issuance costs of $87,000
Balances – December 31, 2014
58 166,257
—
799 $ 324,354 $ 571,454 $
—
14,132 $
—
(2,349 ) $
— 166,315
3,452 $ 911,842
$
See accompanying notes to the Consolidated Financial Statements.
89
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Retained
Income (Loss)
Earnings
(Dollars in thousands, except per share amount)
Treasury
Stock
Non-controlling
Interest
Total
Balances – December 31, 2014
$
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income (loss)
Common stock dividends
paid, $0.55 per share
Dividend paid to non-
controlling interest
Issuance of 365,375 shares
of common stock for
exercise of stock options
Issuance of 245,300 shares
of unvested restricted
common stock
Excess tax benefit on
exercise and forfeiture of
stock options and vesting
of restricted common
stock
Stock-based compensation
expense
Forfeiture of 41,325 shares
of unvested restricted
common stock
Issuance of 7,657 shares of
common stock to non-
employee directors
Repurchase of 133,492
shares of common stock
Issuance of 6,637,243
shares of common stock
for acquisition of Intervest
Bancshares Corporation,
Inc., net of issuance costs
of $100,000
Issuance of 1,447,620
shares of common stock
for acquisition of Bank
of the Carolinas
Corporation, net of
issuance costs of $64,000
Issuance of 2,098,436 shares
of common stock
Balances – December 31, 2015
$
799 $ 324,354 $ 571,454 $
— 182,314
—
14,132 $
—
(2,349 ) $
—
3,452 $ 911,842
— 182,314
—
—
(61 )
—
—
61
—
—
—
—
(6,173 )
—
—
(6,173 )
—
—
(47,079 )
—
—
—
(47,079 )
—
—
—
—
—
(350 )
(350 )
4
5,141
—
—
—
—
5,145
2
(2,351 )
—
—
2,349
—
—
7,049
—
—
—
—
7,049
—
8,202
—
—
—
—
8,202
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6,857 )
—
(6,857 )
66 238,310
—
—
—
— 238,376
14
65,311
—
—
—
—
65,325
21 109,979
—
906 $ 755,995 $ 706,628 $
—
7,959 $
—
(6,857 ) $
— 110,000
3,163 $ 1,467,794
See accompanying notes to the Consolidated Financial Statements.
90
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation
Amortization
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 purchased loans
Amortization (accretion) of FDIC loss share receivable, net of
clawback payable
Gains on sales of other assets
Gains on merger and acquisition transactions
Gain on termination of FDIC loss share agreements
Prepayment penalty on Federal Home Loan Bank of Dallas ("FHLB")
advances
Deferred income tax expense (benefit)
Increase in cash surrender value of BOLI
BOLI death benefits in excess of cash surrender value
Excess tax benefit on exercise of stock options and vesting of
restricted common stock
Stock-based compensation expense
Changes in assets and liabilities:
Accrued interest receivable
Other assets, net
Accrued interest payable and other liabilities
Net cash provided by operating activities
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
182,314 $
118,588 $
91,265
10,801
6,660
(61 )
19,415
3,803
—
379
(5,481 )
(254,858 )
255,406
(51,823 )
—
(14,753 )
—
—
8,853
7,391
(7,795 )
(2,289 )
(7,049 )
8,202
(2,949 )
31,489
13,523
201,178
7,986
4,996
18
16,915
1,299
—
646
(144 )
(203,088 )
207,451
(62,775 )
611
(6,023 )
(4,667 )
(7,996 )
8,062
(258 )
(5,184 )
—
(4,682 )
5,675
(1,098 )
2,588
17,846
96,766
7,196
2,805
(28 )
12,075
1,352
379
515
(161 )
(209,284 )
230,391
(50,771 )
(7,171 )
(9,386 )
(5,163 )
—
—
(10,148 )
(4,529 )
—
(3,173 )
4,487
(34 )
8,653
49
59,319
See accompanying notes to the Consolidated Financial Statements.
91
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
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 increase of non-purchased loans and leases
Net payments received on purchased loans
Payments received from FDIC under loss share agreements
Net payment received from FDIC on termination of loss share
agreements
Other net decreases in FDIC loss share receivable and assets previously
covered by FDIC loss share
Purchases of premises and equipment
Proceeds from sales of other assets
Purchases of BOLI
Proceeds from BOLI death benefits
Cash (invested in) received from unconsolidated investments and
noncontrolling interest
Net cash received in merger and acquisition transactions
Net cash used by investing activities
Cash flows from financing activities:
Net increase in deposits
Repayment of fixed-rate callable FHLB advances
Net proceeds from (repayments of) other borrowings
Net (decrease) increase in repurchase agreements with customers
Proceeds from exercise of stock options
Proceeds from issuance of common stock
Excess tax benefit on exercise of stock options and vesting of restricted
common stock
Repurchase of common stock
Cash dividends paid on common stock
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
$
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
202,943 $
159,982
(92,011 )
(2,582,441 )
718,695
—
55,724 $
103,123
(56,134 )
(1,372,413 )
467,706
24,810
999
85,959
(141,454 )
(545,361 )
291,715
80,269
—
20,425
—
—
(16,804 )
73,721
(100,000 )
3,149
13,688
(18,067 )
73,559
—
—
(1,759 )
299,810
(1,334,715 )
1,103
121,918
(564,558 )
1,001,548
(158,853 )
163,684
(315 )
5,145
110,000
7,049
(6,857 )
(47,079 )
1,074,322
(59,215 )
150,203
90,988 $
553,675
(98,062 )
(483 )
(4,040 )
4,727
—
4,682
(2,349 )
(36,130 )
422,020
(45,772 )
195,975
150,203 $
32,476
(10,106 )
65,547
—
—
(1,108 )
56,786
(84,278 )
15,354
—
132
17,148
4,274
—
3,173
(1,370 )
(25,744 )
12,967
(11,992 )
207,967
195,975
See accompanying notes to the Consolidated Financial Statements.
92
Bank of the Ozarks, Inc.
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
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”). As of December 31, 2015, the Company owns eight
100%-owned finance subsidiary business trusts including Ozark Capital Statutory Trust II (“Ozark II”), Ozark Capital Statutory Trust
III (“Ozark III”), Ozark Capital Statutory Trust IV (“Ozark IV”), Ozark Capital Statutory Trust V (“Ozark V”) (collectively, the
“Ozark Trusts”), and as a result of the Company’s acquisition of Intervest Bancshares Corporation (“Intervest”), Intervest Statutory
Trust II (“Intervest II”), Intervest Statutory Trust III (“Intervest III”), Intervest Statutory Trust IV (“Intervest IV”) and Intervest
Statutory Trust V (“Intervest V”), (collectively, the “Intervest Trusts”; and together with Ozark Trusts, the “Trusts”). Each of the
Trusts was formed in connection with the issuance of certain subordinated debentures and related trust preferred securities. At
December 31, 2015, the Company also owns, 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 Company and the Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by
those regulatory authorities. At December 31, 2015, the Company, through the Bank, conducted operations through 174 offices,
including 81 offices in Arkansas, 28 in Georgia, 25 in North Carolina, 22 in Texas, ten in Florida, three in Alabama, two offices each
in South Carolina and New York and one office in California.
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 companies in which
the Company has limited or no influence over voting and financing decisions (principally defined as owning a voting or economic
interest less than 20%) and investments in limited partnerships and limited liability companies in which the Company’s interest is so
minor such that it has virtually no influence over operating and financial policies are generally accounted for by the cost method of
accounting. 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, 2015 and 2014, the Company has classified all of its
investment securities as available for sale (“AFS”).
Investment securities AFS are reported 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
93
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.
At December 31, 2015 and 2014, the Company owned stock in the Federal Home Loan Bank of Dallas (“FHLB”) 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 (loss). 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.
Non-purchased loans and leases – Non-purchased 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 non-purchased 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, all of which are non-purchased, are classified as either direct financing leases or operating leases, based on the terms of
the agreement. Direct financing leases are reported as the sum of (i) total future lease payments to be received, net of unearned
income, and (ii) estimated residual value of the leased property. Operating leases are recorded at the cost of the leased property, net of
accumulated depreciation. Income on direct financing leases is included in interest income and is recognized on a basis that achieves a
constant periodic rate of return on the outstanding investment. Income on operating leases is recognized as non-interest income on a
straight-line basis over the lease term.
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of
commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they are
funded. Related fees are generally recognized when collected.
Mortgage loans held for sale are included in the Company’s non-purchased loans and leases and totaled $10.4 million and $10.9
million at December 31, 2015 and 2014, respectively. 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
94
Company enters into a forward sale commitment (“FSC”) for the sale of its mortgage loan originations to reduce its market risk and
interest rate 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, 2015 and 2014, 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 $15.7 million and $17.2
million at December 31, 2015 and 2014, respectively.
Purchased loans – Purchased loans are initially recorded at fair value on the date of purchase. Purchased 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 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.
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”).
At the time of acquisition of purchased 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 loan is not
specifically reviewed, such loan is assumed to have characteristics similar to the characteristics of the acquired portfolio of purchased
loans. The grade for each purchased loan without evidence of credit deterioration 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 status of the borrower or the quality or value of 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 individually considered in the determination of the required allowance for loan and lease
losses (“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 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 is accreted into
earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.
Purchased loans that contain evidence of credit deterioration on the date of purchase are individually evaluated by management
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 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 loans with evidence of credit deterioration at the date of acquisition,
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 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 loans with evidence of credit deterioration at the date of acquisition is the difference
between the expected cash flows and the net present value of such 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 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
95
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 loans with evidence of credit deterioration at the date of acquisition
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,
nonperforming 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; however, in accordance with GAAP, the Company continues to accrete into earnings income on such
loans. 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.
Allowance for loan and lease losses – The ALLL is established through a provision for such losses charged against income. All
or portions of loans or leases 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 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 grades to all non-purchased loans and leases, except residential 1-4 family
loans, consumer loans and certain other loans, with each grade being assigned an allowance allocation percentage. 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. 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, the age,
condition, value, nature and marketability of collateral and, for certain loans, the marketability of such loans in any secondary market;
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.
96
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 over various time periods and a variety of
subjective criteria.
For purchased loans, management segregates this portfolio into loans that contain evidence of credit deterioration on the date of
acquisition and loans that do not contain evidence of credit deterioration on the date of acquisition. Purchased 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 partial or full
charge-off.
All other purchased loans are graded by management at the time of purchase. The grade on these purchased 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 partial or full charge-off.
At December 31, 2015, the Company established an ALLL totaling $1.2 million for its purchased loan portfolio. Such ALLL
was based on the Company’s historical charge-off analysis of its purchased loan portfolio and reflects management’s estimate of
probable incurred losses in the purchased loan portfolio that had not previously been charged off. At December 31, 2014, the
Company had no ALLL for its purchased loan portfolio as the Company had determined that all losses had been charged off on
purchased loans where management had determined it was probable that the Company would be unable to collect all amounts
according to the contractual terms thereof (for purchased loans without evidence of credit deterioration at date of acquisition) or
whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1
Fair Values (for purchased loans with evidence of credit deterioration at date of acquisition).
The accrual of interest on non-purchased loans and leases and purchased loans without evidence of credit deterioration at the
date of acquisition is discontinued when, in management’s opinion, the borrower or lessee may be unable to meet payments as they
become due. The Company generally places a loan or lease, excluding purchased loans with evidence of credit deterioration on the
date of acquisition, 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.
All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan or lease, excluding
purchased loans with evidence of credit deterioration at the date of acquisition, 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 loan with evidence of credit deterioration at the date of acquisition 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 loans with evidence of credit deterioration at the date of acquisition, 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’s practice is to charge off any estimated loss
as soon as management is able to identify and reasonably quantify such potential loss. Accordingly, only a small portion of the
Company’s ALLL is needed for potential losses on nonperforming loans.
The Company also maintains an allowance for certain non-purchased loans and leases not considered impaired where (i) the
customer is continuing to make regular payments, although payments may be past due, (ii) there is a reasonable basis to believe the
97
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,
such excess is considered allocated allowance for purposes of the determination of the ALLL.
The Company also includes specific ALLL allocations for qualitative factors including, (i) general economic and business
conditions, (ii) trends that could affect collateral values and (iii) expectations regarding the current business cycle. The Company may
also consider other qualitative factors in future periods for additional ALLL allocations.
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.
Premises and equipment – Premises and equipment are reported at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets. Depreciable
lives for the major classes of assets are generally 20 to 45 years for buildings and 3 to 25 years for furniture, fixtures, equipment and
certain building improvements. Leasehold improvements are amortized over the shorter of the asset’s estimated useful life or the term
of the lease. Accelerated depreciation methods are used for income tax purposes. Maintenance and repair charges are expensed as
incurred.
Foreclosed assets – Repossessed personal properties and real estate acquired through or in lieu of foreclosure, excluding
purchased foreclosed assets, 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. Purchased foreclosed assets are initially recorded at Day 1 Fair
Values. In estimating such Day 1 Fair Values, management considered a number of factors including, among others, appraised value,
estimated selling price, estimated holding periods and net present value (calculated using discount rates ranging from 8.0% to
9.5% per annum) of cash flows expected to be received.
Valuations of all foreclosed assets are periodically reviewed by management with the carrying value of such assets adjusted
through non-interest expense to the then estimated fair value, generally based on third party appraisals, broker price opinions or other
valuations of the property, net of estimated selling costs, if lower, until disposition. 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 limitation”) 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 acquired 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 limitation, a deferred tax asset 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 acquired net operating loss carryforwards or the
expected settlement or recovery of acquired assets with built-in losses subject to section 382 limitation, an increase or decrease of the
deferred tax asset 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
98
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 asset valuation allowance will be recorded as an
adjustment to deferred income tax expense (benefit).
