ANNUAL REPORT
A STRONG
PLATFORM FOR
GROWTH
Through a Combination of
249 Offices
CALIFORNIA
02
2222
22
TEXAS
TEXAS
TEXAS
T his r epor t cont ains f or war d-look ing s t atement s and r e f lec t s management ’s cur r ent v ie w s o f f u tur e economic cir cums t ances , indus tr y
conditions, Company performance and financial results. These for ward-looking statements are subject to a number of factors and uncertainties
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 Januar y 23, 2017
Organic Growth and Acquisitions, We Now Have
in Nine States*
01
NEW YORK
NORTH CAROLINA
24
83
ARKANSAS
SOUTH CAROLINA
02
03
ALABAMA
68
GEORGIA
44
FLORIDA
All scenic photographs are from Bank of the Ozarks’ trade area.
page T WO A TRADITION
OF HIGH
PERFORMANCE
Thanks to Our Customers,
Six Years &
Community
Banker of the Year
American Banker
2010
Top
Performing
Regional Bank
SNL Financial
2012
Top
Performing
Bank
ABA Banking Journal
Assets over $3 Billion
2011
Top
Performing
Bank
ABA Banking Journal
Assets $1 Billion–$10 Billion
2012
Top
Performing
Regional Bank
Bank Director Magazine
Assets $1 Billion–$5 Billion
2013
#Bank in
We’re Leading the United States
page THREE
Counting
Top
Performing
Bank
Bank Director Magazine
Assets $5 Billion–$50 Billion
2016
Top
Performing
Regional Bank
SNL Financial
2016
Top
Performing
Bank
Bank Director Magazine
Assets $1 Billion–$5 Billion
2014
Top
Performing
Bank
Bank Director Magazine
Assets $5 Billion–$50 Billion
2015
Top
Performing
Regional Bank
SNL Financial
2015
#1the U.S.
page F OUR
A LONG-TERM
PERSPECTIVE
The outstanding results we achieved in 2016 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 superior 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.
$270.0
Net Income
(Millions)
Earnings Per Common Share
(Diluted)
$31.7
$0.47
$31.7
$0.47
$0.51
$34.5
$36.8
$0.54
$1.47
$64.0
$0.94
$101.3
$77.0
$1.26
$1.11
$91.2
$1.52
$182.3
$118.6
$2.09
$2.58
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Over the past ten years, we have achieved compound annual growth rates of 23.9% in net income and 18.6% in diluted earnings per
common share.
Loans and Leases, Including Purchased Loans
(Millions)
$14,563
Deposits
(Millions)
$15,575
$8,335
$5,128
$7,971
$5,496
$1,677 $1,871 $2,021 $1,904
$2,346
$2,692
$2,754
$3,357
$2,045
$2,057
$2,341 $2,029
$2,944
$3,101
$2,541
$3,717
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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 compound annual rate
compound annual rate of 22.5%.
of 24.1%.
Net interest income is our largest revenue component,
and income from service charges, trust and mortgage
lending have traditionally been key contributors to non-
interest income.
Net Interest Income
(Millions)
$601.5
Service Charge Income
(Millions)
page FIV E
$38.5
$28.7
$26.6
$382.2
$270.5
$21.6
$19.4
$18.1
$15.2
$168.7
$174.3
$174.3
$193.5
$12.2 $12.0 $12.4
$10.2
$70.7 $77.6
$118.3
$123.6
$98.7
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Net interest income has grown over the last ten years at a
Income from service charges on deposit accounts has grown
compound annual rate of 23.9%.
at a compound annual rate of 14.2% over the past ten years.
Trust Income
(Millions)
$2.6
$2.2
$1.9
$3.4
$3.2
$3.1
$3.5
$4.1
$6.3
$5.9
$5.6
Mortgage Lending Income
(Millions)
$8.1
$6.8
$5.6
$5.6
$5.2
$3.9
$3.3
$3.3
$2.9
$2.7
$2.2
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Over the past ten years, trust income has grown at a
Mortgage lending is a valuable service to our customers and
compound annual rate of 12.4%.
an important source of non-interest income, but it is cyclical
in nature and varies with interest rate and housing market
conditions.
page SI X
CONSISTENT
QUALITY
Net Charge-Off Ratios
FDIC-Insured Financial Institutions
Net Charge-Off Ratios
Bank of the Ozarks, Inc.
2.52%
2.55%
1.75%
1.29%
1.55%
0.81%*
0.69%*
1.10%
0.69%
0.30%*
0.49%
0.44%
0.45%
0.14%*
0.12%*
0.18%*
0.06%*
0.39%
0.24%
0.12%
0.59%
0.45%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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 3Q16.
*E xcludes purchased loans and net charge-of fs related to such loans.
Efficiency Ratios
47.1% 46.3%
42.3%
42.9%
41.6%
37.8%
46.6%
45.3%
45.3%
38.4%
35.8%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
We have worked relentlessly to become one of the most
efficient bank holding companies in the nation.
35.8%
2016 Efficiency Ratio
page SE V EN
Nonperforming Loans & Leases/
Total Loans & Leases
1.24%
1.24%
0.76%
0.75%†
0.70%†
0.34%
0.35%
0.53%†
0.43%†
0.33%†
Nonperforming
Assets/Total Assets††
3.06%
3.06%
3.07%†
2.67%†
1.88%†
1.22%†
0.87%†
0.81%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0.20%†
0.15%†
0.36%
0.24%
0.37%†
0.31%†
Loans & Leases Past Due 30 Days
or More/Total Loans & Leases
Maintaining excellent asset quality has been an important
factor in our historically strong growth in net income.
2.68%
2.01%†
1.99% 2.01%†
1.53%†
1.14%
0.60%
0.73%†
0.79%†
0.45%†
0.28%†
0.16%†
†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.
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
page EIGHT QUALITY AND
DIVERSITY OF
OUR BOARD
CONTRIBUTE
TO OUR
SUCCESS
Non-Independent Directors:
George
Gleason
Linda
Gleason
Dan
Thomas
Independent Directors:
Nicholas
Brown
Paula
Cholmondeley
Richard
Cisne
Robert
East
Nominated:
Kathleen
Franklin
Catherine B.
Freedberg,
Ph.D.
Peter
Kenny
William
Koefoed
Henry
Mariani
Jack
Mullen
Robert
Proost
Dr. John
Reynolds
Ross
Whipple
MINNESOTA
NEW YORK
CALIFORNIA
COLORADO
MARYLAND
MISSOURI
VIRGINIA
NORTH CAROLINA
GEORGIA
PRIMARY RESIDENCE & EMPLOYMENT
SECONDARY RESIDENCE
PLACE OF EMPLOYMENT, IF OTHER THAN THE PRIMARY RESIDENCE
TEXAS
Relevant Industry
Experience
Including banking,
financial services and
real estate industry
experience
page NINE
Financial
Acumen
Including financial
reporting, corporate
finance and accounting
expertise
Leadership
Experience
Including service as
CEO, CFO and other
senior executive level
positions
Expertise in
Technology
Including backgrounds
in information systems
and financial
technology
Blend of
Experiences
and
Qualifications
Public Company
Experience
Including public
company board service
and investor relations
experience
Compliance
Experience
Including risk
management, ethics,
legal and corporate
governance experience
Key Market
Perspective
Geographic diversity
provides valuable
insight and knowledge
of key markets
Independence
Gender
Independent
Non-Independent
Female
Male
3
4
13
12
Independent Director Tenure
Independent Director Age
s
r
o
t
c
e
r
i
D
f
o
#
6
4
2
0
s
r
o
t
c
e
r
i
D
f
o
#
6
4
2
0
Less than
3 Years
3 to 5
Years
More than
5 Years
50–60
61–70
70+
page TEN
page TEN
EXECUTIVE
OFFICERS
Dan Thomas
Vice Chairman, Chief Lending
Officer and President,
Real Estate Specialties Group
Tyler Vance
Chief Operating Officer and
Chief Banking Officer
John Carter
Director of Community Banking
and Chairman of the Officers’
Loan Committee
Gene Holman
President, Mortgage Division
Jennifer Junker
Managing Director,
Trust and Wealth
Management Division
George Gleason
Chairman of the Board and
Chief Executive Officer
Greg McKinney
Chief Financial Officer and
Chief Accounting Officer
R. Darrel Russell
Chief Credit Officer and
Chairman of the Directors’
Loan Committee
Tim Hicks
Executive Vice President,
Chief of Staff
Scott Hastings
President, Leasing Division
and Corporate Loan
Specialties Group
Dennis James
Executive Vice President,
Director of Mergers
and Acquisitions
Ed Wydock
Chief Risk Officer
Brad Rebel
Chief Audit Executive
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
(cid:95)(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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 (cid:95) No (cid:134)
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 (cid:134) No (cid:95)
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 (cid:95) No (cid:134)
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 (cid:95) No (cid:134)
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. (cid:134)
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
(cid:95)
(cid:134) (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 (cid:134) No (cid:95)
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: $3,112,000,000.
(cid:134)
(cid:134)
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 31, 2017
121,555,305
Documents incorporated by reference: Portions of the Registrant’s Proxy Statement for the 2017 Annual Meeting of Shareholders,
scheduled to be held on May 8, 2017, 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, 2016
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
Item 14.
PART IV.
Item 15.
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Exhibit Index
Signatures
Page
2
3
21
36
36
37
37
38
40
42
85
87
141
141
142
143
143
143
143
143
144
144
145
149
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 and our management include certain forward-looking statements that are intended to be covered by
the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s expectations as well as
certain assumptions and estimates made by, and information available to, management at that time. Those statements are not
guarantees of future results or performance and are subject to certain known and unknown risks, uncertainties and other factors that
may cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Forward-
looking statements include, without limitation, statements about economic, real estate market, competitive, employment, credit market
and interest rate conditions, including expectations for further changes in monetary and interest rate policy by the Federal Reserve; our
plans, goals, beliefs, expectations, thoughts, estimates and outlook for the future with respect to our 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, bank owned life insurance income, gains (losses) on investment securities and sales of
other assets and other income from purchased loans; non-interest expense, including acquisition-related, systems conversion and
contract termination expenses; 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 and net charge-off ratios, provision and allowance for loan and lease losses; past due loans and
leases; current or future litigation; interest rate sensitivity, including the effects of possible interest rate changes; future growth and
expansion opportunities including plans for making additional acquisitions; problems with obtaining regulatory approval of or
integrating or managing acquisitions; the effect of the announcement of any future acquisition on customer relationships and operating
results; 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 or equity securities 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.
Actual future performance, outcomes and results may differ materially from those expressed in these forward-looking statements
made by us and management 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 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 acquisitions; the inability to realize expected cost savings and/or
synergies from acquisitions; problems with managing acquisitions; the effect of the announcement of any future acquisition on
customer relationships and operating results; the availability of and access to capital; possible downgrades in our credit ratings or
outlook which could increase the costs of funding from capital markets; 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 are subject as a result
of our total assets exceeding $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 cyber security; 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 (including costs, fines, reputational harm and/or negative
effects) from current or future litigation, regulatory examinations or other legal and/or regulatory actions as well as other factors
described in this Annual Report on Form 10-K or as detailed from time to time in the other reports we file with the Commission. See
also “Item 1A. Risk Factors” of this Annual Report on Form 10-K. 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, or implied by, such
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.
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, 2016, the Company, through the Bank, conducted operations through 250 offices, including
offices in Arkansas, Georgia, Florida, North Carolina, Texas, Alabama, South Carolina, New York and California. At December 31,
2016, 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 that holds our investment securities, a subsidiary
engaged in the development of real estate, a subsidiary that owns private aircraft and various other entities that hold loans, foreclosed
assets or tax credits or engage in other activities. At December 31, 2016, we had total assets of $18.89 billion, total loans and leases,
including purchased loans, of $14.56 billion, total deposits of $15.57 billion and total common stockholders’ equity of $2.79 billion.
Net interest income for 2016 was $601.5 million, net income available to common stockholders was $270.0 million and diluted
earnings per common share were $2.58.
We provide a wide range of retail and commercial banking services. Deposit services include, among others, 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 and processing of merchant debit and credit card transactions. While we provide a wide variety of retail and commercial
banking services, we operate in only one segment. No single external customer comprises more than 10% of our revenues. Interest
income on loans where the underlying collateral is located outside the United States was not material in 2016.
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 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); Los
Angeles, California (2014) and San Francisco, California (2016). In January 2017, we consolidated our New York RESG office with
our New York retail banking office. Our RESG offices have contributed significantly to our growth in non-purchased loans and leases
in recent years.
We have continued our growth and de novo branching strategy. In 2015 we opened two additional loan production offices, one
in Little Rock, Arkansas and one in Greensboro, North Carolina (which we closed in 2016), and we opened our fourth retail banking
office in Houston, Texas. In 2016, we opened our first retail banking office in Siloam Springs, Arkansas, our third retail banking
office in Fayetteville, Arkansas and our second retail banking office in Springdale, Arkansas, and we opened a RESG loan production
3
office in San Francisco, California. We also acquired property in Little Rock, Arkansas in 2016 where we expect to construct a new
corporate headquarters facility that is currently projected to be completed in 2019.
We intend to continue our growth and de novo branching strategy in future years through the opening of additional retail
branches, loan production offices and our new corporate headquarters facility. 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, our needs for deposit gathering capabilities 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 15
acquisitions.
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:
(cid:120) March 2010, Unity National Bank (Cartersville, Georgia)
July 2010, Woodlands Bank (Bluffton, South Carolina)
(cid:120)
September 2010, Horizon Bank (Bradenton, Florida)
(cid:120)
(cid:120) December 2010, Chestatee State Bank (Dawsonville, Georgia)
January 2011, Oglethorpe Bank (Brunswick, Georgia)
(cid:120)
(cid:120) April 2011, First Choice Community Bank (Dallas, Georgia)
(cid:120) 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 its wholly-
owned bank subsidiary, The Citizens Bank, 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”) 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. We subsequently closed one of the acquired offices in Shelby, North Carolina.
In March 2014, we completed our acquisition of Bancshares, Inc. (“Bancshares”) and its wholly-owned bank subsidiary,
OMNIBANK, N.A., for $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 its wholly-owned bank subsidiary, Summit
Bank, 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. We subsequently closed eight Arkansas banking offices in locations where we had excess branch capacity,
including six that were acquired in the Summit acquisition, and we closed the loan production office acquired in the Summit
acquisition.
In February 2015, we completed our acquisition of Intervest and its wholly-owned bank subsidiary, Intervest National Bank, 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.
4
The Intervest acquisition added seven retail banking offices including one in New York City, five in Clearwater, Florida and one in
Pasadena, Florida. We subsequently closed one of the acquired offices in Clearwater, Florida.
In August 2015, we completed our acquisition of Bank of the Carolinas Corporation (“BCAR”) and its wholly-owned bank
subsidiary, Bank of the Carolinas, for 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.
In July 2016, we completed our acquisition of Community & Southern Holdings, Inc. (“C&S”) and its wholly-owned bank
subsidiary, Community & Southern Bank, for 20,983,815 shares of our common stock (plus cash in lieu of fractional shares) in a
transaction valued at approximately $800.3 million. The C&S acquisition expanded our operations in Georgia by adding 46 retail
banking offices throughout Georgia and one retail banking office in Jacksonville, Florida. We subsequently closed five retail banking
offices in Georgia where we had excess branch capacity, including three that were acquired in the C&S acquisition.
In July 2016, we also completed our acquisition of C1 Financial, Inc. (“C1”) and its wholly-owned bank subsidiary, C1 Bank,
for 9,370,587 shares of our common stock (plus cash in lieu of fractional and de minimus shares), net of shares redeemed in exchange
for the sale of certain C1 Bank loans, in a transaction valued at approximately $376.1 million. The C1 acquisition expanded our
operations in Florida by adding 33 retail banking offices on the west coast of Florida and in Miami-Dade and Orange Counties.
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 Seattle, Washington, D.C., Boston and Chicago). 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 Banking (“Dir-CB”) 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-CB 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 risk committee. In addition, the various components of the lending function are periodically audited by our
internal audit group. The results of such audits, including any identified deficiencies or weaknesses and management’s proposed plan
to address any such deficiencies or weaknesses, are provided to and reviewed by the audit committee.
Our loan portfolio, including purchased loans, includes most types of real estate loans, consumer and small business loans
(including indirect marine and recreational vehicle, or RV, loans), commercial and industrial loans, government guaranteed 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 portfolio in
recent years. Included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”
(“MD&A”) to 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.
5
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 (“FSA”) and the Small Business Administration (“SBA”). 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. A substantial portion of our loans are 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), 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 and Small Business 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. Our
portfolio of small business loans includes loans to businesses with less than $1 million in annual revenues. Such loans are centrally
underwritten and generally include loans for the purchase (or refinance) of commercial real estate, equipment, lines of credit and other
business purposes.
Consumer and small business loan interest rates are determined based on the borrower’s credit score, bankruptcy indicator score,
LTV and amortization period, among others. The borrower’s ability to repay is of primary importance in the underwriting of consumer
loans.
Indirect Consumer Marine and RV Loans. Our portfolio of indirect consumer loans includes loans to individuals for the purchase
of marine vessels and recreational vehicles. These loans are generally collateralized by the asset of purchase and have terms ranging
up to 240 months. These loans are underwritten based on a combination of borrower credit score, documented debt service coverage,
previous asset ownership, experience and borrower liquidity, among others.
Government Guaranteed Loans. Our portfolio of government guaranteed loans is comprised primarily of SBA and FSA
guaranteed loans. These loans are commercial in nature and are typically for the refinance or origination of credit facilities secured
by, but not limited to, commercial real estate, agricultural real estate, equipment and various other assets.
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 SBA, 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. Our commercial and industrial loan portfolio also includes shared
6
national credits (“SNC”). SNC generally include syndicated loans and loan commitments, letters of credit, commercial leases, and
other forms of credit.
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.
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, among others. 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. At December 31, 2016, we had $1.99 billion 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. At December 31, 2016,
we had $331 million in deposits obtained via the Internet based on information provided by a listing service (“Internet deposits”).
Currently, none of these Internet deposits are deemed brokered deposits as none of the listing services are facilitating the placement of
the deposit. Brokered and Internet 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
certain of our banking offices located in Arkansas, Texas, Georgia, North Carolina and Florida. 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 Northwest Arkansas, Texas, North Carolina and Florida. 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. At December 31,
2016, total trust assets were approximately $1.87 billion compared to approximately $1.85 billion at December 31, 2015 and
approximately $1.80 billion at December 31, 2014.
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, including, collection, disbursement,
management of cash and information reporting. Our treasury management services also 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.
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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, export history to financial software or spreadsheets, 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 timelier basis, including having the ability to download
transaction history into QuickBooks® for instant reconciliation.
Market Area, Competition and Technology
At December 31, 2016, we conducted banking operations through 250 offices, including offices in Arkansas, Georgia, Florida,
North Carolina, Texas, Alabama, South Carolina, New York and 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 products offered and services rendered, including technology-driven products and services, the convenience
of banking facilities and, in the case of loans to commercial borrowers, relative lending limits, as well as other factors.
A number of competing commercial banks operating in our market areas are branches or subsidiaries of larger organizations
affiliated with 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, 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 and various
other types of lending, our strong commitment to quality customer service, convenient local branches, active community involvement
and competitive products and pricing, including technology-driven products and services.
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.
We utilize, to varying degrees in our business, certain patents, copyrights and trademarks. Additionally, we have various technology
applications under development from our OZRK Labs Group, the technology and innovations group we acquired in our C1
acquisition, to address the needs of our customers and our employees by using technology to provide products and services, create
additional operational efficiencies and provide greater privacy and security protection for our and our customers’ data. While each of
these patents, copyrights, trademarks and technology applications is important to our business, the loss or unavailability of one or
more of these items would not be expected, at the present time, to have a material adverse effect on our business.
Employees
At December 31, 2016, we employed 2,315 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 the Registrant
The following is a list of our executive officers.
George Gleason, age 63, 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 54, Vice Chairman of the Company and Bank, President of the Bank’s RESG and Chief Lending Officer. Mr.
Thomas has served as Vice Chairman 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
8
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 48, 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 42, Chief Operating Officer and Chief Banking Officer. Prior to assuming the Chief Operating Officer role 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.
Darrel Russell, age 63, 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 36, Director of Community Banking and Chairman of the Officers’ Loan Committee. Prior to assuming the title
of Director of Community Banking 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,
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 59, 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 44, Executive Vice President, Chief of Staff. 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. In September 2016, Mr.
Hicks assumed the role of Executive Vice President/Chief of Staff. 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 69, 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.
Dennis James, age 66, Executive Vice President/Director of Mergers and Acquisitions. Mr. James has served as the Director of
Mergers and Acquisitions since 2012 and Executive Vice President since July of 2014. Mr. James practiced public accounting in
Arkansas until 1981, when he joined Bank of the Ozarks as its Chief Financial Officer and a member of its Board of Directors. He
served the Bank for four years, resigning in 1984 to pursue other business interests. He remained focused on the financial industry
serving as Vice Chairman and Chief Operating Officer for a nationwide consumer loan servicer. In 2005, Mr. James rejoined the
Bank and moved to the Dallas area to serve as its North Texas Division President, returning to Little Rock in 2012 as he assumed his
current role as the Bank’s Director of Mergers and Acquisitions. Mr. James is a C.P.A. and graduated from the University of
Arkansas with honors, receiving a B.S.B.A. degree with a major in accounting.
Jennifer Junker, age 46, 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
9
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 60, 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).
Brad Rebel, age 51, Chief Audit Executive since January 2017. Prior to joining the Bank, Mr. Rebel served as Senior Vice
President and Managing Director – Audit at SunTrust Banks, Inc. (NYSE: STI) in Atlanta, Georgia from 2010 through January
2017. Mr. Rebel served as Vice President – Audit at Capital One Financial Corp. in Richmond, Virginia from 2006 to 2009 and as
Vice President – Accounting Policy & SEC Reporting from 2009 to 2010. From 1998 to 2002, Mr. Rebel served as Chief Audit
Executive at Farm Credit Services of America and as South Dakota & Iowa Market Place Leader from 2002 to 2006. From 1989 to
1998, Mr. Rebel held various positions at PricewaterhouseCoopers LLP focusing on mergers and acquisitions, financial statement
audits and accounting research in the financial services practice unit. Mr. Rebel is a C.P.A. (inactive) and holds a B.S. degree in
Finance and Accounting from Kansas State University.
Messrs. Gleason, Thomas, Hicks, James, McKinney, Vance, Wydock and Rebel 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. This summary is not intended to be complete and 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. In July 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:
(cid:120)(cid:3) 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.
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(cid:120)(cid:3) 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.
(cid:120)(cid:3) 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.
(cid:120)(cid:3) Repealing the federal prohibition on payment of interest on demand deposits, thereby permitting depository institutions to
pay interest on business transaction and other accounts.
(cid:120)(cid:3)
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.
(cid:120)(cid:3) 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.
(cid:120)(cid:3)
(cid:120)(cid:3)
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.
(cid:120)(cid:3) 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.
(cid:120)(cid:3) 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 now that our total consolidated assets exceed $15 billion, although such securities will continue to be included in
total risk-based capital.
(cid:120)(cid:3) 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.”
(cid:120)(cid:3)
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.
(cid:120)(cid:3)
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 are
expected to 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, 2016, our total assets were $18.89 billion. As a result, we must 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 these new requirements would negatively impact our results of operations and financial condition and could limit our
11
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 be chaired by an independent
director and include at least one risk management expert with experience in managing risk exposures of large, complex firms. We
passed $10 billion in total assets as of the quarter ending March 31, 2016 and, in connection with passing this threshold, we
established a risk committee meeting the requirements for publicly traded bank holding companies of our size.
In addition, publicly-traded bank holding companies with $10 billion or more in total consolidated assets are required to have a
global risk management framework commensurate with their structure, risk profile, complexity, activities, and size. The risk
management framework must include risk management policies and procedures, as well as processes and controls to implement them.
We have adopted a compliant risk management framework.
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. As of December 31, 2016, we have now passed the $10 billion total average consolidated assets threshold for
four consecutive quarters, and as a result, 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. Because the Bank’s total assets have also exceeded this $10 billion
threshold over the same period, 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. We have not previously been required to comply with the Durbin Amendment’s limitation 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. Because our total consolidated assets passed the $10 billion threshold in 2016, we will have to comply with the restrictions on
swipe fees beginning on July 1, 2017. 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. In December 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. In July 2016, the FRB granted a third one-year extension of the
Volcker Rule conformance period to July 21, 2017 for existing investments in and relationships with covered funds (relationships
existing prior to December 31, 2013). 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 currently 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. In October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) became law. In February 2009, the
American Recovery and Reinvestment Act of 2009 (“Recovery Act”), more commonly known as the economic stimulus or economic
12
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, and 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.
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
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 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 those of 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.
13
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:
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
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.
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. Because the Bank has passed the $10 billion total asset threshold, it is now subject to the assessment rate calculations for
larger banks, which may 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. Insured
institutions with assets of $10 billion or more, including the Company, are required to fund the increase. 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.
Basel III Capital Adequacy Requirements. In July 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,
14
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 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. Until 2016, the Company’s trust preferred securities were
grandfathered under the Basel III Rules and included as tier 1 capital; however, because the Company now exceeds $15 billion in total
assets, its trust preferred securities are now included as tier 2 capital, rather than tier 1 capital.
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 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, for the Company, the trust preferred securities and the subordinated notes.
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%.
Liquidity Coverage Ratio. The Basel III Rules do not address the proposed liquidity coverage ratio (“LCR”) called for by Basel
III. In September 2014, the FRB finalized a rule implementing a LCR requirement in the United States for larger banking
organizations. Neither the Company nor the Bank are subject to the LCR requirement.
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;
(cid:120)
(cid:120)
(cid:120) merchant banking activities; and
(cid:120)
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. The GLBA provides that state
15
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. Financial institutions are required to comply with state law if it is more protective of customer privacy than the GLBA.
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. As cybersecurity 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. Financial expenditures may also be required to
meet regulatory changes in the information security and cybersecurity domains. 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
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 individuals and 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.
Executive and Incentive Compensation. The federal banking regulators have adopted guidelines prohibiting excessive
compensation as an unsafe and unsound practice. Compensation is considered excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee, director or principal shareholder. The FRB has issued
guidance on incentive compensation intended to ensure that the incentive compensation policies do not undermine safety and
soundness by encouraging excessive risk taking. This guidance covers all employees that have the ability to materially affect the risk
profile of an organization, either individually or as part of a group, based on key principles that (i) incentives do not encourage risk-
taking beyond the organization’s ability to identify and manage risk, (ii) compensation arrangements are compatible with effective
internal controls and risk management, and (iii) compensation arrangements are supported by strong corporate governance, including
active and effective board oversight. Deficiencies in compensation practices may affect supervisory ratings and enforcement actions
may be taken if incentive compensation arrangements pose a risk to safety and soundness.
