9Annual Report
20 24
81
02
01
Texas
Arkansas
Alabama
New York
01
NEW YORK
25
NORTH CAROLINA
SOUTH CAROLINA
02
43
FLORIDA
02
CALIFORNIA
ARKANSAS83
22
TEXAS
03
ALABAMA
MISSISSIPPI01
69
GEORGIA
03
01
44
26
North Carolina
02
South Carolina
70
California
Mississippi
Florida
Georgia
9 Through a combination of organic
growth and acquisitions, we serve
our customers in 250+ offices
throughout 10 states.*
This report contains forward-looking statements and reflects management’s current views of future
economic circumstances, industry conditions, company performance and financial results. Actual future
performance, outcomes and results may differ materially from those expressed in these forward-looking
statements due to certain risks, uncertainties and assumptions. A description of certain factors that may
affect future results may be found in this annual report under “Forward-Looking Information” and under
“Part I—Item 1A. Risk Factors.”
*As of December 31, 2019
Bank OZK has a 116-year tradition of community-based service
and commitment to our customers. We’ve always been the
kind of bank where customers like to do business and where
our employees like to work. With a strong commitment to the
communities we serve, we cultivate relationships that grow
and thrive.
At Bank OZK, we are committed to providing the great service
you’ve come to expect from our community bank heritage
while leveraging technology to deliver for our customers. And
no matter where you go, our digital experiences can go with
you, making life simpler, safer and more fun.
2019 Annual Report
1
8
6
4
2
0
500
400
300
200
100
0
A Long-Term Perspective
The strong results we achieved in 2019 reflect our continued
commitment to excellence and our focus on long-term
performance. Our constant pursuit of building relationships,
improving performance and enhancing efficiency has
consistently produced superior results.
We remain focused on asset quality, profitability and growth. We
have achieved strong long-term growth in loans and deposits,
while our net income and diluted earnings per common share
have grown at similar rates.
27.7%
Compound annual
growth rate
Net Income
(Millions)
Earnings Per Common Share
(Diluted)
3
.
1
0
1
$
.
0
4
6
$
7
4
.
1
$
.
0
7
7
$
6
2
.
1
$
1
1
.
1
$
2
.
1
9
$
2
5
.
1
$
.
4
9
0
$
.
8
6
3
$
.
4
5
0
$
9
.
1
2
4
$
1
.
7
1
4
$
9
.
5
2
4
$
.
0
0
7
2
$
.
3
2
8
1
$
.
8
5
2
$
.
6
8
1
1
$
9
0
2
$
.
5
3
.
3
$
.
4
2
3
$
0
3
3
$
.
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
Over the past ten years, we have achieved compound annual growth rates of 27.7% in
net income and 19.8% in diluted earnings per common share.
2
30000
24000
18000
12000
6000
0
1400
1120
840
560
280
0
80
64
48
32
16
0
30000
24000
18000
12000
6000
0
Total Loans
(Millions)
Deposits
(Millions)
2
3
5
7
1
$
,
8
1
1
,
7
1
$
3
4
0
6
1
$
,
3
6
5
4
1
$
,
8
3
9
7
1
$
,
2
9
1
,
7
1
$
4
7
4
8
1
$
,
5
7
5
5
1
$
,
5
3
3
8
$
,
8
2
1
,
5
$
4
0
9
,
1
$
6
4
3
2
$
,
2
9
6
2
$
,
4
5
7
2
$
,
7
5
3
3
$
,
1
7
9
7
$
,
6
9
4
5
$
,
9
2
0
2
$
,
1
4
5
2
$
,
4
4
9
2
$
,
1
0
1
,
3
$
7
1
7
3
$
,
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
Over the past ten years, our total loans, including purchased
loans, have grown at a compound annual rate of 24.9%.
Over the past ten years, our deposits have grown at a compound
annual rate of 24.7%.
Net Interest Income
(Millions)
Non-interest Income
(Millions)
4
.
1
9
8
$
.
2
4
8
8
$
.
4
7
1
8
$
5
.
1
0
6
$
.
2
2
8
3
$
.
5
0
7
2
$
.
7
8
6
1
$
.
.
3
3
4
4
7
7
1
1
$
$
.
5
3
9
1
$
.
3
8
1
1
$
.
6
3
2
1
$
1
.
7
1
1
$
.
3
0
7
$
1
.
1
5
$
.
0
6
7
$
.
9
2
6
$
.
9
3
2
1
$
.
4
2
0
1
$
.
8
7
0
1
$
.
5
7
0
1
$
.
0
5
0
1
9 $
4
8
$
.
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
Net interest income has grown over the last ten years at a
compound annual rate of 22.3%.
Non-interest income has grown over the last ten years at a
compound annual rate of 7.7%.
Efficiency Ratio
Dividends per Share
%
6
6
4
.
%
3
5
4
.
%
3
5
4
.
%
9
2
4
.
%
6
.
1
4
%
8
7
3
.
%
4
8
3
.
%
8
5
3
.
%
9
4
3
.
%
3
0
4
.
%
9
7
3
.
.
4
9
0
$
5
9
7
0
$
.
.
1
7
0
$
.
3
6
0
$
.
5
5
0
$
.
7
4
0
$
.
6
3
0
$
.
5
2
0
$
5
8
1
.
0
$
3
1
.
0
$
5
1
.
0
$
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
We have worked relentlessly to become one of the most
efficient banks in the nation. Our efficiency ratio has ranked
in the top decile of the industry for the past 18 years.
Over the past ten years, we have increased dividends paid to
shareholders at a compound annual rate of 21.9%.
2019 Annual Report
3
200
160
120
80
40
0
1.5
1.2
0.9
0.6
0.3
0.0
History of Asset Quality Better than
the Industry
Our net charge-off ratio has consistently compared favorably
with the ratio for all FDIC-insured institutions as a group.
3
2
1
0
3
2
1
0
0.09%
Net Charge-Off
Ratio†
4
Bank OZK
Net Charge-Off Ratio†
FDIC-Insured Financial Institutions
Net Charge-Off Ratio
%
2
5
2
.
%
5
5
2
.
%
5
7
.
1
%
5
5
.
1
%
1
8
0
.
%
9
6
0
.
%
0
1
.
1
%
0
3
0
.
%
9
6
0
.
%
4
1
.
0
%
2
1
.
0
%
9
4
0
.
%
4
4
0
.
%
8
1
.
0
%
7
4
0
.
%
6
0
0
.
%
6
0
0
.
%
0
5
0
.
%
8
4
0
.
%
8
3
0
.
%
2
5
0
.
%
9
0
0
.
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
Source: Data for all FDIC-Insured Financial Institutions from the FDIC Quarterly Banking Profile for 4Q19.
† Ratios exclude purchased loans and net charge-offs related to such loans.
5
4
3
2
1
0
Nonperforming Non-Purchased Loans (“NPLs”)/
Total Non-Purchased Loans %†
Nonperforming Assets (“NPAs”)/Total Assets %†*
%
%
4
4
2
2
.
.
1
1
%
5
7
0
.
%
0
7
0
.
%
3
4
0
.
%
3
5
% 0
3
3
0
.
.
%
%
6
6
0
0
3
3
.
.
%
2
7
.
1
%
0
2
0
.
%
5
1
.
0
%
0
1
.
0
%
3
2
0
.
%
5
1
.
0
%
7
1
.
%1
7
5
0
.
%
7
8
% 0
3
4
0
.
.
%
7
3
0
.
%
1
3
0
.
%
8
1
.
0
%
3
2
0
.
%
8
1
.
0
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
NPLs were just $24 million, or 0.15% of total non-purchased loans,
at 12/31/19.
NPAs, which include NPLs and foreclosed assets, were just
$43 million, or 0.18% of total assets, at 12/31/19.
Non-Purchased Loans Past Due 30 Days or More
Including Past Due Nonaccrual Non-Purchased Loans
(“Loans Past Due”)/Total Non-Purchased Loans %†
Substandard Non-Purchased Loans/
Total Risk-Based Capital %†
%
9
9
.
1
%
%
1
1
0
0
2
2
.
.
%
3
5
.
1
%
3
7
0
.
%
5
4
0
.
%
9
7
0
.
%
8
2
0
.
%
6
1
.
0
%
5
1
.
0
%
8
2
0
.
%
9
1
.
0
%
2
2
4
1
.
%
7
0
2
1
.
%
3
0
9
.
%
0
6
6
.
%
3
1
.
4
%
0
2
3
.
%
5
7
.
1
%
5
9
0
.
%
7
6
2
.
%
2
2
.
1
%
6
4
2
.
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
Non-purchased loans past due, including past due nonaccrual
non-purchased loans, were just $30 million, or 0.19% of total
non-purchased loans, at 12/31/19.
Substandard loans were $95 million, or just 2.46% of total
risk-based capital, at 12/31/19.
NPAs/Total Risk-Based Capital %†*
%
4
2
4
2
.
%
7
8
3
1
.
%
%
1
1
0
0
9
9
.
.
%
1
5
6
.
%
3
9
3
.
%
6
8
2
.
%
4
4
2
.
%
1
3
2
.
%
0
2
.
1
%
6
4
.
1
%
1
1
.
1
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
2019
We have had tremendous growth in our total
risk-based capital over the last 10 years, while
our ratio of total NPAs/total risk-based capital
has declined to a relatively nominal level.
† Ratios exclude purchased loans, except for their inclusion in total assets.
*In 2014, we terminated our loss share agreement with the FDIC and
reclassified foreclosed assets previously reported as covered by FDIC
loss share to foreclosed assets.
2019 Annual Report
5
25
20
15
10
5
0
2.0
1.6
1.2
0.8
0.4
0.0
5
4
3
2
1
0
40
32
24
16
8
0
Quality and Diversity of Our Board
Contribute to Our Success
Non-
Independent
Director
Independent Directors*
George
Gleason
Nicholas
Brown
Paula
Cholmondeley
Beverly
Cole
Robert
East
Kathleen
Franklin
Catherine B.
Freedberg,
Ph.D.
Jeffrey
Gearhart
Peter
Kenny
William
Koefoed
Jack
Mullen
Christopher
Orndorff
Robert
Proost **
John
Reynolds, M.D.
Steven
Sadoff
Ross
Whipple
*As of December 31, 2019
** Term will end at the 2020 Annual Shareholders’ meeting on May 4, 2020.
Geographic Diversity
(# of Directors)
4
6 3
3
Northeast
South Midwest
West
6
10
8
6
4
2
0
Independent
Non-Independent
Male
Female
DIVERSE BLEND OF EXPERIENCES
& QUALIFICATIONS
Relevant Industry Experience
Including banking, financial services, real estate
and other industries
Expertise in Technology
Including backgrounds in information systems
and financial technology
Leadership Experience
Including service as CEO, CFO and other senior
executive level positions
Financial Acumen
Including financial reporting, corporate finance
and accounting expertise
Public Company Experience
Including public company board service and
executive and investor relations experience
Broad & Diverse Market Perspective
Including geographic diversity that provides
valuable insight and knowledge of key markets
Compliance Experience
Including risk management, ethics, legal,
regulatory and corporate governance experience
Independence*
Gender*
1
Non-Independent
15
Independent
4
Female
12
Male
Director Tenure*
(# of Directors)
Director Age*
(# of Directors)
7
4 5
Less than
4 Years
4 to 6
Years
More than
6 Years
5 6
50’s
60’s
5
70+
*As of December 31, 2019
2019 Annual Report
7
10
8
6
4
2
0
10
8
6
4
2
0
Deep and Talented Executive
Management Team*
George Gleason
Chairman of the Board and
Chief Executive Officer
Greg McKinney
Chief Financial Officer
/ 41 years with OZK
/ 17 years with OZK
Tim Hicks
Chief Administrative Officer
and Executive Director of
Investor Relations
Brannon Hamblen
President and COO—
Real Estate Specialties
Group
/ 11 years with OZK
/ 12 years with OZK
John Carter
Chief Credit Officer and
Chairman of the Directors’
Loan Committee
Cindy Wolfe
Chief Banking Officer
/ 11 years with OZK
/ 22 years with OZK
Alan Jessup
Chief Lending Officer and
Managing Director—Community
Banking and Chairman of the
Officers’ Loan Committee
Jennifer Junker
Managing Director,
Trust and Wealth
/ 12 years with OZK
/ 5 years with OZK
Dennis James
Executive Vice President
and Director of Regulatory
& Government Relations
Scott Trapani
Chief Risk Officer
/ 15 years with OZK
/ 1 year with OZK
14
Average years
with OZK
*Bank OZK executive officers
as of February 28, 2020
Stan Thomas
Chief Accounting Officer
Helen Brown
General Counsel and
Corporate Secretary
/ 9 years with OZK
/ 6 years with OZK
8
2019 Form 10-K
UNITED STATES
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
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
For the fiscal year ended December 31, 2019
ACT OF 1934
For the transition period from to .
FDIC Certificate No. 110
BANK OZK
(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)
71-0130170
(I.R.S. Employer
Identification Number)
72223
(Zip Code)
Registrant’s telephone number, including area code: (501) 978-2265
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.01 par value per share
Trading Symbol(s)
OZK
Name of each exchange on which registered
Nasdaq Global Select Market
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 every Interactive Data File required to be submitted 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 such files).
Yes (cid:134) No (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Smaller reporting company
(cid:95)
(cid:134)
(cid:134)
Accelerated filer
Emerging growth company
(cid:134)
(cid:134)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:134)
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: $3,650,000,000.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Common Stock, par value $0.01 per share
Outstanding at January 31, 2020
129,334,415
Documents incorporated by reference: Portions of the Registrant’s Proxy Statement for the 2020 Annual Meeting of Shareholders,
scheduled to be held on May 4, 2020 are incorporated by reference into Part III of this Annual Report on Form 10-K.
BANK OZK
ANNUAL REPORT ON FORM 10-K
December 31, 2019
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
1
2
18
37
37
37
38
39
40
42
82
83
130
130
131
132
132
132
132
132
133
133
134
136
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 public filings made by us and other oral and written statements or reports 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 the 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 Board of Governors of the Federal Reserve System; 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, trust income, bank owned life
insurance income, other income from purchased loans, loan service, maintenance and other fees, and gains (losses) on investment
securities and sales of other assets; non-interest expense; efficiency ratio; future combined federal and state effective tax rates;
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; nonperforming assets; net charge-offs and net charge-off ratios;
provision and allowance for loan losses; past due loans; 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 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,” “assume,” “believe,” “could,” “estimate,” “expect,” “goal,” “hope,” “intend,” “look,” “may,” “plan,” “project,” “seek,”
“target,” “trend,” “will,” “would,” and similar words and expressions, as they relate to us or our management, identify forward-
looking statements.