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 2012.
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 help to offset a portion of employee benefit costs or to offset a portion of the costs of a supplemental
executive retirement plan for one of the Company’s executive officers. 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 $125.4 million
and $78.7 million at December 31, 2015 and 2014, respectively. The Company performed its annual impairment test of goodwill as of
September 30, 2015. 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, 2015 and 2014, less accumulated amortization of $144,000 and $132,000 at
December 31, 2015 and 2014, 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 $41.5 million and $36.5 million at December 31, 2015 and 2014, respectively, less
accumulated amortization of $14.7 million and $9.7 million at December 31, 2015 and 2014, respectively.
The aggregate amount of amortization expense for the Company’s core deposit and bank charter intangibles is expected to be
$6.2 million in 2016, $5.9 million in 2017, $5.9 million in 2018, $5.5 million in 2019 and $3.0 million in 2020.
Stock-based compensation – The Company has a non-qualified employee stock option plan, a non-employee director stock plan
and an employee restricted stock plan, each of which is described more fully in Note 16. 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
recognized over the vesting period of the award.
Earnings per common share – Earnings per common share are computed using the two-class method. Basic earnings per
common share are computed by dividing net income available 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 net income available to
common stockholders by the weighted-average number of common shares outstanding after consideration of the dilutive effect, if any,
of the Company’s common stock options using the treasury stock method. The Company has determined that its outstanding non-
vested stock awards granted under its restricted stock plan are participating securities.
Segment disclosures – The Company operates in only one segment – community banking. Accordingly, there is no requirement
to report segment information in the Company’s Consolidated Financial Statements. No revenues are derived from foreign countries
and no single external customer comprises more than 10% of the Company’s revenues.
Recent accounting pronouncements – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 provides guidance that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14,
which defers the effective date of this standard to annual and interim periods beginning after December 15, 2017; however, early
adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. The Company is currently
99
evaluating the impact, if any, ASU 2014-09 will have on its financial position, results of operations, and its financial statement
disclosures.
In June 2014, the FASB issued ASU 2014-11 “Transfers and Servicing (Topic 860).” ASU 2014-11 amends the accounting
guidance for repo-to-maturity transactions and requires such transactions to be accounted for as secured borrowings. In addition, ASU
2014-11 requires enhanced disclosures related to the collateral pledged, maturity and risk associated with repurchase agreements. The
Company adopted the provision of ASU 2014-11 beginning April 1, 2015. The adoption of ASU 2014-11 did not have a significant
impact on the Company’s financial position or results of operations but did require additional disclosures about the Company’s
repurchase agreements.
In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20) –
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from
GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered
to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax,
after income from continuing operations. ASU 2015-01 is effective for interim and annual periods beginning after December 15, 2015.
ASU 2015-01 is not expected to have a significant impact on the Company’s financial position, results of operations, or its financial
statement disclosures.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”
which amends the consolidation requirements of ASU 810 by changing the consolidation analysis required under GAAP. The revised
guidance amends the consolidation analysis based on certain fee arrangements or relationships to the reporting entity and, for limited
partnerships, requires entities to consider the limited partner’s rights relative to the general partner. ASU 2015-02 is effective for
annual and interim periods beginning after December 15, 2015. ASU 2015-02 is not expected to have a significant impact on the
Company’s financial position, results of operations, or its financial statement disclosures.
In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the
Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be
presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The
recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. In August 2015,
the FASB issued ASU 2015-15 to clarify the Securities and Exchange Commission (“SEC”) staff’s position on presenting and
measuring debt issue costs related to line-of-credit arrangements. ASU 2015-03 and ASU 2015-15 are effective for interim and
annual periods beginning after December 15, 2015. ASU 2015-03 and ASU 2015-15 are not expected to have a significant impact on
the Company’s financial position, results of operations, or its financial statement disclosures.
In September 2015, the FASB issued ASU 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments.” ASU
2015-16 requires entities to recognize measurement period adjustments during the reporting period in which the adjustments are
determined. The income effects, if any, of a measurement period adjustment are cumulative and are to be reported in the period in
which the adjustment to a provisional amount is determined. Also, ASU 2015-16 requires presentation on the face of the income
statement or in the notes, the effect of the measurement period adjustment as if the adjustment had been recognized at acquisition date.
ASU 2015-16 is effective for fiscal periods beginning after December 15, 2016 and should be applied prospectively to measurement
period adjustments that occur after the effective date.
In January 2016, FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”
ASU 2016-01 revises the accounting for the classification and measurement of investments in equity securities and revises the
presentation of certain fair value changes for financial liabilities measured at fair value. For equity securities, the guidance in ASU
2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income. For financial
liabilities that are measured at fair value in accordance with the fair value option, the guidance requires presenting, in other
comprehensive income, the change in fair value that relates to a change in instrument-specific credit risk. ASU 2016-01 also
eliminates the disclosure assumptions used to estimate fair value for financial instruments measured at amortized cost and requires
disclosure of an exit price notion in determining the fair value of financial instruments measured at amortized cost. ASU 2016-01 is
effective for interim and annual periods beginning after December 15, 2017. The Company is evaluating the impact, if any, that ASU
2016-01 will have on its financial position, results of operations, and its financial statement disclosures.
Proposed Accounting Pronouncements – In December 2012, the FASB announced a project related to the impairment of
financial instruments in an effort to provide new guidance that would significantly change how entities measure and recognize credit
impairment for certain financial assets. While completion of the project and related guidance is still pending, it is anticipated that new
guidance will replace the current incurred loss model that is utilized in estimating the ALLL with a model that requires management to
estimate all contractual cash flows that are not expected to be collected over the life of the loan. The FASB describes this revised
model as the current expected credit loss (“CECL”) model and believes the CECL model will result in more timely recognition of
100
credit losses since the CECL model incorporates expected credit losses versus incurred credit losses. The proposed scope of FASB’s
CECL model would include loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees
that are not accounted for at fair value. The final issuance date and the implementation date of the CECL guidance is currently
pending, and the Company will continue to monitor FASB’s progress on this project.
Reclassifications and recasts – Certain reclassifications of prior years’ amounts have been made to conform with the 2015
financial statements presentation. These reclassifications had no impact on prior years’ net income, as previously reported. During the
second and fourth quarter of 2015, the Company revised its initial estimates regarding the expected recovery of certain acquired loans
and deferred tax assets in its February 10, 2015 acquisition of Intervest. As a result, certain amounts previously reported in the
Company’s 2015 interim consolidated financial statements have been recast.
2. Acquisitions
Bank of the Carolinas
On August 5, 2015, the Company completed its acquisition of Bank of the Carolinas Corporation (“BCAR”) and its wholly-
owned subsidiary Bank of the Carolinas for an aggregate of 1,447,620 shares of its common stock (plus cash in lieu of fractional
shares) in a transaction valued at approximately $65.4 million. The acquisition of BCAR expands the Company’s operations in North
Carolina by adding eight retail banking offices, including one office each in Advance, Asheboro, Concord, Harrisburg, Landis,
Lexington, Mocksville and Winston-Salem. As a result of the BCAR acquisition, the Company acquired total assets with an estimated
fair value of $351.3 million, total loans with an estimated fair value of $266.2 million and total deposits with an estimated fair value of
$288.9 million. Goodwill of $4.8 million, which is the excess of the merger consideration over the estimated fair value of net assets
acquired, was recorded in the BCAR acquisition and is the result of expected operational synergies, expansion of banking services in
the Piedmont Triad region of North Carolina and other factors. This goodwill is not expected to be deductible for tax purposes.
Intervest Bancshares Corporation
On February 10, 2015, the Company completed its acquisition of Intervest and its wholly-owned bank subsidiary Intervest
National Bank, for an aggregate of 6,637,243 shares of its common stock (plus cash in lieu of fractional shares) in a transaction valued
at approximately $238.5 million. The acquisition of Intervest provided the Company with a retail banking office in New York City
and expanded its service area in Florida by adding five retail banking offices in Clearwater, Florida and one retail banking office in
South Pasadena, Florida. During the third quarter of 2015, the Company closed one of the acquired retail banking offices in
Clearwater, Florida. During the fourth quarter of 2015, the Company eliminated the New York lending operations acquired in the
Intervest acquisition. Also, during the second and fourth quarters of 2015, management revised its initial estimates and assumptions
regarding the recovery of certain acquired loans and acquired deferred tax assets. Because such revision occurred during the first 12
months following the date of acquisition and was not the result of a change in circumstances, management has decreased the goodwill
recorded in the Intervest transaction by $4.9 million to reflect this change in estimate.
101
The following table provides a summary of the assets acquired and liabilities assumed as recorded by Intervest, the fair value
adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, the recast adjustments described
above and the estimates of 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. 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. The fair values shown in the following table have been
determined by management to be the Day 1 Fair Values.
Assets acquired:
Cash, due from banks and interest earning deposits
Investment securities
Loans and leases
Allowance for loan losses
Premises and equipment
Foreclosed assets
Accrued interest receivable and other assets
Core deposit intangible asset
Deferred income taxes
Total assets acquired
Liabilities assumed:
Deposits
Subordinated debentures
Accrued interest payable and other liabilities
Total liabilities assumed
Net assets acquired
Consideration paid:
Cash in lieu of fractional shares
Stock
Total consideration paid
Goodwill
Explanation of fair value adjustments
As Recorded
by
Intervest
February 10, 2015
Fair Value
Adjustments
Recast
Adjustments
(Dollars in thousands)
As Recorded
by the
Company
$
$
274,343 $
21,495
1,108,439
(25,208 )
4,357
2,350
34,076
0
11,758
1,431,610
1,162,437
56,702
3,608
1,222,747
208,863 $
—
$
321 a
(33,868 ) b
25,208 b
2,256 c
(1,710 ) d
(4,091 ) e
4,595 f
8,082 g
793
— $
—
7,969
—
—
—
(689 )
(2,347 )
4,933
274,343
21,816
1,082,540
—
6,613
640
29,296
4,595
17,493
1,437,336
22,211 h
(4,463 ) i
358 j
18,106
(17,313 )
$
—
—
—
—
4,933
1,184,648
52,239
3,966
1,240,853
196,483
(7 )
(238,476 )
(238,483 )
42,000
$
a-
b-
c-
d-
e-
f-
g-
h-
i-
j-
This amount reflects the fair value adjustment based on the pricing of the acquired investment securities portfolio.
This amount reflects the fair value adjustment based on the evaluation of the acquired loan portfolio and to eliminate the
recorded allowance for loan losses.
This amount reflects the fair value adjustment based on the evaluation of the premises and equipment acquired.
This amount reflects the fair value adjustment based on the evaluation of the acquired foreclosed assets.
This amount reflects the fair value adjustment based on the evaluation of accrued interest receivable and other assets.
This amount reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.
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.
This amount reflects the fair value adjustment based on the evaluation of the acquired deposits.
This amount reflects the fair value adjustment of these assumed liabilities based on a valuation of such instruments by an
independent, third party valuation firm.
This amount reflects the fair value adjustment based on an evaluation of these assumed liabilities and to record certain liabilities
directly attributable to the Intervest acquisition.
102
Goodwill of $42.0 million, which is the excess of the merger consideration over the estimated fair value of net assets acquired,
was recorded in the Intervest acquisition and is the result of expected operational synergies and other factors. This goodwill is not
expected to be deductible for tax purposes.
The Company’s consolidated results of operations include the operating results of Intervest beginning February 11, 2015
through the end of the reporting period. For the twelve months ended December 31, 2015, Intervest contributed $49.8 million of net
interest income and $24.1 million of net income to the Company’s operating results.
The following unaudited supplemental pro forma information is presented to show the Company’s estimated results assuming
Intervest was acquired as of the beginning of the earliest period presented, adjusted for estimated potential costs savings. These
unaudited 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, 2014 or 2015 and should not be considered as representative of future operating results.
Year Ended December 31,
2015
2014
(Dollars in thousands, except per share amounts)
Net interest income – pro forma (unaudited)
Net income – pro forma (unaudited)
Diluted earnings per common share – pro forma (unaudited)
$
$
$
388,447 $
185,296 $
2.10 $
323,065
141,899
1.68
Summit Bancorp, Inc.
On May 16, 2014, the Company completed its acquisition of Summit Bancorp, Inc. (“Summit”) and Summit Bank, its wholly-
owned bank subsidiary, for an aggregate of $42.5 million in cash and 5,765,846 shares of its common stock. The acquisition of
Summit expanded the Company’s service area in Central, South and Western Arkansas by adding 23 retail banking locations and one
loan production office in nine Arkansas counties. Subsequent to the acquisition, the Company closed the acquired loan production
office and eight retail banking offices, including six retail banking offices that were acquired from Summit, in markets where the
Company had excess branches as a result of the Summit acquisition. Goodwill of $73.4 million, which is the excess of the merger
consideration over the fair value of net assets acquired, was recorded in the Summit acquisition and is the result of expected
operational synergies and other factors. This goodwill is not expected to be deductible for tax purposes.
Bancshares, Inc.
On March 5, 2014, the Company completed its acquisition of Bancshares, Inc. (“Bancshares”) of Houston, Texas and
OMNIBANK, N.A., its wholly-owned bank subsidiary, for an aggregate of $21.5 million in cash. The acquisition of Bancshares
expanded the Company’s service area in South Texas by adding three retail banking offices in Houston and one retail banking office
each in Austin, Cedar Park, Lockhart, and San Antonio.