16
Anti-Money Laundering and the Patriot Act. A major focus of governmental policy on financial institutions in recent years has
been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act (“BSA”) and its implementing regulations
and parallel requirements of the federal banking regulators require the Bank to maintain a risk-based anti-money laundering (“AML”)
program reasonably designed to prevent and detect money laundering and terrorist financing and to comply with the recordkeeping
and reporting requirements of the BSA, including the requirement to report suspicious activity. The USA PATRIOT Act of 2001 (the
“Patriot Act”) substantially broadened the scope of anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations of financial institutions, creating new crimes and penalties and expanding the extra-
territorial jurisdiction of the United States. 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. 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 AML program when reviewing an application to expand operations.
In May 2016, the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued rules under the BSA requiring financial
institutions to identify the beneficial owners who own or control certain legal entity customers at the time an account is opened and to
update their AML compliance programs no later than May 11, 2018, to include risk-based procedures for conducting ongoing
customer due diligence.
FinCEN and the federal banking agencies continue to issue regulations and guidance with respect to the application and
requirements of the BSA and their expectations for effective AML programs. 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, 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. Because the Company’s total assets exceed $10 billion, the CFPB has direct
supervision and enforcement authority over us, including the authority to investigate possible violations of federal consumer financial
law, hold hearings and commence civil litigation.
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
17
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 agency 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.
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:
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
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.
18
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:
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
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
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 TILA, 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. 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.
19
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 of the Consolidated Financial
Statements under “Item 8. Financial Statements and Supplemental Data” of 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. Dividends from the Bank make up the principal source of income to the Company. Regulations of the
FDIC and the Arkansas State Bank Department limit the ability of the Bank to pay dividends to the Company without the prior
approval of such agencies. FDIC regulations prevent insured state banks from paying any dividends from capital and allow the
payment of dividends only from net profits then on hand after deduction for losses and bad debts. The Arkansas State Bank
Department currently limits the amount of dividends that 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.
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 2017, numerous
regulatory agencies are expected to continue promulgating 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 our business may be affected by any new
regulation or statute. The scope, timing and implementation of regulatory and statutory changes, including as a result of the recent
U.S. presidential and congressional elections, are uncertain and could have an adverse effect on our business, financial condition or
results of operation.
20
Available Information
We file annual, 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.
We have adopted a written code of ethics that applies to all directors, officers and employees of the Company, including our
principal executive officer and senior financial officers, in accordance with Section 406 of the Sarbanes(cid:16)Oxley Act of 2002 and the
rules of the SEC promulgated thereunder. Our code of ethics is available on our corporate website, http://www.bankozarks.com, on
the Investor Relations page under Corporate Information-Governance Documents. In the event that we make changes in, or provide
waivers from, the provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose these events on our
corporate website in such section. Also posted on our website, and available in print upon request from any shareholder to our Investor
Relations Department, are our Corporate Governance Principles, Board committee charters and other corporate governance related
policies.
Information contained on or accessible through our website or any other website referenced in this report is not part of this
report. References to websites in this report are intended to be inactive textual references only.
Shareholders may obtain a copy of any of the above-referenced corporate governance documents by writing to our Investor
Relations Department at Investor Relations, Bank of the Ozarks, Inc., P.O. Box 8811, Little Rock, Arkansas 72231 or by calling (501)
978-2265.
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.
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, among others. 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 or, except in limited cases pursuant to 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 or new legislation and regulations regarding incentive compensation that is affecting or
may affect the financial services industry. There can be no assurance that we will be successful in retaining our current executive
21
officers or other key personnel, or hiring additional key personnel to assist in executing our growth, expansion, acquisition and
business 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, subordinated debentures and
subordinated notes. 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, (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, (vii) the timing and amount of cash flows expected to be received on
purchased loans, (viii) the need for additional capital to support continued growth, and (ix) other relevant factors. 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
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
22
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, 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 –
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
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 and non-farm/non-residential 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 83.0% of our total loans and
leases at December 31, 2016. In addition, our construction/land development and non-farm/non-residential loans, which are subsets of
our real estate loans, comprised 36.4% and 32.0%, respectively, of our total loan and lease portfolio at December 31, 2016. 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
23
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 and results of operations.
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 and results of
operations. 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 of the Consolidated
Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of 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.
Our Investment Committee, which reports to the board of directors, has primary responsibility for oversight of investment
portfolio functions. 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.
Our investment securities portfolio consists of several 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 operations and 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.
We currently invest in bank owned life insurance (“BOLI”) and may continue to do so in the future.
We had $581 million in general, hybrid and separate account BOLI contracts at December 31, 2016. BOLI is an illiquid long-
term asset that provides tax savings because cash value growth and life insurance proceeds are not taxable. However, if we needed
additional liquidity and converted the BOLI to cash, such transaction would be subject to ordinary income tax and applicable
penalties. We are also exposed to the credit risk of the underlying securities in the investment portfolio, and to the insurance carrier
provider credit risk (in a general account contract). If BOLI was exchanged to another carrier, additional fees would be incurred and a
tax-free exchange could only be done for insureds that were still actively employed by us at that time. There is interest rate risk
relating to the market value of the underlying investment securities associated with the BOLI in that there is no assurance that the
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market value of these securities will not decline. Investing in BOLI exposes us to liquidity, credit and interest rate risk, which could
adversely affect our results of operations and financial condition.
Our accounting estimates and risk management processes rely on analytical and forecasting models and tools.
The processes we use to estimate probable credit losses and to measure the fair value of financial instruments, as well as the
processes used to estimate the effects of changing interest rates and other measures of our financial condition and results of operations,
depend upon the use of analytical and forecasting models and tools. These models and tools reflect assumptions that may not be
accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models
and tools may prove to be inadequate or inaccurate because of other flaws in their design or their implementation Any such failure in
our analytical or forecasting models and tools could have a material adverse effect on our business, financial condition and results of
operations.
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.
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:
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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;
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(cid:120) 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.
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. The ALCO Committee (“ALCO”), which reports to
the board of directors, has primary responsibility for oversight of our liquidity, funds management, asset/liability (interest rate risk)
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position and capital. Our Investment Committee, which reports to the board of directors, has primary responsibility for oversight of
our 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 an asset/liability and interest rate risk policy and a liquidity and funds management policy, including a
contingency funding plan that, among other things, include procedures for managing and monitoring 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, 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 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,
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, loan and lease repayments, 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 use brokered deposits which may be an unstable and/or expensive deposit source to fund earning asset growth.
We use brokered deposits, subject to certain limitations and requirements, as a source of funding to augment deposits generated
from our branch network, which are our principal source of funding. Our board of directors has established policies and procedures
with respect to the use of brokered deposits. Such policies and procedures require, among other things, that (i) we limit the amount of
brokered deposits as a percentage of total deposits and (ii) our ALCO monitor our use of brokered deposits on a regular basis,
including interest rates and the total volume of such deposits in relation to our total liabilities. ALCO has typically approved the use
of brokered deposits when such deposits are (i) from respected and stable funding sources and (ii) less costly to us than the marginal
cost of additional deposits generated from our branch network. At December 31, 2016 we had $1.99 billion in brokered deposits. In
the event that our funding strategies call for the use of brokered deposits, there can be no assurance that such sources will be available,
or will remain available, or that the cost of such funding sources will be reasonable. Additionally, should our bank subsidiary no
longer be considered well-capitalized, our ability to access new brokered deposits or retain existing brokered deposits could be
affected by market conditions, regulatory requirements or a combination thereof, which could result in most, if not all, brokered
deposit sources being unavailable. The inability to utilize brokered deposits as a source of funding could have an adverse effect on
our financial position, 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, 2016, 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 were to fall 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.
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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
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 and/or the holders of certain classes of our securities could be adversely affected by unfavorable ratings from rating
agencies.
The ratings agencies regularly evaluate us and the Bank, and their ratings of our long-term debt are based on a number of
factors, including our financial strength as well as factors not entirely within our control, including conditions affecting the financial
services industry generally. There can be no assurance that we will not receive adverse changes in our ratings in the future, which
could adversely affect the cost and other terms upon which we are able to obtain funding, and the way in which we are perceived in
the capital markets. Actual or anticipated changes, or downgrades in our credit ratings, including any announcement that our ratings
are under review for a downgrade, could affect the market value and liquidity of our securities, increase our borrowing costs and
negatively impact our profitability. Additionally, a downgrade of the credit rating of any particular security issued by us or our
subsidiaries could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such
securities may be sold.
We may be adversely affected by risks associated with completed or any potential future acquisition.
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:
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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, assumptions 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 the acquired business;
the potential for liabilities, claims and/or other contingencies arising out of the acquired business, 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 reserve or 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 diluted earnings 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.
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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 AML and BSA compliance records of all institutions involved. The process for
obtaining required regulatory approvals has become increasingly more difficult which could affect our acquisition strategy. We may
fail to pursue, evaluate or complete strategic acquisition 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, some 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 any potential future acquisitions.
If our goodwill becomes impaired, we could be required to record impairment charges.
Goodwill represents the amount by which the acquisition cost exceeds the fair value of net assets we acquire in an acquisition.
We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate the carrying
value might be impaired. At December 31, 2016 our goodwill totaled $660 million. While our previous evaluations of goodwill have
not resulted in any impairment charges or write downs of our goodwill, there can be no assurance that future evaluations of goodwill
will not result in findings of impairment and related write downs, which may have a material adverse effect on our financial condition
and results of operations.
The value of our deferred tax asset could be reduced if corporate tax rates in the U.S. are decreased.
There have been recent discussions by the executive branch of the national administration regarding potentially decreasing the
U.S. corporate tax rate. While we may benefit in some respects from any decreases in corporate tax rates, any reduction in the U.S.
corporate tax rate would result in a decrease to the value of our net deferred tax asset, which totaled $104 million at December 31,
2016, and could negatively affect our financial condition and results of operations.
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.
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.
Some of these competitors have an advantage over us through greater financial resources, lending limits and larger distribution
networks, and may be 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 than we have in adopting or modifying growth or operational strategies. 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.
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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 originating and retaining loans, leases and deposits. 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 and services 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, financial conditions, results of operations or liquidity.
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 reputation 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
actions are not resolved in a favorable manner, they may result in significant financial liability and/or adversely affect our market
reputation, 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, including our ability to fully deploy and leverage the
technology applications under development from our OZRK Labs group which we acquired in our C1 transaction, 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.
Some 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.
We utilize, to varying degrees in our business, certain patents, copyrights, trademarks, trade secret laws and confidentiality
provisions to establish and protect our proprietary rights, including those created by our OZRK Labs group. If we are unable to
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protect our intellectual property and proprietary technology, including any technology applications developed by our OZRK Labs
group, 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, including our OZRK Labs technology applications, 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. Any inability to protect our intellectual property or any claims of third-party intellectual property rights may
negatively affect our business, which, in turn, could have an adverse effect on our financial condition or results of operations.
In some instances, litigation may be necessary to enforce our intellectual property rights and protect our proprietary information,
or to defend against claims by third parties that our products, services or technology infringe or otherwise violate their intellectual
property or proprietary rights. Third parties may have, or may eventually be issued, patents that could be infringed by our products,
services or technology. Any of these third parties could bring an infringement claim against us with respect to our products, services
or technology. We may also be subject to third-party infringement, misappropriation, breach or other claims with respect to copyright,
trademark, license usage or other intellectual property rights. In addition, in recent years, individuals and groups, including patent
holding companies, have been purchasing intellectual property assets in order to make claims of infringement and attempt to extract
settlements from companies in the banking and financial services industry. Any litigation or claims brought by or against us, whether
with or without merit, could result in substantial costs to us and divert the attention of our management, which could harm our
business and results of operations. In addition, any intellectual property litigation or claims against us could result in the loss or
compromise of our intellectual property and proprietary rights, subject us to significant liabilities including damage awards, result in
an injunction prohibiting us from marketing or selling certain of our services, require us to redesign affected products or services, or
require us to seek licenses and pay royalties which may only be available on unfavorable terms, if at all, any of which could harm our
business and results of operations.
We are involved in legal proceedings and may be the subject of additional litigation and/or investigations in the future.
The nature of our business ordinarily results in a certain amount of litigation and investigations by government agencies having
oversight over our business. Although we have developed policies and procedures to minimize the impact of legal noncompliance and
other disputes and endeavored to provide reasonable insurance coverage, litigation, government investigations and regulatory actions
present an ongoing risk.
We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other
proceedings filed by or against us, our directors, management or employees, including remedies or damage awards. On at least a
quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings as well as certain
threatened claims (which are not considered incidental to the ordinary conduct of our business) utilizing the latest and most reliable
information available. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.
For matters where it is probable we will incur a loss and the amount can be reasonably estimated, we establish an accrual for the loss.
Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal
proceedings or threatened claims, however, may turn out to be substantially higher than the amount accrued. Further, our insurance
may not cover all litigation, other proceedings or claims, or the costs of defense. Future developments could result in an unfavorable
outcome for any existing or new lawsuits or investigations in which we are, or may become, involved, which may have a material
adverse effect on our business or our results of operations. See “Item 3. Legal Proceedings” of this Annual Report on Form 10-K for
more information regarding pending legal proceedings and any government investigations.
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 and our reputation, which, in turn, could
have a material adverse effect on our financial condition, results of operations and liquidity. Any damage or failure of our information
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systems and technology infrastructure that causes an interruption in service could also have an adverse effect on our business and our
reputation, which could have a material adverse effect on our financial condition, results of operations and liquidity.
In addition, our operations are dependent upon our ability to protect the information systems and technology infrastructure
against damage from physical and cyber security breaches and other disruptions caused by internal and external forces. Cyber security
incidents and other disruptions could jeopardize the security of information stored in and transmitted through our information systems
and networks, which may result in significant liability and reputation risk, and may deter potential customers. We proactively monitor
our network and deploy appropriate security personnel, processes and technologies to identify, protect, detect, respond, and recover
from damage or unauthorized access to our information systems and network. However, there can be no assurance that these security
measures or operational procedures will be completely successful against every threat, every time. New developments or advances in
computer capabilities or new discoveries in the field of cryptography could enable malicious threat actors to circumvent the security
measures we use to protect our data and our customers’ data. 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. Additionally, our risk and exposure to cyber threats and other information security breaches is
heightened due to the prevalence of Internet and mobile banking delivery channels for products and services. Any failure to maintain
adequate security over our information systems, our technology-driven products and services or our customers’ personal and
transactional information could negatively affect our business and our reputation and result in fines, penalties, or other costs, including
litigation expense and/or additional compliance costs, all of which could have a material adverse effect on our financial condition,
results of operations and liquidity.
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 2016, our interchange fee revenue would have been reduced by
approximately $7.4 million. Effective July 1, 2017, we will be subject to the Durbin Amendment and, as a result, our interchange fee
income will be reduced beginning in the third quarter of 2017 and thereafter.
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, fines or fees and/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.
31
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
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 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 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:
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(cid:120)
(cid:120)
(cid:120)
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;
the limitation on our ability to raise qualifying regulatory capital through the use of trust preferred securities as these
securities are no longer included in Tier 1 capital; and
the limitations on our ability to offer certain consumer products and services due to anticipated stricter consumer
protection laws and regulations.
Examples of provisions include, but are not limited to:
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
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
32
(cid:120)
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 have been and will continue to invest significant management attention and resources to evaluate and make changes
necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act as a result of our total assets
exceeding $10 billion. The Dodd-Frank Act created the CFPB, which 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 promulgated by the CFPB. Compliance with
any such new regulations will likely 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 and 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 are subject to heightened regulatory requirements as a result of our total assets exceeding $10 billion.
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. 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 and risk management processes and incur other significant expenses, all of which could have a material adverse effect
on our results of operations.
Unfavorable results from future stress tests may adversely affect our ability to retain customers or require us to raise capital.
Pursuant to the requirements of the Dodd Frank Act, we will be required to submit our first annual stress test results to
appropriate federal regulators by July 31, 2018. This stress test uses three economic and financial scenarios generated by the FRB,
including a baseline, adverse and severely adverse scenarios. A summary of the results of certain aspects of our stress test will be
released publicly. We will also be required to disclose publicly a summary of the Company and Bank stress test results under the
severely adverse scenario. We cannot predict whether our results will be satisfactory or we will remain well-capitalized under all
these stress test scenarios. Should our results be unsatisfactory or we are no longer well-capitalized under any of the scenarios, we
may experience difficulty in retaining existing customers or otherwise growing our business which could adversely affect our
business, financial condition, results of operations and liquidity. Additionally, our regulators could require us to raise additional
capital, impose restrictions on us or take other action based on the stress test results. Such restrictions or actions could negatively
affect our business operations and strategies and have a material adverse effect on our financial condition, results of operations and
liquidity. Any requirement to raise additional capital may be difficult depending on market conditions then existing and may be
dilutive to existing shareholders.
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 and delivery channels, 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 or mobile 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
33
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:
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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;
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 dividends on our common stock as our board of directors may declare out of funds
legally available for such payments. Although we have historically declared such dividends, 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 subordinated debentures and our subordinated notes.
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 of the Consolidated Financial Statements under “Item 8. Financial Statements and Supplementary Data” of
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 a 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.
34
The holders of our subordinated debentures and subordinated notes 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, 2016, 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.
At December 31, 2016, we had an aggregate principal amount of $225 million of subordinated notes which are senior to shares
of our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of the subordinated notes would receive a
distribution from our available assets before any distribution could be made to the holders of 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
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 may be less than that of 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 shareholders’ equity ownership.
We may determine from time to time to issue additional equity securities to raise additional capital, support growth, or 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.
Issuing additional shares of our common stock to acquire other banks and/or bank holding companies may result in dilution
for existing shareholders and may adversely affect the market price of our stock.
In connection with our growth strategy, we have issued, and may issue in the future, shares of our common stock to acquire
additional banks, bank holding companies, and/or other businesses related to the financial services industry. Resales of substantial
amounts of common stock in the public market and the potential of such sales could adversely affect the prevailing market price of our
common stock and impair our ability to raise additional capital through the sale of equity securities.
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 of 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.
35
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, 2016, we
conducted banking operations in 250 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, 2016.
State
Arkansas
Georgia
Florida
North Carolina
Texas
Alabama
South Carolina
New York
California
Total
Banking Facility
Owned
Leased
Total
75 (1)
59
30
22
17
3
2
—
—
208
8 (2)
9 (3)
14
2
5 (4)
—
—
2 (5)
2 (6)
42
83
68
44
24
22
3
2
2
2
250
(1) Includes our principal executive office in Little Rock.
(2) Includes a loan production office in Little Rock.
(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. This loan production office was closed in January 2017 and consolidated with our existing
retail banking office.
(6) Includes loan production offices in Los Angeles and San Francisco.
36
Item 3.
LEGAL PROCEEDINGS
On December 19, 2011, the Company and Bank were named as defendants in a purported class action lawsuit filed 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. On December 20, 2012, the Bank was named as a defendant in a purported class action lawsuit filed in
the Circuit Court of Pulaski County, Arkansas, Ninth Division, styled Audrey Muzingo v. Bank of the Ozarks. Subsequently, counsel
for the plaintiffs in the Walker case and counsel for the plaintiff in the Muzingo case have reached an agreement whereby Ms.
Muzingo is now considered a member of the class in the Walker case. The complaint challenges the manner in which overdraft fees
were charged and the policies related to the posting order of payments. In addition, the complaint alleges violations of the Arkansas
Deceptive Trade Practices Act. The complaint seeks to have the case certified by the court as a class action for all Bank account
holders located in the State of Arkansas similarly situated, and seeks (1) a declaratory judgment as to the wrongful nature of the
Bank’s overdraft fee policies, (2) restitution of overdraft fees paid by the plaintiffs and the putative class as a result of the actions cited
in the complaint, (3) disgorgement of profits as a result of the alleged wrongful actions, (4) unspecified compensatory and statutory or
punitive damages, and (5) pre-judgment interest, costs, and plaintiffs’ attorneys’ fees. The Company and the Bank filed a motion to
dismiss and to compel arbitration pursuant to the terms of the consumer deposit account agreement, which was denied by the trial
court. The Company and the Bank appealed the trial court’s ruling to the Arkansas Supreme Court on an interlocutory basis. The
Arkansas Supreme Court recently affirmed the trial courts’ decision to deny the Company and Bank’s motion to compel arbitration,
finding that there was no mutual agreement or obligation to arbitrate under the terms of the subject deposit account agreement. The
Company and Bank filed a Petition for Writ of Certiorari with the Supreme Court of the United States requesting that the Supreme
Court of the United States review the Arkansas Supreme Court’s decision, but that request was denied. The parties are now engaged
in pre-trial discovery and have agreed to participate in non-binding mediation regarding the plaintiff’s claims.
Although there are significant uncertainties in any purported class action litigation, the Company and the Bank believe that
the Plaintiffs’ claims are subject to meritorious defenses and intend to defend against these claims.
The Company and/or the Bank are parties 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 the various claims and proceedings described above cannot be determined at this time, management of the
Company believes that such claims and proceedings, individually or in the aggregate, will not have a material adverse effect on the
future results of operations, financial condition, or liquidity of the Company.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
37
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company’s common stock is listed on the NASDAQ Global Select Market under the symbol “OZRK” and at December 31,
2016, the Company had approximately 1,339 holders of record. At December 30, 2016 the closing price of our common stock was
$52.59 per share. The following table sets forth for each quarter of 2016 and 2015, the high and low sales price of our common stock
and the cash dividends declared per share.
First quarter
Second quarter
Third quarter
Fourth quarter
$
High
49.46 $
45.34
40.99
54.92
Year Ended December 31,
2016
Low
Cash
Dividend
35.87 $
33.66
33.51
35.36
$
0.150 $
0.155
0.160
0.165
0.630
$
High
38.22
48.68
46.90
54.96
2015
Low
Cash
Dividend
32.35 $
36.31
37.96
41.71
$
0.130
0.135
0.140
0.145
0.550
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 of the Consolidated Financial Statements under “Item 8. Financial Statements and Supplementary Data” of this
Annual Report on Form 10-K for further discussion of dividend restrictions. Additionally, our ability to pay dividends may be
restricted by certain covenants in the indentures governing our trust preferred securities, our subordinated debentures and our
subordinated notes.
The graph below shows a comparison for the period commencing December 31, 2011 through December 31, 2016 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, 2011.
Cumulative Return Comparison
$400
$300
$200
$100
$0
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
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)
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2011
$
$
$
100 $
100 $
100 $
115 $
118 $
118 $
196 $
157 $
167 $
266 $
172 $
175 $
12/31/2016
378
203
234
351 $
168 $
186 $
38
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 2016, 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
—
—
—
—
—
—
—
—
Total
Number
of Shares
Repurchased
—
91,314 (1) $
—
91,314
$
Average
Price Per
Share
—
36.1875
—
36.1875
October 1, 2016 to October 31, 2016
November 1, 2016 to November 30, 2016
December 1, 2016 to December 31, 2016
Total
(1)
202,600 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 4, 2016 and were no longer subject to the vesting restriction or substantial risk of forfeiture. We withheld 91,314 of
such shares to satisfy federal and state tax withholding requirements related to the vesting of these shares.
39
Item 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data is derived from our audited financial statements as of and for each of the five years ended
December 31, 2016 and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of
Operations” and “Item 8. Financial Statements and Supplementary Data” of 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
Federal Deposit Insurance Corporation loss share receivable
Foreclosed assets
Investment securities
Goodwill and other intangible assets
Deposits
Repurchase agreements with customers
Other borrowings
Subordinated notes
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 non-purchased loans and leases(2)
Net charge-offs to total average loans and leases
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:
Tier 1 leverage
Common equity tier 1
Tier 1 risk-based capital
Total risk-based capital
2016
Year Ended December 31,
2013
2014
2015
(Dollars in thousands, except per share amounts)
$
$
662,555
61,050
601,505
23,792
102,399
255,754
269,979
2.58
23.02
17.08
0.63
104,700
121,268
$ 18,890,142
9,605,093
4,958,022
76,541
—
43,702
1,471,612
720,950
15,574,878
65,110
41,903
222,516
118,242
2,791,607
$
$
$
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
9,879,459
6,528,634
1,806,037
60,854
—
22,870
602,348
152,340
7,971,468
65,800
204,540
—
117,685
1,464,631
$
$
$
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
6,766,499
3,979,870
1,147,947
52,918
—
37,775
839,321
105,576
5,496,382
65,578
190,855
—
64,950
908,390
$
$
$
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
4,791,170
2,632,565
724,514
42,945
71,854
49,811
669,384
19,158
3,717,027
53,103
280,895
—
64,950
629,060
$
$
$
2012
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
4,040,207
2,115,834
637,773
38,738
152,198
66,875
494,266
11,827
3,101,055
29,550
280,763
—
64,950
507,664
93.50 %
104.56 %
93.29 %
90.32 %
88.80 %
$ 14,270,078
2,068,328
$
8,621,334
1,217,475
$
5,913,807
786,430
$
4,270,052
560,351
$
3,779,831
458,595
14.49 %
14.12 %
13.30 %
13.12 %
12.13 %
1.89 %
13.05
16.25
4.92
35.84
23.03
0.06 %
0.07
0.15
0.31
0.78 %
521 %
11.99 %
9.99
9.99
11.99
2.11 %
14.97
17.02
5.19
38.45
25.83
0.18 %
0.17
0.20
0.37
0.91 %
452 %
14.96 %
10.79
11.62
12.12
2.01 %
15.08
16.63
5.52
45.35
30.46
0.12 %
0.16
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
28.22
0.14 %
0.26
0.33
1.22
1.63 %
492 %
14.19 %
N/A
16.15
17.18
2.04 %
16.80
17.22
5.91
46.58
22.44
0.30 %
0.46
0.43
1.88
1.83 %
425 %
14.40 %
N/A
18.11
19.36
(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 “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Capital Resources and Liquidity” of
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.
40
Selected Quarterly Financial Data
The following tables are summaries of quarterly results of operations for the periods indicated and should be read in conjunction
with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial
Statements and Supplementary Data” of this Annual Report on Form 10-K.
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
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
2016 – Three Months Ended
March 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share amounts)
121,741 $
(9,224 )
112,517
(2,017 )
19,865
(47,686 )
(30,984 )
(7 )
51,688 $
0.57 $
0.57 $
130,929 $
(11,891 )
119,038
(4,834 )
22,733
(50,928 )
(31,514 )
(21 )
54,474 $
0.60 $
0.60 $
194,357 $
(19,207 )
175,150
(7,086 )
29,231
(78,781 )
(42,470 )
(14 )
76,030 $
0.66 $
0.66 $
215,529
(20,729 )
194,800
(9,855 )
30,571
(78,358 )
(49,312 )
(59 )
87,787
0.72
0.72
2015 – Three Months Ended
March 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share amounts)
91,455 $
(5,966 )
85,489
(6,315 )
29,067
(50,184 )
(18,139 )
(24 )
39,894 $
0.48 $
0.47 $
100,103 $
(6,347 )
93,756
(4,308 )
23,270
(43,724 )
(24,190 )
(28 )
44,776 $
0.52 $
0.51 $
103,484 $
(7,097 )
96,387
(3,581 )
22,138
(45,428 )
(23,385 )
(3 )
46,128 $
0.53 $
0.52 $
114,677
(8,158 )
106,519
(5,211 )
30,540
(51,646 )
(28,741 )
(6 )
51,455
0.58
0.57
$
$
$
$
$
$
$
$
41
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, 2016 and 2015 and our results of operations for each of
the years in the three-year period ended December 31, 2016. 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” of this
Annual Report on Form 10-K.