Actual future performance, outcomes and results may differ materially from those expressed in, or implied by, forward-looking
statements made by us and our 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 in implementing our growth, expansion and acquisition
strategies, including delays in identifying satisfactory sites, hiring or retaining qualified personnel, obtaining regulatory or other
approvals, obtaining permits and designing, constructing and opening new offices or relocating or closing existing offices; the ability
to enter into and/or close additional acquisitions; the availability of and access to capital; possible downgrades in our credit ratings or
outlook which could increase the costs or availability of funding from capital markets; the ability to attract new or retain existing or
acquired deposits or to retain or grow loans, 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 or changes in the relative relationships of various interest rate indices; the potential impact of
the change in the method of determining LIBOR; competitive factors and pricing pressures, including their effect on our net interest
margin or core spread; general economic, unemployment, credit market and real estate market conditions, and the effect of such
conditions on the creditworthiness of borrowers, collateral values, the value of investment securities and asset recovery values;
changes in legal, financial and/or regulatory requirements; recently enacted and potential legislation and regulatory actions and the
costs and expenses to comply with new and/or existing legislation and regulatory actions; changes in U.S. Government monetary and
fiscal policy; Federal Deposit Insurance Corporation (“FDIC”) special assessments or changes to regular assessments; the ability to
keep pace with technological changes, including changes regarding maintaining cybersecurity; the impact of failure in, or breach of,
our operational or security systems or infrastructure, or those of third parties with whom we do business, including as a result of cyber
attacks or an increase in the incidence or severity of fraud, illegal payments, security breaches or other illegal acts impacting us or our
customers; natural disasters or acts of war or terrorism; global pandemics or health emergencies, such as the coronavirus; international
or political instability; impairment of our goodwill or other intangible assets; adoption of new accounting standards, including the
effects from the adoption of the current expected credit loss (“CECL”) model effective January 1, 2020, or changes in existing
standards; and adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future litigation,
regulatory examinations or other legal and/or regulatory actions or rulings as well as other factors described in this Annual Report on
Form 10-K or as detailed from time to time in the other public reports we file with the FDIC. See also “Part I, Item 1A. Risk Factors”
in 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.
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EXPLANATORY NOTE
In June 2017, we eliminated our former bank holding company, Bank of the Ozarks, Inc., by merging it with and into Bank of
the Ozarks (subsequently renamed Bank OZK), an Arkansas state banking corporation (the “Bank”). The Bank is subject to regulation
by the Arkansas State Bank Department (“ASBD”) and, as an insured depository institution that is not a member bank of the Board of
Governors of the Federal Reserve System (“FRB”), the Bank’s primary federal regulator is the Federal Deposit Insurance Corporation
(“FDIC”). The Bank is not subject to the FRB’s regulation and supervision, except such regulations as are made applicable to the
Bank by law and regulation of the FDIC. Unless the context otherwise requires, references in this Annual Report on Form 10-K to
terms such as “Company,” “we,” “us,” and “our” for periods prior to June 26, 2017, refer to Bank of the Ozarks, Inc., which was the
parent holding company and the registrant prior to such date, and, for periods after such date, to the Bank, in each case including its
consolidated subsidiaries. Shares of the Bank’s common stock are listed on the Nasdaq Global Select Market under the symbol
“OZK.”
Item 1. BUSINESS
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 OZK is a regional bank providing innovative financial solutions delivered by expert bankers with a relentless pursuit of
excellence focused on meeting the needs of our customers through a broad array of financial products and services at competitive
prices and with high-quality personal service. We have been recognized as the top performing bank in the nation in its asset size 13
times in the past eight years and in 2019 we were named Best Bank in the South by Money, the personal finance news and advice
brand. At December 31, 2019, we had total assets of $23.6 billion, total loans (including purchased loans) of $17.5 billion, total
deposits of $18.5 billion and total common stockholders’ equity of $4.2 billion. For 2019, net interest income was $884 million, net
income available to common stockholders was $426 million and diluted earnings per common share were $3.30.
We provide a wide range of retail and commercial banking services through more than 250 offices (as of December 31, 2019) in
Arkansas, Georgia, Florida, North Carolina, Texas, Alabama, South Carolina, California, New York and Mississippi. Deposit services
include checking, savings, money market, time deposit and individual retirement accounts. Loan services include various types of real
estate, consumer, commercial, industrial and agricultural loans. We also provide, among other products and services, 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 mobile deposits), debit cards and safe
deposit boxes. Through third party providers, we offer credit cards for consumers and businesses and processing of merchant debit and
credit card transactions. We currently operate in one business segment and do not have significant foreign operations.
Our Corporate Culture
Our Core Values. We hold to five core values as fundamental to who we are and how we do business. These core values
include the following:
1.
In all aspects of the conduct of our business, we apply the highest standards of business and professional ethics,
honesty and fair dealing. These high standards apply in our dealings with customers, shareholders, employees,
regulators and all others, including the investment community, media and general public. We want our reputation to
be above reproach.
2. We are a “for profit” business capitalized by the investments of thousands of shareholders. These shareholders have
entrusted their hard-earned money to us, expecting us to perform at a high level, maximizing their investments over
the long term. We must return reasonable short-term and long-term profits in line with their reasonable expectations
thus justifying their confidence in us.
3. We seek to serve our customers by providing them friendly, personalized service and helping them achieve their
legitimate financial goals and objectives. We seek to understand the individual needs and desires of customers in
their banking relationship, and we strive to meet or exceed their expectations.
4. We view all employees as members of an extended “corporate family.” As such, we want each employee to
experience the satisfaction of working in a positive environment that includes good working relationships, fair
compensation, good benefits, opportunity for other financial rewards and future opportunities. We seek to help each
member of this corporate family grow, develop and achieve his or her career objectives and potential. In return, we
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expect all employees to advance the Bank’s interests through their hard work, loyalty, positive attitudes and
performance. All employees will be evaluated and compensated based on their individual merit and performance
without regard to race, color, national origin, religion, age, sex, sexual orientation, disability, genetic information,
veteran status or any other protected status under federal, state or local law.
5. Our Bank is a good corporate citizen contributing in many ways to the positive educational, cultural and economic
development of the communities in which we do business. Within reasonable limits, employees are encouraged to
be actively involved in a variety of positive community endeavors.
Our core values can be further described through four tenets that we refer to as the OZK Way. The four tenets include the
following:
(cid:120) We want to provide exceptional service, present our products and services in an engaging way, and leverage our
evolving technology to maximize the experience for each customer.
(cid:120) We believe that capitalizing on the unique insights, abilities and experiences of each team member is critical in
achieving the Bank’s full potential. We embrace teamwork, collaboration and diversity in all its forms, recognizing
that our potential together far exceeds the sum of our potential individually.
(cid:120) We expect our team members to conduct themselves and our business with the highest standards of honesty, ethics,
integrity and fair dealing.
(cid:120) We will relentlessly pursue excellence. This quest for excellence includes continuous innovation and improvement,
realizing that many small incremental enhancements can compound mightily over time.
Business Strategy
We believe that stable long-term growth and profitability are the result of developing comprehensive, strong banking
relationships with our customers by offering a wide range of products and services and delivering excellent customer service while
maintaining disciplined underwriting standards. We are focused on originating high-quality loans and growing a stable deposit base
through our emphasis on relationship-based banking, and believe that the following core strategies will assist us in growing our loan
portfolio responsibly, maintaining our operational efficiency, increasing our profitability, and preserving our asset quality.
(cid:120)
In recent years, we have grown our non-purchased loan portfolio while remaining committed to our conservative credit
culture. A significant portion of our non-purchased loan portfolio in recent years has been attributable to our Real Estate
Specialties Group (“RESG”), which focuses on commercial real estate (“CRE”) and acquisition, development and
construction lending. We are focused on continuing to pursue meaningful non-purchased loan growth, including growth
within RESG, while diversifying our growth to achieve more balance between CRE lending and other loan originations.
While RESG continues to be an industry leader in commercial real estate finance, our Indirect Recreational Vehicle (“RV”)
and Marine lending business has become another national lending platform that provides meaningful growth and helps us
achieve diversification within our loan portfolio. We expect that production from our other lending teams such as our
Community Banking Division (including consumer, small business, government guaranteed, stabilized properties,
agricultural, business aviation, affordable housing, middle market CRE, homebuilder finance, residential investment
properties, and charter school lending) and our Corporate and Business Specialties Group (“CBSG”) will continue to further
contribute to that diversification effort. Prioritizing diversified growth in recent years has enabled us to reduce our RESG
portfolio as a portion of total non-purchased loans from approximately 70% on December 31, 2016 to approximately 58% on
December 31, 2019.
(cid:120) As we continue to grow and diversify our lending activities, we intend to employ, and enhance as appropriate, the same
disciplined underwriting standards and credit review processes that have contributed to asset quality that is consistently better
than the industry average, including our below-industry average net charge-off ratio and our ratios of past due loans,
nonperforming loans and nonperforming assets.
(cid:120) Our reputation, expertise and banking model enable us to build and expand our banking relationships with customers in the
markets we serve. We remain committed to growing our business in a disciplined manner. We intend to focus on
underwriting and originating high-quality loans and expanding our business by offering an array of financial products and
services. We believe that successfully focusing on these factors will allow us to continue to achieve long-term and profitable
expansion within our current markets.
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(cid:120) We continue to focus on the evolving role and importance of technology in our business. We are developing innovative
technology-based solutions through our OZK Labs group. This focus is critical in today’s rapidly evolving banking
environment where technology is becoming increasingly important in driving efficiency, speed and quality of service.
(cid:120) We believe that there is an optimal market share for each market that we serve, depending in large part on its competitive
makeup, that will enable us to maximize deposits and loans in the market and benefit from reasonably achievable economies
of scale without inefficiently investing resources in exchange for diminishing returns. We plan to capitalize on growth
opportunities we believe exist in our existing branch network (through expanding current and developing new relationships).
(cid:120) Our focus on long-term operational efficiency is a key factor in achieving our profitability and future growth goals and
objectives. We believe that our expanded and enhanced infrastructure, which has been an area of emphasis for us in recent
years, including our focus on technology and risk management, may allow us the opportunity to improve operational
efficiencies over the long term as we grow our business.
Lending Activities
We provide a variety of commercial and consumer lending products to our customers, including most types of real estate loans,
consumer and small business loans, indirect consumer RV and marine loans, business aviation financing, commercial and industrial
loans, government guaranteed loans, agricultural loans, homebuilder loans, affordable housing loans and subscription financing,
among others. Interest rates charged by us vary with degree of risk, type, size, complexity, repricing frequency and other relevant
factors associated with the loan or financing arrangement. Competition from other lending providers also impacts the interest rates we
charge.
Procedures and Authority. Our Board of Directors (“Board”) and Directors’ Loan Committee (“DLC”) oversee and provide
policy direction for our lending operations, which are primarily administered by our Chief Executive Officer (“CEO”), Chief Credit
Officer (“CCO”) and Chief Lending Officer (“CLO”). We maintain a tiered loan limit authorization system. The CEO, CCO and CLO
are granted lending authority by the Board, and other lending officers are granted authority by the DLC on the recommendation of
appropriate senior officers in amounts commensurate with the officer’s skill level and knowledge. Individual and aggregate lending
relationships exceeding $20 million (up to the limits established by our Board) must be approved by the DLC. Our lending policies
also contain various measures to limit concentration exposures, including customer and CRE exposures for both funded balances and
total commitment (comprised of both funded and unfunded balance), as well as by property type and geography.
We have detailed, comprehensive standards for evaluating credit risk, both at the point of origination and thereafter, and we
have a comprehensive internal grading system that is used to identify credit risk at the individual loan level. Oversight of credit risk is
provided through loan policy, clearly defined processes and detailed procedures. These policies, procedures and processes place
emphasis on strong underwriting standards and early detection of potential credit problems in order to develop and implement any
necessary action plan(s) on a timely basis to mitigate potential losses and are carried out on a daily basis by our lenders and lending
support personnel, our credit administration group, our underwriters and various other officers and personnel in the Bank that have
credit management responsibilities. Additionally, our policies, procedures and processes are subject to review by our Credit Risk
Management (“CRM”) activities (second line oversight), our Board Risk Committee (“BRC”) and periodic reviews by our Internal
Audit group (third line oversight).
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, mixed use properties 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” 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.
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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 “Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Elements – Credit Risk” to this
Annual Report on Form 10-K is an analysis of the weighted-average LTV and loan-to-cost (“LTC”) ratios of our construction and
development loan portfolio.
Small Business and Consumer Loans. 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 various other business purposes. We also offer certain consumer loans,
including loans to fund the purchase of automobiles, ATVs, mobile homes and other similar purposes. These loans are generally
collateralized and have terms ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant
factors. 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 RV and Marine Loans. Our portfolio of indirect consumer loans includes loans to individuals for the
purchase of recreational vehicles and marine vessels, generated largely through relationships with dealers and correspondent
lenders. These loans are generally collateralized by the purchased asset 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 mainly of SBA, FSA and U.S.
Department of Agriculture 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. 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. Also included in commercial and industrial loans are our subscription
credit facilities for investment funds and our business aviation financing. We offer a variety of commercial and industrial loan and
financing 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, capital commitments or other assets. Our commercial and industrial loan
portfolio also includes shared national credits (“SNC”) that are underwritten by our CBSG. SNC generally include syndicated loans
and loan commitments, letters of credit, commercial leases, and other forms of credit.
Commercial and industrial loans, including our SNC portfolio, typically are underwritten on the basis of the borrower’s ability
to make repayment from the cash flow of its business and generally are collateralized by business assets. As a result, such loans
involve additional complexities, variables and risks and require more thorough underwriting and servicing than certain other types of
loans.
Agricultural (Non-Real Estate) Loans. Our portfolio of agricultural (non-real estate) loans consists mainly of 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.
Mortgage Lending. We offer certain residential mortgage products, including long-term fixed rate loans that are retained in our
loan portfolio. In December 2017, we ceased taking new loan applications for secondary market consumer mortgage loans through our
Mortgage Division.
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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. We also make available, through various
deposit placement networks, reciprocal deposits to our consumer, commercial and public funds deposit customers who want to make
large deposit balances eligible for FDIC insurance beyond the traditional $250,000 per insured bank, per depositor. Rates paid on
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.
Deposit balances are generally influenced by national, regional and local economic conditions, changes in prevailing interest
rates, internal pricing decisions, perceived stability of financial institutions and competition, among other factors. Our deposits come
primarily from within our trade area, except that brokered deposits, listing service deposits and certain of our public funds deposits are
from outside our primary trade area and may vary from time to time depending on competitive interest rate conditions and other
factors.