Pending Acquisition – Community & Southern Holdings, Inc.
On October 19, 2015, the Company entered into a definitive agreement and plan of merger (the “C&S Agreement”) with
Community & Southern Holdings, Inc. (“C&S”) and its wholly-owned bank subsidiary Community & Southern Bank, whereby the
Company will acquire all of the outstanding common stock and equity awards of C&S in a transaction valued at approximately $799.6
million. Community & Southern Bank, headquartered in Atlanta, Georgia, operates 47 retail banking offices throughout Georgia and
one retail banking office in Jacksonville, Florida. At December 31, 2015, C&S had approximately $4.2 billion in total assets,
approximately $3.1 billion in total loans, approximately $3.7 billion in total deposits and approximately $460 million in stockholders’
equity.
Under the terms of the C&S Agreement, each outstanding share of common stock of C&S and each outstanding C&S stock
option, warrant, restricted stock unit and deferred stock unit will be converted into the right to receive shares of the Company’s
common stock, plus cash in lieu of any fractional share, all subject to certain conditions and potential adjustments. The number of
Company shares to be issued will be determined based on the Company’s fifteen day volume weighted average stock price as of the
second business day prior to the closing date, subject to a minimum price of $34.10 per share and a maximum price of $56.84 per
share. Upon the closing of the transaction, which is expected to occur late in the first quarter or in the second quarter of 2016, C&S
will merge into the Company and Community & Southern Bank will merge into the Bank. Completion of the transaction is subject to
certain closing conditions, including receipt of customary regulatory approvals.
Pending Acquisition – C1 Financial, Inc.
On November 9, 2015, the Company entered into a definitive agreement and plan of merger (the “C1 Agreement”) with C1
Financial, Inc. (“C1”) and its wholly-owned bank subsidiary C1 Bank, whereby the Company will acquire all of the outstanding
common stock of C1 in a transaction valued at approximately $402.5 million. C1 Bank, headquartered in St. Petersburg, Florida,
103
operates 32 retail banking offices throughout the west coast of Florida and in Miami-Dade and Orange Counties. At December 31,
2015, C1 had approximately $1.7 billion in total assets, approximately $1.4 billion in total loans, approximately $1.3 billion in total
deposits and approximately $201 million in stockholders’ equity.
Under the terms of the C1 Agreement, each outstanding share of common stock of C1 will be converted into the right to receive
shares of the Company’s common stock, plus cash in lieu of any fractional share, all subject to certain conditions and potential
adjustments. The number of Company shares to be issued will be determined based on the Company’s ten day average closing stock
price as of the second business day prior to the closing date, subject to a minimum price of $39.79 per share and a maximum price of
$66.31 per share. Upon the closing of the transaction, which is expected to occur late in the first quarter or in the second quarter of
2016, C1 will merge into the Company and C1 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 C1 shareholders.
3. 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 and FNBB shares which do not have readily
available fair values and are carried at cost.
December 31, 2015:
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Other equity securities
Total investment securities AFS
December 31, 2014:
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
Other equity securities
Total investment securities AFS
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair
Value
$
$
$
$
415,095 $
146,265
3,562
1,038
23,530
589,490 $
555,335 $
245,854
654
14,225
816,068 $
12,321 $
1,720
—
—
—
14,041 $
18,267 $
6,144
—
—
24,411 $
(138 ) $
(1,035 )
—
(10 )
—
(1,183 ) $
(393 ) $
(765 )
—
—
(1,158 ) $
427,278
146,950
3,562
1,028
23,530
602,348
573,209
251,233
654
14,225
839,321
The following table shows gross unrealized losses and estimated fair value of investment securities AFS, aggregated by
investment category and length of time that individual investment securities have been in a continuous unrealized loss position.
December 31, 2015:
Obligations of states and political subdivisions
U.S. Government agency securities
CRA qualified investment fund
Total temporarily impaired investment securities
December 31, 2014:
Obligations of states and political subdivisions
U.S. Government agency securities
Total temporarily impaired investment securities
Less than 12 Months
12 Months or More
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair Value
Unrealized
Losses
$ 18,018 $
72,671
1,029
$ 91,718 $
114 $
930
10
6,167 $
4,381
—
1,054 $ 10,548 $
105
—
24 $ 24,185 $
77,052
1,029
129 $ 102,266 $
138
1,035
10
1,183
$ 29,174 $
9,630
$ 38,804 $
75 $ 34,414 $
47,626
25
100 $ 82,040 $
318 $ 63,588 $
57,256
740
1,058 $ 120,844 $
393
765
1,158
In evaluating the Company’s unrealized loss positions for other-than-temporary impairment for its 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, 2015 and 2014, 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
104
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 is a maturity distribution of investment securities AFS as of December 31, 2015.
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
Amortized
Cost
Estimated
Fair Value
(Dollars in thousands)
40,374 $
99,018
149,264
300,834
589,490 $
40,607
99,767
152,062
309,912
602,348
$
$
For purposes of this maturity distribution, all investment securities are shown based on their contractual maturity date, except
(i) FHLB and FNBB stock and the CRA qualified investment funds which have 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, 2015. 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.
The following table is a summary of sales activities of the Company’s investment securities AFS.
Sales proceeds
Gross realized gains
Gross realized losses
Net gains on investment securities
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
$
202,943 $
5,962 $
(481 )
5,481 $
55,724 $
159 $
(15 )
144 $
999
161
—
161
Investment securities with carrying values of $528.6 million and $694.5 million at December 31, 2015 and 2014, respectively,
were pledged to secure public funds and trust deposits and for other purposes required or permitted by law.
At December 31, 2015, the Company had no holdings of investment securities of any one issuer in an amount greater than 10%
of total common stockholders’ equity. At December 31, 2014, the Company had no holdings of investment securities of any one
issuer, other than U.S. Government agency residential mortgage-backed securities issued by the Federal National Mortgage
Association, in an amount greater than 10% of total common stockholders’ equity.
4. Non-Purchased Loans and Leases
The following table is a summary of the non-purchased loan and lease portfolio by principal category as of the dates indicated.
December 31,
2015
2014
(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 non-purchased loans and leases
350,254
$
2,010,866
2,825,575
74,440
440,828
5,701,963
231,281
27,745
147,735
419,910
$ 6,528,634
105
5.4 % $
1.1
6.8
283,253
30.8 1,503,541
43.3 1,411,838
47,235
211,156
87.4 3,457,023
287,707
3.6
25,669
0.1
115,475
2.4
6.5
93,996
100 % $ 3,979,870
7.1 %
37.8
35.5
1.2
5.3
86.9
7.2
0.6
2.9
2.4
100 %
The above table includes deferred fees, net of deferred costs, that totaled $27.8 million and $12.9 million at December 31, 2015
and 2014, respectively. Direct financing leases are presented net of unearned income totaling $16.9 million and $13.1 million at
December 31, 2015 and 2014, respectively.
Non-purchased loans and leases on which the accrual of interest has been discontinued totaled $13.2 million and $21.1 million
at December 31, 2015 and 2014, respectively. Interest income collected and recognized during 2015, 2014 and 2013 for nonaccrual
loans and leases at December 31, 2015, 2014 and 2013 was $0.4 million, $0.6 million and $0.2 million, respectively. Under the
original terms, these loans and leases would have reported $0.7 million, $1.1 million and $0.6 million of interest income during 2015,
2014 and 2013, respectively.
5. Purchased Loans
The following table is a summary of the purchased loan portfolio by principal category as of the dates indicated.
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 purchased loans
December 31,
2015
2014
(Dollars in thousands)
$
$
386,952 $
1,135,547
47,823
19,918
139,497
1,729,737
60,522
7,487
8,291
1,806,037 $
355,705
504,889
99,776
47,988
42,434
1,050,792
68,825
15,268
13,062
1,147,947
The following table is a summary, as of the dates indicated, of the Company’s purchased loans without evidence of credit
deterioration at the date of acquisition and purchased loans with evidence of credit deterioration at the date of acquisition.
Purchased loans without evidence of credit deterioration at
date of acquisition
Purchased loans with evidence of credit deterioration at
date of acquisition
Total purchased loans
December 31,
2015
2014
(Dollars in thousands)
$
1,589,251 $
871,467
$
216,786
1,806,037 $
276,480
1,147,947
The following table presents a summary, during the years indicated, of the activity of the Company’s purchased loans with
evidence of credit deterioration at the date of acquisition.
Balance – beginning of year
Accretion
Purchased loans acquired
Transfer to foreclosed assets
Net payments received
Loans sold
Net charge-offs
Other activity, net
Balance – end of year
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
276,480 $
37,677
71,996
(7,886 )
(148,175 )
(12,601 )
(1,815 )
1,110
216,786 $
392,421 $
46,466
40,035
(42,306 )
(151,559 )
—
(8,654 )
77
276,480 $
602,994
46,788
39,757
(35,608 )
(235,520 )
—
(24,324 )
(1,666 )
392,421
106
The following table presents a summary, during the years indicated, of changes in the accretable difference on purchased loans
with evidence of credit deterioration at the date of acquisition.
Accretable difference at beginning of year
$
Accretion
Accretable difference acquired
Adjustments to accretable difference due to:
Loans transferred to foreclosed assets
Loans paid off
Loans sold
Cash flow revisions as a result of renewals and/or
modifications
Other, net
Accretable difference at end of year
$
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
74,167 $
(37,677 )
11,546
(418 )
(17,714 )
(1,573 )
30,862
(17 )
59,176 $
83,455 $
(46,466 )
6,732
(1,657 )
(15,909 )
—
47,359
653
74,167 $
98,464
(46,788 )
6,932
(3,261 )
(15,770 )
—
42,895
983
83,455
The following table presents a summary of the Day 1 Fair Value of purchased loans with evidence of credit deterioration on the
date of acquisition for the Intervest acquisition.
Contractually required principal and interest
Non-accretable difference
Cash flows expected to be collected
Accretable difference
Day 1 Fair Value
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 during the years indicated.
As of
February 10, 2015
(Dollars in thousands)
$
$
75,424
(13,286 )
62,138
(8,173 )
53,965
Balance – beginning of year
Non-purchased loans and leases charged off
Recoveries of non-purchased loans and leases previously
charged off
Net non-purchased loans and leases charged off
Purchased loans charged off
Recoveries of purchased loans previously charged off
Net purchased loans charged off
Net charge-offs – total loans and leases
Provision for loan and lease losses:
Non-purchased loans and leases
Purchased loans
Total provision
Balance – end of year
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
52,918 $
(10,091 )
42,945 $
(5,123 )
38,738
(4,327 )
1,127
(8,964 )
(2,982 )
467
(2,515 )
(11,479 )
15,700
3,715
19,415
60,854 $
1,396
(3,727 )
(3,288 )
73
(3,215 )
(6,942 )
13,700
3,215
16,915
52,918 $
1,134
(3,193 )
(4,675 )
—
(4,675 )
(7,868 )
7,400
4,675
12,075
42,945
$
107
As of December 31, 2015 and 2014, the Company had identified purchased loans where management had determined it was
probable that the Company would be unable to collect all amounts according to the contractual terms thereof (for purchased loans
without evidence of credit deterioration at date of acquisition) or 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 (for purchased loans with evidence of credit deterioration at date of
acquisition). As a result the Company recorded net charge-offs totaling $2.5 million during 2015 and $3.2 million during 2014 for
such loans. The Company also recorded $2.5 million during 2015 and $3.2 million during 2014 of provision for loan and lease losses
to cover these charge-offs. Also, the Company recorded $1.2 million of additional provision in 2015 (none in 2014) to absorb probable
incurred losses in its purchased loan portfolio that had not previously been charged off. Additionally, the Company transferred certain
of these purchased loans to foreclosed assets. As a result of these actions, the Company had $8.1 million of impaired purchased loans
at December 31, 2015 and $14.0 million of impaired purchased loans at December 31, 2014.
The following table is a summary of the Company’s ALLL for the year indicated.
Year ended December 31, 2015:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Direct financing leases
Other
Purchased loans
Total
Beginning
Balance
Charge-offs Recoveries
Provision
(Dollars in thousands)
Ending
Balance
$
$
5,482 $
17,190
15,960
2,558
2,147
4,873
818
2,989
901
—
52,918 $
(794 ) $
(857 )
(2,760 )
(27 )
(228 )
(2,762 )
(148 )
(1,041 )
(1,474 )
(2,982 )
(13,073 ) $
86 $
15
83
—
—
299
54
27
563
467
1,594 $
3,898 $
448
4,893
857
1,112
164
(17 )
1,860
2,485
3,715
$
19,415
8,672
16,796
18,176
3,388
3,031
2,574
707
3,835
2,475
1,200
60,854
The following table is a summary of the Company’s ALLL for the year indicated.
Year ended December 31, 2014:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Direct financing leases
Other
Purchased loans
Total
Beginning
Balance
Charge-offs Recoveries
Provision
(Dollars in thousands)
Ending
Balance
$
$
4,701 $
13,633
12,306
3,000
2,504
2,855
917
2,266
763
—
42,945 $
(577 ) $
(1,357 )
(638 )
(214 )
—
(720 )
(222 )
(602 )
(793 )
(3,288 )
(8,411 ) $
135 $
33
11
14
—
808
80
49
266
73
1,469 $
1,223 $
4,881
4,281
(242 )
(357 )
1,930
43
1,276
665
3,215
16,915 $
5,482
17,190
15,960
2,558
2,147
4,873
818
2,989
901
—
52,918
108
The following table is a summary of the Company’s ALLL for the year indicated.