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”). The Company operates in only one
segment – community banking. 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, subordinated debentures and subordinated notes. 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 and gains and losses on investment securities and from sales of other assets.
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 we believe 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. 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 (including
consumer construction loans on 1-4 family properties), consumer loans, indirect 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
42
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 (“LTV”) ratio, the age, condition, value,
nature, quality 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 (“LTC”) and LTV ratios
(with significant emphasis placed on the LTC and LTV ratios for many of our construction and land development loans); (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, quality 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, quality 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. For indirect loans, each individual loan is assigned a risk level based on the borrower’s individual credit score. Each risk
level is assigned a probability of default (“PD”) and an expected loss given default (“LGD”) based on the underlying collateral
securing the loan. Both the PD and the LGD factors are based on composite third-party information for similar loans and borrowers
that have previously defaulted and the resulting loss from such default.
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 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 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 partial or full charge-off.
At December 31, 2016 and 2015, we had established an ALLL totaling $1.6 million and $1.2 million, respectively, 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 or had not otherwise been
considered in establishing our Day 1 Fair Values.
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. 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 and leases.
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
43
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 may also include specific ALLL allocations for qualitative factors.
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, 2016 and 2015, 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 on a quarterly basis.
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 nature and cause of the unrealized loss,
the length of time and extent that fair value has been less than cost and the credit quality, 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 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 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 affect our financial condition, results of operations and liquidity.
44
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 a substantial portion of loans acquired in the transaction.
For those purchased loans without evidence of credit deterioration at the date of acquisition, fair value is determined using market
participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as
adjusted for an estimate of future credit losses and prepayments, and then a market-based discount rate is applied to those cash flows.
For loans individually evaluated, a grade is assigned to each loan at the date of acquisition based on our internal grading system for
purchased loans. To the extent that any purchased loan is not specifically reviewed, such loan is assumed to have characteristics
similar to the assigned rating of the acquired institution’s risk rating adjusted for any estimated differences between our rating
methodology and the acquired bank’s rating methodology. 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 quality or value of 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 or amortized into
or 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 at 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 and quality 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, 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.
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 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.
45
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 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 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).
46
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)
2014
2016
December 31,
2015
(Dollars in thousands, except per share amounts)
$18,890,142 $ 9,879,459 $ 6,766,499
839,321
3,979,870
1,147,947
5,496,382
908,390
118,606
1.52
11.37
10.04
1,471,612
9,605,093
4,958,022
15,574,878
2,791,607
269,979
2.58
23.02
17.08
602,348
6,528,634
1,806,037
7,971,468
1,464,631
182,253
2.09
16.16
14.48
% Change
2016 from
2015
2015 from
2014
91.2 %
144.3
47.1
174.5
95.4
90.6
48.1
23.4
42.5
18.0
46.0 %
(28.2 )
64.0
57.3
45.0
61.2
53.7
37.5
42.1
44.2
(1)
The calculation of our tangible book value per common share and the reconciliation to GAAP is included under the section “Capital Resources
and Liquidity” in this MD&A.
Highlights of 2016 include the following:
(cid:120) Growth in non-purchased loans and leases of 47.1% to $9.61 billion at December 31, 2016;
(cid:120) Growth in purchased loans of 174.5% to $4.96 billion at December 31, 2016;
(cid:120) Growth in total assets of 91.2% to $18.89 billion at December 31, 2016;
(cid:120) Growth in deposits of 95.4% to $15.57 billion at December 31, 2016;
(cid:120) Net income available to common stockholders of $270.0 million for 2016, a 48.1% increase from net income available to
(cid:120)
(cid:120)
common stockholders for 2015;
Return on average assets of 1.89% for 2016;
Returns on average common stockholders’ equity and average tangible common stockholders’ equity of 13.05% and
16.25%, respectively, for 2016 (the calculation of our return on average tangible common stockholders’ equity and the
reconciliation to GAAP are included in this MD&A under the section “Capital Resources and Liquidity”);
(cid:120) Net interest margin, on a fully taxable equivalent (“FTE”) basis, of 4.92% for 2016;
(cid:120) An efficiency ratio (non-interest expense divided by the sum of net interest income, on a FTE basis, and non-interest
income) of 35.8% for 2016;
(cid:120) A net charge-off ratio for total loans and leases of 0.07% for 2016;
(cid:120)
Excluding purchased loans, our ratio of nonperforming loans and leases to total loans and leases was 0.15% at December
31, 2016, and our ratio of nonperforming assets to total assets was 0.31% at December 31, 2016;
(cid:120) On June 23, 2016, we completed an underwritten public offering of $225 million in aggregate principal amount of 5.50%
Fixed-to-Floating Rate Subordinated Notes;
(cid:120) On July 20, 2016, we completed our acquisition of Community & Southern Holdings, Inc. (“C&S”); and
(cid:120) On July 21, 2016, we completed our acquisition of C1 Financial, Inc. (“C1”).
47
Net Interest Income
Net interest income and net interest margin are analyzed in this discussion on a 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 $9.8 million in 2016, $9.6 million in 2015 and $10.7 million in 2014. 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.
2016 compared to 2015
Net interest income for 2016 increased 56.0% to $611.3 million compared to $391.7 million for 2015. Net interest margin
decreased 27 basis points (“bps”) to 4.92% for 2016 compared to 5.19% for 2015. The increase in net interest income was primarily
the result of the growth in average earning assets, which increased 64.5% to $12.42 billion for 2016 compared to $7.55 billion for
2015. The decrease in net interest margin for 2016 compared to 2015 was primarily due to the 14 bps decrease in yield on average
earning assets and 14 bps increase in rates paid on interest bearing liabilities.
Yields on average earning assets decreased to 5.41% for 2016 compared to 5.55% for 2015 primarily due to decreases in yield
on our purchased loan and lease portfolio and our aggregate investment securities portfolio, partially offset by an increase in yield in
our non-purchased loan and lease portfolio. The yield on our portfolio of purchased loans and leases decreased 55 bps to 6.69% for
2016 compared to 7.24% for 2015. This decrease was primarily attributable to the loans acquired in our C&S and C1 acquisitions
during 2016 and, to a lesser extent, loans acquired in our Intervest Bancshares Corporation (“Intervest”) acquisition in 2015, 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. The yield on our aggregate investment securities portfolio for 2016 decreased 111 bps
compared to 2015. This decrease was primarily the result of (i) the investment securities acquired in our C&S acquisition whose
yields were lower than our existing portfolio of investment securities and, to a lesser extent, (ii) the relatively low interest rate
environment for tax-exempt municipal securities that existed for much of 2016 which resulted in certain issuers of such investment
securities calling higher-rate investment securities and refinancing those securities at lower interest rates. The yield on our non-
purchased loan portfolio increased nine bps to 5.09% for 2016 compared to 5.00% for 2015. This increase was primarily due to (i)
higher yields on many newly originated loans during the third and fourth quarters of 2016 compared to 2015, (ii) an acceleration of
loan prepayments on certain of our larger construction and development loans in 2016, (iii) prepayment penalties and/or yield
maintenance provisions on many construction and development loans that paid off early during 2016 and (iv) increases in London
Interbank Offered Rates (“LIBOR”) during 2016. 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, 2016, variable rate loans, many of
which are indexed to and reprice with changes in LIBOR, comprised 82.0% of our non-purchased loans and leases compared to 79.0%
at December 31, 2015. We expect to continue to increase the percentage of variable rate loans in our non-purchased loan and lease
portfolio.
The overall increase in rates on average interest bearing liabilities, which increased 14 bps for 2016 compared to 2015, was
primarily due to (i) an increase in rates on interest bearing deposits, which increased 19 bps for 2016 compared to 2015, (ii) an
increase in rates on our subordinated debentures, which increased 44 bps for 2016 compared to 2015 and (iii) the issuance of our
subordinated notes in the second quarter of 2016. These increases were partially offset by a decrease in rates on other borrowings.
The increase in rates on our interest bearing deposits, the largest component of our interest bearing liabilities, was primarily due to our
deposit gathering initiatives that were implemented 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 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 in 2016 included (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 funds purchased, (iii)
subordinated notes and (iv) subordinated debentures. The rates on repos increased four bps in 2016 compared to 2015. The rates on
our other borrowing sources decreased 77 bps for 2016 compared to 2015. 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%. On June 23, 2016, we completed an underwritten public offering of $225 million in
aggregate principal amount of our 5.50% fixed-to-floating rate subordinated notes. The rate on these subordinated notes, including
amortization of debt issuance costs, using a level-yield methodology over the estimated holding period of seven years, was 5.83%
during 2016. The rates paid on our subordinated debentures, which are tied to a spread over the 90-day LIBOR and reset periodically,
increased 44 bps in 2016 compared to 2015. This increase in rates on our subordinated debentures is primarily due to increases in
LIBOR on the applicable reset dates.
The increase in average earning assets for 2016 compared to 2015 was due, in part, to an increase in the average balance of non-
purchased loans and leases which increased $3.19 billion, or 65.0%, to $8.08 billion for 2016 compared to $4.90 billion for 2015 as
48
we continued to experience strong growth in our originations of non-purchased loans and leases. Additionally the average balance of
purchased loans increased $1.46 billion, or 78.6%, to $3.33 billion for 2016 compared to $1.86 billion for 2015, primarily as a result
of our C&S and C1 acquisitions.
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 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. 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.
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, was 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.
Our other borrowing sources in 2015 and 2014 included (i) repos, (ii) other borrowings and (iii) subordinated debentures. The
rates on repos increased one bps in 2015 compared to 2014. The rates on our other borrowing sources decreased 52 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 increased 68 bps in 2015 compared to 2014. This increase in rates on our subordinated
debentures was 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.
49
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 our Intervest acquisition.
Average Consolidated Balance Sheets and Net Interest Analysis
2016
Average
Balance
Income/
Expense
Yield/
Rate
Year Ended December 31,
2015
2014
Income/
Average
Expense
Balance
(Dollars in thousands)
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
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
Total interest bearing deposits
Repurchase agreements with
customers
Other borrowings
Subordinated notes
Subordinated debentures
Total interest bearing
liabilities
Non-interest bearing liabilities:
Non-interest bearing deposits
Other non-interest bearing liabilities
Total liabilities
Common stockholders’ equity
Noncontrolling interest
Total liabilities and
stockholders’ equity
Net interest income – FTE
Net interest margin – FTE
$
30,260 $
366 1.21 % $
2,902 $
41 1.40 % $
4,897 $
56 1.15 %
466,059
514,545
11,373 2.44
27,049 5.26
363,254
422,983
13,131 3.61
26,406 6.24
325,611
472,310
11,125 3.42
29,983 6.35
8,083,647 411,181 5.09
3,325,443 222,350 6.69
12,419,954 672,319 5.41
1,850,124
$14,270,078
4,898,552 244,978 5.00
1,862,102 134,745 7.24
7,549,793 419,301 5.55
1,071,541
$8,621,334
3,189,308 162,812 5.10
1,098,851
98,212 8.94
5,090,977 302,188 5.94
822,830
$5,913,807
$ 5,897,821 $ 20,316 0.34 % $3,557,037 $
7,969 0.22 % $2,564,250 $
5,424 0.21 %
2,439,447
1,448,166
9,785,434
19,906 0.82
8,372 0.58
48,594 0.50
1,244,879
880,189
5,682,105
6,375 0.51
3,372 0.38
17,716 0.31
558,389
541,938
3,664,577
1,632 0.29
1,510 0.28
8,566 0.23
64,044
46,949
116,679
117,958
89 0.14
1,168 2.49
6,801 5.83
4,398 3.73
73,995
187,608
—
111,409
76 0.10
6,111 3.26
— —
3,665 3.29
63,869
281,829
—
64,950
55 0.09
10,642 3.78
— —
1,693 2.61
10,131,064
61,050 0.60
6,055,117
27,568 0.46
4,075,225
20,956 0.51
2,006,933
60,553
12,198,550
2,068,328
3,200
1,301,574
43,819
7,400,510
1,217,475
3,349
989,073
59,557
5,123,855
786,430
3,522
$14,270,078
$8,621,334
$5,913,807
$611,269
$391,733
$281,232
4.92 %
5.19 %
5.52 %
50
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
2016 over 2015
Yield/
Rate
Net
Change
Volume
2015 over 2014
Yield/
Rate
Net
Change
Volume
(Dollars in thousands)
Increase (decrease) in:
Interest income – FTE:
Interest earning deposits and federal funds
sold
Investment securities:
Taxable
Tax-exempt – FTE
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 notes
Subordinated debentures
Total interest expense
Increase (decrease) in net interest income – FTE
Non-Interest Income
$
331 $
(6 ) $
325 $
(27) $
12 $
(15 )
2,509
4,813
162,013
97,844
267,510
(4,267 )
(4,170 )
4,190
(10,239 )
(14,492 )
(1,758 )
643
166,203
87,605
253,018
1,361
(3,080 )
85,478
55,231
138,963
645
(497 )
(3,312 )
(18,698 )
(21,850 )
2,006
(3,577 )
82,166
36,533
117,113
8,063
9,748
3,284
(14 )
(3,499 )
6,801
244
24,627
2,545
4,743
1,862
21
(4,531 )
—
1,972
6,612
$ 242,883 $ (23,347 ) $ 219,536 $ 133,613 $ (23,112 ) $ 110,501
12,347
13,531
5,000
13
(4,943 )
6,801
733
33,482
2,224
3,516
1,295
10
(3,224 )
—
1,529
5,350
321
1,227
567
11
(1,307 )
—
443
1,262
4,284
3,783
1,716
27
(1,444 )
—
489
8,855
Our non-interest income consists primarily of service charges on deposit accounts, mortgage lending income, trust income,
BOLI income, other income from purchased loans and net gains on investment securities and sales of other assets.
2016 compared to 2015
Non-interest income for 2016 decreased 2.5% to $102.4 million compared to $105.0 million for 2015. Non-interest income for
2016 included $0.8 million of tax-exempt income from BOLI death benefits and $0.2 million of gains on sales of loans. 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.
Service charges on deposit accounts increased 34.0% to $38.5 million in 2016 compared to $28.7 million in 2015. This increase
was primarily due to growth in the number of transaction accounts and the addition of deposit customers from our C&S and C1
acquisitions. Effective July 1, 2017, we will be subject to the provisions of the Durbin Amendment, which are applicable to financial
institutions whose total assets exceed $10 billion and which limits the amount of interchange fees that may be charged for debit and
prepaid card transactions. Had we been subject to the Durbin Amendment in 2016, our interchange fee income (which is included in
our non-interest income from service charges on deposit accounts) would have been reduced by approximately $7.4 million.
Mortgage lending income increased 18.1% to $8.1 million in 2016 compared to $6.8 million in 2015. The volume of
originations of mortgage loans available for sale increased 7.5% to $274 million in 2016 compared to $255 million in 2015.
Trust income increased 5.8% to $6.3 million in 2016 compared to $5.9 million in 2015. This increase in trust income was
primarily due to growth in both corporate and personal trust income.
51
BOLI income increased 46.8% to $14.8 million in 2016 compared to $10.1 million in 2015 primarily due to $145 million of
BOLI purchased in 2016. Additionally, during 2016, we recognized $0.8 million of tax-exempt death benefits compared to $2.3
million recognized during 2015. 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 decreased to $17.3 million in 2016 compared to $26.1 million in 2015. 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.
We had no significant net gains on investment securities in 2016 compared to net gains of $5.5 million in 2015 from the sale of
approximately $197 million of investment securities.
Gains on sales of other assets were $4.2 million in 2016 compared to $14.8 million in 2015. Included in the gains on sales were
$0.2 million of gains of loans in 2016 compared to $6.3 million of gains in 2015.
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, Inc. (“Bancshares”) acquisition and $8.0 million of gain on termination of our Federal
Deposit Insurance Corporation (“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 Bank of the Carolinas Corporation (“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
November.
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 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
52
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.
The following table presents non-interest income for the years indicated.
Non-Interest Income
2016
Service charges on deposit accounts
Mortgage lending income
Trust income
Bank owned life insurance income
Other income from purchased loans, net
Net gains on investment securities
Gains on sales of other assets
Gain on merger and acquisition transaction
Other
Total non-interest income
Non-Interest Expense
$
$
$
Year Ended December 31,
2015
(Dollars in thousands)
28,698
$
6,817
5,903
10,084
26,126
5,481
14,753
—
7,153
105,015
$
$
38,461
8,054
6,268
14,808
17,278
4
4,156
—
13,370
102,399
2014
26,609
5,187
5,592
5,184
14,803
144
6,023
4,667
16,674
84,883
Non-interest expense consists of salaries and employee benefits, net occupancy and equipment expense and other operating
expenses.
2016 compared to 2015
Non-interest expense for 2016 increased 33.9% to $255.8 million compared to $191.0 million for 2015. Non-interest expense
for 2016 included $6.7 million of acquisition-related and systems conversion expenses and $0.1 million of software and contract
termination charges. 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, approximately $6.7 million of acquisition-related and systems conversion expenses and $1.0
million of software and contract termination charges. Our efficiency ratio was 35.8% for 2016 compared to 38.4% for 2015.
Salaries and employee benefits, our largest component of non-interest expense, increased 39.7% to $122.8 million in 2016 from
$88.0 million in 2015. We had 2,315 full-time equivalent employees at December 31, 2016, an increase of 41.0% from 1,642 full-time
equivalent employees at December 31, 2015.
Net occupancy and equipment expense increased 36.1% to $42.5 million in 2016 compared to $31.2 million in 2015. At
December 31, 2016, we had 250 offices, an increase of 43.7% from 174 offices at December 31, 2015.
Other operating expenses increased 25.9% to $90.4 billion in 2016 compared to $71.8 billion in 2015. The increase in other
operating expense in 2016 compared to 2015 is primarily attributable to our growth, including growth as a result of our C&S and C1
acquisitions, as well as expenses to expand and enhance our infrastructure for information technology, information systems,
cybersecurity, business resilience, enterprise risk management, internal audit, compliance, bank secrecy act/anti-money laundering
monitoring and training, among others.
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,
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.
53
Salaries and employee benefits 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, an increase of 9.4% compared to 159 offices at December 31, 2014.
Other operating expenses increased 10.4% to $71.8 million 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 C&S and C1 transactions. 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.
The following table presents non-interest expense for the years indicated.
Non-Interest Expense
2016
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
Income Taxes
$
$
Year Ended December 31,
2015
(Dollars in thousands)
87,953
$
31,248
$
122,832
42,524
5,566
8,800
5,617
21,330
4,950
8,130
1,626
5,125
4,774
4,612
3,610
9,037
—
7,221
255,754
$
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
$
2014
76,884
24,102
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
Our provision for income taxes was $154.3 million in 2016 compared to $94.5 million in 2015 and $53.9 million in 2014. Our
effective income tax rates were 36.4% for 2016, 34.2% for 2015 and 31.2% for 2014. The increases in the effective tax rate for 2016
compared to 2015 and for 2015 compared to 2014 were due primarily to (i) growth in income that is subject to federal and/or state
income taxes, including a decrease in tax-exempt income as a percent of total income, and (ii) growth in taxable income in states with
higher statutory income tax rates. 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, 2016, 2015 and 2014 is included in Note 14 to the Consolidated Financial
Statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
54
Analysis of Financial Condition
Loan and Lease Portfolio
At December 31, 2016, our total loan and lease portfolio was $14.56 billion, an increase of 74.7% from $8.33 billion at
December 31, 2015. At December 31, 2016, our total loan and lease portfolio consisted of 83.0% real estate loans, 3.0% commercial
and industrial loans, 7.1% consumer loans, 0.9% direct financing leases and 6.0% 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.
The amount and type of total loans and leases outstanding are reflected in the following table.
Loan and Lease Portfolio
2016
2015
December 31,
2014
(Dollars in thousands)
2013
2012
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
737,206 $
638,958 $
491,694 $
$ 1,259,289 $
4,665,401
5,295,860
124,857
744,005
12,089,412
440,147
1,028,991
137,188
867,377
443,622
1,100,852
685,813
73,330
151,944
2,455,561
183,633
34,125
68,022
12,266
$14,563,115 $ 8,334,671 $ 5,127,817 $ 3,357,079 $ 2,753,607
2,008,430
1,511,614
95,223
253,590
4,507,815
356,532
40,937
115,475
107,058
1,420,769
795,933
65,864
234,713
3,008,973
157,721
33,148
86,321
70,916
3,146,413
2,873,398
94,358
580,325
7,431,700
291,803
35,232
147,735
428,201
Included in “other” loans at December 31, 2016, 2015, 2014 and 2013 (none at December 31, 2012) are loans totaling $835
million, $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.
55
The amount and type of our real estate loans at December 31, 2016 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.
Geographic Distribution of Real Estate Loans
New York:
New York–Newark–Jersey City, NY–NJ–PA MSA
All other New York(1)
Total New York
Florida:
Miami–Fort Lauderdale–West Palm Beach, FL MSA
Tampa–St. Petersburg–Clearwater, FL MSA
Orlando–Kissimmee–Sanford, FL MSA
North Port–Sarasota–Bradenton, FL MSA
Cape Coral–Fort Myers, FL MSA
Jacksonville, FL MSA
Crestview–Fort Walton Beach–Destin, FL MSA
Deltona–Daytona Beach–Ormond Beach, FL MSA
Lakeland–Winter Haven, FL MSA
Ocala, FL MSA
Punta Gorda, FL MSA
Sebastian–Vero Beach, FL MSA
Sebring, FL MSA
Naples–Immokalee–Marco Island, FL MSA
Palm Bay–Melbourne–Titusville, FL MSA
All other Florida(1)
Total Florida
Georgia:
Atlanta–Sandy Springs–Roswell, GA MSA
Savannah, GA MSA
Dalton, GA MSA
Athens–Clarke County, GA MSA
Gainesville, GA MSA
Brunswick, GA MSA
Macon, GA MSA
Valdosta, GA MSA
Augusta–Richmond County, GA–SC MSA
All other Georgia(1)
Total Georgia
Texas:
Dallas–Fort Worth–Arlington, TX MSA
Houston–The Woodlands–Sugar Land, TX MSA
Austin–Round Rock, TX MSA
Texarkana, TX–AR MSA
College Station–Bryan, TX MSA
Lubbock, TX MSA
Corpus Christi, TX MSA
San Antonio–New Braunfels, TX MSA
All other Texas(1)
Total Texas
Residential
1-4 Family
Non-Farm/
Non-
Residential
Construction/
Land
Development Agricultural
(Dollars in thousands)
Multifamily
Residential
Total
$
6,906 $ 530,089 $ 1,943,597 $
380
7,286
6,781
536,870
609
1,944,206
— $
—
—
63,811 $2,544,403
7,770
2,552,173
—
63,811
312,183
95,139
74,466
35,528
36,219
14,655
27,148
6,457
1,905
—
5,446
—
—
—
—
4,934
614,080
282,971
6,139
1,107
6,429
4,951
552
393
556
—
27,653
330,751
292,787
225,872
128,871
1,592
5,161
—
11,172
5,271
8,567
679,293
401
552
—
10,430
—
—
180
—
—
—
—
—
—
—
—
992
12,555
4,657
—
1,148
128
164
—
15
424
—
4,235
10,771
187
—
—
897
—
—
—
—
328
1,412
3,733
26,819
214
807
1,812
28,881
—
14,713
48
—
—
1,455
26
—
4,288
88
82,884
80,522
—
1,096
7,614
714
8,070
4,726
167
17
26,174
129,100
36,890
68,464
3,407
2,603
16,783
16,013
—
1,165
204
145,529
779,329
462,531
160,156
139,786
113,229
102,413
32,590
32,319
24,719
24,364
22,836
21,859
21,356
17,867
10,888
111,027
2,077,269
1,025,452
52,627
38,057
30,571
25,839
23,494
18,490
13,005
10,203
180,910
1,418,648
495,142
394,963
205,712
25,920
23,308
20,746
14,040
13,106
37,244
1,230,181
142,555
60,996
5,930
38,687
19,438
2,318
4,133
736
494
3,020
10,518
21
—
2,298
585
8,331
300,060
186,154
4,053
12,718
3,796
4,964
10,270
4,732
6,182
581
65,227
298,677
37,977
8,494
12,234
8,396
—
—
—
1,241
1,014
69,356
320,457
279,025
79,546
54,334
55,760
56,559
1,129
10,413
22,272
21,344
6,872
20,383
21,330
15,569
6,015
96,682
1,067,690
471,148
42,435
21,988
12,604
15,046
4,602
8,624
5,676
9,605
57,621
649,349
127,301
92,133
61,200
12,432
1,364
4,733
2,868
5,429
27,131
334,591
56
Geographic Distribution of Real Estate Loans (continued)
Residential
1-4 Family
Non-Farm/
Non-
Residential
Construction/
Land
Development
Agricultural
Multifamily
Residential
Total
(Dollars in thousands)
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
North Carolina/South Carolina:
Charlotte–Concord–Gastonia, NC–SC MSA
Raleigh, NC MSA
Winston–Salem, NC MSA
North Carolina Foothills(5)
Columbia, SC MSA
Wilmington, NC MSA
Charleston–North Charleston, SC MSA
Greensboro–High Point, NC MSA
Hilton Head Island–Bluffton–Beaufort, SC MSA
Myrtle Beach–Conway–North Myrtle Beach,
SC–NC MSA
Greenville–Anderson–Mauldin, 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
Riverside–San Bernardino–Ontario, CA MSA
San Francisco–Oakland–Hayward, CA MSA
San Diego–Carlsbad, CA MSA
Sacramento–Roseville–Arden–Arcade, CA MSA
Oxnard–Thousand Oaks–Ventura, CA MSA
San Jose–Sunnyvale–Santa Clara, CA MSA
Stockton–Lodi, CA MSA
All other California(1)
Total California
Colorado:
Denver–Aurora–Lakewood, CO MSA
Boulder, CO MSA
All other Colorado(1)
Total Colorado
Tennessee:
Nashville–Davidson–Murfreesboro–
Franklin, TN MSA
Chattanooga, TN–GA MSA
All other Tennessee(1)
Total Tennessee
58,235
18,711
34,771
7,541
2,172
7,734
3,032
10,956
143,152
115,357
35,111
5,116
5,488
1,248
7,532
22,119
3,259
4,653
886
3,467
35,102
1,260
240,598
148,137
1,540
15,128
69,369
57,872
39,371
27,432
22,032
—
380,881
167,793
—
44,407
212,200
111,587
10
210
111,807
12,170
851
11,005
2,620
19,478
6,374
12,042
25,354
89,894
1,246
—
—
2,916
—
418
—
244
—
—
—
—
—
4,824
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
22,459
4,047
343
13,213
1,015
1,172
2,757
4,460
49,466
13,453
17
952
1,532
—
—
5,190
2,248
2,329
4,945
—
461
555
31,682
—
38,768
—
—
—
—
—
—
—
38,768
—
—
—
—
—
—
—
—
532,003
166,256
123,030
108,083
69,979
69,342
62,233
79,113
1,210,039
320,692
90,294
87,450
81,557
44,309
44,266
41,008
40,964
21,065
15,990
12,185
69,354
17,355
886,489
286,534
142,486
88,588
69,373
57,872
39,371
27,432
22,032
4,818
738,506
178,358
38,533
45,771
262,662
212,986
34,117
11,153
258,256
158,442
52,723
280,697
89,924
59,791
58,247
18,838
33,303
12,555
18,774
572,129
136,152
54,693
36,508
27,407
41,333
27,186
12,359
19,188
10,187
6,382
2,651
24,275
13,028
411,349
138,397
102,178
73,460
—
—
—
—
—
4,818
318,853
10,556
38,533
—
49,089
101,399
33,404
9,095
143,898
17,120
26,462
28,476
20,759
31,847
19,569
355,398
54,484
473
44,874
44,214
1,728
9,130
1,340
16,025
3,896
3,777
6,067
9,516
2,512
198,036
—
—
—
4
—
—
—
—
—
4
9
—
1,364
1,373
—
703
1,848
2,551
57
Geographic Distribution of Real Estate Loans (continued)
Residential
1-4 Family
Non-Farm/
Non-
Residential
Construction/
Land
Development
Agricultural
Multifamily
Residential
Total
(Dollars in thousands)
177,712
—
—
212,037
Seattle–Tacoma–Bellevue, WA MSA
Arizona:
Phoenix–Mesa–Scottsdale, AZ MSA
All other Arizona(1)
Total Arizona
Illinois:
Chicago–Naperville–Elgin, IL–IN–WI MSA
Bloomington, IL MSA
All other Illinois(1)
Total Illinois
Nevada:
Las Vegas–Henderson–Paradise, NV MSA
Reno, NV MSA
Total Nevada
Cayman Islands
Washington DC / Maryland:
Washington–Arlington–Alexandria, DC–VA–
MD–WV MSA
All other Maryland(1)
Total Washington DC / Maryland
Alabama:
Birmingham–Hoover, AL MSA
Mobile, AL MSA
Huntsville, AL MSA
All other Alabama(1)
Total Alabama
Pennsylvania:
Philadelphia–Camden–Wilmington, PA–NJ–DE–
MD MSA
Lebanon, PA MSA
All other Pennsylvania(1)
Total Pennsylvania
Urban Honolulu, HI MSA
Oregon:
Portland–Vancouver–Hillsboro, OR–WA MSA
Bend–Redmond, OR MSA
All other Oregon(1)
Total Oregon
Ohio:
Cincinnati, OH–KY–IN MSA
Columbus, OH MSA
All other Ohio(1)
Total Ohio
—
—
—
—
2,182
—
—
2,182
—
—
—
—
322
—
322
785
4,987
—
15,397
21,169
—
—
114
114
—
—
—
—
—
—
—
—
—
58
34,325
19,838
2,596
22,434
1,867
12,284
1,362
15,513
80,533
10,440
90,973
121,612
11,038
1,397
12,435
—
13,140
8,860
4,504
26,504
—
18,557
21,497
40,054
143,549
—
143,549
136,799
—
1,207
138,006
—
—
—
—
62,399
—
62,399
19,946
824
1,507
3,537
25,814
33,424
—
—
33,424
—
—
—
11,285
8,372
19,657
25,500
7,095
2,985
35,580
14,874
—
—
14,874
—
4,546
—
4,546
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
432
432
—
—
—
—
—
—
—
—
—
—
—
—
—
32,784
—
32,784
—
—
—
—
37,997
—
37,997
196,171
2,596
198,767
140,848
12,284
2,569
155,701
118,530
10,440
128,970
—
121,612
—
8,923
8,923
—
740
—
3,314
4,054
—
—
—
—
73,759
10,320
84,079
20,731
19,691
10,367
27,184
77,973
33,424
18,557
21,611
73,592
61,017
61,017
23,408
—
—
23,408
—
—
—
—
38,282
11,285
8,372
57,939
25,500
11,641
2,985
40,126
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
Missouri:
St. Louis, MO–IL MSA
Kansas City, MO–KS MSA
All other Missouri(1)
Total Missouri
Minneapolis–St. Paul–Bloomington, MN MSA
Providence–Warwick, RI–MA MSA
Virginia:
Virginia Beach–Norfolk–Newport News,
VA–NC MSA
All other Virginia(1)
Total Virginia
Oklahoma:
Tulsa, OK MSA
All other Oklahoma(1)
Total Oklahoma
Kansas:
Manhattan, KS MSA
All other Kansas(1)
Total Kansas
Mississippi:
Gulfport–Biloxi–Pascagoula, MS MSA
All other Mississippi(1)
Total Mississippi
Louisiana
Bahamas
Connecticut
All other states(6)
—
73
504
577
—
—
—
619
619
—
927
927
—
—
—
—
—
—
402
9,019
4,667
14,088
27,978
25,727
7,279
8,861
16,140
8,379
2,881
11,260
—
758
758
9,537
487
10,024
112
3,395
—
—
11,451
10,591
—
1,535
2,536
4,071
—
—
4,047
4,600
8,647
—
30
30
18,172
—
18,172
1,700
881
2,581
—
—
—
526
31,084
5,067
—
—
867
867
—
—
—
—
—
19,362
—
—
19,362
—
—
—
76
76
—
3,532
3,532
2,008
3,999
6,007
—
—
—
—
—
—
—
—
—
—
570
570
—
—
—
—
19,764
10,627
8,574
38,965
27,978
25,727
11,326
14,156
25,482
10,387
11,369
21,756
18,172
758
18,930
11,237
1,938
13,175
9,137
12,644
—
—
—
11,451
10,591
36,677
Total Real Estate Loans
$1,259,289 $4,665,401 $ 5,295,860 $ 124,857 $ 744,005 $12,089,412
(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.