In addition to our deposit base, we have access to other sources of funding, including Federal Home Loan Bank of Dallas
(“FHLB”) advances, FRB borrowings, repurchase agreements and secured and unsecured federal funds lines of credit from
correspondent banks. We have also accessed the capital markets through subordinated debt and common stock offerings. For
additional information concerning the Bank’s deposits, see “Part II, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Risk Elements – Liquidity Risk” to this Annual Report on Form 10-K.
Other Banking Services
Trust and Wealth Services. We offer a broad array of trust and wealth services from our headquarters in Little Rock, Arkansas,
with additional staff in Northwest Arkansas, Texas, North Carolina, Georgia and Florida. These trust and wealth 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, 2019, total trust assets were
approximately $2.06 billion compared to approximately $1.82 billion at December 31, 2018 and approximately $1.94 billion at
December 31, 2017.
Treasury Management Services. We offer treasury management services which are designed to provide a high level of
customized solutions to business and public funds customers. Our treasury management services include automated clearing house
(“ACH”) 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 merchant and commercial card, among
others.
Market Areas, Concentrations and Competition
At December 31, 2019, we conducted operations through more than 250 offices, including offices in Arkansas, Georgia,
Florida, North Carolina, Texas, Alabama, South Carolina, California, New York and Mississippi. Our business is impacted by the
trends of the regional and local economies in the market areas we serve. We are not dependent upon any single or limited number of
customers, the loss of which would have a material adverse effect on us, nor do we have customer relationships that individually
account for 10% or more of our revenues. No material portion of our business is seasonal.
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,
“fintech” companies, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and many other
financial service firms. In addition, technological advancements continue to contribute to greater competition in financial services
markets. Competition is based on interest rates offered on deposit accounts, interest rates charged on loans, fees and service charges,
the quality and scope of products offered and services rendered, including technology-driven solutions, and the convenience of
banking facilities, 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 we
have, may have greater access to capital markets, and may offer a broader range of financial services than we currently provide.
Additionally, we face competition from a large number of community banks, many of which have senior management who were
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previously with other local banks or investor groups with strong ties to local businesses and the communities in which they serve.
Some of our competitors (larger or smaller) may have more liberal lending policies and processes. Competition among providers of
financial products and services continues to increase as technology advances have lowered the barriers to entry for financial
technology companies, with consumers having the opportunity to select from a growing variety of traditional and nontraditional
alternatives, including crowdfunding, digital wallets and money transfer services. The ability of non-banking financial institutions to
provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are
not subject to many of the same regulatory restrictions as banks, they can often operate with greater flexibility and lower cost
structures. 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, active community involvement
and competitive products and pricing.
Information Technology
The ability to access and use technology is an increasingly competitive factor in the financial 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 financial services
industry. We utilize, to varying degrees in our business, certain patents, copyrights and trademarks. Additionally, we have various
technology applications developed or under development within OZK Labs to address the needs of our customers, our lending groups
and our employees by using technology to provide solutions, 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, we believe 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.
Business Continuity and Information Security
We have developed and implemented business resilience programs to provide employees, customers, and stakeholders with
reasonable assurance of resilience and recovery capabilities prior to, during and following a disruption. These programs align with
industry standards and leading practices, and comply with regulatory requirements, including those of the Federal Financial
Institutions Examination Council (“FFIEC”), and are subject to periodic review by the FDIC and ASBD, as well as internal audits.
The key elements of the programs are business continuity, disaster recovery and crisis management. These include planning,
frequent assessments of new or adapting threats, adjustments to meet the needs of a dynamic organization, verification of recovery
capabilities through tests and exercises, and continuous process improvement. The programs are actively managed, include various
plans and teams trained and available around-the-clock to respond to disruptions and provide appropriate response during a disruption
affecting our employees, customers, assets, business operations, technology infrastructure, brand and/or third-party relationships. The
plans and programs are supported by a governance framework and are reviewed no less than annually to ensure strategies are
effective, scalable, and current. We closely monitor information security for trends and new threats, including cybersecurity risks, and
invest significant resources to continuously improve the security and privacy of our systems and data.
We rely on electronic communications and information systems to conduct our operations and store sensitive data, and employ
an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity
controls. We also utilize 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.
Employees
At December 31, 2019, we had 2,774 full-time equivalent employees. None of our employees is represented by a union,
collective bargaining agreement or similar arrangement, and we have not experienced any labor disputes or strikes arising from any
organized labor groups. We believe our employee relations are good.
Information about our Executive Officers
The following is a list of our executive officers. All information is given as of February 28, 2020.
George Gleason, age 66, Chairman and Chief Executive Officer. Mr. Gleason has served 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.
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Greg McKinney, age 51, Chief Financial Officer. Mr. McKinney joined the Bank in 2003 and served as Executive Vice
President and Controller prior to assuming the role of Chief Financial Officer and Chief Accounting Officer on December 31, 2010.
Effective January 2, 2020, the responsibilities of Chief Financial Officer and Chief Accounting Officer were split, with Mr. McKinney
retaining the title and responsibilities of Chief Financial Officer. 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 senior audit manager when the firm closed its Little Rock office.
Mr. McKinney is a C.P.A. (inactive) and holds a B.S. in Accounting from Louisiana Tech University.
Tim Hicks, age 47, Chief Administrative Officer and Executive Director of Investor Relations. Prior to assuming the role of
Chief Administrative Officer and Executive Director of Investor Relations in 2017, Mr. Hicks served as Executive Vice President and
Chief of Staff since 2016. Mr. Hicks joined the Bank in 2009 and served as Senior Vice President, Corporate Finance until assuming
the role of Executive Vice President, Corporate Finance in 2012. From 2006 to 2009, Mr. Hicks served as director of investor relations
and assistant treasurer of a publicly traded telecommunications company. Prior to 2006, Mr. Hicks held various positions with a big-
four public accounting firm, leaving as a senior audit manager. Mr. Hicks is a C.P.A. (inactive) and holds a B.A. in Business and
Economics from Hendrix College.
Brannon Hamblen, age 54, President and Chief Operating Officer – RESG. Prior to assuming the roles of President – RESG in
2018 and Chief Operating Officer – RESG in 2017, Mr. Hamblen served as Director of Asset Management since 2012. Mr. Hamblen
joined the Bank in 2008 as Senior Vice President, Originations and assumed leadership of RESG Asset Management in 2010. Prior to
joining the Bank, Mr. Hamblen worked in the real estate consulting practices of Ernst & Young/Kenneth Leventhal and KPMG, and in
acquisitions, development, asset management, and capital markets with R.M. Crowe Company, a large Dallas-based, privately owned
real estate owner/operator. Mr. Hamblen holds a B.S. in Agricultural Economics and an M.S. in Land Economics & Real Estate from
Texas A&M University.
John Carter, age 40, Chief Credit Officer and Chairman of the Directors’ Loan Committee. Prior to assuming the title of Chief
Credit Officer in 2018, Mr. Carter served as the Director of Community Banking from 2015 to 2018. Mr. Carter joined the Bank in
2009 and served as a Vice President from 2009 to 2010, a Senior Vice President from 2010 to 2011, the Little Rock Market President
from 2011 to 2014 and the Deputy Director of Community Bank Lending from 2014 to 2015. 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.
Cindy Wolfe, age 54, Chief Banking Officer. Prior to assuming the role of Chief Banking Officer in 2018, Ms. Wolfe served as
Deputy Director of Community Banking overseeing the Bank’s Middle Market CRE business unit and offices across North Carolina
and South Carolina. Ms. Wolfe joined the Bank in 1998, opened the Bank’s Charlotte loan production office in 2001, and served as
Senior Vice President – Lending from 2001 to 2005, Executive Vice President – Lending from 2005 to 2014, and Carolinas Division
President from 2014 to 2018. Prior to joining the Bank, Ms. Wolfe held various positions with national banks in commercial lending,
operations, project management and internal audit. Ms. Wolfe holds a B.A. in Business Administration from Queens University of
Charlotte and is a Certified Commercial Investment Member.
Alan Jessup, age 47, Chief Lending Officer and Managing Director of Community Banking/Chairman of the Officers' Loan
Committee. Prior to assuming the roles of Chief Lending Officer and Managing Director of Community Banking/Chairman of the
Officers’ Loan Committee in 2018, Mr. Jessup served as Deputy Director of Community Banking since 2015 overseeing the Bank’s
Agricultural Lending Division and offices across South Arkansas, Alabama, Florida and Georgia. Mr. Jessup joined the Bank in 2008
and served as Saline County President from 2008 to 2011 and South Arkansas President from 2011 to 2015. Mr. Jessup holds a B.S.
in Finance from Arkansas State University.
Scott Trapani, age 57, Chief Risk Officer since March 2019. Prior to joining the Bank, Mr. Trapani served as Executive Vice
President and Chief Risk Officer for Hilltop Holdings Inc. (NYSE: HTH) in Dallas, Texas from 2015 through 2019. Mr. Trapani
served as Senior Vice President and Chief Risk Officer for the Federal Home Loan Bank of Dallas from 2013 through 2015 and as
Chief Compliance Officer for Invesco, Ltd. in Atlanta, Georgia from 2008 through 2013. Earlier in his career, Mr. Trapani held senior
roles in compliance and risk management with SunTrust Bank, GE Capital Corporation, BearingPoint Consulting and the FDIC. Mr.
Trapani is a C.F.A. and holds a B.S. in Finance from Arizona State University.
Dennis James, age 69, Executive Vice President and Director of Regulatory and Government Relations since January 2019.
Prior to assuming the role of Director of Regulatory and Government Relations, Mr. James served as the Director of Government
Relations since January 2018 and the Director of Mergers/Acquisitions since January 2012. Mr. James initially joined the Bank in
March 1981 as its Chief Financial Officer and a member of the board of directors. In November 1984, he left the Bank to serve as
Vice Chairman and Chief Operating Officer of LSI Financial Group, a consumer loan servicing company. 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 the Bank’s
Director of Mergers/Acquisitions. Mr. James graduated from the University of Arkansas with honors, receiving a B.S.B.A. degree
with a major in accounting.
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Jennifer Junker, age 49, Managing Director, Trust and Wealth. Prior to joining the Bank in 2015, she served as Fiduciary
Director and then as Co-Leader of Trust Advisory Services and Trust Director for a national financial services firm from 2011 through
December 2014. From 2006 to 2011 she was in private practice as an attorney concentrating in trust administration and high net worth
estate planning. She also held the position of Senior Counsel for a national financial services firm from 2000 through 2006, and as an
associate attorney for two law firms in Florida and Minnesota concentrating on legal issues involving trust and wealth management
from 1995 through 2000. Ms. Junker holds a B.A. in English Literature and Communications from Wake Forest University as well as
a J.D. from the University of Florida, College of Law.
Stan Thomas, age 48, Chief Accounting Officer since January 2020. Mr. Thomas joined the Bank in 2011 and served as Senior
Vice President/Director of Financial Reporting from 2011 to 2015 and Executive Vice President/Director of Financial Reporting from
2015 to 2019 prior to assuming the role of Chief Accounting Officer in January 2020. From 2008 to 2011, Mr. Thomas was a senior
audit manager with a regional accounting firm. Prior to 2008, Mr. Thomas held various positions with two big-four accounting firms,
leaving as a senior audit manager. Mr. Thomas is a C.P.A. and holds a B.S. in Accounting and an M.B.A. from Louisiana Tech
University.
Helen W. Brown, age 42, General Counsel and Corporate Secretary. Prior to assuming the role of General Counsel in February
2020, Ms. Brown served as the General Counsel Corporate Governance and Corporate Secretary from July 2018 to January 2020. Ms.
Brown joined the Bank in November 2013 as General Counsel Corporate Finance. Prior to joining the Bank, Ms. Brown was a
Partner at Bass, Berry & Sims PLC in the firm’s Corporate and Securities practice group. While in private practice, Ms. Brown
focused on capital markets transactions, mergers and acquisitions and strategic investments, as well as advising companies on a
variety of corporate governance and securities law matters. Ms. Brown received her Juris Doctor degree from the University of
Arkansas School of Law, summa cum laude, and her Bachelor of Arts degree from the University of Arkansas, cum laude.
SUPERVISION AND REGULATION
We and our subsidiaries are subject to extensive regulation under federal and state banking laws that establish a comprehensive
framework for our operations. This regulatory framework may materially impact our growth potential and financial performance and
is intended primarily for the protection of depositors, customers, federal deposit insurance funds and the stability of the banking
system as a whole, not for the protection of our shareholders and creditors. Significant elements of some of the statutes, regulations
and policies applicable to us and our subsidiaries are described below, although the following discussion is a summary and does not
purport to be complete. This description is qualified in its entirety by reference to the full text of the statutes, regulations and policies
described herein.
Overview
As an insured state bank without a holding company that is not a member of the FRB, we are examined, supervised and
regulated by the ASBD and the FDIC, which is our primary federal regulator. We are also subject to the regulations of the states in
which we do business, the enforcement and rulemaking authority of the Consumer Financial Protection Bureau (“CFPB”) regarding
consumer protection laws and regulations, and various other regulatory authorities, as well as the information reporting requirements
of the Securities Exchange Act of 1934 (the “Exchange Act”) and the FDIC rules relating thereto, as administered and enforced by the
FDIC. We file periodic and current reports and other materials required to be filed under the Exchange Act with the FDIC.
In recent years, both the scope of the laws and regulations and the intensity of the supervision to which our business is subject
have increased, in response to the financial crisis of 2008 as well as other factors such as technological and market changes.
Regulatory enforcement and fines have also increased across the banking and financial services sector. Many of these changes have
occurred as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and its
implementing regulations, most of which are now in place.
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 customers, depositors, other classes of consumers
and the banking system as a whole, rather than the specific protection of our non-deposit creditors or shareholders. 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 monetary penalties and
restrictions imposed on their operations, including in extraordinary circumstances, closure of the banks.
In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”) was signed into law,
which, among other things, amended certain provisions of the Dodd-Frank Act and included certain additional banking-related,
commercial real estate, consumer protection, and securities law-related provisions. The EGRRCPA provides limited regulatory relief
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to certain financial institutions while preserving the existing framework under which U.S. financial institutions are regulated. Despite
the improvements for mid-sized financial institutions such as us that have resulted from the EGRRCPA, many provisions of the Dodd-
Frank Act and its implementing regulations remain in place and will continue to result in additional operating and compliance costs
that could have a material adverse effect on our business, financial condition, and results of operations. In addition, the EGRRCPA
requires the enactment of a number of implementing regulations, the details of which may have a material effect on the ultimate
impact of the law.