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
Purchased loans
Total
Beginning
Balance
Charge-offs Recoveries
Provision
(Dollars in thousands)
Ending
Balance
$
$
4,820 $
10,107
12,000
2,878
2,030
3,655
1,015
2,050
183
—
38,738 $
(837 ) $
(1,111 )
(137 )
(261 )
(4 )
(922 )
(214 )
(482 )
(359 )
(4,675 )
(9,002 ) $
106 $
122
174
14
4
433
104
33
144
—
1,134 $
612 $
4,515
269
369
474
(311 )
12
665
795
4,675
12,075 $
4,701
13,633
12,306
3,000
2,504
2,855
917
2,266
763
—
42,945
The following table is a summary of the Company’s ALLL and recorded investment in non-purchased loans and leases, as of the
dates indicated.
Allowance for
Loan and Lease Losses
Non-Purchased Loans and Leases
ALLL for
Individually
Evaluated
Impaired
Loans and
Leases
ALLL for
All Other
Loans and
Leases
Individually
Evaluated
Impaired
Loans and
Leases
(Dollars in thousands)
Total
ALLL(1)
All Other
Loans and
Leases
Total
Loans and
Leases
December 31, 2015:
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, 2014:
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
$
$
$
$
297 $
8,375 $
8,672 $
31 16,765 16,796
48 18,128 18,176
3,388
3,031
2,574
707
3,835
2,475
2,031 $ 348,223 $ 350,254
939 2,009,927 2,010,866
5,556 2,820,019 2,825,575
74,440
73,127
1,313
83 440,745 440,828
714 230,567 231,281
23
27,745
27,722
— 147,735 147,735
7 419,903 419,910
1,340 $ 58,314 $ 59,654 $ 10,666 $ 6,517,968 $ 6,528,634
2,913
3,031
2,087
705
3,835
2,475
475
—
487
2
—
—
356 $
5,126 $
2,734 $ 280,519 $ 283,253
5,482 $
2,507 1,501,034 1,503,541
18 17,172 17,190
68 15,892 15,960 14,304 1,397,534 1,411,838
6
47,235
46,870
— 211,156 211,156
—
623 287,084 287,707
644
34
3
25,669
25,635
— 115,475 115,475
—
93,996
93,988
8
—
1,095 $ 51,823 $ 52,918 $ 20,575 $ 3,959,295 $ 3,979,870
2,558
2,147
4,873
818
2,989
901
2,552
2,147
4,229
815
2,989
901
365
(1) Excludes $1.2 million of ALLL allocated to the Company’s purchased loans at December 31, 2015.
109
The following table is a summary of impaired loans and leases, excluding purchased loans, as of and for the years indicated.
As of and year ended December 31, 2015:
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
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
Multifamily
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, 2014:
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
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
Multifamily
Commercial and industrial
Consumer
Other
Principal
Balance
Net
Charge-offs
to Date
Principal
Balance,
Net of
Charge-offs
(Dollars in thousands)
Specific
Allowance
Weighted
Average
Carrying
Value
$
2,914 $
962
121
1,153
825
26
—
(1,804 ) $
(907 )
—
—
(322 )
(15 )
—
1,110 $
55
121
1,153
503
11
—
297 $
31
48
475
487
2
—
1,279
129
896
479
404
16
—
6,001
(3,048 )
2,953
1,340
3,203
1,306
1,083
7,873
362
216
261
18
7
(386 )
(198 )
(2,438 )
(202 )
(133 )
(50 )
(5 )
—
920
885
5,435
160
83
211
13
7
—
—
—
—
—
—
—
—
955
1,137
8,255
261
155
141
14
7
11,126
17,127 $
(3,412 )
(6,460 ) $
7,714
10,667 $
—
1,340 $
10,925
14,128
$
$
3,163 $
762
4,656
105
1,233
41
—
(1,674 ) $
(220 )
(545 )
(12 )
(691 )
(23 )
—
1,489 $
542
4,111
93
542
18
—
356 $
18
68
6
644
3
—
1,457
211
1,040
217
554
20
—
9,960
(3,165 )
6,795
1,095
3,499
1,373
2,676
10,378
474
133
264
81
8
(128 )
(711 )
(185 )
(202 )
(133 )
(183 )
(65 )
—
1,245
1,965
10,193
272
—
81
16
8
—
—
—
—
—
—
—
—
1,581
1,988
7,600
383
123
75
18
8
Total impaired loans and leases without a related
ALLL
Total impaired loans and leases
15,387
25,347 $
(1,607 )
(4,772 ) $
13,780
20,575 $
—
1,095 $
11,776
15,275
$
110
Management has determined that certain of the Company’s impaired loans and leases do not require any specific allowance at
December 31, 2015 and 2014 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.
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, 2015, 2014 and 2013 was not material.
Credit Quality Indicators
Non-Purchased Loans and Leases
The following table is a summary of credit quality indicators for the Company’s non-purchased loans and leases as of the dates
indicated.
December 31, 2015:
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, 2014:
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
Satisfactory Moderate
Watch
(Dollars in thousands)
Substandard
Total
$ 342,083 $
1,692,632
2,553,368
40,538
400,848
179,797
27,219
146,934
415,686
2,946 $
73,788
8,916
8,909
4,079
1,854
276
190
182
$ 5,799,105 $ 602,563 $ 101,140 $
— $
235,999
256,655
22,799
35,080
47,802
—
201
4,027
5,225 $ 350,254
8,447 2,010,866
6,636 2,825,575
74,440
2,194
440,828
821
231,281
1,828
27,745
250
147,735
410
419,910
15
25,826 $ 6,528,634
$ 271,576 $
1,300,582
1,190,005
22,446
171,806
208,054
25,267
114,586
89,364
— $
142,688
192,046
12,375
37,886
59,967
—
715
4,312
$ 3,393,686 $ 449,989 $
4,082 $
53,863
11,135
10,226
713
18,310
141
117
286
98,873 $
7,595 $ 283,253
6,408 1,503,541
18,652 1,411,838
47,235
2,188
211,156
751
287,707
1,376
25,669
261
115,475
57
93,996
34
37,322 $ 3,979,870
(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.
111
The following table is an aging analysis of past due non-purchased loans and leases as of the dates indicated.
December 31, 2015:
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, 2014:
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
30-89 Days
Past Due(1)
90 Days
or More(2)
Total
Past Due
(Dollars in thousands)
Current(3)
Total
$
$
$
$
2,793 $
1,881
1,043
1,780
—
823
248
517
8
9,093 $
1,507 $
777
5,645
243
83
751
33
321
7
9,367 $
4,300 $ 345,954 $ 350,254
2,658 2,008,208 2,010,866
6,688 2,818,887 2,825,575
74,440
72,417
2,023
440,828
440,745
83
231,281
229,707
1,574
27,745
27,464
281
147,735
146,897
838
419,910
419,895
15
18,460 $ 6,510,174 $ 6,528,634
6,352 $
2,708
3,520
1,680
—
586
161
39
58
15,104 $
1,536 $
1,445
12,881
304
—
94
55
54
12
16,381 $
7,888 $ 275,365 $ 283,253
4,153 1,499,388 1,503,541
16,401 1,395,437 1,411,838
47,235
1,984
211,156
—
287,707
680
25,669
216
115,475
93
93,996
70
31,485 $ 3,948,385 $ 3,979,870
45,251
211,156
287,027
25,453
115,382
93,926
Includes $1.9 million and $0.9 million of loans and leases on nonaccrual status at December 31, 2015 and 2014, respectively.
(1)
(2) All loans and leases greater than 90 days past due were on nonaccrual status at December 31, 2015 and 2014.
(3)
Includes $2.3 million and $0.4 million of loans and leases on nonaccrual status at December 31, 2015 and 2014, respectively.
112
Purchased Loans
The following table is a summary of credit quality indicators for the Company’s purchased loans as of the dates indicated.
Purchased Loans Without
Evidence of Credit Deterioration at Date of Acquisition
Purchased Loans With
Evidence of Credit
Deterioration at
Date of Acquisition
FV 33
FV 44
FV 55
FV 36
FV 77
(Dollars in thousands)
FV 66
FV 88
Total
Purchased
Loans
December 31, 2015:
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, 2014:
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
4,825
$ 59,497 $ 117,498 $ 38,888 $ 85,684 $
5,039
209,542 693,707 122,652
7,137
13,121 12,511
4,771
797 —
1,456
7,963
20,347 86,588 27,818
13
896
307,332 918,267 197,951 97,187
5,649
6,106
8,912 29,001
205
3,316
726
3,944
20
2
243 —
9,244
185
212
22 10,224
351 $ 82,862 $ 2,172 $ 386,952
363 99,681 4,563 1,135,547
47,823
37
19,918
4,877 —
3,835 — 139,497
749 201,479 6,772 1,729,737
60,522
511
7,487
263 —
8,291
576 —
771 $ 209,503 $ 7,283 $ 1,806,037
7,185
$ 320,914 $ 950,789 $ 207,592 $ 109,185 $
4,312 13,708 — 28,497 4,598
92
2,409
312
1,971
1,525 —
67
$ 73,196 $ 81,840 $ 30,180 $ 71,687 $
166,754 180,522 32,157
4,906
21,803 26,858
10,444 25,187
22,731 11,646
884
294,928 326,053 71,029 92,710
4,900 10,659
20,340 23,048
420 12,538
272
597
5,830
1,605
4,845
$ 321,718 $ 355,203 $ 76,946 $ 116,852 $
8,331
4,823
151 $ 96,752 $ 1,899 $ 355,705
505 114,217 5,828 504,889
99,776
47,988
42,434
723 252,620 12,729 1,050,792
68,825
559
9,297
15,268
4
426
13,062
845 —
748 $ 263,188 $ 13,292 $ 1,147,947
22
3
945 —
The following grades are used for purchased 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 acquired portfolio.
FV 77 – Loans in this category have deteriorated since the date of purchase and are considered impaired.
The following grades are used for purchased 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.
113
The following table is an aging analysis of past due purchased loans as of the dates indicated.
December 31, 2015:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agriculture
Multifamily residential
Commercial and industrial
Consumer
Other
Total
30-89 Days
Past Due
90 Days
or More
Total
Past Due
(Dollars in thousands)
Current
Total
Purchased
Loans
$
$
9,042 $
3,435
919
106
299
714
101
10
14,626 $
6,293 $
6,837
1,255
356
—
924
41
11
15,717 $
15,335 $ 371,617 $ 386,952
10,272 1,125,275 1,135,547
47,823
2,174
19,918
462
139,497
299
60,522
1,638
7,487
142
8,291
21
30,343 $ 1,775,694 $ 1,806,037
45,649
19,456
139,198
58,884
7,345
8,270
Purchased loans without evidence of credit deterioration
at date of acquisition
Purchased loans with evidence of credit deterioration
at date of acquisition
Total
$
7,972 $
2,743 $
10,715 $ 1,578,536 $ 1,589,251
6,654
14,626 $
12,974
15,717 $
19,628
216,786
197,158
30,343 $ 1,775,694 $ 1,806,037
$
December 31, 2014:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agriculture
Multifamily residential
Commercial and industrial
Consumer
Other
Total
$
$
8,088 $
8,907
1,197
237
515
863
199
—
20,006 $
9,043 $
12,439
5,464
875
67
751
103
31
28,773 $
17,131 $ 338,574 $ 355,705
504,889
483,543
21,346
99,776
93,115
6,661
47,988
46,876
1,112
42,434
41,852
582
68,825
67,211
1,614
15,268
14,966
302
13,062
13,031
31
48,779 $ 1,099,168 $ 1,147,947
Purchased loans without evidence of credit deterioration
at date of acquisition
Purchased loans with evidence of credit deterioration
at date of acquisition
Total
$
8,899 $
2,358 $
11,257 $ 860,210 $ 871,467
11,107
20,006 $
26,415
28,773 $
276,480
238,958
37,522
48,779 $ 1,099,168 $ 1,147,947
$
At December 31, 2015 and 2014, a portion of the Company’s purchased loans with evidence of credit deterioration at the date of
acquisition were past due, including many that were 90 days or more past due. Such delinquencies were included in the Company’s
performance expectations in determining the Day 1 Fair Values. Additionally, in accordance with GAAP, the Company continues to
accrete into earnings income on such loans.
114
7. Foreclosed Assets
The following table is a summary, during the years indicated, of activity within foreclosed assets.
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
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
37,775 $
19,347
(35,089 )
(637 )
1,474
22,870 $
49,811 $
55,984
(68,211 )
(6,533 )
6,724
37,775 $
66,875
44,220
(58,297 )
(5,145 )
2,158
49,811
The following table is a summary, as of the dates indicated, of the amount and type of foreclosed assets.
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Total real estate
Commercial and industrial
Consumer
Total foreclosed assets
December 31,
2015
2014
(Dollars in thousands)
$
$
3,030 $
7,174
11,858
492
—
22,554
316
—
22,870 $
7,909
17,305
10,998
728
772
37,712
56
7
37,775
8. Premises and Equipment
The following table is a summary of premises and equipment as of the dates indicated.