59
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
2016
Amount
December 31,
%
(Dollars in thousands)
Amount
2015
%
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
$
596,383
241,831
745,329
31,591
102,693
1,043,710
171,436
491,816
315,265
56,342
38,916
830,089
$ 4,665,401
12.8 % $
557,528
164,011
996,793
225,417
47,196
373,272
72,784
53,092
58,498
88,180
18,182
491,460
100.0 % $ 3,146,413
5.2
16.0
0.7
2.2
22.4
3.7
10.5
6.8
1.2
0.8
17.7
17.7 %
5.2
31.7
7.2
1.5
11.9
2.3
1.7
1.8
2.8
0.6
15.6
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.
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
2016
Amount
$
291,131
Amount
%
(Dollars in thousands)
5.5 % $
237,138
2015
%
610,662
684,979
11.5
12.9
494,704
172,268
8.3 %
17.2
6.0
123,099
2.3
33,120
1.1
1,147,198
201,111
712,547
1,525,133
$ 5,295,860
21.7
3.8
13.5
28.8
26,538
130,966
809,063
969,601
100.0 % $ 2,873,398
0.9
4.6
28.2
33.7
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. For any
construction and development loan with interest reserves, we also consider the construction period interest in our underwriting process
(otherwise, our underwriting of such loans with and without interest reserves is virtually identical). 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 equity and all other required subordinated elements of the capital structure
be fully funded 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
60
typically fund the majority of the construction period interest through loan advances. Generally, as part of our underwriting process,
we 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. While we had advanced interest reserves as part of the funding process, we
believe that the borrowers in effect had in most cases provided for these sums as part of their initial equity contribution. During the
years ended December 31, 2016, 2015 and 2014, there were no situations where additional interest reserves were advanced on a loan
to avoid such loan from becoming nonperforming, and at December 31, 2016, 2015 and 2014, we had no construction and
development loans with interest reserves that were nonperforming.
During the years ended December 31, 2016, 2015 and 2014, we recognized approximately $112 million, $60 million and $23
million, respectively, of interest income on construction and development loans from the advance of interest reserves. We advanced
construction period interest on construction and development loans totaling approximately $104 million, $58 million and $21 million,
respectively, during the years ended December 31, 2016, 2015 and 2014.
The maximum committed balance of all construction and development loans which provide for the use of interest reserves at
December 31, 2016 was approximately $13.58 billion, of which $4.79 billion was outstanding at December 31, 2016 and $8.79 billion
remained to be advanced. The weighted average LTC 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 LTV ratio on such loans, based on the most recent appraisals
and assuming such loans are ultimately fully advanced, is expected to be approximately 43%.
The following table reflects total loans and leases grouped by remaining maturities at December 31, 2016 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
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 Year or
Less
Over 1
Through
5 Years
Over
5 Years
Total
(Dollars in thousands)
$ 3,610,965
112,137
7,957
54,560
459,312
$ 4,244,931
$ 6,621,461
259,974
260,305
81,852
388,702
$ 7,612,294
$ 1,856,986
68,036
760,729
776
19,363
$ 2,705,890
$ 12,089,412
440,147
1,028,991
137,188
867,377
$ 14,563,115
$
713,284
2,808,046
717,352
6,249
$ 4,244,931
$ 2,182,895
4,439,151
990,126
122
$ 7,612,294
$ 1,555,280
705,280
441,980
3,350
$ 2,705,890
$ 4,451,459
7,952,477
2,149,458
9,721
$ 14,563,115
61
The following table reflects total loans and leases as of December 31, 2016 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 at 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 at 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 2
Through
3 Years
Over 3
Through
5 Years
(Dollars in thousands)
$ 1,057,351 $ 901,413 $619,262 $ 833,552 $1,039,881 $ 4,451,459
7,952,477
2,149,458
9,721
$10,554,129 $1,011,416 $780,946 $1,136,702 $1,079,922 $14,563,115
7,674,756
1,812,352
9,670
121,854
181,254
42
59,871
50,128
4
72,837
88,842
5
23,159
16,882
—
Over 5
Years
Total
72.5 %
72.5 %
6.9 %
79.4 %
5.4 %
84.8 %
7.8 %
92.6 %
7.4 %
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 in “Item 7A. Quantitative and Qualitative
Disclosures About Market Risk – Interest Rate Risk” in this Annual Report on Form 10-K includes consideration of the effect of all interest
rate floors and ceilings in loans and leases.
At December 31, 2016, most 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)
$
593,271 $ 5,737,615 $
448,736
827,748
279,703
554,257
1,311,181
349,424
$ 2,149,458 $ 7,952,477 $
— $ 6,330,886
1,002,993
—
2,148,649
9,720
629,128
1
9,721 $ 10,111,656
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.
62
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
December 31,
2016
2015
(Dollars in thousands)
$
$
4,809,224
(92,821 )
4,716,403
319,733
(78,114 )
241,619
4,958,022
$
$
1,613,563
(24,312 )
1,589,251
284,410
(67,624 )
216,786
1,806,037
On July 20, 2016 and July 21, 2016, the dates we closed our C&S and C1 acquisitions, respectively, each outstanding loan in
C&S’ and C1’s loan portfolio was categorized into (i) a loan with evidence of credit deterioration or (ii) a loan without evidence of
credit deterioration. During the fourth quarter of 2016, we revised our initial estimates and assumptions regarding the recovery of
certain loans acquired in our C&S and our C1 acquisitions. As a result, we increased the initial fair value of loans acquired in our
C&S acquisition by $3.6 million, and we reduced the initial fair value of loans acquired in our C1 acquisition by $1.2 million.
The following table is a summary of the loans acquired in the C&S and C1 acquisitions with evidence of credit deterioration at
the date of acquisition.
Fair Value Adjustments for Purchased
Loans With Evidence of Credit Deterioration
at Date of C&S and C1 Acquisitions
C&S
as of
July 20, 2016
C1
as of
July 21, 2016
$
(Dollars in thousands)
106,109
(28,946 )
77,163
(11,793 )
65,370
$
111,700
(37,255 )
74,445
(7,315 )
67,130
Contractually required principal and interest
Nonaccretable difference
Cash flows expected to be collected
Accretable difference
Total
$
$
63
The following 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 the date of acquisition in each
of the C&S and C1 acquisitions.
Fair Value Adjustment for Purchased Loans
Without Evidence of Credit Deterioration at
Date of C&S Acquisition
Unpaid
Principal
Balance
Fair
Value
Adjustment
Day 1
Fair Value
$ 1,019,910 $
1,477,936
549,887
$ 3,047,733 $
(Dollars in thousands)
(12,626 ) $ 1,007,284
(41,850 )
1,436,086
(26,080 )
523,807
(80,556 ) $ 2,967,177
Fair Value Adjustment for Purchased Loans
Without Evidence of Credit Deterioration at
Date of C1 Acquisition
Unpaid
Principal
Balance
Fair
Value
Adjustment
Day 1
Fair Value
$
242,171 $
747,409
280,600
$ 1,270,180 $
(Dollars in thousands)
(2,182 ) $
(15,595 )
(7,729 )
239,989
731,814
272,871
(25,506 ) $ 1,244,674
Weighted
Average
Fair Value
Adjustment
(in bps)
124
283
474
264
Weighted
Average
Fair Value
Adjustment
(in bps)
90
209
275
201
Risk Rating
FV 33
FV 44
FV 55
Total
Risk Category
FV 33
FV 44
FV 55
Total
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.
64
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
2016
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
$
$
$
Year Ended December 31,
2015
(Dollars in thousands)
276,480
$
37,677
71,996
(7,886 )
(148,175 )
(12,601 )
(1,815 )
1,110
216,786
$
$
216,786
29,974
132,500
(4,296 )
(131,488 )
—
(2,152 )
295
241,619
2014
392,421
46,466
40,035
(42,306 )
(151,559 )
—
(8,654 )
77
276,480
A summary of changes in the accretable differences on purchased loans with evidence of credit deterioration at the date of
acquisition is shown below for the periods indicated.
Accretable Difference on Purchased Loans
With Evidence of Credit Deterioration
At Date of Acquisition
2016
Accretable difference – beginning of year
Transfers to foreclosed assets
Purchased loans paid off
Purchased loans sold
Cash flow revisions as a result of renewals and/or modifications
Accretable difference acquired
Accretion
Other, net
Accretable difference – end of year
Nonperforming Assets
$
$
59,176
(358 )
(6,094 )
—
23,294
19,108
(29,974 )
—
65,152
Year Ended December 31,
2015
(Dollars in thousands)
$
$
74,167
(418 )
(17,714 )
(1,573 )
30,862
11,546
(37,677 )
(17 )
59,176
$
$
2014
83,455
(1,657 )
(15,909 )
—
47,359
6,732
(46,466 )
653
74,167
Nonperforming assets consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days or more past due,
(3) TDRs and (4) real estate or other assets that have been acquired in partial or full satisfaction of loan or lease obligations or upon
foreclosure. Purchased loans are not included in the following table as nonperforming assets, except for their inclusion in total assets.
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 at 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.
65
Income on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs which continue to accrue
interest, is recognized on a cash basis when and if actually collected.
The following table presents information, excluding purchased 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
Nonperforming loans and leases to total loans and
leases(2)
Nonperforming assets to total assets(2)
Nonperforming Assets
2016
2015
$
$
14,371
—
—
14,371
43,702
58,073
$
$
13,194
—
—
13,194
22,870
36,064
December 31,
2014
(Dollars in thousands)
$
$
21,085
—
—
21,085
37,775
58,860
$
$
2013
2012
8,737
—
—
8,737
49,811
58,548
$
$
9,109
—
—
9,109
66,875
75,984
0.15 %
0.31
0.20 %
0.37
0.53 %
0.87
0.33 %
1.22
0.43 %
1.88
(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, 2016, we had reduced the carrying value of our loans and leases deemed impaired (all of which were included
in nonaccrual loans and leases) by $5.8 million to the estimated fair value of such loans and leases of $10.2 million. The adjustment to
reduce the carrying value of impaired loans and leases to estimated fair value consisted of $3.0 million of partial charge-offs and $2.8
million of specific loan and lease loss allocations. These amounts do not include our $6.5 million of impaired purchased loans at
December 31, 2016.
The following table is a summary of activity within foreclosed assets during the periods indicated.
Activity Within Foreclosed Assets
2016
$
Year Ended December 31,
2015
(Dollars in thousands)
37,775
$
19,347
(31,923 )
(3,803 )
1,474
22,870
$
$
22,870
25,103
(26,446 )
(3,626 )
25,801
43,702
2014
49,811
55,984
(68,211 )
(6,533 )
6,724
37,775
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
$
$
66
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
Total real estate
Commercial and industrial
Consumer
Foreclosed assets
December 31,
2016
2015
(Dollars in thousands)
$
$
3,762
17,207
21,568
473
43,010
293
399
43,702
$
$
3,030
7,174
11,858
492
22,554
316
—
22,870
The following table presents information concerning the geographic location of nonperforming assets, excluding purchased
loans, at December 31, 2016. 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
$
$
7,244 $
532
482
46
—
5,239
109
719
14,371 $
11,285 $
11,524
3,134
16,271
541
175
484
288
43,702 $
18,529
12,056
3,616
16,317
541
5,414
593
1,007
58,073
As of December 31, 2016, 2015 and 2014, 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 $2.9 million during 2016, $2.5 million during 2015 and $3.2 million during 2014 for such loans. We also recorded $3.3
million during 2016, $3.7 million during 2015 and $3.2 million during 2014 of provision for purchased loans. We had $1.6 million of
ALLL at December 31, 2016 and $1.2 million at December 31, 2015 (none at December 31, 2014) 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 $6.5 million of impaired purchased loans at December 31, 2016, $8.1 million
of impaired purchased loans at December 31, 2015 and $14.0 million of impaired purchased loans at December 31, 2014.
67
The following table is a summary, as of the dates indicated, of impaired purchased loans.
Impaired Purchased Loans
2016
2015
December 31,
2014
(Dollars in thousands)
2013
2012
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
$
$
1,243
$
771
$
748
$
— $
—
5,273
6,516
$
0.13 %
7,283
8,054
$
0.45 %
13,292
14,040
$
46,179
46,179
$
38,463
38,463
1.22 %
6.37 %
6.03 %
Allowance and Provision for Loan and Lease Losses
Our ALLL was $76.5 million at December 31, 2016 compared to $60.9 million at December 31, 2015 and $52.9 million at
December 31, 2014. At December 31, 2016, we allocated $1.6 million of ALLL to our purchased loan portfolio, compared to $1.2
million at December 31, 2015. At December 31, 2014 we had no ALLL for our purchased loan portfolio. Excluding purchased loans,
our ALLL as a percentage of nonperforming loans and leases was 521% at December 31, 2016 compared to 452% at December 31,
2015 and 251% at December 31, 2014. 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.
In recent years, we have focused on loan transactions that include various combinations of (i) marquee properties, (ii) strong and
capable sponsors or borrowers, (iii) low leverage, and (iv) defensive loan structure. At the same time, our loan portfolio has expanded
throughout the United States and consists of a diversified portfolio in terms of geographic location. We consider this geographic
diversification to be a substantial source of strength in regard to portfolio credit quality. Additionally, we have continued to focus on
originating high quality loans at low leverage. At December 31, 2016, our ratios of weighted-average LTC and weighted-average LTV
on construction loans with interest reserves, assuming such loans are ultimately fully funded, were approximately 50% and
approximately 43%, respectively. Each of these factors mentioned above has contributed to our favorable asset quality ratios and net
charge-off ratios in recent years. In addition, these factors have also helped to contribute to recent decreases in our ratio of ALLL to
total non-purchased loans and leases.
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 2016 was $23.8 million, including
$20.5 million for non-purchased loans and leases and $3.3 million for purchased loans, compared to $19.4 million in 2015, including
$15.7 million for non-purchased loans and leases and $3.7 million for purchased loans, and $16.9 million in 2014, including $13.7
million for non-purchased loans and leases and $3.2 million for purchased loans.
Our ALLL allocated to non-purchased loans and leases as a percent of total non-purchased loans and leases decreased to 0.78%
at December 31, 2016 compared to 0.91% at December 31, 2015 and 1.33% at December 31, 2014, primarily as a result of the low
level of net charge-offs in recent quarters, our conservative underwriting practices, our general trends in recent years of lower LTC
and LTV ratios in our construction and development portfolio and generally improving economic conditions in many of our markets.
While we believe our ALLL at December 31, 2016 and related provision for 2016 were appropriate, changing economic and other
conditions may require future adjustments to the ALLL or the amount of provision thereto.
68
The following table is an analysis of the ALLL for the periods indicated.
Analysis of the ALLL
2016
2015
Balance, beginning of period
Non-purchased loans and leases charged off:
Real estate:
$
60,854 $
Year Ended December 31,
2014
(Dollars in thousands)
42,945 $
52,918 $
2013
2012
38,738 $
39,169
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
charged 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
(406 )
(323 )
(42)
(37)
—
(808 )
(118 )
(228 )
(3,143 )
(1,744 )
(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 )
(6,041 )
(10,091 )
(5,123 )
(4,327 )
(6,636 )
52
10
68
—
14
144
78
37
36
533
828
(5,213 )
(5,675 )
2,783
(2,892 )
(8,105 )
86
15
83
—
—
184
299
54
27
563
1,127
(8,964 )
(2,982 )
467
(2,515 )
(11,479 )
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 )
20,500
3,292
23,792
76,541 $
74,941 $
1,600
76,541 $
15,700
3,715
19,415
60,854 $
59,654 $
1,200
60,854 $
13,700
3,215
16,915
52,918 $
52,918 $
—
52,918 $
7,400
4,675
12,075
42,945 $
42,945 $
—
42,945 $
$
$
$
107
18
106
141
—
372
35
238
2
8
655
(5,981 )
(6,195 )
—
(6,195 )
(12,176 )
5,550
6,195
11,745
38,738
38,738
—
38,738
69
The following is a summary of our net charge-off and various ALLL ratios for the periods indicated.
Net Charge-Off and ALLL 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 total loans and leases to
total average loans and leases
ALLL for non-purchased loans and leases to total
non-purchased loans and leases(2)
ALLL for purchased loans to total purchased loans
ALLL to total loans and leases
ALLL to nonperforming loans and leases(2)
2016
Year Ended December 31,
2014
2013
2015
2012
0.06 %
0.18 %
0.12 %
0.14 %
0.30 %
0.09
0.07
0.78
0.03
0.53
521 %
0.14
0.17
0.91
0.07
0.73
452 %
0.29
0.16
1.33
—
1.03
251 %
0.70
0.26
1.63
—
1.28
492 %
0.86
0.46
1.83
—
1.41
425 %
(1)
(2)
Excludes purchased loans and net charge-offs related to such loans.
Excludes purchased loans and ALLL allocated 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.
Allocation of the ALLL
2016
2015
% of
Loans
and
Leases(1)
% of
Loans
and
Leases(1)
Allowance
Allowance
December 31,
2014
% of
Loans
and
Leases(1)
Allowance
(Dollars in thousands)
2013
2012
% of
Loans
and
Leases(1)
Allowance
% of
Loans
and
Leases(1)
Allowance
ALLL for non-purchased
loans and leases:
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 ALLL for non-
purchased loans
and leases
ALLL for purchased loans
Total ALLL
$ 10,225
5.0 % $ 8,672
5.4 % $ 5,482
7.1 % $ 4,701
9.5 % $ 4,820
12.9 %
21,555
24.8
16,796
30.8
17,190
37.8
13,633
41.9
10,107
38.1
20,673
2,787
2,447
2,359
1,945
10,684
2,266
49.6
1.0
4.5
2.4
2.3
1.4
9.0
18,176
3,388
3,031
2,574
707
3,835
2,475
43.3
1.1
6.8
3.5
0.4
2.3
6.4
15,960
2,558
2,147
4,873
818
2,989
901
35.5
1.2
5.3
7.2
0.6
2.9
2.4
12,306
3,000
2,504
2,855
917
2,266
763
27.4
1.8
7.9
4.7
1.0
3.3
2.5
12,000
2,878
2,030
3,655
1,015
2,050
183
27.4
2.4
6.7
7.6
1.4
3.2
0.3
74,941
1,600
$ 76,541
59,654
1,200
$ 60,854
52,918
—
$ 52,918
42,945
—
$ 42,945
38,738
—
$ 38,738
(1)
Excludes purchased loans.
70
The amounts shown in the previous table 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 ALLL 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).
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 and the list of loans and leases with specific reserves, 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 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, 2016 substandard loans and leases, excluding
purchased loans, not designated as impaired, nonaccrual or 90 days past due, totaled $9.8 million, compared to $10.3 million at
December 31, 2015 and $11.7 million at December 31, 2014. No loans or leases were designated as doubtful or loss at December 31,
2016, 2015 or 2014.
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 Banking (“Dir-CB”) 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-CB 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
our CCO. At least quarterly the board of directors or the Directors’ Loan Committee reviews summary reports of past due loans and
leases, internally classified and watch list loans and leases, activity in our 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
risk committee.
Investment Securities
At December 31, 2016, 2015 and 2014, 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).
71
The following table presents the amortized cost and estimated fair value of investment securities as of the dates indicated. Our
investment in the “CRA qualified investment fund” includes shares held in a mutual fund that qualify under the Community
Reinvestment Act of 1977 for community reinvestment purposes. 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
2016
December 31,
2015
2014
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
Amortized
Cost
Estimated
Fair
Value
Estimated
Fair
Value
(Dollars in thousands)
$ 946,886 $ 919,013 $ 415,095 $ 427,278 $ 555,335 $ 573,209
251,233
654
—
14,225
$1,511,490 $1,471,612 $ 589,490 $ 602,348 $ 816,068 $ 839,321
146,265
3,562
1,038
23,530
535,490
9,915
1,034
6,160
245,854
654
—
14,225
146,950
3,562
1,028
23,530
547,297
10,086
1,061
6,160
Estimated
Fair
Value
Our investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $8.7 million and
gross unrealized losses of $48.6 million at December 31, 2016; gross unrealized gains of $14.0 million and gross unrealized losses of
$1.2 million at December 31, 2015; and gross unrealized gains of $24.4 million and gross unrealized losses of $1.2 million at
December 31, 2014. We believe that all of the unrealized losses on individual investment securities at December 31, 2016, 2015 and
2014 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.
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, 2016:
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Other equity securities
Total
December 31, 2015:
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Other equity securities
Total
Amortized
Cost
Unaccreted
Discount
Unamortized
Premium
Par
Value
(Dollars in thousands)
$
946,886 $
547,297
10,086
1,061
6,160
$ 1,511,490 $
$
$
415,095 $
146,265
3,562
1,038
23,530
589,490 $
6,124 $
119
5,500
—
—
11,743 $
6,165 $
227
25
—
—
6,417 $
(36,567 ) $
(19,002 )
(72 )
—
—
916,443
528,414
15,514
1,061
6,160
(55,641 ) $ 1,467,592
(4,747 ) $
(4,363 )
(9 )
—
—
(9,119 ) $
416,513
142,129
3,578
1,038
23,530
586,788
We recognized premium amortization, net of discount accretion, of $6.6 million during 2016, $0.4 million during 2015 and $0.6
million during 2014. Any premium amortization or discount accretion is considered an adjustment to the yield of our investment
securities.
We had net gains of $4,000 in 2016 from the sale of approximately $0.5 million of investment securities, compared to net gains
of $5.5 million in 2015 from the sale of approximately $197 million of investment securities and net gains of $0.1 million in 2014
72
from the sale of approximately $56 million of investment securities. Investment securities totaling $182 million in 2016, $160 million
in 2015 and $103 million in 2014 matured or were called by the issuer. We purchased investment securities totaling $652 million in
2016, $92 million in 2015 and $56 million in 2014.
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.