The current U.S. political environment makes the prospects for further statutory changes to federal banking laws in the near
term uncertain; however, even absent additional legislation, the federal banking agencies will continue to consider and potentially
propose and adopt regulatory changes. Recent proposals include potential changes to regulations addressing brokered deposits and
regulations under the Community Reinvestment Act. Changes in applicable laws or regulations, and in their interpretation and
application by regulatory agencies and other governmental authorities, cannot be predicted, but any of such changes may have an
adverse effect on our business, financial condition or results of operations.
Safety and Soundness
The federal banking agencies have adopted guidelines pursuant to the Federal Deposit Insurance Act (“FDIA”) establishing
general safety and soundness standards for depository institutions related to, among other things, internal controls, information
systems, internal audit systems, loan underwriting and documentation, compensation, interest rate exposure, and asset growth. For
example, the FDIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, and
limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related
interest. If the FDIC determines that an institution fails to meet these standards, the FDIC may require the institution to submit an
acceptable compliance plan or, alternatively, pursue other courses of action depending on the specific circumstances and severity of
the noncompliance.
Permissible Activities
Our business is generally limited to activities permitted by Arkansas law and any applicable federal laws. Under the Arkansas
Banking Code of 1997 (the “Arkansas Banking Code”), we may generally engage in all usual banking activities, including, among
other things, taking deposits, lending money, issuing letters of credit, buying, discounting and negotiating promissory notes, bonds,
drafts and other forms of indebtedness, and buying and selling certain investment securities. Subject to the authorization of the
Arkansas State Bank Commissioner (the “Bank Commissioner”), we may also engage in any activity then permissible for national
banks.
In addition, under the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), state banks such as ours 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.
Dodd-Frank Act
The Dodd-Frank Act fundamentally restructured federal banking regulation by shifting from prudential regulation of individual
institutions to a systemic view of regulations. The Dodd-Frank Act and its implementing regulations resulted in significant regulatory
change. Aspects of the Dodd-Frank Act that have had or may have a material effect on our business include, among others: changing
the assessment base for federal deposit insurance; making permanent the $250,000 limit for federal deposit insurance; eliminating the
requirement that the FDIC pay dividends from the DIF in certain cases; repealing the federal prohibitions on the payment of interest
on demand deposits; heightening corporate governance requirements for all public companies (including “say-on-pay” shareholder
votes, compensation clawback policy requirements, expanded executive compensation disclosures and new director independence
requirements); creation of the CFPB; imposing additional underwriting standards and other requirements for mortgage lending;
permitting the establishment of de novo interstate branches; limiting debit card interchange fee charges for banks with $10 billion or
more in assets; and incentivizing and protecting whistleblowers who report violations of the federal securities laws.
Because our total assets exceed $10 billion, we must also comply with certain additional requirements created by the Dodd-
Frank Act, including enhanced prudential oversight requirements and a more frequent and enhanced regulatory examination regime.
Failure to comply with these requirements could result in regulatory enforcement actions, could negatively impact our business,
financial condition or results of operations and could limit our growth or expansion activities. The changes resulting from the Dodd-
Frank Act have had and may continue to have an effect on 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 have required and may continue to require us to invest significant management attention and resources to
evaluate and take any actions necessary to comply with new statutory and regulatory requirements.
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Capital Stress Testing. As a result of the EGRRCPA, we are no longer required to prepare annual capital stress tests pursuant to
the Dodd-Frank Act. However, we continue to utilize internal stress testing as part of our capital planning process and monitor our
capital consistent with the safety and soundness expectations of the federal regulators.
Debit Interchange Fees. Since July 1, 2017 we have been required to comply with Section 1075 of the Dodd-Frank Act, often
referred to as the Durbin Amendment, which caps interchange fees for debit card transactions, or “swipe fees,” at $0.21 plus 5 basis
points multiplied by the size of the transaction. Prior to July 1, 2017, we were exempt from the Durbin Amendment’s limitation on
swipe fees because our total assets were less than $10 billion.
The Volcker Rule. Section 619 of the Dodd-Frank Act, also known as the Volcker Rule, prohibits banks and their affiliates from
engaging in proprietary trading or acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a
hedge fund or private equity fund. In August 2019, the federal banking agencies amended the Volcker Rule (effective as of January 1,
2020) to establish a tiered compliance regime based on a bank’s dollar amount of trading activity. Because we do not currently engage
and have not historically engaged in activities prohibited by the Volcker Rule or its associated regulations, we do not currently
anticipate that it will have a material effect on our operations. 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. Unanticipated effects of the
Volcker Rule’s provisions or future regulatory or court interpretations may have an adverse effect on our business.
Emergency Economic Stabilization Act. From December 2008 to November 2009, we participated in the Troubled Asset Relief
Program (“TARP”) and related Capital Purchase Plan (“CPP”) established by the U.S. Treasury Department (“Treasury”). Although
we exited the programs in 2009, the Office of the Special Inspector General for TARP (“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. In addition, in the event
that any bank we have previously acquired or acquire in the future participated in the TARP and CPP programs, we are or will be
subject to the same enforcement and oversight activities of the Inspector General with respect to such bank’s participation.
CRE Lending Concentrations. The federal banking agencies, including the FDIC, have promulgated guidance governing
financial institutions with concentrations in CRE lending. The guidance provides that a bank has a concentration in CRE lending if (i)
total reported loans for construction, land development and other land represent 100% or more of total risk-based capital or (ii) total
reported loans secured by multifamily and non-owner occupied non-farm/non-residential properties and loans for construction, land
development and other land represent 300% or more of total capital and the bank’s CRE loan portfolio has increased 50% or more
during the prior 36 months. 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 CRE lending. Based on the regulatory guidance, we have determined that we have a concentration in
CRE lending. While we believe we have implemented policies and procedures with respect to our CRE lending consistent with this
guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the
guidance that may result in additional costs to us.
Deposit Premiums and Assessments
Our deposits are insured by the FDIC’s DIF to the fullest extent permissible by law, and we are subject to deposit insurance
assessments to maintain the DIF. Under the FDIC’s risk-based assessment system, the assessment rates for an insured depository
institution are determined by an assessment rate calculator, which is based on a number of elements such as supervisory evaluations,
regulatory capital levels and other components that measure the perceived risk the institution poses to the DIF. The calculated
assessment rate is applied to the institution’s average consolidated total assets less its average tangible equity during the assessment
period to determine the dollar amount of the assessment paid by the institution. The FDIC has the ability to make discretionary
adjustments to the total score based upon its determination of the existence of significant risk factors that are not adequately captured
in the calculations. In addition to ordinary assessments, the FDIC has the ability to impose special assessments in certain instances.
The Dodd-Frank Act increased the minimum target DIF reserve ratio from 1.15% to 1.35% of estimated insured deposits and
required that the increased reserve ratio be reached by September 30, 2020. Pursuant to the FDIC’s DIF restoration plan, insured
institutions with total assets of $10 billion or more, including us, are responsible for funding the increase, and on July 1, 2016, the
FDIC began imposing a surcharge on such banks. The surcharge equaled an annual rate of 4.5 basis points applied to the institution’s
assessment base (with certain adjustments), and continued through October 1, 2018, when the reserve ratio exceeded 1.35%. 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.
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Capital Requirements
We are subject to the risk-based capital requirements established by the FDIC and other federal banking regulators consistent
with agreements 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 us on January 1, 2015 (subject to a phase-in period for certain
provisions). The Basel III Rules require the maintenance of minimum amounts and ratios of common equity tier 1 capital, tier 1
capital and total capital to risk-weighted assets, and of tier 1 capital to adjusted quarterly average assets.
Under the Basel III Rules, common equity tier 1 capital consists of common stock and paid-in capital (net of treasury stock) and
retained earnings. Common equity tier 1 capital is reduced by goodwill, certain intangible assets, net of associated deferred tax
liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and
certain other items as specified by the Basel III Rules.
Tier 1 capital includes common equity tier 1 capital and certain additional tier 1 items as provided under the Basel III Rules.
Our tier 1 capital consists solely of common equity tier 1 capital. Because we exceed $15 billion in total assets, our trust preferred
securities are not included in tier 1 capital, but continue to be included as tier 2 capital.
The Basel III Rules allow insured depository institutions to make a one-time election not to include most elements of
accumulated other comprehensive income (loss) 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 our level of capital depending upon
the impact of interest rate fluctuations on the fair value of our investment securities portfolio.
Total capital includes tier 1 capital and tier 2 capital. Tier 2 capital includes, among other things, the allowable portion of the
allowance for loan losses, trust preferred securities and subordinated notes.
The Basel III Rules also changed the risk-weights of assets in an effort to better reflect perceived 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 (“HVCRE”) 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 EGRRCPA clarified the definition and risk-weighting of HVCRE loans, with the revised definition excluding
any loans made prior to January 1, 2015, and certain other loans currently classified as HVCRE.
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 Basel III Rules require us 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%, (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%, (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%, and (iv) a minimum leverage ratio of 4.0%.
Cybersecurity and Privacy
Cybersecurity is a high-priority item for legislators and regulators at the federal and state levels, as well as internationally. State
and federal banking regulators have issued various policy statements and, in some cases, regulations, emphasizing the importance of
technology risk management and supervision. Such policy statements and regulations 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. 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 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. These requirements, including state regulatory rules such as the detailed and extensive
cybersecurity rules issued in 2016 by the New York State Department of Financial Services, may cause us to incur significant
additional compliance costs and in some cases may impact our growth prospects. Additionally, if we fail to observe federal or state
regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.
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Federal statutes and regulations, including the GLBA and the Right to Financial Privacy Act of 1978, limit our ability to
disclose non-public information about consumers, customers and employees to nonaffiliated third parties. Specifically, the GLBA
requires us to disclose our privacy policies and practices relating to sharing non-public information and enables retail customers to opt
out of our ability to share information with unaffiliated third parties under certain circumstances. The GLBA also requires us to
implement a comprehensive information security program that includes administrative, technical and physical safeguards to ensure the
security and confidentiality of customer records and information and, if applicable state law is more protective of customer privacy
than the GLBA, financial institutions, including our bank, will be required to comply with such state law. Other laws and regulations
impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes. These
regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
In connection with the regulations governing the privacy of consumer financial information, the federal banking agencies, including
the FDIC, have adopted guidelines for establishing information security standards and programs to protect such information.
Proposed or new legislation or regulations related to information security, data and/or privacy may significantly increase our
compliance costs and impede our ability to grow into specific markets. There are a number of proposals that have either recently been
adopted or are currently pending before federal, state, and foreign legislative and regulatory bodies. For example, in 2018 the
European Union’s General Data Protection Regulation (the “GDPR”) and the California Consumer Privacy Act of 2018 (the “CCPA”)
became effective. Both the GDPR and the CCPA impose additional obligations on companies regarding the handling of personal data
and provide certain individual privacy rights to persons whose data is stored. In the event of a data breach, there are mandatory
reporting requirements that may hamper a company’s ability to fully assess an incident prior to external reporting. We must
constantly monitor additional legal and regulatory requirements that apply to existing and future subsets of our customer base for
protection against legal, reputational, and financial risk due to compliance failures.
Community Reinvestment Act and Fair Lending
The Community Reinvestment Act of 1977, or CRA, requires that federal banking regulators, in connection with their
examinations of financial institutions, evaluate the record of financial institutions in meeting the credit needs of their local
communities, 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. Regulations under the
CRA also provide for regulatory assessment of a bank’s record in meeting the needs of its service areas, and this record is taken into
account by the regulators when considering applications to, among other things, establish branches or merge with or acquire another
bank or its assets or liabilities. A bank’s CRA performance record is reviewed in connection with the filing of certain regulatory
applications, including merger applications and branch applications. An unsatisfactory performance record can substantially delay or
block the transactions contemplated by such applications. Additionally, a bank must make certain portions of its most recent CRA
examination report conducted by its federal banking regulators available for public review. In December 2019, the FDIC and the
Office of the Comptroller of the Currency (“OCC”) proposed changes to the CRA’s implementing regulations in an attempt to reduce
their complexity. We will continue to evaluate the impact of any changes to the regulations implementing the CRA.
We are also subject to certain fair lending laws and regulations, including the Equal Credit Opportunity Act of 1974 and the Fair
Housing Act of 1968, which (among other things) prohibit discrimination in credit and residential real estate transactions, including
discrimination on the basis of, among other factors, race or color, national origin, gender, marital or familial status, age, handicap or
disability, and religion. We are required to have a fair lending program of sufficient depth and breadth to monitor fair lending risks
and appropriately remediate identified risks. Bank regulators have increasingly focused on the enforcement of these laws, and fair
lending weaknesses can result in significant supervision and/or enforcement actions, along with fines, penalties, or financial
remediation; reputational damage; CRA rating downgrade; investigation and enforcement actions by the U.S. Department of Justice
(“DOJ”); or restrictions on our growth, revenue or expansion opportunities.
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 federal banking regulators have issued guidance on incentive compensation policies intended to ensure that banks’
incentive compensation policies do not undermine safety and soundness by encouraging excessive risk taking. This guidance, which
covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a
group, is based on key principles that a bank’s incentive compensation arrangements should (i) provide incentives that do not
encourage risk-taking beyond the organization’s ability to identify and manage risk, (ii) be compatible with effective internal controls
and risk management, and (iii) be supported by strong corporate governance, including active and effective board oversight.
Deficiencies in compensation practices may affect our supervisory ratings, which could affect our ability to make acquisitions or take
other actions, and enforcement actions may be taken if our incentive compensation arrangements or related risk-management control
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or governance processes pose a risk to safety and soundness and we are not taking prompt and effective measures to correct the
deficiencies.
The Dodd-Frank Act requires the federal banking agencies and the Securities and Exchange Commission (“SEC”) to establish
joint regulations or guidelines for specified regulated entities, like us, having at least $1 billion in total assets, to prohibit incentive-
based payment arrangements that encourage inappropriate risk-taking by providing an executive officer, employee, director or
principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. These
regulators must also establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation
arrangements. The federal regulators proposed such regulations in April 2011 and issued a second proposed rule in April 2016. The
April 2016 proposed rule would apply to banks with at least $1 billion in average total consolidated assets and would prohibit certain
types and features of incentive-based compensation arrangements, require incentive-based compensation arrangements to adhere to
certain basic principles, and require appropriate board or committee oversight and recordkeeping and disclosures to the appropriate
agency. Although final rules have not been adopted to date, if these or other regulations are adopted in a form similar to that proposed,
they will impose limitations on the manner in which we may structure compensation for our executives and certain other employees.