Land
Construction in process
Buildings and improvements
Leasehold improvements
Equipment
Gross premises and equipment
Accumulated depreciation
Premises and equipment, net
December 31,
2015
2014
(Dollars in thousands)
87,652 $
1,198
195,599
6,582
73,121
364,152
(67,914 )
296,238 $
81,431
1,849
174,669
5,765
67,392
331,106
(57,515 )
273,591
$
$
The Company’s interest on construction projects during 2015, 2014 and 2013 was not material. Included in occupancy expense
is rent of $4.3 million, $2.3 million and $1.4 million incurred under noncancelable operating leases in 2015, 2014 and 2013,
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, 2015 are as follows: $3.7 million
in 2016, $3.3 million in 2017, $3.0 million in 2018, $2.8 million in 2019, $2.7 million in 2020 and $8.8 million thereafter. Rental
income recognized for leases of buildings and premises under operating leases was $1.7 million during 2015, $1.3 million during 2014
and $1.1 million during 2013.
115
9. Deposits
The following table is a summary of the scheduled maturities of time deposits as of the dates indicated.
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
December 31,
2015
2014
(Dollars in thousands)
$
$
1,455,571 $
709,527
158,209
66,675
42,708
5,792
$
2,438,482
1,148,350
232,348
39,561
17,037
16,532
4,111
1,457,939
The aggregate amount of time deposits with a minimum denomination of $250,000 was $602.1 million and $294.5 million at
December 31, 2015 and 2014, respectively.
10. Repurchase Agreements With Customers
At December 31, 2015 and 2014, securities sold under agreements to repurchase (“repurchase agreements”) totaled $65.8
million and $65.6 million, respectively. Securities utilized as collateral for repurchase agreements are primarily U.S. Government
agency mortgage-backed securities and are maintained by the Company’s safekeeping agents. These securities are reviewed by the
Company on a daily basis, and the Company may be required to provide additional collateral due to changes in the fair market value
of these securities. The terms of the Company’s repurchase agreements are continuous but may be cancelled at any time by the
Company or the customer.
11. Borrowings
Short-term borrowings with original maturities less than one year include FHLB advances, Federal Reserve Bank (“FRB”)
borrowings and federal funds purchased. The following table is a summary of information relating to these short-term borrowings as
of the dates indicated.
Average annual balance
December 31 balance
Maximum month-end balance during year
Interest rate:
Weighted-average – year
Weighted-average – December 31
December 31,
2015
2014
$
(Dollars in thousands)
19,847 $
162,750
162,750
0.28 %
0.36 %
7,145
—
71,750
0.20 %
—
At December 31, 2015 and 2014, the Company had fixed rate FHLB advances with original maturities exceeding one year of
$41.8 million and $190.9 million, respectively. These fixed rate advances bear interest at rates ranging from 0.71% to 4.54% at
December 31, 2015, 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, 2015, the Bank had $2.6 billion of unused FHLB borrowing
availability.
116
The following table is a summary of aggregate annual maturities and weighted-average interest rates of FHLB advances with an
original maturity of over one year as of December 31, 2015.
Maturity
2016
2017
2018
2019
2020
Thereafter
Total
Amount
Weighted-
Average
Interest Rate
(Dollars in thousands)
$
$
271
20,275
20,248
55
388
553
41,790
1.14 %
3.13
2.52
2.91
1.86
4.54
2.83
Included in the above table are $40.0 million of FHLB advances that contain features making them callable on a quarterly basis
at the option of FHLB. The following table is a summary of the weighted-average interest rates and maturity dates of such callable
advances as of December 31, 2015.
Callable quarterly
Callable quarterly
Total
12. Subordinated Debentures
$
$
Amount
Weighted-
Average
Interest Rate
(Dollars in thousands)
3.16 %
2.53
2.85
20,000
20,000
40,000
Maturity
2017
2018
At December 31, 2015 the Company had the following issues of trust preferred securities outstanding and subordinated
debentures owed to the Trusts.
Subordinated
Debentures
Owed to
Trust
Unamortized
Discount at
December
31, 2015
Carrying
Value of
Subordinated
Debentures
at December
31, 2015
Trust
Preferred
Securities
of the Trust
(Dollars in thousands)
Interest Rate
at
December
31, 2015
Final Maturity
Date
$
$
14,433 $
14,434
15,464
20,619
15,464
15,464
15,464
10,310
121,652 $
14,433 $
— $
14,434
—
15,464
—
20,619
—
14,831
(633 )
14,731
(733 )
14,130
(1,334 )
9,043
(1,267 )
(3,967 ) $ 117,685 $
14,000
14,000
15,000
20,000
15,000
15,000
15,000
10,000
118,000
3.51 % September 29, 2033
3.27 September 25, 2033
2.60 September 28, 2034
2.11 December 15, 2036
3.48 September 17, 2033
3.32 March 17, 2034
2.97 September 20, 2034
2.16 December 15, 2036
Ozark II
Ozark III
Ozark IV
Ozark V
Intervest II
Intervest III
Intervest IV
Intervest V
Total
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
117
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 2006 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.
On February 10, 2015, in conjunction with the Intervest acquisition, the Company acquired Intervest II, Intervest III, Intervest
IV and Intervest V with outstanding subordinated debentures totaling $56.7 million and related trust preferred securities totaling $55.0
million. On the date of such acquisition, the Company recorded the assumed subordinated debentures owed to the Intervest Trusts at
estimated fair value of $52.2 million, based on an independent third party valuation, to reflect a current market interest rate for
comparable obligations. The fair value adjustment of $4.5 million is being amortized, using a level-yield methodology over the
estimated holding period of approximately eight years, as an increase in interest expense of the subordinated debentures owed to the
Intervest Trusts. In addition to the subordinated debentures of the Intervest Trusts, the Company also acquired $1.7 million of trust
common equity issued by the Intervest Trusts.
The trust preferred securities issued by Intervest Trust II and the related subordinated debentures bear interest, adjustable
quarterly, at 90-day LIBOR plus 2.95% and contain a final maturity of September 17, 2033. The trust preferred securities issued by
Intervest Trust III and the related subordinated debentures bear interest, adjustable quarterly, at 90-day LIBOR plus 2.79% and contain
a final maturity of March 17, 2034. The trust preferred securities issued by Intervest Trust IV and the related subordinated debentures
bear interest, adjustable quarterly, at 90-day LIBOR plus 2.40% and contain a final maturity of September 20, 2034. The trust
preferred securities issued by Intervest Trust V and the related subordinated debentures bear interest, adjustable quarterly, at 90-day
LIBOR plus 1.65% and contain a final maturity of December 15, 2036.
At December 31, 2015, the Company had an aggregate of $121.7 million of subordinated debentures outstanding (with an
aggregate carrying value of $117.7 million) and had an asset of $3.7 million representing its investment in the common equity issued
by the Trusts. The sole assets of the Trusts are the adjustable rate debentures and the liabilities of the Trusts are the trust preferred
securities. At December 31, 2015 and 2014, the Trusts had aggregate common equity of $3.7 million and $1.9 million, respectively,
and did not have any restricted net assets. The Company has, through various contractual arrangements or by operation of law, fully
and unconditionally guaranteed all obligations of the Trusts with respect to the trust preferred 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 trust preferred securities generally mature at or near the 30th anniversary date of each issuance. However, the
trust preferred securities and related subordinated debentures may be prepaid at par, subject to regulatory approval.
13. Issuance of Common Stock
On December 8, 2015, the Company completed the sale of 2,098,436 shares of its common stock to certain investors that
resulted in net proceeds of approximately $110 million. The proceeds of the offering were contributed to the Bank and will be used
for general corporate and other purposes.
118
14. Income Taxes
The following table is a summary of the components of the provision (benefit) for income taxes as of the dates indicated.
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Provision for income taxes
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
79,191 $
7,873
87,064
6,432
959
7,391
94,455 $
47,661 $
6,456
54,117
(598 )
340
(258 )
53,859 $
43,750
6,547
50,297
(8,689 )
(1,459 )
(10,148 )
40,149
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.
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
2015
Year Ended December 31,
2014
2013
35.0 %
35.0 %
35.0 %
2.2
(2.2 )
(1.3 )
0.5
34.2 %
2.6
(4.0 )
(1.1 )
(1.3 )
31.2 %
2.6
(4.4 )
(1.2 )
(1.4 )
30.6 %
Income tax benefits from the exercise of stock options and vesting of common stock under the Company’s restricted stock and
incentive plan in the amount of $7.0 million, $4.7 million and $3.2 million in 2015, 2014 and 2013, respectively, were recorded as an
increase to additional paid-in capital.
At December 31, 2015, current income taxes payable of $8.7 million was included in other liabilities, and at December 31, 2014
current income taxes receivable of $5.4 million was included in other assets.
119
The following table is a summary, as of the dates indicated, 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 for purchased loans
Differences in amounts reflected in the financial statements
and income tax basis for deposits assumed in acquisitions
Stock-based compensation
Deferred compensation
Foreclosed assets
Deferred loan fees and costs, net
Acquired net operating losses
Other, net
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Accelerated depreciation on premises and equipment
Investment securities AFS
Acquired intangible assets
Total gross deferred tax liabilities
Net deferred tax assets
December 31,
2015
2014
(Dollars in thousands)
$
22,802 $
20,324
24,600
20,444
5,771
4,199
2,035
3,101
10,579
27,862
4,273
105,222
(474 )
104,748
21,924
5,650
1,448
29,022
75,726 $
1,337
3,268
1,991
3,503
4,785
13,332
1,479
70,463
(474 )
69,989
18,653
7,692
556
26,901
43,088
$
Federal net operating losses were acquired in certain of the Company’s acquisitions. Such federal net operating losses acquired
totaled $75.1 million, of which $72.2 million remained to be utilized as of December 31, 2015 and will expire at various dates
beginning in 2028 to 2033.
State net operating losses were acquired in certain of the Company’s acquisitions. Such state net operating losses acquired
totaled $84.2 million, of which $76.4 million remained to be utilized as of December 31, 2015 and will expire at various dates
beginning in 2022 to 2034.
At December 31, 2015 and 2014, the Company had a deferred tax valuation allowance of $0.5 million to reflect its assessment
that the realization of the benefits from the recovery of certain acquired net operating losses are expected to be subject to section 382
limitations of the IRC.
To the extent that additional information becomes available regarding the settlement or recovery of acquired net operating loss
carryforwards or assets with built-in losses acquired in any of the Company’s acquisitions, management may be required to make
adjustments to its deferred tax asset valuation allowance, which could affect goodwill and/or deferred income tax expense (benefit).
15. 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
120
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.
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 2015,
2014 and 2013 of $2.7 million, $2.3 million and $1.8 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. Prior to 2013, 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). At both December 31, 2015 and 2014, the Company had Plan assets, along with an equal amount of
liabilities, totaling $4.2 million, 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 2015, 2014 and 2013, respectively, the Company
accrued $223,000, $200,000 and $180,000 for the future benefits payable under the SERP. The SERP is an unfunded plan and is
considered a general contractual obligation of the Company.
16. 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. All employee options outstanding at December 31, 2015 were issued with a vesting period
of three years and expire seven years after issuance. At December 31, 2015 there were 1,319,549 shares available for future grants
under this plan.
During 2015, the Company adopted the Bank of the Ozarks, Inc. Non-Employee Director Stock Plan (the “Director Plan”) that
provides for awards of common stock to eligible non-employee directors. The Director Plan grants to each director who is not
otherwise an employee of the Company, or any subsidiary, shares of common stock on the day of his or her election as director of the
Company at each annual shareholders meeting, or any special meeting called for the purpose of electing a director or directors of the
Company, and upon appointment for the first time as director of the Company. The number of shares of common stock to be awarded
will be the equivalent of $25,000 worth of shares of common stock based on the average of the highest reported asked price and
lowest reported bid price on the grant date. The common stock awarded under this plan is fully vested on the grant date. The aggregate
number of shares of common stock which may be issued as awards under this plan will not exceed 50,000 shares, subject to certain
adjustments. During 2015, the Company issued 7,657 shares of common stock and incurred $0.3 million in stock-based compensation
expense related to common stock awards issued under the Director Plan.
Prior to the adoption of the Director Plan, the Company had a nonqualified stock option plan for non-employee directors. No
options were granted under this plan during 2015. All options previously granted under this plan were exercisable immediately and
expire ten years after issuance.
121
The following table summarizes stock option activity for both the employee and non-employee director stock option plans for
the year ended December 31, 2015.
Weighted-
Average
Exercise
Price/Share
Weighted-
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Options
Outstanding – January 1, 2015
Granted
Exercised
Forfeited
Outstanding – December 31, 2015
Fully vested and exercisable at December 31, 2015
Expected to vest in future periods
Fully vested and expected to vest at December 31, 2015(2)
1,859,350 $
659,181
(365,375 )
(118,680 )
2,034,476
456,625 $
1,362,745
1,819,370 $
23.49
52.94
14.08
27.56
34.50
14.92
5.6 $
4.1 $
32,717 (1)
15,711 (1)
33.29
5.5 $
31,245 (1)
(1) Based on closing price of $49.46 per share on December 31, 2015.
(2) At December 31, 2015 the Company estimates that options to purchase 215,106 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 2015, 2014 and 2013 was $12.5 million, $10.0 million and $7.7
million, respectively.
Options to purchase 659,181 shares, 616,250 shares and 526,000 shares, respectively, were granted during 2015, 2014 and 2013
with a weighted-average grant date fair value of $14.00, $7.04 and $5.61, 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,
2015
2014
2013
1.69 %
1.19 %
31.0 %
5.0
1.62 %
1.49 %
24.1 %
5.0
1.30 %
1.85 %
30.2 %
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 SEC Staff Accounting Bulletin No. 110.
The total fair value of options to purchase shares of the Company’s common stock that vested during 2015, 2014 and 2013 was
$2.0 million, $1.5 million and $1.2 million, respectively. Stock-based compensation expense for stock options included in non-interest
expense was $2.6 million, $2.1 million and $1.7 million for 2015, 2014 and 2013, respectively. Total unrecognized compensation cost
related to non-vested stock option grants was $9.7 million at December 31, 2015 and is expected to be recognized over a weighted-
average period of 2.5 years.