The following table presents the types and estimated fair values of our investment securities at December 31, 2016 based on
credit ratings by one or more nationally-recognized credit rating agencies.
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
Credit Ratings of Investment Securities
AAA(1)
AA(2)
A(3)
BBB(4)
(Dollars in thousands)
Non-Rated(5)
Total
$ 162,438
50,448
—
—
6,160
$ 219,046
$ 412,107
485,042
—
—
—
$ 897,149
$ 160,438
—
519
—
—
$ 160,957
$
$
17,566
—
9,396
—
—
26,962
$ 166,464
—
—
1,034
—
$ 167,498
$
919,013
535,490
9,915
1,034
6,160
$ 1,471,612
14.9 %
14.9 %
60.9 %
75.8 %
11.0 %
86.8 %
1.8 %
88.6 %
11.4 %
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).
73
The following table reflects the expected maturity distribution of our investment securities, at estimated fair value, at
December 31, 2016 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, 2016, 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
$
$
9,249
71,416
—
—
—
80,665
Over 1
Through 5
Years
$
70,380
231,701
3,000
—
—
$ 305,081
Over 5
Through
10 Years
(Dollars in thousands)
$ 142,042
176,205
2,963
—
—
$ 321,210
Over 10
Years
Total
$ 697,342
56,168
3,952
1,034
6,160
$ 764,656
$ 919,013
535,490
9,915
1,034
6,160
$ 1,471,612
5.5 %
5.5 %
2.39 %
20.7 %
26.2 %
2.57 %
21.8 %
48.0 %
3.10 %
52.0 %
100.0 %
4.60 %
100.0 %
3.73 %
(1)
Includes approximately $5.8 million of FHLB stock which has historically paid quarterly dividends at a variable rate approximating the federal
funds rate.
Deposits
Our lending and investing activities are funded primarily by deposits. On July 20, 2016, we assumed $3.27 billion of deposits as
a result of our acquisition of C&S and on July 21, 2016, we assumed $1.30 billion of deposits as a result of our acquisition of C1. 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 $3.04 billion in 2016, $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
2016
December 31,
2015
(Dollars in thousands)
2014
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
$ 2,589,458
16.6 % $1,515,482
19.0% $1,145,454
20.8 %
2,751,283
5,297,074
1,741,307
3,195,759
$15,574,881
1,398,104
17.7
2,619,400
34.0
921,680
11.2
20.5
1,516,802
100.0 % $7,971,468
17.5
32.9
11.6
19.0
1,031,255
1,861,734
660,711
797,228
100.0% $5,496,382
18.8
33.9
12.0
14.5
100.0 %
At December 31, 2016, we had outstanding brokered deposits of $1.99 billion, compared to $677 million at December 31, 2015
and $210 million at December 31, 2014.
74
We use brokered deposits, subject to certain limitations and requirements, as a source of funding to augment deposits generated
from our branch network, which are our principal source of funding. Our board of directors has established policies and procedures
with respect to the use of brokered deposits. Such policies and procedures require, among other things, that (i) we limit the amount of
brokered deposits as a percentage of total deposits and (ii) our ALCO Committee (“ALCO”), which reports to the board of directors,
monitor our use of brokered deposits on a regular basis, including interest rates and the total volume of such deposits in relation to our
total liabilities. ALCO has typically approved the use of brokered deposits when such deposits are (i) from respected and stable
funding sources and (ii) less costly to us than the marginal cost of additional deposits generated from our branch network.
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
2016
Average
Balance
Average
Rate
Paid
Year Ended December 31,
2015
Average
Rate
Average
Paid
Balance
(Dollars in thousands)
2014
Average
Balance
Average
Rate
Paid
$ 2,006,933
— $1,301,574
— $ 989,073
—
1,829,321
4,068,500
1,448,166
2,439,447
$11,792,367
0.29 % 1,226,592
2,330,445
0.37
880,189
0.58
1,244,879
0.82
$6,983,679
0.50
0.19%
0.24
0.38
0.51
0.31
979,500
1,584,750
541,938
558,389
$4,653,650
0.13 %
0.34
0.28
0.29
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
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,
2016
(Dollars in thousands)
$
$
741,575
715,786
1,170,455
567,943
3,195,759
75
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
Arkansas
Georgia
Texas
Florida
North Carolina
New York
Alabama
South Carolina
Total
2016
Amount
%
December 31,
2015
Amount
(Dollars in thousands)
%
2014
Amount
%
$ 6,309,230
3,714,963
2,056,956
2,015,492
890,091
378,348
107,458
102,343
$15,574,881
40.5 % $3,783,703
722,675
23.9
1,312,538
13.2
739,955
12.9
838,361
5.7
399,933
2.4
110,283
0.7
64,020
0.7
100.0 % $7,971,468
47.5% $2,912,291
675,801
996,908
141,266
599,184
—
124,469
46,463
100.0% $5,496,382
9.1
16.5
9.3
10.5
5.0
1.4
0.7
53.0 %
12.3
18.1
2.6
10.9
—
2.3
0.8
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, federal funds purchased),
subordinated notes 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 notes
Subordinated debentures
Total other interest bearing liabilities
2016
Average
Balance
$ 64,044
46,949
116,679
117,958
$ 345,630
Average
Rate
Paid
Year Ended December 31,
2015
Average
Rate
Average
Paid
Balance
(Dollars in thousands)
2014
Average
Balance
Average
Rate
Paid
0.14 % $ 73,995
187,608
2.49
—
5.83
111,409
3.73
$ 373,012
3.60
0.10% $ 63,869
281,829
3.26
—
—
64,950
3.29
$ 410,648
2.64
0.09 %
3.78
—
2.61
3.02
(1)
Included in other borrowings at December 31, 2016 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.
On June 23, 2016, we completed an underwritten public offering of $225 million in aggregate principal amount of our 5.50%
Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Notes”) for net proceeds of $222.3 million after underwriter discounts and
offering expenses. The Notes are unsecured, subordinated debt obligations of the Company and will mature on July 1, 2026. The
Notes will bear interest at an initial rate of 5.50% per annum. Beginning July 1, 2021, the Notes will bear interest at a floating rate
equal to three-month LIBOR plus a spread of 442.5 basis points; provided, however, that in the event three-month LIBOR is less than
zero, then three-month LIBOR shall be deemed to be zero. Debt issuance costs of $2.7 million are being amortized, using a level-
yield methodology over the estimated holding period of seven years, as an increase in interest expense on the Notes.
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 in 2015 compared to 2014 is due to $52.2 million (net of purchase accounting adjustments) of subordinated debentures
assumed in the Intervest transaction.
76
Capital Resources and Liquidity
Capital Resources
Subordinated Notes. On June 23, 2016, we completed an underwritten public offering of $225 million in aggregate principal
amount of our Notes. The Notes are unsecured, subordinated debt obligations and mature on July 1, 2026. From and including the
date of issuance to, but excluding July 1, 2021, the Notes bear interest at an initial rate of 5.50% per annum. From and including
July 1, 2021 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-
month LIBOR as calculated on each applicable date of determination plus a spread of 442.5 basis points; provided, however, that in
the event three-month LIBOR is less than zero, then three-month LIBOR shall be deemed to be zero.
We may, beginning with the interest payment date of July 1, 2021, and on any interest payment date thereafter, redeem the
Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and
unpaid interest to, but excluding the date of redemption. We may also redeem the Notes at any time, including prior to July 1, 2021, at
our option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent us from deducting interest
payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being
recognized as Tier 2 capital for regulatory capital purposes; or (iii) we are required to register as an investment company under the
Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes
plus any accrued and unpaid interest to but excluding the redemption date. The Notes provide us with additional Tier 2 regulatory
capital to support our expected future growth.
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, 2016, 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,
2016
Carrying Value
of Subordinated
Debentures at
December 31,
2016
Trust
Preferred
Securities
of the
Trusts
Contractual
Interest Rate at
December 31,
2016
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
$
$
(Dollars in thousands)
14,433
14,434
15,464
20,619
14,919
14,834
14,318
9,221
118,242
— $
—
—
—
(545 )
(630 )
(1,146 )
(1,089 )
(3,410 ) $
$
$
14,000
14,000
15,000
20,000
15,000
15,000
15,000
10,000
118,000
3.90 % September 29, 2033
September 25, 2033
3.83
September 28, 2034
3.14
December 15, 2036
2.56
September 17, 2033
3.94
3.78 March 17, 2034
3.40
2.61
September 20, 2034
December 15, 2036
Our subordinated debentures and trust preferred 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” in this MD&A for a discussion of our trust preferred securities and their inclusion in our regulatory
capital.
Other Sources of Capital. 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.
77
Common Stockholders’ Equity and Reconciliation of Non-GAAP Financial Measures. We use non-GAAP financial measures,
specifically 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.
Calculation of Tangible Common Stockholders’ Equity
and 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 other intangibles, net of
accumulated amortization
Total intangibles
Total tangible common stockholders’ equity
Total assets
Less intangible assets:
Goodwill
Core deposit and other 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
2016
December 31,
2015
(Dollars in thousands)
2014
$
2,791,607
$
1,464,631
$
908,390
(660,119 )
(125,442 )
(78,669 )
(60,831 )
(720,950 )
2,070,657
18,890,142
(660,119 )
(60,831 )
(720,950 )
18,169,192
$
$
$
$
$
$
(26,898 )
(152,340 )
1,312,291
9,879,459
(125,442 )
(26,898 )
(152,340 )
9,727,119
$
$
$
(26,907 )
(105,576 )
802,814
6,766,499
(78,669 )
(26,907 )
(105,576 )
6,660,923
14.78 %
14.83 %
13.42 %
11.40 %
13.49 %
12.05 %
Calculation of Total Tangible Common
Stockholders’ Equity and Tangible Book
Value per Common Share
Total common stockholders’ equity before noncontrolling
interest
Less intangible assets:
Goodwill
Core deposit and other 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
2016
December 31,
2015
2013
2014
(In thousands, except per share amounts)
2012
$ 2,791,607 $ 1,464,631 $
908,390 $
629,060 $
507,664
(660,119 )
(125,442 )
(78,669 )
(5,243 )
(5,243 )
(60,831 )
(720,950 )
(26,898 )
(152,340 )
$ 2,070,657 $ 1,312,291 $
121,268
23.02
17.08
$
$
$
$
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 $
(6,584 )
(11,827 )
495,837
70,544
7.18
7.03
78
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 other 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
2016
2015
$ 269,979
$ 182,253
Year Ended December 31,
2014
(Dollars in thousands)
$
$ 118,606
2013
2012
91,237
$
77,044
$ 2,068,328
$ 1,217,475
$ 786,430
$ 560,351
$ 458,595
(363,324 )
(118,013 )
(51,793 )
(5,243 )
(5,243 )
(43,623 )
(406,947 )
$ 1,661,381
(28,660 )
(146,673 )
$ 1,070,802
(21,651 )
(73,444 )
$ 712,986
(9,661 )
(14,904 )
$ 545,447
(6,774 )
(12,017 )
$ 446,578
13.05%
16.25%
14.97 %
17.02 %
15.08 %
16.63 %
16.28 %
16.73 %
16.80 %
17.25 %
Common Stock Dividend Policy. In 2016 we paid dividends of $0.63 per common share, compared to $0.55 per common share
in 2015 and $0.47 per common share in 2014. On January 3, 2017, our board of directors approved a dividend of $0.17 per common
share that was paid on January 27, 2017 to shareholders of record on January 20, 2017. 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 in “Item 8. Financial Statement and Supplementary Data” of this Annual Report on Form 10-K for a
discussion of dividend restrictions.
Capital Compliance
Regulatory Capital. We are 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 our financial condition and results of operations. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative
measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our 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. The
tier 1 capital for our holding company consists of common equity tier 1 capital and, prior to the third quarter of 2016, $118 million of
trust preferred securities issued by the Trusts. The Basel III Rules include certain provisions that require trust preferred securities to be
phased out of, or no longer be considered, qualifying tier 1 capital for certain institutions depending on the size of the institution as
measured by total assets. As a result of our acquisitions of C&S on July 20, 2016 and C1 on July 21, 2016, our total assets exceeded
$15 billion. Accordingly, pursuant to the Basel III Rules, our trust preferred securities are no longer included in tier 1 capital as of
September 30, 2016, but continue to be included in total capital.
79
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 to avoid significant variations in the level of capital depending upon the impact
of interest rate fluctuations on the fair value of our 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, for the Company, the trust preferred securities and the subordinated notes.
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 began
phasing in January 1, 2016 at 0.625% of risk-weighted assets, and will increase each year 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 4.0%.
Additionally, in order to be considered well-capitalized under the Basel III Rules, we must maintain (i) a ratio of 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%.
80
The following table presents actual and required capital ratios as of December 31, 2016 and 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, 2016 and 2015, respectively, based on the 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, 2016:
Tier 1 leverage to average assets:
Company
Bank
$2,093,548 11.99 % $ 698,438
698,597
2,405,095 13.77
4.00 % $ 698,438
698,597
4.00
4.00 %
4.00 $ 873,246
N/A N/A
5.00 %
Common equity tier 1 to risk-
weighted assets:
Company
Bank
Tier 1 capital to risk-weighted assets:
2,093,548
9.99
2,405,095 11.48
1,074,382 5.125
1,073,635 5.125
1,467,448
1,466,428
7.00
7.00
N/A N/A
6.50
1,361,684
Company
Bank
2,093,548
9.99
2,405,095 11.48
1,388,835 6.625
1,387,870 6.625
1,781,902
1,780,663
8.50
8.50
N/A N/A
8.00
1,675,918
Total capital to risk-weighted assets:
Company
Bank
2,513,089 11.99
2,481,636 11.85
1,808,106 8.625
1,806,849 8.625
2,201,173 10.50
2,199,643 10.50
N/A N/A
2,094,898 10.00
December 31, 2015:
Tier 1 leverage to average assets:
Company
Bank
$1,417,940 14.96 % $ 379,116
378,900
1,385,192 14.62
4.00 % $ 379,116
378,900
4.00
4.00 %
4.00 $ 473,625
N/A N/A
5.50 %
Common equity tier 1 to risk-
weighted assets:
Company
Bank
Tier 1 capital to risk-weighted assets:
1,316,373 10.79
1,385,192 11.36
549,200
548,840
4.50
4.50
854,311
853,752
7.00
7.00
N/A N/A
6.50
792,769
Company
Bank
1,417,940 11.62
1,385,192 11.36
732,267
731,787
6.00
6.00
1,037,378
1,036,698
8.50
8.50
N/A N/A
8.00
975,716
Total capital to risk-weighted assets:
Company
Bank
Liquidity
1,478,794 12.12
1,446,046 11.86
976,356
975,716
8.00
8.00
1,281,467 10.50
1,280,627 10.50
N/A N/A
1,219,645 10.00
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. ALCO has primary responsibility for
oversight of our liquidity, funds management, asset/liability (interest rate risk) position and capital. Our Investment Committee,
which reports to our board of directors, has primary responsibility for oversight of our investment portfolio functions.
The objective of managing liquidity risk is to ensure the cash flow requirements resulting from depositor, borrower and other
creditor demands are met, as well as our operating cash needs, and the cost of funding such requirements and needs is reasonable. We
maintain an asset/liability and interest rate risk policy and liquidity and funds management policy, including 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.
81
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 generally 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, 2016, we had $10.07 billion in unfunded balances on loans already closed, the vast majority of which is
attributable to construction loans for which construction has commenced. In most cases the borrower’s equity and all other required
subordinated elements of the capital structure must be fully funded before we advance funds. Typically we are the last to advance
funds and the first to be repaid. In many cases we do not advance funds on loans for many months after closing because the
borrower’s equity and other funding sources must fund first. This conservative practice for handling construction loans has led to the
large unfunded balance of closed loans. As a result, we maintain a detailed 36-month forward funding forecast projecting all loan
fundings and loan pay downs and pay offs. Our ability to project monthly net portfolio growth with a substantial degree of accuracy is
an important part of our liquidity management process.
At December 31, 2016, we had substantial unused borrowing availability. This availability was primarily comprised of the
following four options: (1) $4.78 billion of available blanket borrowing capacity with the FHLB, (2) $593 million of investment
securities available to pledge for federal funds or other borrowings, (3) $230 million of available unsecured federal funds borrowing
lines and (4) up to $169 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 $242 million in 2016, $201 million in 2015 and $97
million in 2014. 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 2016 compared
to 2015 and for 2015 compared to 2014 was primarily due to growth in our net income from $119 million in 2014 to $182 million in
2015 to $270 million in 2016.
Investing activities used net cash of $2.28 billion in 2016, $1.33 billion in 2015 and $565 million in 2014. The increase in net
cash used by investing activities in 2016 compared to 2015 and in 2015 compared to 2014 was primarily the result of growth in our
non-purchased loans and leases, which used $3.03 billion in 2016, compared to $2.58 billion in 2015 and $1.37 billion in 2014. BOLI
purchases used $145 million in 2016 and $100 million in 2015 (none in 2014). Additionally, the net activity in our investment
securities portfolio used $469 million in 2016, but provided $270 million in 2015 and $103 million in 2014. We received net
payments on purchased loans totaling $1.16 billion in 2016, $719 million in 2015 and $468 million in 2014, and we received net cash
in merger and acquisition transactions totaling $204 million in 2016, $300 million in 2015 and $122 million in 2014.
Financing activities provided net cash of $2.82 billion in 2016, $1.07 billion in 2015 and $422 million in 2014. The increase in
net cash provided by financing activities was primarily the result of growth of our deposits to fund our lending activities. Our deposits
provided $3.04 billion in 2016, $1.00 billion in 2015 and $554 million in 2014. In addition, during 2016, we received proceeds of
$222 million from the issuance of our Notes, and during 2015, we received proceeds of $110 million from the sale of 2,098,436 shares
of our common stock.
82
Contractual Obligations. The following table presents, as of December 31, 2016, 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.
Time deposits(1)
Deposits without a stated maturity(2)
Repurchase agreements with customers(1)
Other borrowings(1)
Subordinated notes (1)
Subordinated debentures(1)
Lease obligations
Other obligations
Total contractual obligations
Contractual Obligations
1 Year
or Less
$ 3,894,111 $
10,638,130
65,110
21,603
19,147
4,216
7,621
65,948
$14,715,886 $
Over 1
Through
3 Years
Over 3
Through
5 Years
(Dollars in thousands)
796,133 $ 249,579 $
—
—
21,230
25,094
7,878
12,815
14,603
877,753 $ 302,576 $
—
—
1,615
25,094
7,878
9,200
9,210
Over
5 Years
Total
10,356 $ 4,950,179
— 10,638,130
65,110
—
44,450
2
350,779
281,444
191,492
171,520
48,583
18,947
21,194
110,955
503,463 $16,399,678
(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, 2016. 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, 2016.
Off-Balance Sheet Commitments. We are party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of our customers. These financial instruments primarily include commitments to extend credit
(most of which are in the form of unfunded balances on loans already closed) and standby letters of credit. The following table details
the amounts and expected maturities of significant off-balance sheet commitments as of December 31, 2016. Commitments to extend
credit do not necessarily represent future cash requirements as these commitments may expire without being drawn.
Off-Balance Sheet Commitments
Commitments to extend credit
Standby letters of credit
Total commitments
$
$
1 Year
or Less
Over 1
Through 3
Years
Over 3
Through 5
Years
(Dollars in thousands)
893,841 $ 6,353,559 $ 2,643,993 $
1,096
946,957 $ 6,354,655 $ 2,644,046 $
53,116
53
Over
5 Years
Total
178,650 $10,070,043
54,265
178,650 $10,124,308
—
Growth and Expansion
De Novo Growth. In 2015, we opened two loan production offices, one in Little Rock, Arkansas and one in Greensboro, North
Carolina (which we closed in 2016), and we opened our fourth retail banking office in Houston, Texas. In 2016, we opened our first
retail banking office in Siloam Springs, Arkansas, our third retail banking office in Fayetteville, Arkansas and our second retail
banking office in Springdale, Arkansas, and we opened a RESG loan production office in San Francisco, California. We also acquired
property in Little Rock, Arkansas in 2016 where we expect to construct a new corporate headquarters facility that is currently
projected to be completed in 2019. In January 2017, we consolidated our New York, New York RESG loan production office in with
our retail banking office in New York, New York, and in February 2017, we opened a loan production office in Atlanta, Georgia for
our mortgage lending team. We also expect to open a retail banking office in McKinney, Texas in 2017, and we expect to replace
leased facilities with Bank-owned facilities in Miami Beach, Florida and Harrisburg, North Carolina in 2017.
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
83
result of a variety of factors including our financial results, changes in economic or competitive conditions, strategic opportunities or
other factors.
During 2016 we spent $45.2 million on capital expenditures for premises and equipment. Our capital expenditures for 2017 are
expected to be in the range of $23 million to $35 million, including progress payments on construction projects expected to be
completed in 2017 through 2019, 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 15 acquisitions, including seven FDIC-assisted transactions.
In December 2012, we completed our acquisition of Genala Banc, Inc. (“Genala”) and its wholly-owned bank subsidiary, The
Citizens Bank, 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”) 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. We subsequently closed one of the acquired offices in Shelby, North Carolina.
In March 2014, we completed our acquisition of Bancshares and its wholly-owned bank subsidiary, OMNIBANK, N.A., for
$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 and its wholly-owned bank subsidiary, Summit Bank, 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. We subsequently
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.
In February 2015, we completed our acquisition of Intervest and its wholly-owned bank subsidiary, Intervest National Bank, 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. We subsequently closed one of the acquired offices in Clearwater, Florida.
In August 2015, we completed our acquisition of BCAR and its wholly-owned bank subsidiary, Bank of the Carolinas, for
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.
In July 2016, we completed our acquisition of C&S and its wholly-owned bank subsidiary, Community & Southern Bank, for
20,983,815 shares of our common stock (plus cash in lieu of fractional shares) in a transaction valued at approximately $800.3 million.
The C&S acquisition expanded our operations in Georgia by adding 46 retail banking offices throughout Georgia and one retail
banking office in Jacksonville, Florida. We subsequently closed five retail banking offices in Georgia where we had excess branch
capacity, including three that were acquired in the C&S acquisition.
In July 2016, we also completed our acquisition of C1 and its wholly-owned bank subsidiary, C1 Bank, for 9,370,587 shares of
our common stock (plus cash in lieu of fractional and de minimus shares), net of shares redeemed in exchange for the sale of certain
C1 Bank loans, in a transaction valued at approximately $376.1 million. The C1 acquisition expanded our operations in Florida by
adding 33 retail banking offices on the west coast of Florida and in Miami-Dade and Orange Counties.
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 Seattle, Washington, D.C., Boston
84
and Chicago). 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.
See Note 1 to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” in this
Annual Report on Form 10-K for a discussion of certain recently issued accounting pronouncements.
Recently Issued Accounting Standards
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 Annual Report on Form 10-K.
Interest Rate Risk
A significant form of market risk is 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.
ALCO regularly reviews 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. ALCO uses an earnings simulation
model to analyze our interest rate risk and interest rate sensitivity. ALCO reports to the full Board quarterly.
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 additional factors including: (1) the
expected exercise of call features on various assets and liabilities, (2) the expected rates at which various rate sensitive assets and rate
sensitive liabilities will reprice, (3) the expected growth in various interest earning assets and interest bearing liabilities and the
expected interest rates on new assets and liabilities, (4) the expected relative movements in different interest rate indexes which are
used as the basis for pricing or repricing various assets and liabilities, (5) existing and expected contractual cap 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, (7) the timing and amount
of cash flows expected to be received on purchased loans, (8) the need for additional capital and/or debt to support continued growth
and (9) 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 typically 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 our change in net interest income assuming interest 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.
85
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, 2017. 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
17.0%
13.6
10.1
6.6
3.2
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 in “Item 8. Financial Statements and Supplementary Data”
in this Annual Report on Form 10-K 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 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.
86
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Bank of the Ozarks, Inc.
In our opinion, the accompanying consolidated balance sheet as of December 31, 2016 and the related consolidated statements
of income, comprehensive income, stockholders’ equity and cash flows for the year then ended present fairly, in all material respects,
the financial position of Bank of the Ozarks, Inc. and its subsidiaries at December 31, 2016, and the results of their operations and
their cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these
financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the Report of Management on the Company’s Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's
internal control over financial reporting based on our integrated 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 the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) 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 (iii) 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 described in the Report of Management on the Company’s Internal Control Over Financial Reporting, management has
excluded Community & Southern Holdings, Inc. and C1 Financial, Inc. from its assessment of internal control over financial reporting
as of December 31, 2016 because they were assets acquired by the Company in multiple purchase business combinations during
2016. We have also excluded Community & Southern Holdings, Inc. and C1 Financial, Inc. from our audit of internal control over
financial reporting. The total assets and total interest income of the acquired assets represent 18% and 17%, respectively, of the
related consolidated financial statement amounts as of and for the year ended December 31, 2016.
/s/PricewaterhouseCoopers LLP
Little Rock, Arkansas
March 1, 2017
87
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 the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows
for each of the two 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 the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
Atlanta, Georgia
February 19, 2016
/s/ Crowe Horwath LLP
88
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 notes
Subordinated debentures
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares
issued or outstanding at December 31, 2016 and 2015
Common stock; $0.01 par value; 300,000,000 and 125,000,000 shares
authorized; 121,267,616 and 90,612,388 shares issued at December 31,
2016 and 2015, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock, at cost, none at December 31, 2016 and 133,492 shares
at December 31, 2015
Total stockholders’ equity before noncontrolling interest
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2016
2015
(Dollars in thousands, except
per share amounts)
$
$
$
814,255
52,105
866,360
1,471,612
9,605,093
4,958,022
(76,541 )
14,486,574
504,086
43,702
51,919
580,945
720,950
163,994
18,890,142
2,589,458
8,048,355
4,937,065
15,574,878
65,110
41,903
222,516
118,242
72,622
16,095,271
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
—
—
1,213
1,901,880
914,434
(25,920 )
—
2,791,607
3,264
2,794,871
18,890,142
$
906
755,995
706,628
7,959
(6,857 )
1,464,631
3,163
1,467,794
9,879,459
$
$
$
$
See accompanying notes to the Consolidated Financial Statements.
89
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
2016
Year Ended December 31,
2015
(Dollars in thousands, except per share amounts)
2014
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 notes
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
Other income from purchased loans, net
Net gains on investment securities
Gains on sales of other assets
Gain on merger and acquisition transaction
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
$
410,884
222,350
$
244,638
134,745
$
11,373
17,582
366
662,555
48,593
89
1,169
6,801
4,398
61,050
601,505
23,792
577,713
38,461
8,054
6,268
14,808
17,278
4
4,156
—
13,370
102,399
122,832
42,524
90,398
255,754
424,358
154,278
270,080
(101 )
269,979
2.59
2.58
$
$
$
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
$
$
$
$
$
$
162,567
98,212
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
14,803
144
6,023
4,667
16,674
84,883
76,884
24,102
65,029
166,015
172,447
53,859
118,588
18
118,606
1.53
1.52
See accompanying notes to the Consolidated Financial Statements.