Anti-Money Laundering, the USA PATRIOT Act and the Office of Foreign Assets Control Regulation
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 us 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 AML laws and regulations by imposing significant new compliance and due diligence obligations on 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. Financial institutions are also prohibited from entering into specified financial transactions and account
relationships and must take certain steps to assist government agencies in detecting and preventing money laundering and to report
certain types of suspicious transactions. The Patriot Act also amended Section 18(c) of the FDIA (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.
We are subject to the customer due diligence rules issued by Treasury’s Financial Crimes Enforcement Network (“FinCEN”)
under the BSA, which require 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 to include risk-based policies and procedures for
conducting ongoing customer due diligence, including policies and procedures that are reasonably designed to (1) identify and verify
the identity of customers; (2) identify and verify the identity of the beneficial owners of companies opening accounts; (3) understand
the nature and purpose of customer relationships to develop customer risk profiles; and (4) conduct ongoing monitoring to identify and
report suspicious transactions and, on a risk basis, to maintain and update customer information. As part of the requirement to obtain
beneficial ownership information, we must identify and verify the identity of any individuals who own 25 percent or more of a legal
entity, and an individual who controls the legal entity.
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, to comply with United States sanctions that affect
transactions with designated foreign countries, nationals and others, or to comply with any other relevant laws or regulations, could
have serious legal, economic and reputational consequences for the institution, including causing applicable bank regulatory
authorities to not approve any applications, including branch openings and mergers or acquisitions, when regulatory approval is
required or to prohibit such transactions even if approval is not required.
Oversight and Enforcement
Enforcement Authority. The FDIC possesses enforcement authority over insured banks, including us, pursuant to the FDIA, the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”) and other statutes. Insured banks may be subject to
potential actions for unsafe or unsound practices or violations of laws, rules, regulations or conditions imposed in writing by
applicable federal banking agencies. The FDIC may exercise its enforcement powers by, among other things, issuing a cease-and-
desist order, imposing civil monetary penalties, requiring an increase in capital, entering into informal and formal enforcement actions
against the insured bank, requiring the insured bank to take identified corrective actions to address cited concerns or refrain from
taking certain actions, or terminating deposit insurance.
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Federal and state banking regulators have the authority to initiate informal or formal enforcement actions against us. Informal
actions may include board resolutions approved by the applicable regulators, supervisory letters or memoranda of understanding.
Formal actions may include consent orders, cease-and-desist orders, requiring an increase in capital, termination of deposit insurance
and civil money penalties. Informal actions are generally a confidential part of the regulators’ examination and supervisory process
and may not be disclosed without the permission of the regulators. Formal actions, however, are publicly disclosed.
In connection with the 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, certain deposit gathering activities, acquisitions of assets, establishing new branches, entering into new lines of business,
or using brokered deposits. The capital restoration plan will not be accepted by the regulators unless any company having control of
the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified
amount.
Examination. Consistent with their supervision practices for banks of our size, the FDIC and ASBD utilize an exam team that
remains on site throughout the year and conduct regular examinations of us, reviewing such matters as the overall safety and
soundness of our institution, the adequacy of our allowance for loan losses, the quality of our loans and investments, the
appropriateness of management practices, risk management, interest rate exposure, vendor management, internal controls and audit
systems, compliance with laws and regulations, and other aspects of our operations. These examinations are designed for the
protection of our depositors, rather than our shareholders. Our FDIC and ASBD examinations are generally conducted jointly by the
agencies. In addition, 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 FDIC, in order to assess compliance with consumer financial protection laws.
Acquisition Approvals. Under the Bank Merger Act and the Arkansas Banking Code, the prior approval of the FDIC and the
ASBD is required for us to merge with another bank or purchase all or substantially all of the assets or assume any of the deposits of
another FDIC-insured depository institution. In reviewing applications for merger and acquisition transactions, bank regulators
consider, among other things, the competitive effect and public benefits of the transactions, the capital position and managerial
resources of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s CRA
performance record, the applicant’s compliance with fair housing and other consumer protection laws and the effectiveness of all
organizations involved in combatting money laundering activities. In addition, failure to implement or maintain adequate compliance
programs could cause bank regulators not to approve an acquisition where regulatory approval is required or to prohibit an acquisition
even if approval is not required.
Change in Bank Control. Under the Change in Bank Control Act (the “CIBCA”), a notice must be submitted to the FDIC if any
person (including a company), or group acting in concert, seeks to acquire “control” of us. Control is defined as the power, directly or
indirectly, to direct our management or policies or to vote 25% or more of any class of our outstanding voting securities. Additionally,
a rebuttable presumption of control arises when any person (including a company), or group acting in concert, seeks to acquire 10% or
more, but less than 25%, of any class of our outstanding voting securities which are publicly traded. When reviewing a notice under
the CIBCA, the FDIC will take into consideration the financial and managerial resources of the acquirer, the convenience and needs of
the communities served by us, the anti-trust effects of the acquisition and other factors. Under the Bank Holding Company Act of
1956, as amended (the “BHCA”), any company that is not an existing bank holding company would be required to obtain prior
approval from the FRB before it could obtain “control” of us (and thereby become a bank holding company) within the meaning of the
BHCA. Control generally is defined to mean the ownership or power to vote 25% or more of any class of our voting securities, the
ability to control in any manner the election of a majority of our directors or the exercise of a controlling influence over our
management and policies. An existing bank holding company would be required to obtain the FRB’s prior approval under the BHCA
before acquiring more than 5% of any class of our voting securities.
Other Regulations and Restrictions
Reporting Obligations. We 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. We
also submit FFIEC Consolidated Reports of Condition and Income (“Call Reports”) to the FDIC on a quarterly basis and file other
required reports with various federal and state regulators.
Lending Limits. Our lending and investment authority is derived from Arkansas law. The lending power is generally subject to
certain restrictions, including limitations on 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 18 of the consolidated financial statements
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under “Part II, Item 8. Financial Statements and Supplementary 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 accounts that earn only a nominal amount of interest, the effect of the reserve requirements is to
increase our cost of funds.
Payment of Dividends. Regulations of the FDIC and the ASBD limit our ability to pay dividends to our shareholders 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 ASBD currently limits the
amount of dividends that we can pay our shareholders to 75% of net profits after taxes for the current year plus 75% of retained net
profits after taxes for the immediately preceding year. In addition, our ability to pay dividends may also be restricted by certain
covenants contained in the indentures governing our trust preferred securities, our subordinated debentures and our subordinated
notes. See also note 18 of the consolidated financial statements under “Part II, Item 8. Financial Statements and Supplementary Data”
of this Annual Report on Form 10-K for a discussion of dividend restrictions.
Restrictions on Transactions with Affiliates or Related Parties. Federal law substantially restricts transactions between financial
institutions and their affiliates, particularly their non-financial institution affiliates. An affiliate of a bank is any company or entity that
controls, is controlled by or is under common control with the bank.
We are 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. 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. We are 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. We are 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.
Securities Laws and Regulations. We are subject to 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
FDIC, the ASBD and state securities regulatory authorities for matters relating to the offer and sale of our securities.
Consumer Financial Protection
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 complex environment for consumer finance regulation. We are subject to
a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws
include, among others, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act, the Home Ownership and Equity Protection Act, the Electronic Fund Transfer Act, the Fair and Accurate Credit
Transactions Act, the Fair Debt Collection Practices Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Truth
in Savings Act, the Expedited Funds Availability Act, the Check Clearing for the 21st Century Act, the Service Members Civil Relief
Act, the Telephone Consumer Protection Act, the CAN-SPAM Act, and similar state laws, as well as state usury laws and other state
consumer protection laws. These and other laws, among other things, require disclosures of the cost of credit and terms of deposit
accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report
information, provide financial privacy protections, prohibit unfair, deceptive and abusive acts and practices, restrict our ability to raise
interest rates and subject us to significant regulatory oversight. Failure to comply with these and other consumer protection
requirements may result in significant liability in private civil actions or enforcement actions by federal and state bank regulators or
consumer protection agencies or state attorneys general, and may prevent us from engaging in merger or acquisition transactions or
other activities requiring regulatory approval or that regulators may prohibit even if approval is not required.
The CFPB is designed to prevent unfair, deceptive and abusive practices and ensure that all consumers have access to markets
for consumer financial products and services, and that such markets are fair, transparent and competitive. Because our 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 laws, hold hearings and commence civil litigation, and establish applicable examination,
enforcement and reporting requirements. The CFPB has significant authority to implement and enforce the consumer finance laws
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identified above and others, 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 unfair, deceptive or abusive 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 our
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, to impose significant monetary penalties or
injunctive relief that prohibits lenders from engaging in allegedly unlawful practices, or to obtain cease and desist orders providing for
affirmative relief or monetary penalties. The CFPB has been active in bringing enforcement actions related to consumer financial
protection laws and obtaining the forms of relief described above.
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.
Arkansas Law
We are subject to examination and regulation by the ASBD. Under the Arkansas Banking Code, the acquisition of more than
25% of any class of the outstanding capital stock of any bank requires approval of the Bank Commissioner. The Bank Commissioner’s
approval is required in order for us to make acquisitions, amend our articles of incorporation, repurchase shares of our capital stock
(other than payments to dissenting shareholders in a transaction), issue preferred stock or debt, increase, reduce or retire any part of
our capital stock, retire debt instruments, or conduct certain types of activities that are incidental or closely related to banking.
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.
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 monetary policies of the FRB 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 the FRB’s monetary and fiscal policies.
Future Regulation of Banks
Banking regulators, federal and state governments and other bodies routinely consider and enact new laws, regulations and
policies, and may have differing interpretations regarding certain laws, regulations and policies, regulating the banking industry and
public companies generally. In addition to potential legislative action, it is unclear whether or to what extent the federal departments
and agencies will finalize, adopt, amend or repeal existing or proposed rules and regulations, including those implementing the Dodd-
Frank Act and the EGRRCPA. The ultimate impact of changes in laws on our business and results of operations will depend in part on
regulatory interpretation and rulemaking, including as a result of the EGRRCPA, 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. However, given our growth and the extensive and comprehensive
regulation of our industry, we expect that our regulatory compliance costs will continue to increase over time. The scope, timing and
implementation of regulatory and statutory changes are uncertain and could have an adverse effect on our business, financial condition
or results of operation.
AVAILABLE INFORMATION
We file annual, periodic and current reports, proxy statements and other information required by the Exchange Act with the
FDIC, copies of which are available electronically at the FDIC’s website at http://www.fdic.gov. In addition, we make available, free
of charge, through the Investor Relations section of our Internet website at http://ir.ozk.com under “Filings,” 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
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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 FDIC. You may also inspect and copy any document we file with the FDIC at the public reference facilities maintained at
the FDIC, Accounting and Securities Disclosure Section, Division of Risk Management Supervision, 550 17th Street, NW,
Washington, DC 20429.
We have adopted a written code of ethics that applies to all directors, officers and employees of the Bank, including our
principal executive officer, principal financial officer and principal accounting officer, in accordance with Section 406 of the
Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder. Our code of ethics is available on our Investor
Relations website, http://ir.ozk.com, under “Corporate - Governance Documents.” In the event that we make changes in, or provide
waivers from, the provisions of this code of ethics that we are required to disclose, we intend to disclose these events on our Investor
Relations website in such section. Our Corporate Governance Guidelines, Board committee charters and other corporate governance
related documents are also posted on our website, and available in print upon request from any shareholder to our Investor Relations
Department.
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 OZK, P. O. Box 8811, Little Rock, Arkansas 72231-8811 or by calling (501) 978-
2265. Pursuant to Section 350.3 of the FDIC rules and regulations, each bank is required to make available on request an annual
disclosure statement. Our Annual Report on Form 10-K serves as our annual disclosure statement.
Item 1A. RISK FACTORS
An investment in shares of our common stock involves a variety of risks, some of which are specific to us and some of which are
inherent to the financial services industry. 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 our securities. 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.
ECONOMIC AND CREDIT RISKS
Our financial performance may be adversely affected by conditions in the financial markets and economic conditions
generally and in our markets in particular.
Our financial performance is highly dependent on the business environment in the markets where we operate and in the U.S. as
a whole. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity,
investor or business confidence, consumer sentiment, limitations on the availability or increases in the cost of credit and capital,
increases in inflation or interest rates, natural disasters, terrorist attacks, acts of war, or a combination of these or other factors. A
worsening of business and economic conditions generally or specifically in the principal markets in which we conduct business could
have adverse effects, including, but not limited to, the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
a decrease in deposit balances or the demand for loans and other products and services we offer;
an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on
their loans or other obligations to us, which could lead to higher levels of past due loans, nonperforming assets, net
charge-offs and provisions for credit losses;
a decrease in the value of loans and other assets secured by real estate;
a decrease in net interest income from our lending and deposit gathering activities; and
an increase in competition resulting from financial services companies.
It is possible that the business environment in the markets where we operate and in the U.S. as a whole may continue to
experience volatility in the future. There can be no assurance that these conditions will improve in the near term or that conditions will
not worsen. Such conditions could adversely affect our business, financial condition, and results of operations.
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Our business depends on the condition of the local and regional economies where we operate and we may have more credit
risk to the extent loans are concentrated by location or industry of the borrowers or collateral.
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 states where we
currently have most of our banking offices, or the markets in which our assets are geographically located. Slowdown in economic
activity in these areas, including deterioration in housing or real estate 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 delinquencies or non-payment of loans 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.
Approximately 19% of our total loan portfolio at December 31, 2019 was concentrated in the New York–Newark–Jersey City
Metropolitan Statistical Area (“MSA”). As a result, our financial condition and results of operations depend, in part, upon economic
conditions in this market area. Deterioration in economic conditions in this market could result in one or more of the following: an
increase in loan delinquencies and charge-offs, an increase in problem assets and foreclosures, a decrease in the demand for our
products and services, or a decrease in the value of collateral for loans, especially real estate.
If we do not properly manage our credit risk, our business could be seriously harmed.
There are substantial risks inherent in making any loan, 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.
Although we attempt to minimize our credit risk through, among other management and monitoring procedures, prudent loan
underwriting procedures and by monitoring concentrations of our loans, 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
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 underwriting policies and procedures to local market conditions or changing
economic circumstances could significantly increase our credit risk, which could have an adverse effect on our allowance and
provision for credit 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 portfolio.
Our loan 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 72.8% of our total loans at December 31, 2019
(77.2% at December 31, 2018). In addition, our construction/land development and non-farm/non-residential loans, which are subsets
of our real estate loans, comprised 36.4% and 22.6%, respectively, of our total loan portfolio at December 31, 2019 (38.4% and
25.2%, respectively, at December 31, 2018). Real estate loans, including construction/land development and non-farm/non-residential
loans, pose different risks than other types of loan 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 uncertainty of total construction
costs, including the potential for construction cost overruns, project completion risk, general contractor credit risk and risks associated
with the ultimate sale, lease or use of the completed construction. In addition, many of our real estate construction, acquisition and
development loans typically involve large balances to single borrowers or groups of related borrowers. If a decline in economic
conditions or other issues cause difficulties for our borrowers of these types of loans, if we fail to accurately evaluate the credit risk of
these loans when we underwrite them or if we do not continue to adequately monitor the performance of these loans, the underlying
construction projects that collateralize our loans may have material adverse deviations from projected construction plans and budgets,
resulting in the potential that our loan portfolio could experience delinquencies, defaults and credit losses that could have a material
adverse effect on our business, financial condition or results of operations.