The Company has a restricted stock and incentive plan that permits issuance of up to 1,600,000 shares of restricted stock or
restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock and
incentive 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 and incentive plan will be determined in the sole discretion of the Company’s board of directors or its
personnel and compensation committee. Shares of common stock issued under the restricted stock and incentive plan may be shares of
original issuance, shares held in treasury or shares that have been reacquired by the Company. At December 31, 2015 there were
576,325 shares available for future grants under this plan.
122
The following table summarizes non-vested restricted stock activity for the year ended December 31, 2015.
Outstanding – January 1, 2015
Granted
Forfeited
Earned and issued
Outstanding – December 31, 2015
Weighted-average grant date fair value
Shares
444,700
245,300
(41,325 )
(213,200 )
435,475
29.87
$
Restricted stock awards of 245,300 shares were granted during 2015 with a weighted-average grant date fair value of $34.39. No
restricted stock awards were granted during 2014. 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 $5.2 million, $3.5 million and $2.8 million for 2015, 2014 and 2013, respectively. Unrecognized
compensation expense for nonvested restricted stock awards was $6.8 million at December 31, 2015 and is expected to be recognized
over a weighted-average period of 1.8 years.
On January 13, 2016 the Company’s personnel and compensation committee approved the issuance of restricted stock awards
for 212,907 shares of restricted common stock that vest on January 13, 2019. Total compensation expense for the restricted stock
awards is expected to be approximately $9.1 million and is expected to be recognized ratably over the three-year vesting period.
17. 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 standby letters of credit and commitments to extend
credit.
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,
2015 and 2014 is $16.5 million and $4.5 million, respectively. The Company holds collateral to support letters of credit when deemed
necessary. The total of collateralized commitments at December 31, 2015 and 2014 was $15.9 million and $4.3 million, respectively.
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.
123
At December 31, 2015, the Company had outstanding commitments to extend credit, excluding mortgage interest rate lock
commitments, totaling $5.8 billion. The following table shows the contractual maturities of outstanding commitments to extend credit
at December 31, 2015.
Maturity
2016
2017
2018
2019
2020
Thereafter
Total
Contractual Maturities at
December 31, 2015
(Dollars in thousands)
$
$
346,090
1,460,041
2,849,647
798,867
273,243
76,369
5,804,257
18. 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
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
7,920 $
9,295
(14,542 )
(1,145 )
1,528 $
7,001 $
7,974
(7,055 )
—
7,920 $
2,526
15,680
(12,273 )
1,068
7,001
The Company had outstanding commitments to extend credit to related parties totaling $6.0 million and $5.3 million at
December 31, 2015 and 2014, respectively.
19. 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.
The FDIC and other federal banking regulators revised 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 of 2010 (the “Basel III Rules”). The Basel III Rules became effective for the Company and the
Bank on January 1, 2015 (subject to a phase-in period for certain provisions). The Basel III Rules require the maintenance of
minimum amounts and ratios (set forth in the following table) of common equity tier 1 capital, tier 1 capital and total capital (as
defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital to adjusted quarterly average assets (as defined).
Under the Basel III Rules, common equity tier 1 capital consists of common stock and paid-in capital (net of treasury stock) and
retained earnings. Common equity tier 1 capital is reduced by goodwill, certain intangible assets, net of associated deferred tax
liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and
certain other items as specified by the Basel III Rules.
124
Tier 1 capital includes common equity tier 1 capital and certain additional tier 1 items as provided under the Basel III Rules. The
tier 1 capital for the Company consists of common equity tier 1 capital and $118 million of trust preferred securities issued by the
Trusts. The Basel III Rules include certain provisions that would require trust preferred securities to be phased out of qualifying tier 1
capital. Currently, the Company’s trust preferred securities are grandfathered under the Basel III Rules and will continue to be
included as tier 1 capital. However, should the Company exceed $15 billion in total assets, the grandfather provisions applicable to its
trust preferred securities would no longer apply and such trust preferred securities would no longer be included as tier 1 capital, but
would continue to be included as total capital. The common equity tier 1 capital and the tier 1 capital are the same for the Bank.
Basel III 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. The Company and Bank made this opt-out election to avoid significant variations in the level of capital
depending upon the impact of interest rate fluctuations on the fair value of its investments securities portfolio.
Total capital includes tier 1 capital and tier 2 capital. Tier 2 capital includes, among other things, the allowable portion of the
ALLL and any trust preferred securities that are excluded from tier 1 capital.
The Basel III Rules also changed the risk-weights of assets in an effort 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.
The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective capital amounts
by risk-weighted assets. The leverage ratio is calculated by dividing tier 1 capital by adjusted quarterly average total assets.
The Basel III Rules limit 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, tier 1 capital and total capital to risk-weighted
assets in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer will be
phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year by that amount until fully implemented
at 2.5% on January 1, 2019. When fully phased in on January 1, 2019, the Basel III Rules will require the Company and Bank to
maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation
buffer, which effectively results in a minimum ratio of 7.0% upon full implementation, (ii) a minimum ratio of tier 1 capital to risk-
weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer, which effectively results in a minimum ratio of 8.50% upon
full implementation, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus a 2.5% capital conservation
buffer, which effectively results in a minimum ratio of 10.5% upon full implementation and (iv) a minimum leverage ratio of at least
4.0%.
Prior to January 1, 2015, federal and state regulatory agencies required 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 consisted of common equity, retained earnings, certain types of preferred stock, qualifying
minority interest and trust preferred securities, subject to limitations, and excluded goodwill and various intangible assets. Total
capital included 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.
125
The following table presents actual and required capital ratios as of December 31, 2015 for the Company and the Bank under the
Basel III Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31,
2015 based on the current phase-in provisions of the Basel III Rules and the minimum required capital levels as of January 1, 2019
when the Basel III Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt
corrective action regulations, as amended to reflect the changes under the Basel III Rules.
Actual
Capital
Amount
Ratio
Minimum Capital
Required – Basel III
Phase-In Schedule
Capital
Amount Ratio
Minimum Capital
Required – Basel III
Fully Phased-In
Capital
Amount
Ratio
(Dollars in thousands)
Required to be
Considered Well
Capitalized
Capital
Amount
Ratio
December 31, 2015:
Tier 1 leverage to average assets:
Company
Bank
Common equity tier 1 to risk-
weighted assets:
Company
Bank
$ 1,417,940 14.96 % $ 379,116 4.00 % $ 379,116
1,385,192 14.62 378,900 4.00 378,900
4.00 %
4.00 $ 473,625 5.00 %
N/A N/A
1,316,373 10.79 549,200 4.50 854,311
1,385,192 11.36 548,840 4.50 853,752
7.00
N/A N/A
7.00 792,769 6.50
Tier 1 capital to risk-weighted assets:
Company
Bank
1,417,940 11.62 732,267 6.00 1,037,378
1,385,192 11.36 731,787 6.00 1,036,698
8.50
N/A N/A
8.50 975,716 8.00
Total capital to risk-weighted assets:
Company
Bank
N/A N/A
1,478,794 12.12 976,356 8.00 1,281,467 10.50
1,446,046 11.86 975,716 8.00 1,280,627 10.50 1,219,645 10.00
The following table is a summary of the actual and required regulatory capital amounts and ratios as of December 31, 2014 for
the Company and the Bank under the regulatory capital rates then in effect.
December 31, 2014
Tier 1 leverage (to average assets):
Company
Bank
Total capital (to risk-weighted assets):
Company
Bank
Tier 1 capital (to risk-weighted assets):
Company
Bank
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
(Dollars in thousands)
Amount
Required
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 851,681
824,120
12.92 % $ 197,711
197,465
12.52
3.00 % $ 329,518
3.00 329,108
5.00 %
5.00
904,600
877,038
12.47
12.10
580,425
580,259
8.00 725,532
8.00 725,324
10.00
10.00
851,682
824,120
11.74
11.37
290,213
290,130
4.00 435,319
4.00 435,194
6.00
6.00
As of December 31, 2015 and 2014, the most recent notification from the regulators categorized the Company and the Bank as
well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification
that management believes have changed the Company’s or the Bank’s category.
The state bank commissioner’s approval is required before the Bank can declare and pay any dividend of 75% or more of the net
profits of the Bank after all taxes for the current year plus 75% of the retained net profits for the immediately preceding year. At
December 31, 2015 and 2014, respectively, $117.8 million and $18.8 million were available for payment of dividends by the Bank
without the approval of regulatory authorities.
126
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 $155 million and $93 million, respectively, at December 31, 2015
and 2014.
20. 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. At
December 31, 2015 and 2014, the Company had no liabilities that were accounted for at fair value.
The Company applies the following fair value hierarchy.
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations whose inputs are observable.
Level 3 – Instruments whose inputs are unobservable.
The following table sets forth the Company’s assets, as of the date indicated, that are accounted for at fair value.
December 31, 2015:
(1):
Investment securities AFS
Obligations of state and political subdivisions
U.S. Government agency securities
Corporate bonds
CRA qualified investment fund
Total investment securities AFS
Impaired non-purchased loans and leases
Impaired purchased loans
Foreclosed assets
Total assets at fair value
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
$
$
— $
—
—
1,028
1,028
—
—
—
1,028 $
408,774 $
146,950
3,562
—
559,286
—
—
—
559,286 $
18,504 $
—
—
—
18,504
9,327
8,054
22,870
58,755 $
427,278
146,950
3,562
1,028
578,818
9,327
8,054
22,870
619,069
(1) Does not include shares of FHLB and FNBB stock that do not have readily determinable fair values and are carried at aggregate cost of $23.5
million.
The following table sets forth the Company’s assets, as of the date indicated, that are accounted for at fair value.
December 31, 2014:
Investment securities AFS (1):
Obligations of state and political subdivisions
U.S. Government agency securities
Corporate bonds
Total investment securities AFS
Impaired non-purchased loans and leases
Impaired purchased loans
Foreclosed assets
Total assets at fair value
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
$
$
— $
—
—
—
—
—
—
— $
553,808 $
251,233
654
805,695
—
—
—
805,695 $
19,401 $
—
—
19,401
19,480
14,040
37,775
90,696 $
573,209
251,233
654
825,096
19,480
14,040
37,775
896,391
(1) Does not include shares of FHLB and FNBB stock that do not have readily determinable fair values and are carried at aggregate cost of $14.2
million.
127
The following table presents information related to Level 3 non-recurring fair value measurements at December 31, 2015.
Description
Impaired non-purchased
loans and leases
Impaired purchased
loans
Fair Value at
December 31,
2015
Technique
Unobservable Inputs
$
$
(Dollars in thousands)
9,327
Third party appraisal(1)
or discounted cash flows
1. Management discount based on
underlying collateral characteristics
and market conditions
2. Life of loan
8,054
Third party appraisal(1)
and/or discounted cash
flows
1. Management discount based on
underlying collateral characteristics
and market conditions
Foreclosed assets
$
22,870
2. Life of loan
Third party appraisal,(1)
broker price opinions
and/or discounted cash
flows
1.
2.
3.
Management discount based on asset
characteristics and market conditions
Discount rate
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 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 of the Company’s 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, 2015 and 2014. 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 $18.5 million and $19.4 million at December 31, 2015 and 2014, 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, 2015 and 2014, the third
party pricing matrices valued the Company’s total portfolio of private placement bonds at $18.5 million and $19.4 million,
respectively, which was equal to the par value of the private placement bonds at December 31, 2015 and 2014. Accordingly, at
December 31, 2015 and 2014 the Company reported the private placement bonds at $18.5 million and $19.4 million, respectively.
Impaired non-purchased 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 non-purchased loans and leases (all of which are included in
nonaccrual loans and leases) by $7.8 million and $5.9 million, respectively, to the estimated fair value of $9.3 million and $19.5
million, respectively, for such loans and leases at December 31, 2015 and 2014. These adjustments to reduce the carrying value of
impaired non-purchased loans and leases to estimated fair value at December 31, 2015 and 2014 consisted of $6.5 million and $4.8
million, respectively, of partial or full charge-offs and $1.3 million and $1.1 million, respectively, of specific loan and lease loss
allocations.
Impaired purchased loans – Impaired purchased loans are measured at fair value on a non-recurring basis. At December 31,
2015 and 2014, the Company had identified purchased loans where management had determined it was probable that the Company
would be unable to collect all amounts according to the contractual terms thereof (for purchased loans without evidence of credit
128
deterioration at date of acquisition) or 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 (for purchased loans with evidence of credit deterioration at date of acquisition). As a result the
Company recorded net charge-offs, totaling $2.5 million during 2015 and $3.2 million during 2014 for such loans. The Company
recorded $2.5 million during 2015 and $3.2 million during 2014 of provision for loan and lease losses to cover these charge-offs.
Also, the Company recorded $1.2 million of additional provision in 2015 (none in 2014) for loan and lease losses to absorb probable
incurred losses in its purchased loan portfolio that had not previously been charged off. Additionally, the Company transferred certain
of these purchased loans to foreclosed assets. As a result of these actions, the Company had $8.1 million of impaired purchased loans
at December 31, 2015 and $14.0 million of impaired purchased loans at December 31, 2014.