90
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
Unrealized gains and losses on investment securities AFS
Tax effect of unrealized gains and losses on investment securities AFS
Reclassification of gains on investment securities AFS
included in net income
Tax effect of reclassification of gains on investment
securities AFS included in net income
Total other comprehensive income (loss)
Total comprehensive income
$
$
2016
270,080
Year Ended December 31,
2015
(Dollars in thousands)
182,314
$
$
(52,736 )
18,860
(4 )
(4,491 )
1,711
(5,481 )
1
(33,879 )
236,201
$
2,088
(6,173 )
176,141
$
2014
118,588
29,164
(11,272 )
(144 )
56
17,804
136,392
See accompanying notes to the Consolidated Financial Statements.
91
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Non-controlling
Interest
Total
(Dollars in thousands, except per share amount)
737 $ 143,017 $ 488,978 $
—
118,588
—
(3,672 ) $
—
— $
—
3,470 $ 632,530
118,588
—
—
—
—
18
—
—
17,804
(36,130 )
4,723
—
4,682
5,675
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,349 )
(18 )
—
—
—
—
—
—
—
—
17,804
(36,130 )
4,727
4,682
5,675
—
(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
$
—
—
—
4
—
—
—
—
58
799 $ 324,354 $ 571,454 $
166,257
—
—
14,132 $
—
(2,349 ) $
—
166,315
3,452 $ 911,842
See accompanying notes to the Consolidated Financial Statements.
92
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Non-controlling
Interest
Total
(Dollars in thousands, except per share amount)
799 $ 324,354 $ 571,454 $
—
182,314
—
14,132 $
—
(2,349 ) $
—
3,452 $ 911,842
182,314
—
—
—
—
—
4
2
—
—
—
—
—
—
—
—
—
5,141
(2,351 )
7,049
8,202
—
—
—
(61)
—
(47,079 )
—
—
—
—
—
—
—
—
—
(6,173 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,349
—
—
—
—
(6,857 )
61
—
—
—
(6,173 )
(47,079 )
(350 )
(350 )
—
—
—
—
—
—
—
5,145
—
7,049
8,202
—
—
(6,857 )
66
238,310
—
—
—
—
238,376
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
$
906 $ 755,995 $ 706,628 $
14
21
65,311
109,979
—
—
—
—
—
65,325
—
7,959 $
—
(6,857 ) $
—
110,000
3,163 $1,467,794
See accompanying notes to the Consolidated Financial Statements.
93
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Dollars in thousands, except per share amount)
Treasury
Stock
Non-controlling
Interest
Total
906 $ 755,995 $ 706,628 $
—
—
270,080
7,959 $
—
(6,857 ) $
—
3,163 $1,467,794
270,080
—
—
—
—
3
2
—
—
—
—
—
—
—
—
6,159
(6,859 )
3,576
10,754
—
—
(3,304 )
(101 )
—
—
(33,879 )
(62,173 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,857
—
—
—
—
—
101
—
—
—
—
—
—
—
—
—
—
(33,879 )
(62,173 )
6,162
—
3,576
10,754
—
—
(3,304 )
209
787,337
—
—
—
—
787,546
Balances – December 31, 2015
$
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income (loss)
Common stock dividends
paid, $0.63 per share
Issuance of 315,600 shares
of common stock for
exercise of stock options
Issuance of 218,761 shares
of unvested restricted
common stock
Excess tax benefit on
exercise and forfeiture of
stock options
Stock-based compensation
expense
Forfeiture of 21,139 shares
of unvested restricted
common stock
Issuance of 12,415 shares of
common stock to non-
employee directors
Repurchase and cancellation
of 91,314 shares
of common stock
Issuance of 20,983,815
shares of common stock
for acquisition of
Community & Southern
Holdings, Inc., net of
issuance costs of $395,000
Issuance of 9,370,587
shares of common stock,
net of shares redeemed
for certain loans,
for acquisition of C1
Financial, Inc., net of
issuance costs of $82,000
Balances – December 31, 2016
93
348,222
—
$
1,213 $1,901,880 $ 914,434 $
—
(25,920 )
—
— $
—
348,315
3,264 $2,794,871
94
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
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
Gains on sales of other assets
Gain on merger and acquisition transaction
Gain on termination of Federal Deposit Insurance
Corporation ("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
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
270,080
$
182,314
$
118,588
15,236
9,796
(101 )
23,792
3,610
6,562
(4 )
(273,863 )
263,825
(70,467 )
(4,156 )
—
—
—
12,703
(13,999 )
(809 )
(3,576 )
10,754
(14,064 )
14,615
(8,006 )
241,928
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 )
(6,023 )
(4,667 )
(7,996 )
8,062
(258 )
(5,184 )
—
(4,682 )
5,675
(1,098 )
3,199
17,846
96,766
See accompanying notes to the Consolidated Financial Statements.
95
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 received from (invested in) unconsolidated investments and
noncontrolling interest
Net cash received in merger and acquisition transactions
Net cash used by investing activities
Cash flows from financing activities:
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
$
537
182,337
(652,106 )
(3,033,145 )
1,161,051
—
$
202,943
159,982
(92,011 )
(2,582,441 )
718,695
—
55,724
103,123
(56,134 )
(1,372,413 )
467,706
24,810
—
—
20,425
—
(45,171 )
41,013
(145,000 )
2,116
—
(16,804 )
73,721
(100,000 )
3,149
428
203,695
(2,284,245 )
(1,759 )
299,810
(1,334,715 )
Net increase in deposits
Repayment of fixed-rate callable FHLB advances
Net (repayments of) proceeds from other borrowings
Net decrease in repurchase agreements with customers
Proceeds from exercise of stock options
Proceeds from issuance of common stock
Proceeds from issuance of subordinated notes
Excess tax benefit on exercise of stock options and vesting of restricted
common stock
Repurchase and cancellation of shares of common stock
Cash dividends paid on common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
$
3,038,009
—
(386,206 )
(690 )
6,162
—
222,315
3,576
(3,304 )
(62,173 )
2,817,689
775,372
90,988
866,360
$
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
$
See accompanying notes to the Consolidated Financial Statements.
96
13,688
(18,067 )
73,559
—
—
1,103
121,918
(564,558 )
553,675
(98,062 )
(483 )
(4,040 )
4,727
—
—
4,682
(2,349 )
(36,130 )
422,020
(45,772 )
195,975
150,203
Bank of the Ozarks, Inc.
Notes to Consolidated Financial Statements
December 31, 2016, 2015 and 2014
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, 2016, 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, 2016, the Company also owns, indirectly through the Bank, a subsidiary that holds the Company’s investment
securities, a subsidiary engaged in the development of real estate, a subsidiary that owns private aircraft and various other entities that
hold loans, 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, 2016, the
Company, through the Bank, conducted operations through 250 offices, including offices in Arkansas, Georgia, Florida, North
Carolina, Texas, Alabama, South Carolina, New York and 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 investment subsidiary, 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 has a
controlling financial interest with both (1) the power to direct the activities of the entity that most significantly affects the entity’s
economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the entity or the right
to receive benefits from the entity that could potentially be significant to the entity. A company that has a controlling financial interest
is considered the primary beneficiary and consolidates the VIE. 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, 2016 and 2015, the Company has classified all of its
investment securities as available for sale (“AFS”).
97
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
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 on a quarterly basis.
At December 31, 2016 and 2015, 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 nature and cause of the
unrealized loss, the length of time and extent that fair value has been less than cost and the credit quality, 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 affect 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. 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.
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 $20.4 million and $10.4
million at December 31, 2016 and 2015, 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
98
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, 2016 and 2015, 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 $19.2 million and $15.7
million at December 31, 2016 and 2015, 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 a substantial portion of loans acquired in the
transaction. For those purchased loans without evidence of credit deterioration at the date of acquisition, fair value is determined using
market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected,
as adjusted for an estimate of future credit losses and prepayments, and then a market-based discount rate is applied to those cash
flows. For loans individually evaluated, a grade is assigned to each loan at the date of acquisition based on our internal grading
system for purchased loans. To the extent that any purchased loan is not specifically reviewed, such loan is assumed to have
characteristics similar to the assigned rating of the acquired institution’s risk rating adjusted for any estimated differences between our
rating methodology and the acquired bank’s rating methodology. 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 or
amortized 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 at the date of acquisition, management
considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments,
estimated loss ratios, estimated value and quality 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.
99
Management separately monitors purchased loans with evidence of credit deterioration on the date of acquisition and
periodically reviews such loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair
Values. A loan is reviewed (i) any time it is renewed or extended, (ii) at any other time additional information becomes available to
the Company that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality or
value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio.
Management separately reviews the performance of the portfolio of purchased 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. 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
(including consumer construction loans on 1-4 family properties), consumer loans, indirect 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 (“LTV”)
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
(“LTC”) and LTV ratios (with significant emphasis placed on the LTC and LTV ratios for many of our construction and land
development loans); (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, quality 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, quality 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.
100
Residential 1-4 family, consumer loans and certain other loans are assigned an allowance allocation percentage based on past
due status. For indirect loans, each individual loan is assigned a risk level based on the borrower’s individual credit score. Each risk
level is assigned a probability of default (“PD”) and an expected loss given default (“LGD”) based on the underlying collateral
securing the loan. Both the PD and the LGD factors are based on composite third-party information for similar loans and borrowers
that have previously defaulted and the resulting loss from such default.
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 at the date of
acquisition and loans that do not contain evidence of credit deterioration at the date of acquisition. Purchased loans with evidence of
credit deterioration at the date of acquisition 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, 2016 and 2015, respectively, the Company established an ALLL totaling $1.6 million and $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 or
had otherwise been considered in establishing the Day 1 Fair Values.
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 at 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.
101
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
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 may also include specific ALLL allocations for qualitative factors.
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
102
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 2013.
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, core deposit and intellectual property intangibles.
Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The Company had
goodwill of $660.1 million and $125.4 million at December 31, 2016 and 2015, respectively. The Company performed its annual
impairment test of goodwill as of September 30, 2016. 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, 2016 and 2015, less accumulated amortization of $156,000 and $144,000 at
December 31, 2016 and 2015, 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 $77.5 million and $41.5 million at December 31, 2016 and 2015, respectively, less
accumulated amortization of $18.4 million and $14.7 million at December 31, 2016 and 2015, respectively.
Intellectual property intangibles represents amounts allocated to acquired intellectual property and are being amortized over
three years. Intellectual property intangibles totaled $1.9 million at December 31, 2016 (none at December 31, 2015), less
accumulated amortization of $0.3 million at December 31, 2016 (none at December 31, 2015).
The aggregate amount of amortization expense for the Company’s core deposit, bank charter and intellectual property
intangibles is expected to be $12.6 million in 2017, $12.6 million in 2018, $11.9 million in 2019, $9.1 million in 2020 and $6.4
million in 2021.
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 single external customer comprises more
than 10% of the Company’s revenues. Interest income on loans where the underlying collateral is located outside the United States
was not material during 2016, 2015 or 2014.
103
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
evaluating the impact, if any, ASU 2014-09 will have on its financial position, results of operations, and its financial statement
disclosures.
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. The Company adopted the provisions of ASU 2015-01 beginning January 1, 2016. The
adoption of ASU 2015-01 did not have a significant effect 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.”
ASU 2015-02 amends the consolidation analysis required under GAAP for 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. The
Company adopted the provisions of ASU 2015-02 beginning January 1, 2016. The adoption of ASU 2015-02 did not have a
significant effect 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 was 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. The Company adopted ASU 2015-03 and ASU 2015-15 beginning
January 1, 2016. ASU 2015-03 and ASU 2015-15 did not have a significant effect 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.
The Company adopted ASU 2015-16 beginning January 1, 2016. The adoption of ASU 2015-16 did not have a significant effect on
the Company’s financial position or results of operations. The Company has disclosed certain measurement period adjustments in the
Notes to the Consolidated Financial Statements.
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.
In February 2016, FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize a right-of-use
asset and a lease liability on their balance sheet. The right-of-use asset and related lease liability will be initially measured at the
present value of the remaining lease payments; however, if the original term of the lease is less than twelve months and the lease does
not contain a purchase option that is reasonably certain to be exercised, a lessee may account for the lease as an operating lease. ASU
2016-02 is effective for interim periods and fiscal years beginning after December 15, 2018. While the Company continues to
evaluate the effect that ASU 2016-02 will have on its financial position, results of operations, and its financial statement disclosures,
104
the adoption of ASU 2016-02 is expected to result in leased assets and related lease liabilities to be included on its balance sheet,
along with the related leasehold amortization and interest expense included in its statement of income.
In March 2016, FASB issued ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09
requires entities to record all of the tax effects related to share-based payments at settlement (or expiration) through the income
statement. In addition, all tax-related cash flows, such as excess tax benefits, should be reported as operating activities rather than
financing activity in the statement of cash flows. Also, entities are allowed to make a policy election related to forfeitures to either
estimate the number of awards expected to vest or account for forfeitures when they occur. ASU 2016-09 is effective for interim and
annual periods beginning after December 15, 2016 with early adoption permitted. The Company adopted ASU 2016-09 beginning
January 1, 2017, including the provision to account for forfeitures as they occur. The adoption of ASU 2016-09 did not have a
significant effect on the Company’s financial position, results of operations, or its financial statement disclosures.
In June 2016, FASB issued ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments” which significantly revises the guidance related to impairment of financial instruments. The new guidance
replaces the current incurred loss model that is utilized in estimating the allowance for loan and lease losses 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. This revised model is
what FASB describes as the current expected credit loss (“CECL”) model and FASB believes the CECL model will result in more
timely recognition of credit losses since the CECL model incorporates expected credit losses versus incurred credit losses. The scope
of ASU 2016-13 includes loans, including purchased loans with credit deterioration, available-for-sale debt instruments, lease
receivables, loan commitments and financial guarantees that are not accounted for at fair value. ASU 2016-13 is effective for interim
and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after
December 15, 2018. The Company is evaluating the effect that ASU 2016-13 will have on its financial position, results of operations,
and its financial statement disclosures.
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230)” which FASB believes clarifies
guidance on how certain transactions are classified within the statement of cash flows. The standard addresses a number of cash flow
presentation items including a) debt prepayment and extinguishment, b) contingent consideration payments made after a business
combination, c) proceeds from the settlement of insurance claims, corporate owned life insurance policies and BOLI policies, d)
distributions received from equity method investees, e) classification of beneficial interest received in a securitization transaction and
cash receipts from beneficial interest in securitized trade receivables and f) separately identifiable cash flows and application of the
predominance principle. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017 with early
adoption permitted. Since ASU 2016-15 applies to the classification of cash flows, no impact is anticipated on the Company’s
financial position or results of operations; however, the Company is evaluating the effect, if any, on its statement of cash flows and its
financial statement disclosures.
In January 2017, FASB issued ASU 2017-01 “Business Combinations (Topic 805), Clarifying the Definition of a Business” that
changes the definition of a business when evaluating whether transactions should be accounted for as the acquisition of assets or the
acquisition of a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the assets acquired are
concentrated in a single asset or a group of similar identifiable assets; if so, the acquired assets or group of identifiable assets is not
considered a business. In addition, the guidance requires that to be considered a business, the acquired assets must include an input
and a substantive process that together significantly contribute to the ability to create output. The ASU removes the evaluation of
whether a market participant could replace any of the missing elements. ASU 2017-01 is effective for interim and annual periods
beginning after December 15, 2017. The Company is evaluating the effect, if any, that ASU 2017-01 may have on its financial
position, results of operations and its financial statement disclosures.
Reclassifications and recasts – Certain reclassifications of prior years’ amounts have been made to conform with the 2016
financial statements presentation. These reclassifications had no impact on prior years’ net income, as previously reported. During the
fourth quarter of 2016, the Company revised its initial estimates regarding certain acquired assets and liabilities associated with its
July 2016 acquisitions of Community & Southern Holdings, Inc. (“C&S”) and C1 Financial, Inc. (“C1”).
105
2. Acquisitions
Community & Southern Holdings, Inc.
On July 20, 2016, the Company completed its acquisition of C&S and its wholly-owned bank subsidiary, Community &
Southern Bank, in a transaction valued at approximately $800.3 million. Pursuant to the terms of the merger agreement, the Company
issued 20,983,815 shares of its common stock (plus cash in lieu of fractional shares) to C&S stockholders and to holders of
outstanding C&S stock options, restricted stock units, deferred stock units and warrants in satisfaction of all outstanding C&S equity
awards (net of shares withheld for taxes). The acquisition of C&S provided the Company with 46 banking offices throughout Georgia
and one banking office in Jacksonville, Florida. On December 16, 2016, the Company closed five banking offices in Georgia, where
it had excess branch capacity, including three that were acquired in the C&S acquisition.
The following table provides a summary of the assets acquired and liabilities assumed as recorded by C&S, the estimates of the
fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, including adjustments
made subsequent to the initial fair value adjustments, and the estimates of the resultant fair values of those assets and liabilities as
recorded by the Company. Management continues to evaluate and may revise further, if necessary, one or more of the fair value
adjustments in future periods. To the extent that any of these fair value adjustments are revised in future periods, the resultant fair
values and the amount of goodwill may be subject to further adjustment.
Assets acquired:
Cash, due from banks and interest earning deposits
Investment securities
Loans
Allowance for loan losses
Premises and equipment
Foreclosed assets
BOLI
Goodwill
Core deposit intangible asset
Deferred income taxes
Accrued interest receivable and other assets
Total assets acquired
Liabilities assumed:
Deposits
Other borrowings
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
As Recorded
by
C&S
July 20, 2016
Fair Value
Adjustments
Adjustments(1)
(Dollars in thousands)
As Recorded
by the
Company
$
72,942 $
447,674
3,090,579
(42,395 )
73,238
6,274
86,596
44,514
12,227
23,298
38,226
3,853,173
3,256,372
90,000
22,991
3,369,363
$
483,810 $
— $
4,063 a
(61,649 ) b
42,395 b
31,969 c
(521 ) d
(45 ) e
(44,514 ) f
21,327 g
(9,059 ) h
(2,003 ) i
(18,037 )
— $
—
3,617
—
(425 )
—
—
—
(358 )
(5,130 )
1,258
(1,038 )
j
11,813
—
(585 ) k
11,228
(29,265 )
$
—
—
(1,262 )
(1,262 )
224
72,942
451,737
3,032,547
—
104,782
5,753
86,551
—
33,196
9,109
37,481
3,834,098
3,268,185
90,000
21,144
3,379,329
454,769
(12,336 )
(787,942 )
(800,278 )
345,509
$
(1) Represents adjustments, during the fourth quarter of 2016, of the initial fair value adjustments.
Explanation of preliminary fair value adjustments
a- Adjustment reflects the fair value adjustment based on the pricing of the acquired held to maturity investment securities
portfolio.
106
b- Adjustment reflects the fair value adjustment based on the evaluation of the acquired loan portfolio and to eliminate the
recorded allowance for loan losses.
c- Adjustment reflects the fair value adjustment based on the evaluation of the premises and equipment acquired.
d- Adjustment reflects the fair value adjustment based on the evaluation of the acquired foreclosed assets.
e- Adjustment reflects the fair value adjustment based on the evaluation of BOLI acquired.
f-
Adjustment reflects the elimination of previously recorded goodwill.
g- Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition, net of
the elimination of previously recorded core deposit intangible assets.
h-
i-
j-
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.
Adjustment reflects the fair value adjustment based on the evaluation of accrued interest receivable and other assets.
Adjustment reflects the fair value adjustment based on the evaluation of the acquired deposits.
k- Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly
attributable to the C&S acquisition.
During the fourth quarter of 2016, management revised its initial estimates and assumptions regarding the recovery of certain
acquired loans and acquired deferred tax assets, as well as revising the initial fair value adjustments of certain other acquired assets
and assumed liabilities. As a result of such revisions, management decreased the goodwill recorded in the C&S acquisition by $0.2
million.
Goodwill of $345.5 million, which is the excess of the merger consideration over the estimated fair value of net assets acquired,
was recorded in the C&S acquisition and is the result of expected operational synergies, expansion of full service banking in Georgia
and other factors. This goodwill is not expected to be deductible for tax purposes. Management continues to evaluate the fair value
adjustments and the resultant fair values of acquired assets and assumed liabilities recorded in the C&S acquisition. To the extent that
management revises any of the fair value adjustments, the amount of goodwill recorded in the C&S acquisition may be subject to
further adjustment.
The Company’s consolidated results of operations include the operating results of C&S beginning July 21, 2016 through the end
of the reporting period. During 2016, C&S contributed approximately $86.5 million of net interest income and approximately $39.5
million of net income to the Company’s operating results.
The following unaudited supplemental pro forma information is presented to show the estimated results assuming C&S was
acquired as of the beginning of each period presented, adjusted for estimated 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,
2015 or 2016 and should not be considered as representative of future operating results.
Net interest income – pro forma (unaudited)
Net income – pro forma (unaudited)
Diluted earnings per common share – pro forma (unaudited)
$
$
$
690,426
329,199
2.83
$
$
$
555,075
245,847
2.27
Year Ended December 31,
2016
2015
(Dollars in thousands, except per share amounts)
107
C1 Financial, Inc.
On July 21, 2016, the Company completed its acquisition of C1 and its wholly-owned bank subsidiary, C1 Bank, in a
transaction valued at approximately $376.1 million. Pursuant to the terms of the merger agreement and immediately after the effective
time of the C1 Merger and in accordance with the terms of the Brazilian standby purchase agreement dated December 21, 2015, the
Company sold certain C1 Bank loans (“Brazilian Loans”) equal to the aggregate purchase price of the Brazilian Loans. As a result of
the closing of the C1 Merger, the Company issued 9,370,587 shares of its common stock to C1 shareholders, net of the shares
redeemed in exchange for the Brazilian Loans. The acquisition of C1 provided the Company with 33 banking offices throughout the
west coast of Florida and in Miami-Dade and Orange counties.
The following table provides a summary of the assets acquired and liabilities assumed as recorded by C1, the estimates of the
fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, including adjustments
made subsequent to the initial fair value adjustments, and the estimates of the resultant fair values of those assets and liabilities as
recorded by the Company. Management continues to evaluate and may revise further, if necessary, one or more of the fair value
adjustments in future periods. To the extent that any of these fair value adjustments are revised in future periods, the resultant fair
values and the amount of goodwill may be subject to further adjustment.
Assets acquired:
Cash, due from banks and interest earning deposits
Investment securities
Loans
Allowance for loan losses
Premises and equipment
Foreclosed assets
BOLI
Core deposit and other intangible assets
Deferred income taxes
Accrued interest receivable and other assets
Total assets acquired
Liabilities assumed:
Deposits
Other borrowings
Accrued interest payable and other liabilities
Total liabilities assumed
Net assets acquired
Consideration paid:
Cash and shares redeemed for Brazilian loans
Stock
Total consideration paid
Goodwill
July 21, 2016
As Recorded
by
C1
Fair Value
Adjustments
Adjustments(1)
As Recorded
by the
Company
(Dollars in thousands)
$
143,592 $
7,618
1,353,498
(7,307 )
63,943
21,704
36,280
576
1,608
12,182
1,633,694
1,294,439
131,010
4,775
1,430,224
$
203,470 $
—
(28 ) a
(40,456 ) b
7,307 b
13,690 c
(1,656 ) d
—
9,198 e
8,288
f
(3,124 ) g
(6,781 )
2,779 h
i
2,558
1,040
j
6,377
(13,158 )
$
$
— $
—
(1,238 )
—
(300 )
—
—
—
2,100
—
562
—
—
3,104
3,104
(2,542 )
143,592
7,590
1,311,804
—
77,333
20,048
36,280
9,774
11,996
9,058
1,627,475
1,297,218
133,568
8,919
1,439,705
187,770
(27,694 )
(348,397 )
(376,091 )
188,321
$
(1)
Represents adjustments, during the fourth quarter of 2016, of the initial fair value adjustments.
108
Explanation of preliminary fair value adjustments
a- Adjustment reflects the fair value adjustment based on the pricing of the acquired investment securities portfolio.
b- Adjustment reflects the fair value adjustment based on the evaluation of the acquired loan portfolio and to eliminate the
recorded allowance for loan losses.
c- Adjustment reflects the fair value adjustment based on the evaluation of the premises and equipment acquired.
d- Adjustment reflects the fair value adjustment based on the evaluation of the acquired foreclosed assets.
e- Adjustment reflects the fair value adjustment for the core deposit and intellectual property intangible assets recorded as a result
of the acquisition, net of the elimination of previously recorded intangible assets.
f-
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.
g- Adjustment reflects the fair value adjustment based on the evaluation of accrued interest receivable and other assets.
h- Adjustment reflects the fair value adjustment based on the evaluation of the acquired deposits.
i-
j-
Adjustment reflects the fair value adjustment of these assumed liabilities.
Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly
attributable to the C1 acquisition.
During the fourth quarter of 2016, management revised its initial estimates and assumptions regarding the recovery of certain
acquired loans and acquired deferred tax assets, as well as revising the initial fair value adjustments of certain other acquired assets
and assumed liabilities. As a result of such revisions, management increased the goodwill recorded in the C1 acquisition by $2.5
million.
Goodwill of $188.3 million, which is the excess of the merger consideration over the estimated fair value of net assets acquired,
was recorded in the C1 acquisition and is the result of expected operational synergies, expansion of full service banking throughout
the west coast of Florida and in Miami-Dade and Orange counties, the acquisition of the former C1 labs innovation group and other
factors. This goodwill is not expected to be deductible for tax purposes. Management continues to evaluate the fair value adjustments
and the resultant fair values of acquired assets and assumed liabilities recorded in the C1 acquisition. To the extent that management
revises any of the fair value adjustments, the amount of goodwill recorded in the C1 acquisition may be subject to further adjustment.
The Company’s consolidated results of operations include the operating results of C1 beginning July 22, 2016 through the end
of the reporting period. During 2016, C1 contributed approximately $35.1 million of net interest income and approximately $13.9
million of net income to the Company’s operating results.
The following unaudited supplemental pro forma information is presented to show the estimated results assuming C1 was
acquired as of the beginning of each period presented, adjusted for estimated 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,
2015 or 2016 and should not be considered as representative of future operating results.
Year Ended December 31,
2015
2016
(Dollars in thousands,
except per share amounts)
644,670
295,823
2.69
$
$
$
461,762
211,162
2.18
Net interest income – pro forma (unaudited)
Net income – pro forma (unaudited)
Diluted earnings per common share – pro forma (unaudited)
$
$
$
109
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 investment in the “CRA qualified investment fund” includes shares held in a mutual fund that
qualify under the Community Reinvestment Act of 1977 for community reinvestment purposes. 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, 2016:
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, 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
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair
Value
$
946,886 $
547,297
10,086
1,061
6,160
$ 1,511,490 $
$
$
415,095 $
146,265
3,562
1,038
23,530
589,490 $
7,785 $
962
—
—
—
8,747 $
12,321 $
1,720
—
—
—
14,041 $
(35,658 ) $
(12,769 )
(171 )
(27 )
—
919,013
535,490
9,915
1,034
6,160
(48,625 ) $ 1,471,612
(138 ) $
(1,035 )
—
(10 )
—
(1,183 ) $
427,278
146,950
3,562
1,028
23,530
602,348
The following table shows gross unrealized losses and estimated fair value of investment securities AFS, aggregated by
investment category and length of time that individual investment securities have been in a continuous unrealized loss position.