We believe we have established appropriate underwriting and ongoing monitoring policies and procedures for our real estate
loans, including construction/land development and non-farm/non-residential loans, and have established appropriate allowances for
such loans. However, there can be no assurance that such underwriting and ongoing monitoring policies and 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 credit losses, which could have an adverse effect on our financial position and
results of operations.
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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, whether locally, regionally or nationally, and numerous other factors. If the value
of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could
become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions
are declining or have declined, we may not be able to realize the value of the security anticipated when we originated the loan, which
in turn could have an adverse effect on our net charge-offs, our allowance and provision for credit 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, or expected to be realized, upon disposition of foreclosed assets will approximate the carrying value of such assets. If the
proceeds, or expected 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, or otherwise be required to write down the value of such assets, which in turn could have an adverse
effect on our results of operations.
The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property may not
accurately describe the net value of the collateral that we can realize.
Our underwriting and ongoing monitoring policies and processes for real estate loans generally utilize appraisals of the real
property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate
values may change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this
estimate may not accurately describe the net value of the real property collateral after the loan is made. As a result, we may obtain
subsequent appraisals that differ materially from prior appraisals regarding the value of the property, which could have an adverse
effect on the loan’s credit quality or risk rating, and we may not be able to realize the full amount of any remaining indebtedness when
we foreclose on and sell the relevant property. This could have a material adverse effect on our business, financial condition or results
of operations.
Our indirect lending involves risk elements in addition to normal credit risk.
Our Indirect RV and Marine lending group makes loans to individuals for the purchase of those types of vehicles and vessels.
We serve customers that cover varying ranges of creditworthiness, and the terms and rates of these types of loans reflect those varying
risk profiles. We have limited personal contact with these borrowers as a result of indirect lending through non-bank channels, namely
dealer and correspondent relationships. If we are not able to maintain existing relationships with significant dealers or correspondents
or if we are not able to develop new relationships for any reason – including if we are not able to provide services on a timely basis or
compete successfully with the products and services of our competitors – our indirect lending volumes, and the number of dealers and
correspondents with whom we have relationships, could decline in the future, which could adversely affect our results of operations or
financial condition. While our lending team is experienced and skilled at underwriting and monitoring these loans, such loans involve
risk elements in addition to normal credit risk. While these loans are secured, they are secured principally by depreciating assets and
characterized by LTV ratios that could result in us not recovering the full value of an outstanding loan upon default by the borrower. If
the losses from our indirect loan portfolio are higher than anticipated, it could have a material adverse effect on our allowance and
provision for credit losses and our financial condition and results of operations.
We could experience deficiencies in our allowance for credit losses.
We maintain an allowance for credit losses, established through a provision for credit losses charged to expense, that represents
our best estimate of probable losses incurred in our loan portfolio. Effective January 1, 2020, we adopted the current expected credit
loss (“CECL”) model which requires, among other items, that we establish an allowance for the lifetime expected losses on individual
loans, and a reserve (reflected as a liability on our consolidated balance sheet) for lifetime expected losses on our unfunded
commitments (comprised primarily of closed but unfunded construction and development loans). The aggregate of the allowance for
both the funded loans and the unfunded commitments is referred to as our allowance for credit losses (“ACL”). Although we believe
that we maintain our ACL, on a post-CECL basis, at a level adequate to absorb lifetime expected losses in our loan portfolio, estimates
of credit losses are subjective and their accuracy may depend on the outcome of future events that are difficult to predict. Our
experience in the banking industry indicates that some portion of our loans may only be partially repaid or may never be repaid at all.
Credit losses occur for many reasons beyond our control. Accordingly, we may incur charge-offs or otherwise be required to make
significant and unanticipated increases in our ACL 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 ACL and our methodologies for calculating the ACL. These regulatory authorities may require adjustments to the ACL or ACL
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methodology or may require recognition of additional credit losses or charge-offs based upon their judgment. Any increase in the
ACL, credit losses or charge-offs required by bank regulatory authorities could have a material adverse effect on our financial
condition, results of operations and liquidity.
The CECL guidance requires the ACL to be forward-looking and requires immediate recognition of estimated credit losses over
the remaining life of financial assets. The CECL model applies to the measurement of credit losses on the financial assets measured at
amortized cost, including but not limited to loan receivables. It also applies to off-balance sheet credit exposures not accounted for at
fair value (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). For assets within the
scope of CECL, a cumulative-effect adjustment is recognized in retained earnings as of the beginning of the first reporting period in
which the guidance is effective. We have developed and implemented processes and procedures to comply with the CECL
requirements. Effective January 1, 2020, CECL changed the method of provisioning ACL, required us to increase our ACL and
increased the types of data we need to collect and review to determine the appropriate ACL. In addition, this change will likely result
in more volatility in the level of ACL and our provision expense for credit losses. See Recent Accounting Pronouncements included in
note 1 of the consolidated financial statements included in “Part II, Item 8. Financial Statements and Supplementary Data” of this
Annual Report on Form 10-K and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Risk Elements – Credit Management Actions – 2020” of this Annual Report on Form 10-K for a more detailed
discussion of changes to how we measure and recognize credit impairment, including the effect on our ACL, under the CECL
methodology.
We face strong competition in our markets.
Competition in many of our banking markets is intense. We compete with financial and bank holding companies, state and
national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages,
insurance companies, mortgage 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 either privately-held or non-banks that are
not subject to the same extensive regulations that govern our activities and thus benefit from greater flexibility than we have in
adopting or modifying growth or operational strategies. Some of our competitors (larger or smaller) may have more liberal lending
policies and processes. If we fail to compete effectively for deposits, loans 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.
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 information, financial statements, credit reports, tax returns or other financial
information, including information falsely provided as a result of identity theft, could have an adverse effect on our business, financial
condition and results of operations.
OPERATIONAL RISKS
We depend on key personnel for our success.
Our operating results and ability to execute our strategic plans and minimize credit 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 believes is capable of managing and growing our business and executing those strategic plans. 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, as discussed in “Item 1. Business – Supervision and
Regulation – Executive and Incentive Compensation.” There can be no assurance that we will be successful in retaining our current
executive officers or other key personnel, or hiring additional key personnel to assist in executing our business strategies.
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We rely on certain third-party vendors.
Our reliance on certain third-party vendors to provide products and services necessary to maintain our day-to-day operations
subjects us to the risk of operational disruption, failure or capacity constraints. Third-party vendors provide certain key operational
components, such as cloud-based computing, storage services, payment and card processing services and internet connections and
network access. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with applicable
contractual arrangements or service level agreements. Legal authorities and regulators could hold us responsible for failures by these
parties to comply with applicable laws, rules or regulations. These failures could expose us to significant litigation or regulatory action
that could limit our activities or impose significant fines or other financial losses. Additionally, we could be subject to significant
litigation from consumers or other parties harmed by these failures and could suffer significant losses of business and revenue, as well
as reputational harm as a result of these failures.
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.
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
solutions, and as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic
payment systems, as well as nontraditional alternatives like crowdfunding and digital wallets. 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 OZK Labs
group, to address the needs of our customers by using technology to provide solutions 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 solutions 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 customers and could have an adverse effect on our business, financial position, results of operations
and liquidity.
Failures or interruptions in or breaches to our computer systems, or other cyber threats or information security incidents,
could materially and adversely affect our business and operations.
We are dependent upon information technologies, computer systems and networks, including those maintained by us and those
maintained and provided to us by third parties (e.g. cloud solutions and “software-as-a-service”), to conduct operations and are reliant
on technology to help increase efficiency in our business. These systems could become unavailable or impaired from a variety of
causes, including storms and other natural disasters, terrorist attacks, fires, utility outages, internal or external theft or fraud, design
defects, human error or complications encountered as existing systems are maintained, replaced or upgraded. 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, causes an interruption in service, or 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.
In addition, our operations require us to protect our information systems, technology infrastructure and data. Cyber security
incidents and other disruptions could jeopardize the security of information stored in and transmitted through our information systems
and networks and result in the transmission, theft, disclosure and/or destruction of our confidential information, including client and
customer information, corporate information or other assets. 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 procedures will be completely
successful against every threat, every time, or that we will discover a breach in a timely fashion, especially as the methods used
become increasingly complex and sophisticated and change frequently. Additionally, our risk and exposure to cyber threats and other
information security breaches is heightened as we expand our use of cloud technology and internet and mobile banking delivery
channels for our products and services.
We also face the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that
facilitate our business activities, including vendors, exchanges, and other financial intermediaries. Such parties could also be the
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source or cause of an attack on, or breach of, our operational systems, data or infrastructure, and could disclose such attack or breach
to us in a delayed manner or not at all. In addition, we may be at risk of an operational failure with respect to our customers’
systems. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these
threats and the continued uncertain global economic environment.
As cyber threats continue to evolve, we may be required to expend significant, additional resources to continue to modify or
enhance our protective measures, investigate and remediate any information security vulnerabilities, or respond to any changes to state
or federal regulations, policy statements or laws concerning information systems or security. 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.
Ineffective techniques for managing risk, or failures or circumvention of our internal controls, may expose us to material
unanticipated losses.
In order to manage the significant risks inherent in our business, we must maintain effective policies, procedures and systems
that enable us to identify, monitor and control our exposure to material risks, such as credit, operational, legal and reputational risks.
Our risk management methods may prove to be ineffective due to their design, their implementation or the degree to which we adhere
to them, or as a result of the lack of adequate, accurate or timely information or otherwise. Any failure or circumvention of our
controls, processes and procedures or failure to comply with regulations related to controls, processes and procedures could
necessitate changes in those controls, processes and procedures, which may increase our compliance costs, divert management
attention from our business or subject us to regulatory actions and increased regulatory scrutiny. If our risk management efforts are
ineffective, we could suffer losses that could have a material adverse effect on our financial condition, results of operations and
liquidity, and we could be subject to litigation from customers or sanctions or fines from regulators. Our techniques for managing the
risks we face may not fully mitigate the risk exposure in all economic or market environments, including exposure to risks that we
might fail to identify or anticipate.
Our internal controls, disclosure controls, processes and procedures, and corporate governance policies and procedures are
based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are
met. Any failure or circumvention of our controls, processes and procedures or failure to comply with regulations related to controls,
processes and procedures could necessitate changes in those controls, processes and procedures, which may increase our compliance
costs, divert management attention from our business or subject us to regulatory actions and increased regulatory scrutiny. Any of
these could have an adverse effect on our financial condition, results of operations and liquidity.
We are subject to environmental liability risks.
A significant portion of our loan 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 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, including any fines or penalties levied for noncompliance with environmental
laws, could have an adverse effect on our financial condition, results of operations and liquidity.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks,
extreme weather events, or other natural disasters and climate change.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as coronavirus, or other
widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks, extreme terrestrial or solar
weather events or other natural disasters, could create economic and financial disruptions, and could lead to operational difficulties
(including travel limitations) that could impair our ability to manage our businesses.
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Certain of our borrowers may be affected by the recent outbreak of the coronavirus, which originated in Wuhan, Hubei
Province, China but has been reported in other countries. These effects could include disruptions or restrictions in our borrowers’
supply chains or decreases in demand for their products and services. If our borrowers are adversely affected, or if the virus leads to a
widespread health crisis that impacts economic growth, our financial condition and results of operations could be adversely affected,
despite having no direct operations in China.
Our operations and customer base are located in markets where natural disasters, including tornadoes, severe storms, fires,
floods, hurricanes, earthquakes and other extreme weather conditions often occur. Such natural disasters could significantly impact the
local population and economies and our business, and could pose physical risks to our properties and/or employees, and could increase
the risk that many of our borrowers may experience losses or sustained job interruption, which may materially impair their ability to
satisfy their loan obligations. 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 and liquidity.
Some of our operations and customer base are also located in markets which could experience the effects of climate change,
including increases in storm incidents and resulting rising sea levels. To the extent climate change causes changes in weather patterns,
our markets could experience increases in storm intensity and rising sea-levels. Over time, these conditions could result in declining
demand for certain types of business that we finance, including commercial real estate projects, or decrease the value of our loans and
other assets secured by real estate that might be impacted. Should the impact of climate change be material in nature or occur for
lengthy periods of time, our financial condition or results of operations would be adversely affected. In addition, changes in federal
and state legislation and regulation on climate change could result in increased capital expenditures to, among other things, improve
the energy efficiency of properties we own in order to comply with such regulations. Climate change may also have indirect effects on
our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable There can be no
assurance that climate change will not have a material adverse effect on our operations or business.
Consumers may decide not to use 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 banks. For example, consumers can now maintain funds that would have historically been
held as 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 by transacting through non-bank enterprises or through the use of
emerging payment technologies such as cryptocurrencies. The process of eliminating banks as intermediaries could result in the loss
of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue
streams and the lower-cost deposits as a source of funds could have an adverse effect on our financial condition, results of operations
and liquidity.
New lines of business, products, product enhancements or services may subject us to additional risks.
From time to time, we may implement or acquire new lines of business or offer new products and product enhancements as well
as new services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts. In
acquiring, developing or marketing new lines of business, products, product enhancements or services, we may invest significant time
and resources, although there is no guarantee that these new lines of business, products, product enhancements or services will be
successful or that we will realize their expected benefits. Further, initial timetables for the introduction and development of new lines
of business, products, product enhancements or services may not be achieved, and price and profitability targets may not prove
feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also
impact the ultimate implementation and success of new lines of business or offerings of new products, product enhancements or
services. Furthermore, any new line of business, product, product enhancement or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of
new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on our
business, financial condition or results of operations.
Our accounting estimates and risk management processes rely on analytical and forecasting models and tools.
The processes we use to estimate probable credit losses, to measure the fair value of financial instruments, and to measure and
monitor risk throughout the Bank, 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
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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 selection of accounting policies and methods may affect our reported financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of
operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they
comply with accounting principles generally accepted in the U.S. (“GAAP”) and reflect management’s judgment of the most
appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting
policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may
result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies have been determined by management to be critical to presenting our financial condition and results
of operations. They require management to make difficult, subjective or complex judgments about matters that are
uncertain. Materially different amounts could be reported under different conditions or using different assumptions or
estimates. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following:
significantly increase the ACL or sustain credit losses that are significantly higher than the reserve provided; recognize significant
impairment on goodwill and other intangible asset balances; or significantly increase our accrued tax liability. Any of these could have
a material adverse effect on our business, financial condition or results of operations. For a discussion of our critical accounting
policies, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical
Accounting Policies.”