Foreclosed assets – Repossessed personal properties and real estate acquired through or in lieu of foreclosure, excluding
purchased foreclosed assets, 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. Purchased foreclosed assets are initially recorded at Day 1 Fair
Values. In estimating such Day 1 Fair Values, management considered a number of factors including, among others, appraised value,
estimated selling price, estimated holding periods and net present value (calculated using discount rates ranging from 8.0% to
9.5% per annum) of cash flows expected to be received.
Valuations of all foreclosed assets are periodically reviewed by management with the carrying value of such assets adjusted
through non-interest expense to the then estimated fair value, generally based on third party appraisals, broker price opinions or other
valuations of the property, net of estimated selling costs, if lower, until disposition.
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.
Balances – December 31, 2013
Total realized gains/(losses) included in earnings
Total unrealized gains/(losses) included in other comprehensive income
Acquired
Paydowns and maturities
Sales
Transfers in and/or out of Level 3
Balances – December 31, 2014
Total realized gains/(losses) included in earnings
Total unrealized gains/(losses) included in other comprehensive income
Acquired
Paydowns and maturities
Sales
Transfers in and/or out of Level 3
Balances – December 31, 2015
Investment
Securities
AFS
(Dollars in thousands)
$
$
$
18,682
—
454
1,907
(786 )
(856 )
—
19,401
—
(2 )
—
(895 )
—
—
18,504
21. 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 of the Company’s investment securities are
reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer. The
129
Company’s investments in the common stock of the FHLB and FNBB of $23.5 million and $14.2 million at December 31, 2015 and
2014 do not have readily determinable fair values and are carried at cost.
Loans and leases – The fair value of loans and leases, including purchased 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.
Deposit liabilities – The fair value of demand deposits, savings accounts, money market deposits and other transaction accounts
is the amount payable on demand at the reporting date. The fair value of fixed maturity time deposits is estimated using the rate
currently available for deposits of similar remaining maturities.
Repurchase agreements – For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Other borrowed funds – For these short-term instruments, the carrying amount is a reasonable estimate of fair value. The fair
value of long-term instruments is estimated based on the current rates available to the Company for borrowings with similar terms and
remaining maturities.
Subordinated debentures – The fair values of these instruments are based primarily upon discounted cash flows using rates for
securities with similar terms and remaining maturities.
Off-balance sheet instruments – The fair values of commercial loan commitments and letters of credit are based on fees
currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of
commercial loan commitments and letters of credit were not material at December 31, 2015 and 2014.
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 carrying amounts and estimated fair values as of the dates indicated and the fair value hierarchy
of the Company’s financial instruments.
December 31,
2015
2014
Fair
Value
Hierarchy
Carrying
Amount
Estimated
Fair
Value
(Dollars in thousands)
Carrying
Amount
Estimated
Fair
Value
Financial assets:
Cash and cash equivalents
Investment securities AFS
Loans and leases, net of ALLL
Financial liabilities:
Demand, savings and interest bearing transaction
deposits
Time deposits
Repurchase agreements with customers
Other borrowings
Subordinated debentures
Level 1
Levels 1,
2 and 3
Level 3
Level 1
Level 2
Level 1
Level 2
Level 2
130
$
90,988 $
90,988 $ 150,203 $ 150,203
602,348
839,321
8,273,817 8,165,123 5,074,899 5,042,831
839,321
602,348
$ 5,532,986 $ 5,532,986 $ 4,038,443 $ 4,038,443
2,438,482 2,456,323 1,457,939 1,463,590
65,578
203,493
39,103
65,578
190,855
64,950
65,800
205,918
77,534
65,800
204,540
117,685
22. Supplemental Cash Flow Information
The following is a summary of supplemental cash flow information for the periods indicated:
Cash paid during the period for:
Interest
Income Taxes
Supplemental schedule of non-cash investing and financing activities:
Loans and premises and equipment transferred to
foreclosed assets
Loans advanced for sales of 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
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
28,567 $
57,948
21,471 $
47,293
18,929
49,453
19,347
—
55,984
1,423
(10,395 )
303,865
—
29,295
166,315
—
44,220
2,942
(23,784 )
60,079
917
23. Non-Interest Income and Other Operating Expenses
The following is a summary of gains on sales of other assets for the periods indicated.
Gain on sales of purchased loans
Gain on sales of foreclosed assets
Gain on sales of premises and equipment and
other assets
Gain on sales of other assets
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
6,285 $
8,365
103
14,753 $
27 $
5,924
72
6,023 $
—
8,861
525
9,386
The following is a summary of other non-interest income for the periods indicated.
Gain on termination of FDIC loss share agreements
Other, net
Total other non-interest income
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
— $
7,153
7,153 $
7,996 $
9,289
17,285 $
—
5,110
5,110
131
The following is a summary of other operating expenses for the periods indicated.
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
FHLB prepayment penalties
Other
Total other operating expenses
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
3,950 $
5,948
2,805
12,594
2,635
3,047
1,308
3,795
2,665
5,068
3,803
6,660
8,853
8,650
71,781 $
4,090 $
4,765
3,029
10,765
4,987
3,023
898
2,380
1,485
3,276
1,299
4,996
8,062
11,974
65,029 $
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
24. Earnings Per Common Share (“EPS”)
The following table sets forth the computation of basic and diluted EPS for the periods indicated.
2015
Year Ended December 31,
2014
(In thousands, except per share amounts)
2013
Numerator:
Distributed earnings allocated to common stockholders
Undistributed earnings allocated to common stockholders
Net earnings allocated to common stockholders
$
$
47,079 $
135,174
182,253 $
36,130 $
82,476
118,606 $
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
Basic EPS
Diluted EPS
86,785
563
77,538
522
87,348
2.10 $
2.09 $
78,060
1.53 $
1.52 $
$
$
25,744
65,493
91,237
71,910
492
72,402
1.27
1.26
Options to purchase 656,181 shares, 559,050 shares and 476,100 shares, respectively, of the Company’s common stock at a
weighted-average exercise price of $52.98 per share, $36.05 per share and $24.80 per share, respectively, were outstanding during
2015, 2014 and 2013, 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.
132
25. Changes in and Reclassification From Accumulated Other Comprehensive Income (“AOCI”)
The following table presents changes in AOCI for the periods indicated.
Beginning balance of AOCI – unrealized gains and losses
on investment securities AFS
Other comprehensive income (loss):
Unrealized gains and losses on investment securities
AFS
Tax effect of unrealized gains and losses on investment
securities AFS
Amounts reclassified from AOCI
Tax effect of amounts reclassified from AOCI
Total other comprehensive income (loss)
Ending balance of AOCI – unrealized gains and losses on
investment securities AFS
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
14,132 $
(3,672 ) $
10,783
(4,491 )
29,164
(23,623 )
1,711
(5,481 )
2,088
(6,173 )
(11,272 )
(144 )
56
17,804
9,266
(161 )
63
(14,455 )
$
7,959 $
14,132 $
(3,672 )
Amounts reclassified from AOCI are included in net gains on investment securities and the tax effect of amounts reclassified
from AOCI are included in provision for income tax in the consolidated statements of income. The amounts reclassified from AOCI
relate entirely to unrealized gains/losses on investment securities AFS that were sold during the periods indicated.
26. 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 as of and for the periods indicated.
Condensed Balance Sheets
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 and other liabilities
Subordinated debentures
Total liabilities
Stockholders’ equity:
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’ equity
133
December 31,
2015
2014
(Dollars in thousands)
$
$
$
$
18,597 $
1,555,648
3,652
1,092
4,299
1,583,288 $
430 $
542
117,685
118,657
906
755,995
706,628
7,959
(6,857 )
1,464,631
1,583,288 $
23,068
942,736
1,950
1,092
5,054
973,900
277
283
64,950
65,510
799
324,354
571,454
14,132
(2,349 )
908,390
973,900
Condensed Statements of Income
Income:
Dividends from Bank
Dividends from Trusts
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 available to common stockholders
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
$
35,100 $
95
8
35,203
3,665
13,532
17,197
18,006
7,137
157,110
182,253 $
100,000 $
51
178
100,229
1,693
9,314
11,007
89,222
4,304
25,080
118,606 $
34,000
52
24
34,076
1,720
7,716
9,436
24,640
3,956
62,641
91,237
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income available to common stockholders
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
Excess tax benefits on exercise of stock options and
vesting of restricted common stock
Changes in other assets and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of other assets
Cash contributed to Bank
Cash received (paid) in merger and acquisition transactions,
net of cash acquired
Net cash used by investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Proceeds from issuance of common stock
Excess tax benefits on exercise of stock options and
vesting of restricted common stock
Repurchase of common stock
Cash dividends paid on common stock
Net cash provided (used) by financing activities
Net (decrease) increase in cash
Cash—beginning of year
Cash—end of year
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
182,253 $
118,606 $
91,237
(157,110 )
(1,174 )
8,202
(7,049 )
9,458
34,580
—
(110,000 )
(25,080 )
(417 )
5,675
(4,682 )
4,923
99,025
3,997
—
2,691
(107,309 )
(63,928 )
(59,931 )
5,145
110,000
4,727
—
7,049
(6,857 )
(47,079 )
68,258
(4,471 )
23,068
18,597 $
4,682
(2,349 )
(36,130 )
(29,070 )
10,024
13,044
23,068 $
(62,641 )
(566 )
4,487
(3,173 )
844
30,188
—
—
(8,707 )
(8,707 )
4,274
—
3,173
(1,370 )
(25,744 )
(19,667 )
1,814
11,230
13,044
$
134
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, 2015 and have concluded that there was no change during the Company’s
fourth quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
135
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, 2015, based on criteria
established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). 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 of America. 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 institutions acquired during 2015, 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 they have 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, 2015, based on the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
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, 2015 and 2014 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,
2015, and our report dated February 19, 2016, expressed an unqualified opinion thereon.
Atlanta, Georgia
February 19, 2016
/s/ Crowe Horwath LLP
136
Report of Management on the Company’s Internal Control Over Financial Reporting
February 19, 2016
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, 2015, based on criteria
for effective internal control over financial reporting described in the 2013 Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. As permitted, management excluded from its assessment the
operations of the Intervest Bancshares Corporation and Bank of the Carolinas Corporation acquisitions made during 2015, which
acquisitions are described in Note 2 to the Consolidated Financial Statements. The assets acquired in these acquisitions and excluded
from management’s assessment on internal control over financial reporting comprised approximately 12.0% of total consolidated
assets at December 31, 2015. Based on this assessment, management has concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2015, based on the specified criteria.
Crowe Horwath LLP, the independent registered public accounting firm that audited the Company’s Consolidated Financial
Statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2015. This report is included in this item under the heading “Report of Independent
Registered Public Accounting Firm on Internal Control Over Financial Reporting.”
/s/ George Gleason
George Gleason
Chairman and Chief Executive Officer
Item 9B. OTHER INFORMATION
None.
/s/ Greg McKinney
Greg McKinney
Chief Financial Officer and Chief Accounting Officer
137
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.
138
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.
139
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
2.4
2.5
2.6
3.1
3.2
3.3
3.4
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.
Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks, Intervest Bancshares Corporation
and Intervest National Bank, dated as of July 31, 2014 (previously filed as Exhibit 2.1 to the Company’s Current Report
on Form 8-K filed with the Commission on July 31, 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 Intervest Bancshares
Corporation and Intervest National Bank. The Registrant agrees to furnish supplementally any omitted schedule to the
Commission upon request.
Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks, Community & Southern Holdings,
Inc. and Community & Southern Bank, dated as of October 19, 2015 (previously filed as Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed with the Commission on October 19, 2015, and incorporated herein by this reference.
Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules contain various items related to the business of and the
representations and warranties made by Community & Southern Holdings, Inc. and Community & Southern Bank. The
Registrant agrees to furnish supplementally any omitted schedules to the Commission upon request.
Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks, C1 Financial, Inc. and C1 Bank
dated as of November 9, 2015 (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with
the Commission on November 10, 2015, and incorporated herein by this reference). Pursuant to Item 601(b)(2) of
Regulation S-K, certain schedules contain various items related to the business of and the representations and warranties
made by C1 Holdings, Inc. and C1 Bank. The Registrant agrees to furnish supplementally any omitted schedules to the
Commission upon request.
Amended and Restated Articles of Incorporation of the Company, 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 Company 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).
Articles of Amendment to the Amended and Restated Articles of Incorporation of Bank of the Ozarks, Inc. dated May
19, 2014 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on
May 20, 2014 and incorporated herein by this reference).
140
3.5
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
Amended and Restated By Laws of Bank of the Ozarks, Inc., dated November 18, 2014 (previously filed as Exhibit 3.1
to the Company’s current report on Form 8-K filed with the Commission on November 21, 2014, 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.
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).
Third Amended and Restated Bank of the Ozarks, Inc. Non-Employee Director Stock Option Plan as Amended and
Restated as of April 15, 2013 (previously filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2013 and incorporated herein by this reference).
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).
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).
Bank of the Ozarks, Inc. 2009 Restricted Stock and Incentive Plan, as amended and restated effective May 19, 2014
(previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 20,
2014 and incorporated herein by this reference).
Amendment to the Bank of the Ozarks, Inc. Stock Option Plan adopted May 19, 2014 (previously filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed with the Commission on May 20, 2014 and incorporated herein by this
reference).
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).
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).
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).
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).
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).
Form of Notice of Grant of Restricted Stock and Award Agreement, as amended (previously filed as Exhibit 10.12 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference).
Form of stock option agreement for non-employee directors (previously filed as Exhibit 10.13 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by this reference).
Form of stock option agreement for executive officers (previously filed as Exhibit 10.14 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by this reference).
Bank of the Ozarks, Inc. 2014 Stock-Based Performance Award Plan (previously filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on June 25, 2014 and incorporated herein by this reference).