Less than 12 Months
12 Months or More
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair Value
Unrealized
Losses
December 31, 2016:
Obligations of states and political subdivisions
U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
$ 641,862 $ 35,648 $
480,000
6,915
1,035
12,764
171
27
Total temporarily impaired investment securities
$1,129,812 $ 48,610 $
4,501 $
160
—
—
4,661 $
10 $ 646,363 $
5
—
—
15 $1,134,473 $
480,160
6,915
1,035
35,658
12,769
171
27
48,625
December 31, 2015:
Obligations of states and political subdivisions
U.S. Government agency securities
CRA qualified investment fund
$
Total temporarily impaired investment securities
$
18,018 $
72,671
1,029
91,718 $
114 $
930
10
6,167 $
4,381
—
24 $
105
—
24,185 $
77,052
1,029
1,054 $ 10,548 $
129 $ 102,266 $
138
1,035
10
1,183
In evaluating the Company’s unrealized loss positions for other-than-temporary impairment for its investment securities
portfolio, management considers the credit quality, financial condition and near term prospects of the issuer, the nature and cause of
the unrealized loss, the severity and duration of the impairments and other factors. At December 31, 2016 and 2015, management
determined the unrealized losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality
of the investments. Accordingly, management believes that all of its unrealized losses on investment securities are temporary in
nature. The Company does not have the intent to sell these investment securities and more likely than not, would not be required to
sell these investment securities before fair value recovers to amortized cost.
110
The following table is a maturity distribution of investment securities AFS as of December 31, 2016.
Amortized
Cost
Estimated
Fair Value
Due in one year or less
Due after one year to five years
Due after five years to ten years
Due after ten years
Total
$
$
$
(Dollars in thousands)
82,229
310,104
325,093
794,064
1,511,490
$
80,665
305,081
321,210
764,656
1,471,612
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, 2016. 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
2016
$
$
$
Year Ended December 31,
2015
(Dollars in thousands)
202,943
$
5,962
$
(481 )
5,481
$
$
$
$
537
4
—
4
2014
55,724
159
(15 )
144
Investment securities with carrying values of $1.17 billion and $528.6 million at December 31, 2016 and 2015, respectively,
were pledged to secure public funds and trust deposits and for other purposes required or permitted by law.
At December 31, 2016, 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. 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.
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.
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
December 31,
2016
2015
(Dollars in thousands)
$
481,063
2,385,652
4,762,967
97,866
435,342
8,162,890
228,480
216,517
137,188
860,018
$ 9,605,093
5.0 % $
350,254
2,010,866
24.8
2,825,575
49.6
74,440
1.0
440,828
4.5
5,701,963
84.9
231,281
2.4
27,745
2.3
147,735
1.4
9.0
419,910
100 % $ 6,528,634
5.4 %
30.8
43.3
1.1
6.8
87.4
3.6
0.1
2.4
6.5
100 %
111
The above table includes deferred fees, net of deferred costs, that totaled $43.9 million and $27.8 million at December 31, 2016
and 2015, respectively. Direct financing leases are presented net of unearned income totaling $15.6 million and $16.9 million at
December 31, 2016 and 2015, respectively.
Non-purchased loans and leases on which the accrual of interest has been discontinued totaled $14.4 million and $13.2 million
at December 31, 2016 and 2015, respectively. Interest income collected and recognized during 2016, 2015 and 2014 for nonaccrual
loans and leases at December 31, 2016, 2015 and 2014 was $0.4 million, $0.4 million and $0.6 million, respectively. Under the
original terms, these loans and leases would have reported $0.8 million, $1.0 million and $1.7 million of interest income during 2016,
2015 and 2014, 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,
2016
2015
(Dollars in thousands)
$
$
778,226
2,279,749
532,893
26,991
308,663
3,926,522
211,667
812,474
7,359
4,958,022
$
$
386,952
1,135,547
47,823
19,918
139,497
1,729,737
60,522
7,487
8,291
1,806,037
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,
2016
2015
(Dollars in thousands)
$
$
4,716,403
$
1,589,251
241,619
4,958,022
$
216,786
1,806,037
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
$
$
112
2016
$
Year Ended December 31,
2015
(Dollars in thousands)
276,480
$
37,677
71,996
(7,886 )
(148,175 )
(12,601 )
(1,815 )
1,110
216,786
$
$
216,786
29,974
132,500
(4,296 )
(131,488 )
—
(2,152 )
295
241,619
2014
392,421
46,466
40,035
(42,306 )
(151,559 )
—
(8,654 )
77
276,480
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
$
$
2016
Year Ended December 31,
2015
(Dollars in thousands)
74,167
$
(37,677 )
11,546
$
59,176
(29,974 )
19,108
(358 )
(6,094 )
—
(418 )
(17,714 )
(1,573 )
23,294
—
65,152
$
30,862
(17 )
59,176
$
2014
83,455
(46,466 )
6,732
(1,657 )
(15,909 )
—
47,359
653
74,167
The following table is a summary of the loans acquired in the C&S and C1 acquisitions with evidence of credit deterioration at
the date of acquisition.
C&S
as of
July 20, 2016
C1
as of
July 21, 2016
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.
$
(Dollars in thousands)
106,109
(28,946 )
77,163
(11,793 )
65,370
$
111,700
(37,255 )
74,445
(7,315 )
67,130
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
$
$
113
2016
Year Ended December 31,
2015
(Dollars in thousands)
$
52,918
(10,091 )
60,854
(6,041 )
828
(5,213 )
(5,675 )
2,783
(2,892 )
(8,105 )
20,500
3,292
23,792
76,541
$
1,127
(8,964 )
(2,982 )
467
(2,515 )
(11,479 )
15,700
3,715
19,415
60,854
2014
42,945
(5,123 )
1,396
(3,727 )
(3,288 )
73
(3,215 )
(6,942 )
13,700
3,215
16,915
52,918
$
$
As of December 31, 2016 and 2015, 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 $2.9 million during 2016, $2.5 million during 2015 and $3.2
million during 2014 for such loans. The Company also recorded $3.3 million during 2016, $3.7 million during 2015 and $3.2 million
during 2014 of provision for loans. The Company had $1.6 million of ALLL at December 31, 2016 and $1.2 million at December 31,
2015 (none at December 31, 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 $6.5 million of impaired purchased loans at December 31, 2016, $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, 2016:
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
(Dollars in thousands)
Provision
Ending
Balance
$
$
$
8,672
16,796
18,176
3,388
3,031
2,574
707
3,835
2,475
1,200
60,854 $
(406 ) $
(323 )
(42 )
(37 )
—
(118 )
(228 )
(3,143 )
(1,744 )
(5,675 )
(11,716 ) $
52 $
10
68
—
14
78
37
36
533
2,783
3,611
$
1,907 $
5,072
2,471
(564 )
(598 )
(175 )
1,429
9,956
1,002
3,292
23,792 $
10,225
21,555
20,673
2,787
2,447
2,359
1,945
10,684
2,266
1,600
76,541
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
(Dollars in thousands)
Provision
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
114
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
(Dollars in thousands)
Provision
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
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, 2016:
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, 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
$
$
$
$
9,899 $ 10,225 $
326 $
174
1,384
387
59
463
16
—
41
$ 478,652 $ 481,063
2,385,652
4,762,967
97,866
435,342
228,480
216,517
137,188
860,018
2,850 $ 72,091 $ 74,941 $ 13,093 $9,592,000 $9,605,093
2,383,516
4,757,466
96,668
434,463
227,730
216,457
137,188
859,860
21,381
19,289
2,400
2,388
1,896
1,929
10,684
2,225
21,555
20,673
2,787
2,447
2,359
1,945
10,684
2,266
2,411
2,136
5,501
1,198
879
750
60
—
158
8,672 $
297 $
31
48
475
—
487
2
—
—
$ 348,223 $ 350,254
2,010,866
2,825,575
74,440
440,828
231,281
27,745
147,735
419,910
1,340 $ 58,314 $ 59,654 $ 10,666 $6,517,968 $6,528,634
8,375 $
16,765
18,128
2,913
3,031
2,087
705
3,835
2,475
2,009,927
2,820,019
73,127
440,745
230,567
27,722
147,735
419,903
16,796
18,176
3,388
3,031
2,574
707
3,835
2,475
2,031
939
5,556
1,313
83
714
23
—
7
(1) Excludes $1.6 million and $1.4 million of ALLL allocated to the Company’s purchased loans at December 31, 2016 and 2015,
respectively.
115
The following table is a summary of impaired loans and leases, excluding purchased loans, as of and for the years indicated.
As of and for the year ended December 31, 2016:
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
Multifamily
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 for the 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
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
$
$
$
$
$
$
$
1,904
1,171
5,137
1,064
879
809
55
153
(216 ) $
(523 )
(34 )
—
—
(322 )
(4 )
—
1,688
648
5,103
1,064
879
487
51
153
11,172
(1,099 )
10,073
$
$
879
1,997
1,208
366
133
313
14
5
4,915
16,087
2,914
962
121
1,153
825
26
6,001
1,306
1,083
7,873
362
216
261
18
7
(156 )
(509 )
(810 )
(232 )
(133 )
(50 )
(5 )
—
723
1,488
398
134
—
263
9
5
(1,895 )
(2,994 ) $
3,020
13,093
(1,804 ) $
(907 )
—
—
(322 )
(15 )
(3,048 )
(386 )
(198 )
(2,438 )
(202 )
(133 )
(50 )
(5 )
—
1,110
55
121
1,153
503
11
2,953
920
885
5,435
160
83
211
13
7
$
$
$
326
174
1,384
387
59
463
16
41
2,850
—
—
—
—
—
—
—
—
—
2,850
297
31
48
475
487
2
1,340
—
—
—
—
—
—
—
—
1,088
186
1,118
1,118
176
506
23
31
4,246
896
1,131
1,998
169
33
209
11
6
4,453
8,699
1,279
129
896
479
404
16
3,203
955
1,137
8,255
261
155
141
14
7
Total impaired loans and leases without a related
ALLL
Total impaired loans and leases
11,126
17,127
$
(3,412 )
(6,460 ) $
7,714
10,667
$
$
—
1,340
$
10,925
14,128
116
Management has determined that certain of the Company’s impaired loans and leases do not require any specific allowance at
December 31, 2016 and 2015 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, 2016, 2015 and 2014 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, 2016:
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, 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
Satisfactory
Moderate
Watch
(Dollars in thousands)
Substandard
Total
$
474,853 $
2,010,397
4,409,108
48,835
381,845
149,698
216,120
135,980
855,217
$ 8,682,053 $
— $
287,157
336,004
37,712
49,607
73,559
—
46
4,710
788,795 $
$
1,938
81,527
11,402
9,158
1,971
3,994
164
208
81
110,443 $
4,272 $
6,571
6,453
2,161
1,919
1,229
233
954
10
481,063
2,385,652
4,762,967
97,866
435,342
228,480
216,517
137,188
860,018
23,802 $ 9,605,093
$
342,083 $
1,692,632
2,553,368
40,538
400,848
179,797
27,219
146,934
415,686
$ 5,799,105 $
— $
235,999
256,655
22,799
35,080
47,802
—
201
4,027
602,563 $
$
2,946
73,788
8,916
8,909
4,079
1,854
276
190
182
101,140 $
5,225 $
8,447
6,636
2,194
821
1,828
250
410
15
350,254
2,010,866
2,825,575
74,440
440,828
231,281
27,745
147,735
419,910
25,826 $ 6,528,634
(1)
The Company does not risk rate its residential 1-4 family loans (including consumer construction loans on 1-4 family properties), its consumer
loans, indirect 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.
117
Substandard – Loans and leases in this category are characterized by deterioration in quality exhibited by a number of
weaknesses requiring corrective action and posing risk of some loss.
The following table is an aging analysis of past due non-purchased loans and leases as of the dates indicated.
30-89 Days
Past Due(1)
90 Days
or More(2)
Total
Past Due
(Dollars in thousands)
Current(3)
Total
December 31, 2016:
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, 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
$
$
$
$
2,410
1,718
3,082
1,220
—
522
169
408
196
9,725
2,793
1,881
1,043
1,780
—
823
248
517
8
9,093
$
$
$
$
2,082 $
1,318
198
136
883
551
52
812
6
6,038 $
1,507 $
777
5,645
243
83
751
33
321
7
9,367 $
$
476,571 $
4,492
3,036
3,280
1,356
883
1,073
221
1,220
202
481,063
2,385,652
2,382,616
4,762,967
4,759,687
97,866
96,510
435,342
434,459
228,480
227,407
216,517
216,296
137,188
135,968
860,018
859,816
15,763 $ 9,589,330 $ 9,605,093
$
345,954 $
4,300
2,658
6,688
2,023
83
1,574
281
838
15
350,254
2,010,866
2,008,208
2,825,575
2,818,887
74,440
72,417
440,828
440,745
231,281
229,707
27,745
27,464
147,735
146,897
419,910
419,895
18,460 $ 6,510,174 $ 6,528,634
Includes $4.6 million and $1.9 million of loans and leases on nonaccrual status at December 31, 2016 and 2015, respectively.
(1)
(2) All loans and leases greater than 90 days past due were on nonaccrual status at December 31, 2016 and 2015.
(3)
Includes $3.7 million and $2.0 million of loans and leases on nonaccrual status at December 31, 2016 and 2015, respectively.
118
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
FV 33
FV 44
FV 55
FV 36
FV 77
(Dollars in thousands)
Purchased Loans
With
Evidence of Credit
Deterioration at
Date of Acquisition
FV 66
FV 88
Total
Purchased
Loans
December 31, 2016:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total
December 31, 2015:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
$ 99,447 $ 379,883 $162,166 $ 62,507 $
282 $ 72,052 $ 1,889 $ 778,226
128,347
2,279,749
712
3,128
11,404
532,893
33
2,536
26,991
—
4,058
404
— 308,663
— 10,237
714
211,667
9,463
22
1,722
812,474
328
194
2,496
7,359
457
—
44
$880,146 $2,970,976 $790,487 $ 73,551 $ 1,243 $236,346 $ 5,273 $4,958,022
309,450 1,415,399
351,001
104,303
5,154
13,169
231,758
11,838
172,168
17,268
414,116
319,442
1,497
5,229
419,978
63,561
3,825
54,116
10,897
75,812
132
2,735
55
381
127
86
—
$ 59,497 $ 117,498 $ 38,888 $ 85,684 $
209,542
13,121
4,825
20,347
8,912
726
3,944
693,707
12,511
7,963
86,588
29,001
205
3,316
122,652
7,137
1,456
27,818
9,244
185
212
5,039
4,771
797
896
5,649
6,106
243
351 $ 82,862 $ 2,172 $ 386,952
1,135,547
363
4,563
47,823
22
37
19,918
—
—
— 139,497
13
60,522
20
7,487
2
8,291
—
771 $209,503 $ 7,283 $1,806,037
99,681
10,224
4,877
3,835
7,185
263
576
511
—
—
Total
$320,914 $ 950,789 $207,592 $109,185 $
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 and are considered impaired.
119
The following table is an aging analysis of past due purchased loans as of the dates indicated.
30-89 Days
Past Due
90 Days
or More
Total
Past Due
(Dollars in thousands)
Current
Total
Purchased
Loans
December 31, 2016:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agriculture
Multifamily residential
Commercial and industrial
Consumer
Other
Total
Purchased loans without evidence of credit deterioration
at date of acquisition
Purchased loans with evidence of credit deterioration
at date of acquisition
Total
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
Purchased loans without evidence of credit deterioration
at date of acquisition
Purchased loans with evidence of credit deterioration
at date of acquisition
Total
$
$
$
$
$
$
$
$
10,547 $
7,471
21,008
49
—
891
4,421
—
44,387 $
8,665 $
20,528
527
638
—
1,305
1,502
—
33,165 $
759,014 $
19,212 $
27,999
21,535
687
—
2,196
5,923
—
778,226
2,279,749
2,251,750
532,893
511,358
26,991
26,304
308,663
308,663
211,667
209,471
812,474
806,551
7,359
7,359
77,552 $ 4,880,470 $ 4,958,022
38,621 $
8,619 $
47,240 $ 4,669,163 $ 4,716,403
5,766
44,387 $
24,546
33,165 $
30,312
241,619
211,307
77,552 $ 4,880,470 $ 4,958,022
$
9,042
3,435
919
106
299
714
101
10
14,626 $
6,293 $
6,837
1,255
356
—
924
41
11
15,717 $
371,617 $
15,335 $
10,272
2,174
462
299
1,638
142
21
386,952
1,135,547
1,125,275
47,823
45,649
19,918
19,456
139,497
139,198
60,522
58,884
7,487
7,345
8,291
8,270
30,343 $ 1,775,694 $ 1,806,037
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
120
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
$
$
2016
$
Year Ended December 31,
2015
(Dollars in thousands)
37,775
$
19,347
(31,923 )
(3,803 )
1,474
22,870
$
$
22,870
25,103
(26,446 )
(3,626 )
25,801
43,702
2014
49,811
55,984
(68,211 )
(6,533 )
6,724
37,775
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
Total real estate
Commercial and industrial
Consumer
Total foreclosed assets
8. Premises and Equipment
December 31,
2016
2015
(Dollars in thousands)
$
$
3,762
17,207
21,568
473
43,010
293
399
43,702
$
$
3,030
7,174
11,858
492
22,554
316
—
22,870
The following table is a summary of premises and equipment as of the dates indicated.
December 31,
2016
2015
Land
Construction in process
Buildings and improvements
Leasehold improvements
Equipment
Gross premises and equipment
Accumulated depreciation
Premises and equipment, net
$
$
$
(Dollars in thousands)
129,574
4,861
344,416
11,567
96,404
586,822
(82,736 )
504,086
$
87,652
1,198
195,599
6,582
73,121
364,152
(67,914 )
296,238
The Company’s interest on construction projects during 2016, 2015 and 2014 was not material. Included in occupancy expense
is rent of $7.2 million, $4.3 million and $2.3 million incurred under noncancelable operating leases in 2016, 2015 and 2014,
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, 2016 are as follows: $7.6 million
in 2017, $7.0 million in 2018, $5.8 million in 2019, $5.3 million in 2020, $3.9 million in 2021 and $18.7 million thereafter. Rental
income recognized for leases of buildings and premises under operating leases was $2.2 million during 2016, $1.7 million during 2015
and $1.3 million during 2014.
121
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,
2016
2015
(Dollars in thousands)
$
$
3,910,461
548,234
232,881
174,245
62,541
8,703
4,937,065
$
$
1,455,571
709,527
158,209
66,675
42,708
5,792
2,438,482
The aggregate amount of time deposits with a minimum denomination of $250,000 was $1.13 billion and $602 million at
December 31, 2016 and 2015, respectively.
10. Repurchase Agreements With Customers
At December 31, 2016 and 2015, securities sold under agreements to repurchase (“repurchase agreements”) totaled $65.1
million and $65.8 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 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,
2016
2015
(Dollars in thousands)
$
$
2,301
—
—
19,847
162,750
162,750
0.48 %
—
0.28 %
0.36 %
At December 31, 2016 and 2015, the Company had fixed rate FHLB advances with original maturities exceeding one year of
$41.9 million and $41.8 million, respectively. These fixed rate advances bear interest at rates ranging from 1.53% to 3.96% at
December 31, 2016, 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, 2016, the Bank had $4.78 billion of unused FHLB borrowing
availability.
122
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, 2016.
Maturity
2017
2018
2019
2020
2021
Thereafter
Total
Amount
Weighted-
Average
Interest Rate
(Dollars in thousands)
20,304
20,278
240
403
678
—
41,903
3.13 %
2.52
1.53
1.84
3.96
—
2.82
$
$
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, 2016.
Callable quarterly
Callable quarterly
Total
12. Subordinated Notes
Amount
Weighted-
Average
Interest Rate
$
$
20,000
20,000
40,000
(Dollars in thousands)
3.16 %
2.53
2.85
Maturity
2017
2018
On June 23, 2016, the Company completed an underwritten public offering of $225 million in aggregate principal amount of its
5.50% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Notes”) for net proceeds of $222.3 million after underwriting
discounts and offering expenses. The Notes were issued pursuant to the Subordinated Indenture, dated as of June 23, 2016 (the “Base
Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First
Supplemental Indenture, dated as of June 23, 2016 (the “Supplemental Indenture”), between the Company and the Trustee. The Base
Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes
are unsecured, subordinated debt obligations of the Company and will mature on July 1, 2026. From and including the date of
issuance to, but excluding July 1, 2021, the Notes will bear interest at an initial rate of 5.50% per annum. From and including July 1,
2021 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month
London Interbank Offered Rate (“LIBOR”) as calculated on each applicable date of determination plus a spread of 442.5 basis points;
provided, however, that in the event three-month LIBOR is less than zero, then three-month LIBOR shall be deemed to be zero. Debt
issuance costs of $2.7 million are being amortized, using a level-yield methodology over the estimated holding period of seven years,
as an increase in interest expense on the Notes.
The Company may, beginning with the interest payment date of July 1, 2021, and on any interest payment date thereafter,
redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus
accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the Notes at any time, including
prior to July 1, 2021, at the Company’s option, in whole but not in part, if: (i) a change or prospective change in law occurs that could
prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event
occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is
required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption
price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date.
123
13. Subordinated Debentures
At December 31, 2016 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, 2016
Carrying
Value of
Subordinated
Debentures
at December
31, 2016
Trust
Preferred
Securities
of the Trust
Interest Rate
at
December
31, 2016
Final Maturity
Date
Ozark II
Ozark III
Ozark IV
Ozark V
Intervest II
Intervest III
Intervest IV
Intervest V
Total
$
$
14,433 $
14,434
15,464
20,619
15,464
15,464
15,464
10,310
121,652 $
— $
—
—
—
(545 )
(630 )
(1,146 )
(1,089 )
(3,410 ) $ 118,242 $
14,433 $
14,434
15,464
20,619
14,919
14,834
14,318
9,221
(Dollars in thousands)
14,000
14,000
15,000
20,000
15,000
15,000
15,000
10,000
118,000
3.90 % September 29, 2033
September 25, 2033
3.83
3.14
September 28, 2034
2.56 December 15, 2036
3.94
September 17, 2033
3.78 March 17, 2034
3.40
September 20, 2034
2.61 December 15, 2036
On September 25, 2003, Ozark III sold to investors in a private placement offering $14 million of adjustable rate trust preferred
securities, and on September 29, 2003, Ozark II sold to investors in a private placement offering $14 million of adjustable rate trust
preferred securities (collectively, “2003 Securities”). The 2003 Securities bear interest, adjustable quarterly, at 90-day LIBOR plus
2.95% for Ozark III and 90-day LIBOR plus 2.90% for Ozark II. The aggregate proceeds of $28 million from the 2003 Securities were
used to purchase an equal principal amount of adjustable rate subordinated debentures of the Company that bear interest, adjustable
quarterly, at 90-day LIBOR plus 2.95% for Ozark III and 90-day LIBOR plus 2.90% for Ozark II (collectively,“2003 Debentures”).
On September 28, 2004, Ozark IV sold to investors in a private placement offering $15 million of adjustable rate trust preferred
securities (“2004 Securities”). The 2004 Securities bear interest, adjustable quarterly, at 90-day LIBOR plus 2.22%. The $15 million
proceeds from the 2004 Securities were used to purchase an equal principal amount of adjustable rate subordinated debentures of the
Company that bear interest, adjustable quarterly, at 90-day LIBOR plus 2.22% (“2004 Debentures”).
On September 29, 2006, Ozark V sold to investors in a private placement offering $20 million of adjustable rate trust preferred
securities (“2006 Securities”). The 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.
124
At December 31, 2016, the Company had an aggregate of $121.7 million of subordinated debentures outstanding (with an
aggregate carrying value of $118.2 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 both December 31, 2016 and 2015, the Trusts had aggregate common equity of $3.7 million 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.
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
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
$
115,879
25,696
141,575
11,773
930
12,703
154,278
$
$
79,191
7,873
87,064
6,432
959
7,391
94,455
$
$
47,661
6,456
54,117
(598 )
340
(258 )
53,859
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
2016
Year Ended December 31,
2015
2014
35.0 %
3.9
(1.5 )
(1.2 )
0.2
36.4 %
35.0 %
2.2
(2.2 )
(1.3 )
0.5
34.2 %
35.0 %
2.6
(4.0 )
(1.1 )
(1.3 )
31.2 %
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 $3.6 million, $7.0 million and $4.7 million in 2016, 2015 and 2014, respectively, were recorded as an
increase to additional paid-in capital.
At December 31, 2016, current income taxes receivable of $5.8 million was included in other assets and, at December 31, 2015,
current income taxes payable of $8.7 million was included in other liabilities.
125
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
Investment securities AFS
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,
2016
2015
(Dollars in thousands)
$
30,191
$
51,737
6,903
5,919
2,446
3,901
17,240
27,836
9,251
8,054
163,478
(474 )
163,004
46,206
—
13,213
59,419
103,585
$
$
22,802
24,600
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
Federal net operating losses were acquired in certain of the Company’s acquisitions. Such federal net operating losses acquired
totaled $80.9 million, of which $71.6 million remained to be utilized as of December 31, 2016 and will expire at various dates
beginning in 2029 to 2034.
State net operating losses were acquired in certain of the Company’s acquisitions. Such state net operating losses acquired
totaled $116.2 million, of which $92.4 million remained to be utilized as of December 31, 2016 and will expire at various dates
beginning in 2023 to 2035.
At both December 31, 2016 and 2015, 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).
Additionally, to the extent that management revises any of the fair value adjustments of acquired assets and assumed liabilities in the
Company’s C&S or C1 acquisitions, such adjustments may result in adjustments to deferred tax assets and/or deferred tax liabilities.
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
126
not exceed 5% of the employee’s compensation for the year, and (iv) all employer matching contributions made under the provisions
of the Safe-Harbor CODA are non-forfeitable. Certain other statutory limitations with respect to the Company’s contribution under the
401(k) Plan also apply. Matching contributions made by the Company prior to the 401(k) Plan becoming a Safe-Harbor CODA vest
over six years and are held in trust until distributed pursuant to the terms of the 401(k) Plan.
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 2016,
2015 and 2014 of $3.6 million, $2.7 million and $2.3 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 December 31, 2016 and 2015, respectively, the Company had Plan assets, along with an equal
amount of liabilities, totaling $4.9 million and $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 2016, 2015 and 2014, respectively, the Company
accrued $248,000, $223,000 and $200,000 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, 2016 were issued with a vesting period
of three years and expire seven years after issuance. At December 31, 2016 there were 1,402,941 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 $35,000 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 2016 and 2015, respectively, the Company issued 12,415 shares and 7,657 shares of common stock and incurred
$0.5 million and $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 2016. All options previously granted under this plan were exercisable immediately and
expire ten years after issuance.
127
The following table summarizes stock option activity for both the employee and non-employee director stock option plans for
the year ended December 31, 2016.
Outstanding – January 1, 2016
Granted
Exercised
Forfeited
Outstanding – December 31, 2016
Fully vested and exercisable at December 31, 2016
Expected to vest in future periods
Fully vested and expected to vest at December 31, 2016(2)
Options
2,034,476 $
18,683
(315,600 )
(102,075 )
1,635,484
529,925 $
1,041,146
1,571,071 $
Weighted-
Average
Exercise
Price/Share
Weighted-
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
34.50
40.83
19.52
40.02
37.10
19.43
36.66
4.9 $
3.6 $
25,582 (1)
17,574 (1)
4.9 $
25,259 (1)
(1) Based on closing price of $52.59 per share on December 30, 2016.