LEGAL, COMPLIANCE AND REGULATORY RISKS
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 issuance or redemption
of debt securities, common stock or other forms of capital, payment of dividends on shares of our common stock, mergers and
acquisitions, investments, interest rates charged for loans, interest rates paid on deposits, opening, closing or relocation 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.
In addition, 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. We continue to implement a number of externally driven regulatory programs, changes and
enhancements. The cumulative impact of the collective change initiatives could be significant and have direct implications on
resourcing and our people. Our ability to execute our strategy may also be limited by our operational capacity and the increasing
complexity of the regulatory environment in which we operate.
We are subject to increased litigation, government investigation and increased scrutiny from bank regulatory and other
government authorities, stemming from broader systemic regulatory concerns, including with respect to stress testing, liquidity and
capital levels, asset quality, provisioning for credit loss, AML/BSA, consumer compliance and other prudential matters and efforts to
ensure that financial institutions take steps to improve their risk management and prevent future crises. In this regard, government
authorities, including the bank regulatory agencies and law enforcement, are also pursuing aggressive enforcement actions with
respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and
perceived compliance failures and may also adversely affect our ability to enter into certain transactions or engage in certain activities,
or obtain necessary regulatory approvals in connection therewith. The government enforcement authority includes, among other
things, the ability to assess significant civil or criminal monetary penalties, fines, or restitution; to issue informal or formal
enforcement actions, including required board resolutions, memoranda of understanding, written agreements, consent orders, cease
and desist orders or prompt corrective action orders; to take corrective action and cease unsafe and unsound practices; and to initiate
injunctive actions against banking organizations and institution-affiliated parties. These enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices.
In some cases, regulatory agencies may take supervisory actions that may not be publicly disclosed, which may address existing
controls and could restrict or limit a financial institution. Also, as part of our regular examination process, our regulators may advise
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us to operate under various restrictions as a prudential matter. Such supervisory actions or restrictions, in whatever manner imposed,
could negatively affect our ability to engage in new activities and certain transactions, as well as have a material adverse effect on our
business and results of operations and may not be publicly disclosed.
We are involved in legal proceedings and may be the subject of additional litigation and/or investigations in the future.
In the normal course of business, from time to time, we are or have been named as a defendant in various legal actions,
including arbitrations, class actions and other litigation, arising in connection with our business activities and acquisitions. Certain
legal actions may include claims for substantial compensatory or punitive damages or indeterminate amounts of damages. In addition,
while the arbitration provisions in certain of our customer agreements historically have limited our exposure to consumer class action
litigation, there can be no assurance that we will be able to include or enforce such arbitration clauses in the future.
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. In accordance with GAAP, 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 and our 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 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 Trust and Wealth 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 not be able to protect our intellectual property, and may be 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 OZK Labs group. If we are unable to protect
our intellectual property and proprietary technology, including any technology applications developed by our OZK 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 obtaining licenses to avoid or resolve any intellectual property disputes. Third-party
intellectual property rights, valid or not, may also impede our deployment of the full scope of our products and service capabilities,
including our OZK Labs technology applications, in all of the market areas in which we operate or market our products and services.
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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 an acquisition, however, is subject to the risks that, among others, 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 business reputation, 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 products or 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.
Changes in accounting standards could materially impact how we report our financial results.
The Financial Accounting Standards Board (“FASB”), the SEC and other bodies that establish and/or interpret accounting
standards periodically change the financial accounting and reporting standards that govern the preparation of our consolidated
financial statements or may change prior interpretations or positions on how these standards should be applied. These changes may be
difficult to predict and may materially affect how we record and report our financial condition and results of operations. In some
cases, we could be required to apply a new or revised standard retroactively, which would result in changes to previously reported
financial results.
Our concentration in CRE lending may subject us to additional scrutiny.
The federal banking agencies, including the FDIC, have promulgated guidance on sound risk management practices for
financial institutions with concentrations in CRE lending. The guidance provides that a bank may have a concentration in CRE lending
if (i) total reported loans for construction, land development and other land represent 100% or more of total risk-based capital or (ii)
total reported loans secured by multifamily and non-owner occupied, non-farm/non-residential properties and loans for construction,
land development and other land represent 300% or more of total risk-based capital and the bank’s commercial real estate loan
portfolio has increased 50% or more during the prior 36 months. Based on these criteria, we have a concentration in CRE lending as
total loans for construction, land development and other land loans represented 165% of our total risk-based capital at December 31,
2019 (186% at December 31, 2018). Additionally, while our ratio of total loans for multifamily and non-owner occupied, non-
farm/non-residential and loans for construction, land development and other land to total risk-based capital of 276% at December 31,
2019 does not exceed regulatory guidance, this ratio has exceeded such regulatory guidance in prior years (313% at December 31,
2018). The guidance states that 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 CRE lending. While we believe we have implemented policies, procedures and
appropriate risk management practices with respect to our CRE loan portfolio consistent with this guidance, bank regulators could
require us to implement additional policies, procedures or risk management practices, or require us to maintain increased capital
levels, consistent with their interpretation of the guidance that may result in additional costs to us.
We are subject to the Community Reinvestment Act (“CRA”) and federal and state fair lending laws, and failure to comply
with those laws could lead to material penalties.
The CRA, the Equal Credit Opportunity Act and the Fair Housing Act impose nondiscriminatory lending requirements on
financial institutions. The CFPB, the DOJ, and other federal and state agencies are responsible for enforcing these laws and
regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class
action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our
rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties,
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injunctive relief, imposition of restrictions on acquisition activity and restrictions on expansion activity, which could negatively
impact our reputation, business, financial condition and results of operations.
Increases in FDIC insurance premiums may adversely impact our earnings and financial condition.
Our deposits are insured by the FDIC up to legal limits and, accordingly, we are subject to FDIC deposit insurance assessments.
We generally cannot control the amount of premiums we will be required to pay for FDIC insurance, with such premiums being based
on our risk classification under an FDIC risk-based assessment system. Our assessments are based on our average consolidated total
assets minus our average tangible equity. To determine our initial assessment rate, the FDIC uses a performance score and a loss-
severity score, and in calculating these scores the FDIC uses our capital level, supervisory ratings and certain financial measures to
assess our ability to withstand asset-related stress and funding-related stress. The FDIC also has the ability to make discretionary
adjustments to the total score based upon significant risk factors that the FDIC determines are not adequately captured in these
calculations. Changes to our assessment base or assessment rate, which are determined on a quarterly basis, could result in an increase
in our FDIC insurance premiums. In addition, unfavorable economic conditions, increased bank failures or other events causing the
DIF to suffer losses may cause the FDIC to charge additional special assessments. Future increases of FDIC insurance premiums or
special assessments could have a material adverse effect on our business, financial condition or results of operations.
Existing 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 continue to affect the
profitability of our business activities, require additional 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 the following risks, among others:
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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;
limitation on our ability to raise qualifying regulatory capital through the use of trust preferred securities or subordinated
notes as these securities and notes are no longer included in Tier 1 capital; and
limitations on our ability to offer certain consumer products and services due to anticipated stricter consumer protection
laws and regulations.
We have been and will continue investing significant management attention and resources to evaluate and make changes
necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act. 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 adversely 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 of banks and other 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.
Changes in U.S. trade policies and other factors beyond our control, including the imposition of tariffs and retaliatory tariffs,
may adversely impact our business, financial condition and results of operations.
Following the U.S. presidential election in 2016, there has been discussion and dialogue regarding potential changes to U.S.
trade policies, legislation, treaties and tariffs, including trade policies and tariffs affecting other countries, including China, the
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European Union, Canada and Mexico and retaliatory tariffs by such countries. Tariffs and retaliatory tariffs have been imposed, and
additional tariffs and retaliation tariffs have been proposed. Such tariffs, retaliatory tariffs or other trade restrictions on products and
materials that our customers import or export could cause the prices of our customers’ products to increase which could reduce
demand for such products, or reduce our customers’ margins, and adversely impact their revenues, financial results and ability to
service debt; which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes
in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations
and financial condition could be materially and adversely affected. It remains unclear what the U.S. Administration or foreign
governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or international trade
agreements and policies. On October 1, 2018, the United States, Canada and Mexico agreed to a new trade deal (“USMCA”) to
replace the North American Free Trade Agreement (“NAFTA”), which was signed into law on January 29, 2020 after congressional
approval. The full impact of this agreement on us, our customers and on the economic conditions in our markets is currently unknown.
A trade war or other governmental action related to tariffs or international trade agreements or policies has the potential to negatively
impact ours and/or our customers' costs, demand for our customers' products, and/or the U.S. economy or certain sectors thereof and,
thus, adversely impact our business, financial condition and results of operations.
We are subject to changes in federal and state tax laws, interpretation of existing laws and examinations and challenges by
taxing authorities.
Our financial performance is impacted by federal and state tax laws. Given the current economic and political environment, and
ongoing budgetary pressures, the enactment of additional new federal or state tax legislation may occur or interpretations of existing
tax laws could change. The enactment of such legislation or changes in the interpretation of existing law may have a material adverse
effect on our financial condition, results of operations and liquidity.
In the normal course of business, we are routinely subjected to examinations and audits from federal and state taxing authorities
regarding tax positions taken by us and the determination of the amount of tax due. These examinations may relate to income,
franchise, gross receipts, payroll, property, sales and use, unclaimed property or other tax returns filed, or not filed, by us. The
challenges made by taxing authorities may result in adjustments to the amount of taxes due, and may result in the imposition of
penalties and interest. If any such challenges are not resolved in our favor, they could have a material adverse effect on our financial
condition, results of operations and liquidity.
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, 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 payment of a premium over the market price for the shares held by
shareholders.
LIQUIDITY AND MARKET RISKS
We may not be able to meet the cash flow requirements of our depositors, borrowers, or creditors, or the cash needs for
expansion or 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 is the potential that we
will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding
(referred to as “funding liquidity risk” or that we cannot easily unwind or offset specific expenses without significantly lowering
market prices because of inadequate market depth or market disruptions (referred to as “market liquidity risk”). Our ALCO
Committee (“ALCO”), which reports to the Board, has primary responsibility for oversight of our liquidity, funds management,
asset/liability (interest rate risk) position, investment portfolio, and capital.
The objective of managing liquidity risk is to ensure that our cash flow requirements resulting from depositor, borrower
(including our ability to fund our significant balance of closed but unfunded loans), 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 policies and procedures for managing and monitoring liquidity risk. Generally we rely on deposits, repayments of loans and
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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 secondary funding sources, including
wholesale deposit sources such as brokered deposits, FHLB advances, federal funds purchased and other sources of short-term
borrowings to make loans, 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 repayments are
generally a relatively stable source of funds but are subject to the borrowers’ ability to repay loans, 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 may not be readily convertible to cash.
We anticipate we will continue to rely primarily on deposits, loan repayments, and cash flows from our investment securities, as
well as other funding sources as appropriate, 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, or if we otherwise experience an increase in funding liquidity risk or an increase in market liquidity risk, we
might be unable to meet our depositors’, borrowers’ or creditors’ needs, which would adversely affect our financial condition, results
of operations and liquidity.
If we lose a significant portion of our core deposits or our cost of funding deposits increases, our liquidity and/or profitability
could be adversely impacted.
Our profitability depends in part on successfully attracting and retaining a stable base of relatively low-cost deposits, as deposits
have traditionally served as our largest, least costly source of funding. The competition for these deposits in our markets is strong, and
deposit trends can shift with economic conditions. Our deposit levels might fall if an improving economy, rising market rates, or
increased competition causes depositors to become more comfortable with risk and to demand higher interest rates on their deposits or
seek other investments or vehicles offering higher rates of return.
We sometimes offer credit enhancements to depositors, such as FHLB letters of credit and, for certain deposits of public
monies, pledges of collateral in the form of readily marketable securities. Any event or circumstance that interferes with or limits our
ability to offer these products to customers that require greater security for their deposits, such as a significant regulatory enforcement
action or a significant decline in our capital levels, could negatively impact our ability to attract and retain deposits. If we were to lose
a significant portion of our low-cost deposits, we would be required to borrow from other sources at higher rates and our liquidity and
profitability could be adversely impacted.
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. Our Board 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 deposits. At December 31, 2019 we had $2.12 billion in brokered deposits ($2.04 billion at December
31, 2018). 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 we no longer be
considered well-capitalized, our ability to access new brokered deposits or retain existing brokered deposits could be adversely
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 to maintain adequate levels of capital to support operations. At December 31, 2019,
our regulatory capital ratios were at “well-capitalized” levels under regulatory guidelines. However, our business strategy calls for
continued growth in our existing banking markets 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 through other means. 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
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insurance premiums, increased cost of funding or loss of funding sources could have an adverse effect on our financial condition,
results of operations and liquidity.
We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our
commitments and business needs. As a publicly traded company, a likely source of additional funds is the capital markets,
accomplished generally through the issuance of equity, including common stock, preferred stock, warrants, depository shares, stock
purchase contracts or stock purchase units, and the issuance of senior debt or subordinated debentures. Our ability to raise additional
capital, including senior debt or subordinated debentures, if needed, will depend, among other things, on conditions in the equity
and/or debt markets at that time, which are outside of our control, and our financial performance. In addition, any issuance of
preferred stock or debt by us will require the prior approval of the ASBD and may be accompanied by time delays associated with
obtaining such approval. If market conditions change during any time delays associated with obtaining regulatory approval, we may
not be able to issue equity or debt on as favorable terms as were contemplated at the time of commencement of the process, or at all.
We cannot assure you that access to additional capital 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, our depositors 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 continue to grow in our existing banking
markets and to expand into new markets could be impaired.
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 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 on our common stock 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. For example, in the event we become subject to an
enforcement action or depending upon our regulatory status, our regulators may prevent us from paying dividends to our shareholders.
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 18 of the consolidated financial statements under “Part II, Item 8.
Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for a discussion of dividend restrictions.
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 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 offering rates, replace loan 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 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 and economic value of equity (“EVE”) 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 and 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 investment securities and from the repayment or prepayment of loans, (viii) the need, if any, for
additional capital and/or debt to support continued growth, and (ix) other relevant factors. EVE, which measures the expected change
in the fair value of equity, is calculated as the fair value of all assets minus the fair value of liabilities and incorporates a number of
assumptions including (i) the timing and amount of cash flows expected to be received or paid on various assets and liabilities, (ii) the
expected exercise of call features on various assets and liabilities, (iii) estimated discount rates and (iv) other relevant factors. These
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assumptions and inputs into our interest simulation model and EVE are difficult to predict. Should these assumptions prove to be
inaccurate, our interest simulation model and EVE 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.