141
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
11.1
12.1
21
23.1
31.1
31.2
32.1
32.2
Bank of the Ozarks, Inc. 2014 Executive Cash Bonus Plan (previously filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed with the Commission on June 25, 2014 and incorporated herein by this reference).
Bank of the Ozarks, Inc. 2015 Stock-Based Performance Award Plan (previously filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on January 16, 2015 and incorporated herein by this reference).
Bank of the Ozarks, Inc. 2015 Executive Cash Bonus Plan (previously filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed with the Commission on January 16, 2015 and incorporated herein by this reference).
Bank of the Ozarks, Inc. 2016 Stock-Based Performance Award Plan (previously filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on January 15, 2016 and incorporated herein by this reference).
Bank of the Ozarks, Inc. 2016 Executive Cash Bonus Plan (previously filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed with the Commission on January 15, 2016 and incorporated herein by this reference).
Bank of the Ozarks, Inc. Amended and Restated Stock Option Plan, effective May 18, 2015 (previously filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 18, 2015 and incorporated
herein by this reference).
Form of Stock Option Grant Agreement, effective May 18, 2015 for employees under the Amended and Restated Stock
Option Plan, effective May 18, 2015 (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed with the Commission on May 18, 2015 and incorporated herein by this reference).
Bank of the Ozarks, Inc. Non-Employee Director Stock Plan, effective May 18, 2015 (previously filed as Exhibit 10.3 to
the Company’s Current Report on Form 8-K filed with the Commission on May 18, 2015 and incorporated herein by this
reference).
Earnings Per Share Computation (included in Note 24 to the Consolidated Financial Statements).
Computation of Ratios of Earnings to Fixed Charges, filed herewith.
List of Subsidiaries of the Registrant, filed herewith.
Consent of Crowe Horwath, LLP, filed herewith.
Certification of Chairman and Chief Executive Officer, filed herewith.
Certification of Chief Financial Officer and Chief Accounting Officer, filed herewith.
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
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Definition Linkbase
XBRL Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
* Management contract or a compensatory plan or arrangement.
142
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/ Greg McKinney
Chief Financial Officer and Chief Accounting Officer
Date: February 19, 2016
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
/s/ Dan Thomas
Dan Thomas
/s/ Greg McKinney
Greg McKinney
/s/ Tyler Vance
Tyler Vance
/s/ Nicholas Brown
Nicholas Brown
/s/ Richard Cisne
Richard Cisne
/s/ Robert East
Robert East
/s/ Catherine B. Freedberg
Catherine B. Freedberg
/s/ Linda Gleason
Linda Gleason
/s/ Peter Kenny
Peter Kenny
/s/ William Koefoed
William Koefoed
/s/ Henry Mariani
Henry Mariani
/s/ Robert Proost
Robert Proost
/s/ R. L. Qualls
R. L. Qualls
/s/ John Reynolds
John Reynolds
/s/ Sherece West-Scantlebury
Sherece West-Scantlebury
/s/ Ross Whipple
Ross Whipple
Chairman of the Board, Chief Executive Officer and Director
February 19, 2016
Vice Chairman, President – Real Estate Specialties Group and
Chief Lending Officer and Director
February 19, 2016
Chief Financial Officer and Chief Accounting Officer
February 19, 2016
Chief Operating Officer/Chief Banking Officer and Director
February 19, 2016
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
143
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
February 19, 2016
Bank of the Ozarks, Inc.
Calculation of Ratio of Earnings to Fixed Charges
The following table presents the calculation of the consolidated ratio of earnings to fixed charges for the
periods presented.
Exhibit 12.1
Years Ended December 31,
2015
2014
2013
(Dollars in thousands)
2012
2011
Earnings:
Add:
Net income before income taxes
Fixed charges
Other
Less:
Interest capitalized
Noncontrolling interest of subsidiaries
Earnings
Fixed Charges:
Interest expense:
Deposits
FHLB advances, fed funds purchased
and subordinated debentures
Interest capitalized
Estimated interest divided included within rental expense
Preferred dividend requirements
Fixed charges
$ 276,770 $ 172,447 $ 131,414 $ 110,999 $ 151,511
30,645
3
21,825
4
28,041
2
21,225
1
18,831
3
(30 )
61
(24 )
(18 )
$ 304,844 $ 193,631 $ 150,252 $ 132,824 $ 182,117
(24 )
20
(24 )
28
(24 )
(18 )
$ 17,716 $ 8,566 $ 6,103 $ 8,982 $ 11,686
9,852
30
443
—
18,749
51
159
—
$ 28,041 $ 21,225 $ 18,831 $ 21,825 $ 30,645
12,618
70
155
—
12,531
57
140
—
12,389
24
246
—
Ratio of Earnings to Fixed Charges
(including deposit interest)
Ratio of Earnings to Fixed Charges
(excluding deposit interest)
10.87
9.12
7.98
6.09
5.94
29.52
15.30
11.80
10.34
9.61
The ratio of earnings to fixed charges is computed in accordance with item 503 of Regulation S-K by
dividing (1) income before income taxes, fixed charges and amortization of capitalized interest, less interest
capitalized and noncontrolling interest in income of subsidiaries that have not incurred fixed charges by (2) total
fixed charges. For purposes of computing this ratio:
fixed charges, including interest on deposits, include all interest expense, interest capitalized and the
estimated portion of rental expense attributable to interest, net of income from subleases; and
fixed charges, excluding interest on deposits, include interest expense (other than on deposits), interest
capitalized and the estimated portion of rental expense attributable to interest, net of income from
subleases.
Subsidiaries of the Registrant
Exhibit 21
1.
2.
3.
4.
5.
6.
7.
8.
9.
Bank of the Ozarks, an Arkansas state chartered bank.
Ozark Capital Statutory Trust II, a Connecticut business trust.
Ozark Capital Statutory Trust III, a Delaware business trust.
Ozark Capital Statutory Trust IV, a Delaware business trust.
Ozark Capital Statutory Trust V, a Delaware business trust.
The Highlands Group, Inc., an Arkansas corporate subsidiary of Bank of the Ozarks.
Arlington Park, LLC, a 50% owned Arkansas LLC subsidiary of The Highlands Group, Inc.
BOTO, LLC, a 100% owned Arkansas LLC subsidiary of Bank of the Ozarks.
ASMSA Investment Fund LLC, a 99% owned Delaware subsidiary of Bank of the Ozarks.
10. Open Avenues Investment Fund LLC, a 99% owned Delaware subsidiary of Bank of the Ozarks.
11. BOTO FL Properties LLC, a 100% owned Florida subsidiary of Bank of the Ozarks.
12.
13.
PAB State Credits LLC, a 100% owned Georgia subsidiary of Bank of the Ozarks.
FCB Properties LLC, a 100% owned Georgia subsidiary of Bank of the Ozarks.
14. BOTO NC Properties, LLC, a 100% owned North Carolina subsidiary of Bank of the Ozarks.
15. BOTO GA Properties, LLC, a 100% owned Georgia subsidiary of Bank of the Ozarks.
16. BOTO-AR Properties, LLC, a 100% owned Arkansas subsidiary of Bank of the Ozarks.
17.
FNB Insurance Agency, Inc., a 100% owned North Carolina subsidiary of Bank of the Ozarks.
18. Carolina Foothills Properties, LLC, a 100% owned North Carolina subsidiary of Bank of the Ozarks.
19. Carolina Foothills Properties Group I, LLC, a 100% owned North Carolina subsidiary of Bank of the Ozarks.
20. Carolina Foothills Properties Group II, LLC, a 100% owned North Carolina subsidiary of Bank of the Ozarks.
21. Carolina Foothills Properties Group III, LLC, a 100% owned North Carolina subsidiary of Bank of the Ozarks.
22. BOTO SC Properties, LLC, a 100% owned South Carolina subsidiary of Bank of the Ozarks.
23. Omnibank Center Business Condominium Owners Association, Inc., a 75.2% owned Texas subsidiary of Bank of the Ozarks.
24.
25.
26.
27.
28.
Summit Real Estate Investments, Inc., a 100% owned Arkansas subsidiary of Bank of the Ozarks.
Intervest Statutory Trust II, a Connecticut business trust
Intervest Statutory Trust III, a Connecticut business trust
Intervest Statutory Trust IV, a Delaware business trust
Intervest Statutory Trust V, a Delaware business trust
29. Arlington Oaks I, LLC, a 100% owned Florida subsidiary of Arlington Oaks II, LLC
30. Arlington Oaks II, LLC, a 100% owned Florida subsidiary of Bank of the Ozarks
31. BOTO Holdings, Inc., a 100% owned Texas subsidiary of Bank of the Ozarks
32. RESG Cayman Islands SPE, LLC, a 100% owned Texas subsidiary of Bank of the Ozarks
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-203388 on Form S-3, Registration Statement No.
333-208877 on Form S-4 pertaining to the C1 Financial, Inc. merger, Registration Statement No. 333-204268 pertaining to the
Amended and Restated Stock Option Plan, Registration Statement No. 333-204266 pertaining to the Director Stock Plan, 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, Registration Statement No. 333-183910 on Form S-8 pertaining to the
Bank of the Ozarks, Inc. 2009 Restricted Stock Plan, Registration Statement No. 333-194720 on Form S-8 pertaining to the Bank of
the Ozarks, Inc. 401(k) Retirement Savings Plan, and Registration Statement No. 333-194721 on Form S-8 pertaining to the Bank of
the Ozarks, Inc. 2009 Restricted Stock Plan of our reports dated February 19, 2016 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, 2015.
/s/ Crowe Horwath LLP
Atlanta, Georgia
February 19, 2016
Exhibit 31.1
CERTIFICATIONS
I, George Gleason, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Bank of the Ozarks, Inc.;
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;
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;
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)
b)
c)
d)
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;
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;
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
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)
b)
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
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 19, 2016
/s/ George Gleason
George Gleason
Chairman and Chief Executive Officer
I, Greg McKinney, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Bank of the Ozarks, Inc.;
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;
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;
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)
b)
c)
d)
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;
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;
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
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)
b)
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
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 19, 2016
/s/ Greg McKinney
Greg McKinney
Chief Financial Officer and Chief Accounting Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
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, 2015 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 19, 2016
/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, 2015 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 19, 2016
/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.
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2015 BOARD OF DIRECTORS
George Gleason
Chairman and
Chief E xecutive Of ficer
Bank of the Ozarks, Inc.,
Lit tle Rock , Arkansas
Dan Thomas
Vice Chairman, Chief
Lending Of ficer and
President , Real Estate
Specialties Group
Bank of the Ozarks, Inc.,
Dallas, Texas
Nicholas Brown
President and
Chief E xecutive Of ficer
Southwest Power Pool,
Lit tle Rock , Arkansas
Richard Cisne
Founding Par tner
Hudson, Cisne and Co.,
LLP, Lit tle Rock , Arkansas
Robert East
Chairman and Chief
E xecutive Of ficer
Rober t East Co., Inc.;
Managing Par tner
Advanced Cabling
S ystems, LLC,
Lit tle Rock , Arkansas
Catherine B.
Freedberg, Ph.D.
Former Lecturer
Har vard Universit y,
Depar tment of Ar t
and Architecture,
Washington, D.C.
Linda Gleason
Retired Banker,
Lit tle Rock , Arkansas
Peter Kenny
Independent Market
Strategist ;
Founder,
Kenny ’s Commentar y,
Denver, Colorado
William Koefoed
Chief Financial Of ficer
Puppet Labs, Inc.,
Por tland, Oregon
Henry Mariani
Chairman and Chief
E xecutive Of ficer
Allur tec, Inc.;
Chairman
NLC Products, Inc.,
Lit tle Rock , Arkansas
Robert Proost
Retired Corporate Vice
President , Chief Financial
Of ficer and Director
of Administration
A .G. Edwards, Inc.,
St . Louis, Missouri
R.L. Qualls*
Retired President and
Chief E xecutive Of ficer
Baldor Electric Company,
Lit tle Rock , Arkansas
Our Board of Directors’
outstanding leadership and
vision have moved the Company
forward and created a solid
foundation for strong future
growth and profitability.
John Reynolds
Pathologist and
Laborator y Director
Memorial Hospital,
Bainbridge, Georgia
Tyler Vance*
Chief Operating Of ficer
and Chief Banking Of ficer
Bank of the Ozarks, Inc.,
Lit tle Rock , Arkansas
Dr. Sherece
West-Scantlebury*
President and CEO
Winthrop Rockefeller
Foundation,
Lit tle Rock , Arkansas
Ross Whipple
President
Horizon Timber
Ser vices, Inc.,
Arkadelphia, Arkansas
2016 NOMINEES TO THE BOARD OF DIRECTORS
* Director term will end at the 2016 Annual
Shareholders Meeting on May 16, 2016.
Paula Cholmondeley
Chief E xecutive Of ficer
The Sorrel Group,
Alexandria, Virginia
Jack Mullen
Director of Derivatives
and Marketplace Strategy
AgriBank , FCB,
Minneapolis, Minnesota
Lit tle Rock, Arkansas
(501) 978-2265, Fax (501) 320-4078
NASDAQ: OZRK • w w w.bankozarks.com
For additional information, contact:
Investor Relations,
Bank of the Ozarks, Inc.
P.O. Box 8811
Lit tle Rock, Arkansas 72231-8811
Transfer Agent:
Bank of the Ozarks Trust
and Wealth Management Division
P.O. Box 8811
Lit tle Rock, Arkansas 72231-8811
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com