(2) At December 31, 2016 the Company estimates that options to purchase 64,413 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 2016, 2015 and 2014 was $7.6 million, $12.5 million and $10.0
million, respectively.
Options to purchase 18,683 shares, 659,181 shares and 616,250 shares, respectively, were granted during 2016, 2015 and 2014
with a weighted-average grant date fair value of $11.52, $14.00 and $7.04, 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,
2016
2015
2014
1.27 %
1.66 %
36.4 %
5.0
1.69 %
1.19 %
31.0 %
5.0
1.62 %
1.49 %
24.1 %
5.0
The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The
expected dividend yield is estimated using the current annual dividend level and recent stock price of the Company’s common stock at
the date of grant. Expected stock volatility is based on historical volatilities of the Company’s common stock. The expected life of the
options is calculated based on the “simplified” method as provided for under SEC Staff Accounting Bulletin No. 110.
The total fair value of options to purchase shares of the Company’s common stock that vested during 2016, 2015 and 2014 was
$2.2 million, $2.0 million and $1.5 million, respectively. Stock-based compensation expense for stock options included in non-interest
expense was $4.1 million, $2.6 million and $2.1 million for 2016, 2015 and 2014, respectively. Total unrecognized compensation cost
related to non-vested stock option grants was $6.7 million at December 31, 2016 and is expected to be recognized over a weighted-
average period of 1.7 years.
The Company has a restricted stock and incentive plan that permits issuance of up to 2,400,000 shares of restricted stock or
restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock 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, 2016 there were
1,178,703 shares available for future grants under this plan.
128
The following table summarizes non-vested restricted stock activity for the year ended December 31, 2016.
Outstanding – January 1, 2016
Granted
Forfeited
Earned and issued
Outstanding – December 31, 2016
Weighted-average grant date fair value
Shares
435,475
218,761
(21,139 )
(202,600 )
430,497
39.90
$
Restricted stock awards of 218,761 shares were granted during 2016 with a weighted-average grant date fair value of $45.66.
Restricted stock awards of 245,300 shares were granted during 2015 with a weighted-average grant date fair value of $34.39. There
were no restricted stock awards granted during 2014. The fair value of the restricted stock awards is amortized to compensation
expense over the three-year vesting period 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 $6.2 million, $5.2 million and $3.5 million for 2016, 2015 and 2014, respectively. Unrecognized
compensation expense for nonvested restricted stock awards was $9.2 million at December 31, 2016 and is expected to be recognized
over a weighted-average period of 1.7 years.
On January 18, 2017 the Company’s personnel and compensation committee approved the issuance of (i) options to purchase
600,514 shares of the Company’s common stock with an exercise price of $52.08 that vest on January 18, 2020 and (ii) restricted
stock awards for 237,887 shares of restricted common stock that vest on January 18, 2020. Total compensation expense for the stock
options and the restricted stock awards is expected to be approximately $21.7 million and is expected to be recognized 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 not
longer than one year. The maximum amount of future payments the Company could be required to make under these letters of credit
at December 31, 2016 and 2015 is $54.3 million and $16.5 million, respectively. The Company holds collateral to support letters of
credit when deemed necessary. The total of collateralized commitments at December 31, 2016 and 2015 was $48.9 million and $15.9
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.
129
At December 31, 2016, the Company had outstanding commitments to extend credit, excluding mortgage interest rate lock
commitments, totaling $10.07 billion, consisting primarily of loans closed but not yet funded. The following table shows the
contractual maturities of outstanding commitments to extend credit at December 31, 2016.
Maturity
2017
2018
2019
2020
2021
Thereafter
Total
Contractual
Maturities at
December 31, 2016
(Dollars in
thousands)
$
$
893,841
2,198,627
4,154,932
2,582,549
61,444
178,650
10,070,043
The Company is a party to various 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
claims and proceedings cannot be determined at this time, management 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.
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
$
$
2016
Year Ended December 31,
2015
(Dollars in thousands)
7,920
$
9,295
(14,542 )
(1,145 )
1,528
$
$
$
1,528
10,583
(11,380 )
—
731
2014
7,001
7,974
(7,055 )
—
7,920
The Company had outstanding commitments to extend credit to related parties totaling $5.2 million and $6.0 million at
December 31, 2016 and 2015, 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 our 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 our
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.
130
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, prior to the third quarter of 2016, $118 million of trust
preferred securities issued by the Trusts. The Basel III Rules include certain provisions that require trust preferred securities to be
phased out of, or no longer be considered, qualifying tier 1 capital for certain institutions depending on the size of the institution as
measured by total assets. As a result of the Company’s acquisitions of C&S on July 20, 2016 and C1 on July 21, 2016, the Company’s
total assets exceeded $15 billion. Accordingly, pursuant to the Basel III Rules, the Company’s trust preferred securities are no longer
included in tier 1 capital as of September 30, 2016, but will continue to be included in total capital.
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 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, for the Company, the trust preferred securities and the subordinated notes.
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 began
phasing in January 1, 2016 at 0.625% of risk-weighted assets, and will increase each year 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 the 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 4.0%.
Additionally, in order to be considered well-capitalized under the Basel III Rules, the Company and the Bank must maintain (i) a ratio
of 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%.
131
The following table presents actual and required capital ratios as of December 31, 2016 and 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, 2016 and 2015, respectively, based on the 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, 2016:
Tier 1 leverage to average assets:
Company
Bank
$2,093,548 11.99 % $ 698,438
698,597
2,405,095 13.77
4.00 % $ 698,438
698,597
4.00
4.00 %
4.00 $ 873,246
N/A N/A
5.00 %
Common equity tier 1 to risk-
weighted assets:
Company
Bank
Tier 1 capital to risk-weighted assets:
2,093,548
9.99
2,405,095 11.48
1,074,382 5.125
1,073,635 5.125
1,467,448
1,466,428
7.00
7.00
N/A N/A
6.50
1,361,684
Company
Bank
2,093,548
9.99
2,405,095 11.48
1,388,835 6.625
1,387,870 6.625
1,781,902
1,780,663
8.50
8.50
N/A N/A
8.00
1,675,918
Total capital to risk-weighted assets:
Company
Bank
2,513,089 11.99
2,481,636 11.85
1,808,106 8.625
1,806,849 8.625
2,201,173 10.50
2,199,643 10.50
N/A N/A
2,094,898 10.00
December 31, 2015:
Tier 1 leverage to average assets:
Company
Bank
$1,417,940 14.96 % $ 379,116
378,900
1,385,192 14.62
4.00 % $ 379,116
378,900
4.00
4.00 %
4.00 $ 473,625
N/A N/A
5.50 %
Common equity tier 1 to risk-
weighted assets:
Company
Bank
Tier 1 capital to risk-weighted assets:
1,316,373 10.79
1,385,192 11.36
549,200
548,840
4.50
4.50
854,311
853,752
7.00
7.00
N/A N/A
6.50
792,769
Company
Bank
1,417,940 11.62
1,385,192 11.36
732,267
731,787
6.00
6.00
1,037,378
1,036,698
8.50
8.50
N/A N/A
8.00
975,716
Total capital to risk-weighted assets:
Company
Bank
1,478,794 12.12
1,446,046 11.86
976,356
975,716
8.00
8.00
1,281,467 10.50
1,280,627 10.50
N/A N/A
1,219,645 10.00
As of December 31, 2016 and 2015, 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, 2016 and 2015, respectively, $233.9 million and $117.8 million were available for payment of dividends by the Bank
without the approval of regulatory authorities.
Under FRB regulation, the Bank is also limited as to the amount it may loan to its affiliates, including the Company, and such
loans must be collateralized by specific types of collateral. The maximum amount available for loan from the Bank to the Company is
limited to 10% of the Bank’s capital and surplus or approximately $310 million and $155 million, respectively, at December 31, 2016
and 2015.
132
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, 2016 and 2015, the Company had no material 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, 2016:
Investment securities AFS (1):
Obligations of state and political subdivisions
U.S. Government agency securities
Corporate obligations
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)
$
— $
—
—
1,034
1,034
—
—
—
901,634 $
535,490
9,915
—
1,447,039
—
—
—
$
1,034 $ 1,447,039 $
919,013
17,379 $
535,490
—
9,915
—
1,034
—
1,465,452
17,379
10,243
10,243
6,516
6,516
43,702
43,702
77,840 $ 1,525,913
(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 $6.2
million.
The following table sets forth the Company’s assets, as of the date indicated, that are accounted for at fair value.
December 31, 2015:
Investment securities AFS (1):
Obligations of state and political subdivisions
U.S. Government agency securities
Corporate obligations
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.
133
The following table presents information related to Level 3 non-recurring fair value measurements at December 31, 2016.
Description
Impaired non-purchased
loans and leases
Impaired purchased
loans
Foreclosed assets
Fair Value at
December 31,
2016
Technique
(Dollars in thousands)
10,243 Third party appraisal(1)
or discounted cash flows
6,516 Third party appraisal(1)
and/or discounted cash flows
$
$
$
Unobservable Inputs
1. Management discount based on
underlying collateral characteristics
and market conditions
2. Life of Loan
1. Management discount based on
underlying collateral characteristics
and market conditions
2. Life of Loan
43,702 Third party appraisal,(1)
broker price opinions
and/or discounted cash flows
1. Management discount based on asset
characteristics and market conditions
2. Discount rate
3. Holding period
(1)
The Company utilizes valuation techniques consistent with the market, cost, and income approaches, or a combination thereof in determining
fair value.
The following methods and assumptions are used to estimate the fair value of the Company’s assets 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 on a quarterly basis.
The Company has determined that certain of its investment securities had a limited to non-existent trading market at
December 31, 2016 and 2015. 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 $17.4 million and $18.5 million at December 31, 2016 and 2015, 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, 2016 and 2015, the third
party pricing matrices valued the Company’s total portfolio of private placement bonds at $17.4 million and $18.5 million,
respectively, which was equal to the par value of the private placement bonds at December 31, 2016 and 2015. Accordingly, at
December 31, 2016 and 2015 the Company reported the private placement bonds at $17.4 million and $18.5 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 $5.8 million and $7.8 million, respectively, to the estimated fair value of $10.2 million and $9.3
million, respectively, for such loans and leases at December 31, 2016 and 2015. These adjustments to reduce the carrying value of
impaired non-purchased loans and leases to estimated fair value at December 31, 2016 and 2015 consisted of $3.0 million and $6.5
million, respectively, of partial or full charge-offs and $2.8 million and $1.3 million, respectively, of specific loan and lease loss
allocations.
134
Impaired purchased loans – Impaired purchased loans are measured at fair value on a non-recurring basis. At December 31,
2016 and 2015, 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 $2.9 million during 2016 and $2.5 million during 2015 for such loans. The Company
recorded $3.3 million during 2016 and $3.7 million during 2015 of provision for purchased loans. The Company had $1.6 million of
ALLL at December 31, 2016 and $1.2 million at December 31, 2015 for loans 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 $6.5 million of impaired purchased loans at December 31, 2016 and
$8.1 million of impaired purchased loans at December 31, 2015.
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, 2014
Total unrealized gains/(losses) included in other comprehensive income
Paydowns and maturities
Transfers in and/or out of Level 3
Balances – December 31, 2015
Total unrealized gains/(losses) included in other comprehensive income
Paydowns and maturities
Transfers in and/or out of Level 3
Balances – December 31, 2016
Investment
Securities
AFS
(Dollars in thousands)
$
$
19,401
(2 )
(895 )
—
18,504
(363 )
(762 )
—
17,379
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 on a quarterly basis. The Company’s investments in the common stock of the FHLB and FNBB of $6.1 million and $23.5
million, in the aggregate, at December 31, 2016 and 2015, respectively, do not have readily determinable fair values and are carried at
cost.
135
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 notes and 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, 2016 and 2015.
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.
Fair
Value
Hierarchy
Carrying
Amount
December 31,
2016
2015
Estimated
Fair
Value
(Dollars in thousands)
Carrying
Amount
Estimated
Fair
Value
$
866,360 $
866,360 $
90,988 $
90,988
1,471,612
14,486,574
1,471,612
14,221,113
602,348
8,273,817
602,348
8,165,123
$10,637,813 $10,637,813 $ 5,532,986 $ 5,532,986
2,456,323
65,800
205,918
—
77,534
4,937,065
65,110
41,903
222,516
118,242
2,438,482
65,800
204,540
—
117,685
4,965,279
65,110
42,696
223,133
84,478
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 notes
Subordinated debentures
Level 1
Levels 1,
2 and 3
Level 3
Level 1
Level 2
Level 1
Level 2
Level 2
Level 2
136
22. Supplemental Cash Flow Information
The following is a summary of supplemental cash flow information for the periods indicated:
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
Cash paid during the period for:
Interest
Income Taxes
$
53,370
125,980
$
28,567
57,948
$
Supplemental schedule of non-cash investing and financing activities:
Loans and other assets 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
25,103
271
(52,736 )
1,135,863
19,347
—
(10,395 )
303,865
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 (loss) on sales of loans
Gain on sales of foreclosed assets
Gain on sales of premises and equipment and
other assets
Gain on sales of other assets
$
$
The following is a summary of other non-interest income for the periods indicated.
2016
Year Ended December 31,
2015
(Dollars in thousands)
6,285
8,365
$
(188 ) $
3,648
696
4,156
$
103
14,753
$
21,471
47,293
55,984
1,423
29,295
166,315
2014
27
5,924
72
6,023
Gain on termination of FDIC loss share agreements
Other, net
Total other non-interest income
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
$
— $
13,370
13,370
$
— $
7,153
7,153
$
7,996
8,678
16,674
137
The following is a summary of other operating expenses for the periods indicated.
2016
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
24. Earnings Per Common Share (“EPS”)
$
$
$
Year Ended December 31,
2015
(Dollars in thousands)
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
$
5,566
8,800
5,617
21,330
4,950
8,130
1,626
5,125
4,774
4,612
3,610
9,037
—
7,221
90,398
$
2014
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
The following table sets forth the computation of basic and diluted EPS for the periods indicated.
Numerator:
Distributed earnings allocated to common stockholders
Undistributed earnings allocated to common stockholders
Net earnings allocated to common stockholders
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
2016
Year Ended December 31,
2015
(In thousands, except per share amounts)
2014
62,173
207,806
269,979
$
$
47,079
135,174
182,253
$
$
36,130
82,476
118,606
104,409
291
104,700
2.59
2.58
$
$
86,785
563
87,348
2.10
2.09
$
$
77,538
522
78,060
1.53
1.52
$
$
$
$
Options to purchase 650,197 shares, 656,181 shares and 559,050 shares, respectively, of the Company’s common stock at a
weighted-average exercise price of $54.11 per share, $52.98 per share and $36.05 per share, respectively, were outstanding during
2016, 2015 and 2014, 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.
138
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
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
7,959
$
14,132
$
(3,672 )
(52,736 )
18,860
(4 )
1
(33,879 )
(4,491 )
1,711
(5,481 )
2,088
(6,173 )
29,164
(11,272 )
(144 )
56
17,804
$
(25,920 ) $
7,959
$
14,132
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.
139
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 notes
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
December 31,
2016
2015
(Dollars in thousands)
$
$
$
$
22,179
3,102,061
3,652
1,092
10,878
3,139,862
620
6,877
222,516
118,242
348,255
1,213
1,901,880
914,434
(25,920 )
—
2,791,607
3,139,862
$
$
$
$
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
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
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
$
71,370
115
2
71,487
11,199
17,752
28,951
42,536
12,020
215,423
269,979
$
$
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
140
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 (paid) received 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
Proceeds from issuance of subordinated notes
Excess tax benefits on exercise of stock options and
vesting of restricted common stock
Repurchase and cancellation of shares of common stock
Cash dividends paid on common stock
Net cash provided (used) by financing activities
Net increase (decrease) in cash
Cash—beginning of year
Cash—end of year
2016
Year Ended December 31,
2015
(Dollars in thousands)
2014
$
269,979
$
182,253
$
118,606
(215,423 )
(1,718 )
10,754
(3,576 )
6,041
66,057
—
(222,315 )
(6,736 )
(229,051 )
6,162
—
222,315
3,576
(3,304 )
(62,173 )
166,576
3,582
18,597
22,179
$
(157,110 )
(1,174 )
8,202
(7,049 )
9,458
34,580
—
(110,000 )
2,691
(107,309 )
5,145
110,000
—
7,049
(6,857 )
(47,079 )
68,258
(4,471 )
23,068
18,597
$
$
(25,080 )
(417 )
5,675
(4,682 )
4,923
99,025
3,997
—
(63,928 )
(59,931 )
4,727
—
—
4,682
(2,349 )
(36,130 )
(29,070 )
10,024
13,044
23,068
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.
As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the
participation of the Company’s Chairman and Chief Executive Officer (principal executive officer) and its Chief Financial Officer and
Chief Accounting Officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in SEC Rule 13a-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other
procedures designed to ensure that the information required to be disclosed in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management, including our principal executive and principal financial officers, as
appropriate, to allow for timely decisions regarding required disclosure. Based on that evaluation, the principal executive officer and
principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and
procedures were effective.
141
(b) 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, 2016 and have concluded that there was no change during the Company’s
fourth quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
(c) Report of Management on the Company’s Internal Control Over Financial Reporting
March 1, 2017
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 generally accepted accounting
principles. 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 generally
accepted accounting principles, 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. 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 effectiveness of the Company’s internal control over financial reporting as of December 31,
2016, based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As permitted, management
excluded from its assessment of internal control over financial reporting the Community & Southern Holdings, Inc. and C1 Financial,
Inc. acquisitions made during 2016, which acquisitions are described in Note 2 to the Consolidated Financial Statements. The total
assets and total interest income from these acquisitions comprised approximately 18% of total consolidated assets at December 31,
2016 and approximately 17% of total consolidated interest income for the year ended December 31, 2016. Based on this assessment,
management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016, based
on the specified criteria.
PricewaterhouseCoopers, 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 also audited the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2016. Their report is included in Item 8 under the heading “Report of Independent
Registered Public Accounting Firm.”
/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
142
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.
143
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 Selected Quarterly Financial Data, 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 following the signature page to this Form 10-K.
(c) Financial Statement Schedules.
See Part IV, Item 15(a)(2) of this Annual Report on Form 10-K.
Item 16. FORM 10-K SUMMARY
Not Applicable.
144
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).
145
3.5
3.6
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*
Articles of Amendment to the Amended and Restated Articles of Incorporation of Bank of the Ozarks, Inc., dated May
16, 2016 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on
May 17, 2016 and incorporated herein by reference).
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).
146
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
11.1
12.1
21
23.1
23.2
31.1
31.2
32.1
32.2
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).
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).
Bank of the Ozarks, Inc. 2017 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 19, 2017 and incorporated herein by reference).
Bank of the Ozarks, Inc. 2017 Cash-Based Performance Plan (previously filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed with the Commission on January 19, 2017 and incorporated herein by reference).
Second Amended and Restated Bank of the Ozarks, Inc. 2009 Restricted Stock and Incentive Plan, effective May 16,
2016 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May
17, 2016 and incorporated herein by reference).
Form of Notice of Grant of Restricted Stock and Award Agreement, effective May 16, 2016, for grants under the Second
Amended and Restated Bank of the Ozarks, Inc. 2009 Restricted Stock and Incentive Plan, effective May 16, 2016
(previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 17,
2016 and incorporated herein by reference).
Bank of the Ozarks, Inc. Non-Employee Director Stock Plan, as amended, effective May 16, 2016 (previously filed as
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on May 17, 2016 and
incorporated herein by 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.
Consent of PricewaterhouseCoopers 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.
147
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Definition Linkbase
101.LAB
XBRL Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
* Management contract or a compensatory plan or arrangement.
148
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: March 1, 2017
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
/s/ George Gleason
George Gleason
/s/ Dan Thomas
Dan Thomas
/s/ Greg McKinney
Greg McKinney
/s/ Nicholas Brown
Nicholas Brown
/s/ Paula Cholmondeley
Paula Cholmondeley
/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/ Jack Mullen
Jack Mullen
/s/ Robert Proost
Robert Proost
/s/ John Reynolds
John Reynolds
/s/ Ross Whipple
Ross Whipple
DATE
March 1, 2017
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Vice Chairman, President – Real Estate Specialties Group
and Chief Lending Officer
March 1, 2017
Chief Financial Officer and Chief Accounting Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
149
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
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,
2016
2015
2014
2013
2012
(Dollars in thousands)
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, subordinated
notes and subordinated debentures
Interest capitalized
Estimated interest divided included within rental expense
Preferred dividend requirements
Fixed charges
$
$ 424,358 $276,769 $172,447 $131,414 $110,999
21,825
4
61,813
2
18,831
3
21,225
1
28,041
2
(47 )
101
(24 )
20
$ 486,227 $304,843 $193,631 $150,252 $132,824
(24 )
(18 )
(24 )
28
(30 )
61
$
48,593 $ 17,716 $
8,566 $
6,103 $
8,982
12,457
47
716
—
12,618
70
155
—
61,813 $ 28,041 $ 21,225 $ 18,831 $ 21,825
12,389
24
246
—
12,531
57
140
—
9,852
30
443
—
Ratio of Earnings to Fixed Charges
(including deposit interest)
Ratio of Earnings to Fixed Charges
(excluding deposit interest)
7.87
10.87
9.12
7.98
6.09
33.10
27.81
14.62
11.33
9.64
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:
(cid:120)
(cid:120)
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.
Exhibit 21
Subsidiaries of the Registrant
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., a 100% owned Arkansas subsidiary of Bank of the Ozarks
Arlington Park, LLC, a 50% owned Arkansas subsidiary of The Highlands Group, Inc.
BOTO, LLC, a 100% owned Arkansas subsidiary of Bank of the Ozarks
ASMSA Investment Fund LLC, a 99% owned Delaware subsidiary of Bank of the Ozarks
Open Avenues Investment Fund LLC, a 99% owned Delaware subsidiary of Bank of the Ozarks
BOTO FL Properties LLC, a 100% owned Florida subsidiary of Bank of the Ozarks
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
BOTO NC Properties, LLC, a 100% owned North Carolina subsidiary of Bank of the Ozarks
BOTO GA Properties, LLC, a 100% owned Georgia subsidiary of Bank of the Ozarks
BOTO-AR Properties, LLC, a 100% owned Arkansas subsidiary of Bank of the Ozarks
BOTO SC Properties, LLC, a 100% owned South Carolina subsidiary of Bank of the Ozarks
Omnibank Center Business Condominium Owners Association, Inc., a 75.2% owned Texas subsidiary of Bank of the Ozarks
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
BOTO Holdings, Inc., a 100% owned Texas subsidiary of Bank of the Ozarks
RESG Cayman Islands SPE, LLC, a 100% owned Texas subsidiary of Bank of the Ozarks
Hughes Meadows Apartments, LP, a 99.99% owned Arkansas subsidiary of Summit Real Estate Investments, Inc.
Keiser Apartments Limited Partnership, a 99% owned Arkansas subsidiary of Summit Real Estate Investments, Inc.
Ridgecrest Limited Partnership, a 95% owned Arkansas subsidiary of Summit Real Estate Investments, Inc.
East Atlantic Properties, LLC, a 100% owned North Carolina subsidiary of Bank of the Ozarks
BOTC, LLC, a 100% owned North Carolina subsidiary of Bank of the Ozarks
Twin Points Road Clubhouse Properties, LLC, a 100% owned Arkansas subsidiary of Bank of the Ozarks
Highway 7 Properties, LLC, a 100% owned Arkansas subsidiary of Bank of the Ozarks
Bay Street Townhomes Condominium Assoc., Inc., a 100% owned Florida subsidiary of Bank of the Ozarks
Wynwood First, LLC, a 100% owned Florida subsidiary of Bank of the Ozarks
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
Subsidiaries of the Registrant
35.
36.
37.
38.
910 Cape Coral Parkway, LLC, a 100% owned Florida subsidiary of Bank of the Ozarks
BOTO Bankmobile, LLC (FKA C1 Bankmobile, LLC), a 100% owned Florida subsidiary of Bank of the Ozarks
Deltona Inn Properties, LLC, a 100% owned Florida subsidiary of Bank of the Ozarks
Elizabeth Station, LLC, a 33.34% owned Georgia 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.
333-211419 on Form S-8 pertaining to the Restricted Stock and Incentive Plan, 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 2015 and 2014 Consolidated Financial Statements of Bank of the Ozarks, Inc., which report appears in this Annual Report on
Form 10-K for Bank of the Ozarks, Inc. for the year ended December 31, 2015.
/s/ Crowe Horwath LLP
Atlanta, Georgia
March 1, 2017
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-203388), and on Form S-8
(Nos. 333-211419, 333-204268, 333-204266, 333-194721, 333-194720, 333-183910, 333-183909, 333-68596, 333-74577, 333-32175
and 333-32173) of Bank of the Ozarks, Inc. of our report dated March 1, 2017 relating to the financial statements and the effectiveness
of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.2
/s/PricewaterhouseCoopers LLP
Little Rock, Arkansas
March 1, 2017
CERTIFICATIONS
I, George Gleason, certify that:
Exhibit 31.1
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: March 1, 2017
/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: March 1, 2017
/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, 2016 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.
March 1, 2017
/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, 2016 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.
March 1, 2017
/s/ Greg McKinney
Greg McKinney
Chief Financial Officer and Chief Accounting Officer
In accordance with SEC Release No. 34-47986, this Exhibit 32.2 is furnished to the SEC as an accompanying document and is not
deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section,
nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
OUR
HISTORY
1903
1937
1979
1983
Newton County Bank
chartered in Jasper, AR
Bank of Ozark
chartered in Ozark, AR
Gleason purchases
Bank of Ozark
Gleason purchases Newton County Bank;
assumes charter
1994
Launches de novo branching plan;
changes name to Bank of the Ozarks
1995
Relocates
headquarters to
Little Rock, AR
1997
1998
Bank of the Ozarks, Inc.
holds initial public
stock offering (OZRK)
Begins expansion in
Arkansas’ three
largest cities
2001
2003
2004
2006
2008
Opened Charlotte,
NC LPO
RESG and Leasing
divisions established
Begins de novo expansion in Texas
with an emphasis on Metro Dallas
Opens 11 new offices,
a company record
Opens new headquarters
in Little Rock, AR
2010
2011
2012
2013
Completes four FDIC-assisted acquisitions in Georgia,
Florida, Alabama, South Carolina and North Carolina
Completes three FDIC-
assisted acquisitions
in Georgia and Florida
Completes acquisition
of The Citizens Bank
in Alabama
Completes acquisition
of First National Bank in
Shelby, North Carolina
2014
2015
2016
Completes acquisitions of
OMNIBANK in Texas and
Summit Bank in Arkansas
Completes acquisitions of Intervest National Bank
in New York and Florida, and Bank of the Carolinas
in North Carolina
Becomes a $10 billion organization based on assets. C1
Bank acquisition in Florida and Community & Southern Bank
acquisition in Georgia and Florida completed in July
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