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 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 in
general. 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 adversely 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 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.
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.
ALCO has primary responsibility for oversight of our 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 that have experienced a deterioration of financial condition, or that 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 $739 million in general, hybrid and separate account BOLI contracts at December 31, 2019. 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’s
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 also 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 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 financial condition, results of operation and liquidity.
Changes to or possible elimination of London Interbank Offered Rates (“LIBOR”) may adversely affect the holder of, the
market value of, and the interest expense paid on our subordinated notes and our subordinated debentures and related trust
preferred securities, and may affect certain of our loans.
On July 27, 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or
compelling banks to submit rates for the calculation of LIBOR to the LIBOR administrator. The announcement indicates that the
continuation of LIBOR on the current basis will not be guaranteed after 2021. It is impossible to predict whether and to what extent
banks will continue to provide LIBOR submissions to the LIBOR administrator, whether LIBOR will cease to be published or
supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. In
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June 2017, the FRB’s Alternative Reference Rates Committee selected the Secured Overnight Financing Rate (“SOFR”) as the
preferred alternative to LIBOR and began publication of SOFR in April 2018. However, uncertainty remains as to whether SOFR may
become an accepted alternative to LIBOR and it is impossible to predict the effect of SOFR or any other alternatives on the value of
securities based on LIBOR such as our subordinated notes and our subordinated debentures and related trust preferred securities.
Uncertainty as to the replacement or disappearance of LIBOR or other reforms may adversely affect the value of and the return
on our subordinated notes and our subordinated debentures and related trust preferred securities, as well as the interest we pay on
those securities. In the event that a published LIBOR rate is unavailable, the rate on our subordinated notes and our subordinated
debentures and related trust preferred securities will be determined as set forth in the governing agreements. If a published LIBOR rate
is unavailable and banks are unwilling to provide quotations for the calculation of LIBOR as set forth in the agreements governing our
subordinated notes and our subordinated debentures and related trust preferred securities, the LIBOR rate for those securities will be
the LIBOR rate in effect for the prior interest period, except that if a published LIBOR rate is unavailable prior to July 1, 2021, the
interest rate for our subordinated notes will reset to 5.50% on July 1, 2021 and remain at that rate until such time, if any, that a LIBOR
rate is published. As a result, the interest rate on our subordinated notes and our subordinated debentures and related trust preferred
securities may effectively become fixed. If this occurs, the value of and trading market for these securities, as well as the interest we
pay on them, may be adversely affected.
At December 31, 2019, approximately $12.53 billion, or approximately 71% of our total loans were variable rate. Of those
variable rate loans, approximately 79% were indexed to 30-day or 90-day LIBOR. Most of our loan agreements that are indexed to
LIBOR include provisions that do not require us to default to any alternative index recommendations but instead allow us, in our sole
discretion, to designate an alternative interest rate index in the event that LIBOR should become unavailable or unstable. While we
believe these provisions within most of these loan agreements address the potential future unavailability of LIBOR, there can be no
assurance that such provisions will be effective or will not be challenged by our borrowers.
The 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. 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.
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, 2019, we had an aggregate principal amount of $118 million of floating rate and 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, 2019, 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 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, so long as we obtain regulatory approval prior to issuing such
securities. Our Board 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.
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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, over a short period of time, in response to a variety of factors,
including, among other things:
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actual or anticipated variations in quarterly results of operations;
recommendations or changes in recommendations by securities analysts regarding our securities;
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 products and services offered, by competitors;
changes in the political climate;
changes in global financial markets and global economies and general market conditions, such as interest or foreign
exchange rates, stock, commodity or real estate valuations or volatility and other geopolitical, regulatory or judicial
events;
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or
involving us or our competitors; and
changes in, or proposed changes to, 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.
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. 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 and may
adversely affect the market price of our stock.
We have issued, and may issue in the future, shares of our common stock in connection with our acquisition of other financial
institutions or to support expected growth. We may determine from time to time to issue additional equity securities to raise additional
capital, support growth, or to make acquisitions. Further, we have, and may continue to, issue stock options, grant restricted stock
awards or other stock grants, awards or units in order 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. In addition, 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.
STRATEGIC, REPUTATIONAL AND OTHER RISKS
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.
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Numerous factors, such as weakening or deteriorating economic conditions, regulatory restrictions or actions, legislative
considerations, and competition may impede or restrict our ability to expand our market presence and could adversely affect our future
operating results.
We have made, and are continuing to make, significant changes and enhancements to our infrastructure in a number of
important areas. The ultimate success and completion of these changes may vary significantly from initial planning, which
could which could materially affect our control environment, operating efficiency, and results of operations.
Over the last several years, we have completed numerous strategic initiatives and improvement projects, including the merger of
our bank holding company into the Bank, our name change and strategic rebranding, expansion and enhancement of our infrastructure
for information technology, cybersecurity, information systems, business resilience, enterprise risk management, internal audit,
compliance, BSA and AML monitoring activities and program enhancements, training and a number of other important areas,
including expanding our human and physical infrastructure to serve low-to-moderate income and majority-minority markets and
customer segments. Ongoing investment will continue with respect to expansion and enhancements to our infrastructure,
implementation of various customer-facing digital capabilities, and a variety of other projects to enhance, automate or otherwise create
efficiencies in how we do business.
These changes continue to be implemented; some of the projects are fully completed, and some projects are in their early stages.
By their very nature, projections of duration, cost, expected savings, expected efficiencies and related items are subject to change and
significant variability. We may encounter significant adverse developments in the completion and implementation of these changes.
These may include significant time delays, cost overruns, loss of key people, technological problems, processing failures and other
adverse developments. Any or all of these issues could result in disruptions to our systems, processes, control environment, procedures
and employees, which may adversely impact our customers and our ability to conduct business.
We have plans, policies and procedures designed to prevent or limit the negative effect of these potential adverse developments.
However, there can be no assurance that any such adverse developments will not occur or, if they do occur, that they will be
adequately remediated. The ultimate effect of any adverse development could subject us to additional regulatory scrutiny, or expose us
to civil litigation and possible financial liability, any of which could materially affect our control environment, operating efficiency
and results of operations.
If we do not manage our growth effectively, our business, future prospects, financial condition, results of operations and
liquidity could be adversely affected.
Our reputation, expertise and banking model enable us to build and expand our banking relationships with customers in the
markets we serve. We remain committed to growing our business in a disciplined manner. Our growth prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by banking companies pursuing such strategies. In order to
successfully expand our banking relationships in our current or new markets, we must, among other things:
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 growth;
identify and expand into suitable markets;
identify and acquire suitable sites for new banking offices;
obtain regulatory and other approvals;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120) maintain adequate common equity and regulatory capital;
(cid:120)
(cid:120) maintain sufficient qualified staffing, infrastructure and organizational capacity to support growth and compliance with
sustain employee productivity while pursuing various organizational initiatives; and
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.
35
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 may continue 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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, products and services 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 depositors 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. Any acquisition may involve the payment of a
premium over book and/or market value and, therefore, some dilution of our tangible book value and diluted earnings per common
share may occur in connection with any such future acquisition. Failure to successfully integrate the entities we acquire into our
existing operations could significantly increase our operating costs and have a material adverse effect on our business, financial
condition and results of operations.
We must generally satisfy a number of meaningful conditions prior to completing any acquisition, including, in certain cases,
federal and state regulatory approval. Bank regulators consider a number of factors when determining whether to approve a proposed
transaction, including the effect of the transaction on financial stability and the ratings and compliance history of all institutions
involved, including the CRA examination results and AML and BSA compliance records of all institutions involved. The process for
obtaining required regulatory approvals may be difficult. 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.
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 and deposits. Adverse developments, consumer
sentiment, or other external perceptions regarding the practices of competitors, or the industry as a whole, may also adversely impact
our reputation and business prospects. These perceptions could stem from a variety of sources, including negative posts or
communications about us on a social media website or the disclosure of non-public information or negative comments regarding us or
our business from employees or others on social media or other websites. 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, which could have an adverse effect on our financial conditions, results of operations and liquidity.
36
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, or inactions, 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 other 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.
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, 2019 our goodwill totaled $661 million. While our previous evaluations of
goodwill, including our evaluation as of December 31, 2019, 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 could have a material adverse effect on our financial condition and results of operations.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
Our principal executive office is located in Little Rock, Arkansas. At December 31, 2019, we conducted banking operations in
254 offices in ten states, including 243 banking offices and eleven loan production offices. Such offices include both owned and
leased facilities.
The following table sets forth specific information about our facilities, by state, at December 31, 2019.
State
Arkansas
Georgia
Florida
North Carolina
Texas
Alabama
South Carolina
California
New York
Mississippi
Total
Banking Facility
Owned
Leased
Total
74 (1)
61
31
24
20
2
2
—
—
—
214
7 (2)
9 (3)
13 (4)
2 (5)
4 (6)
—
—
3 (7)
1
1 (8)
40
81
70
44
26
24
2
2
3
1
1
254
(1) Includes our principal executive office in Little Rock.
(2) Includes one loan production office in Little Rock.
(3) Includes one loan production office each in Atlanta and Alpharetta.
(4) Includes a loan production office in Orlando.
(5) Includes one loan production office each in Raleigh and Greenville.
(6) Includes a loan production office in Tyler.
(7) Includes one loan production office each in Los Angeles, San Francisco and Irvine.
(8) Includes a loan production office in Brookhaven.
Item 3.
LEGAL PROCEEDINGS
On October 26, 2018, a purported class action complaint alleging violations of federal securities laws was filed against Bank
OZK in the United States District Court for the Eastern District of Arkansas, captioned Jordan Colbert et al. v. Bank OZK et al., case
number 4:18-cv-793-JM. Under applicable federal law, the federal district court in the Colbert Case named Strathclyde Pension Fund
as the lead class plaintiff. The Colbert complaint, as amended on June 21, 2019, alleges violations of Sections 10(b) and 20(a) of the
37
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by the Bank, its CEO, George Gleason, and its
CFO, Greg McKinney, for making allegedly false and misleading statements and allegedly failing to disclose material facts relating to
the risk of loss regarding two commercial real estate loans. The amended complaint alleges essentially that the Bank lacked adequate
internal controls to assess credit risk; as a result, such loans, which were classified as substandard, posed an increased risk of loss and
were reasonably likely to lead to charge-offs, which actually occurred in the third quarter of 2018; and consequently, defendants’
public statements during the class period about the Bank’s business, operations, and prospects were materially misleading and/or
lacked a reasonable basis. The amended complaint identified the respective proposed class period as encompassing persons who
purchased the Bank’s common stock between February 19, 2016 and October 18, 2018, and seeks damages against the Bank and the
individual defendants. The Bank and the individual defendants believe that the plaintiffs’ allegations set forth in the amended
complaint are without merit, and the Bank and the individual defendants have moved to dismiss the case and intend to vigorously
defend against the alleged claims.
On December 4, 2018, a shareholder derivative complaint was filed in the Circuit Court of Pulaski County, Arkansas, case
number 60CV-18-8280, by Barbara Peak as plaintiff, against the Bank, as a nominal defendant, and the Bank’s directors and CFO,
Greg McKinney. As amended on July 15, 2019, the complaint alleges, among other things, that the individual named defendants,
including particularly the members of the Board’s audit committee and risk committee, respectively, breached their fiduciary duties in
the context of the same factual circumstances recited in the two purported class action complaints noted in the preceding paragraph, by
allegedly failing to properly maintain oversight over the Bank’s internal controls and practices and procedures, and allegedly allowing
the Bank to disseminate materially misleading information through its public disclosures. The amended complaint seeks damages
against the individual defendants and disgorgement of any profits, benefits and other compensation received by them. The Bank
intends to vigorously oppose the ability of the plaintiff to proceed in a derivative capacity. All defendants have moved to dismiss the
action, and the individual defendants intend to vigorously defend against the claims against them.
On August 14, 2019, a shareholder derivative complaint was filed in the United States District Court for the Eastern District of
Arkansas, case number 4:19-cv-567-KGB, by Barbara Bonessi as plaintiff, against the Bank, as nominal defendant, the current
members of the board of directors, and certain current and former officers and directors of the Bank. As amended on January 20, 2020,
the complaint alleges claims against the current members of the board of directors of breach of fiduciary duty, waste of corporate
assets, unjust enrichment, failing to prevent other officers and directors from alleged insider trading in the Bank’s stock, and violation
of Section 14(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder, all in the context of the
same factual circumstances recited in the actions noted in the two preceding paragraphs. The amended complaint also alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder,
and alleges unlawful sales of Bank stock against certain current and former directors and officers of the Bank while in possession of
non-public material adverse information, based on the same factual circumstances recited in the actions noted in the two preceding
paragraphs. Under the amended complaint, the plaintiff seeks damages against the individual defendants and disgorgement of any
profits, benefits and other compensation received by them. The Bank will vigorously oppose the ability of the plaintiff to proceed
under the amended complaint in a derivative capacity, and all individual defendants intend to vigorously defend against the claims
against them.
The Bank is a party as both plaintiff and defendant to various claims arising in the ordinary course of business, including
administrative and/or legal proceedings that may include employment-related claims as well as claims of lender liability, breach of
contract, and other similar lending-related claims encountered on a routine basis. While the ultimate resolution of these ordinary
course 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 Bank’s financial condition or results of operations.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
38
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Bank’s common stock is listed on the Nasdaq Global Select Market under the symbol “OZK” and at December 31, 2019,
the Bank had approximately 1,279 shareholders of record. On December 31, 2019, the closing price of our common stock was $30.51
per share.
During the fourth quarter of 2019, the Bank issued 16,150 shares of common stock in connection with the exercise of stock
options issued to certain participants under the Bank’s Stock Option Plans. The shares were issued in reliance on the exemption
provided by Section 3(a)(2) of the Securities Act of 1933, because the sales involved securities issued by a bank.
During the fourth quarter of 2019, we had no repurchases of shares of our common stock.
The graph below shows a comparison for the period commencing December 31, 2014 through December 31, 2019 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, 2014.
Cumulative Return Comparison
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
OZK (Bank OZK)
MID (S&P Midcap 400 Index)
NDF (Nasdaq Financial Index)
OZK (Bank OZK)
MID (S&P Midcap 400 Index)
NDF (Nasdaq Financial Index)
12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019
88
143 $
$
154
118 $
$
184
135 $
$
64 $
122 $
142 $
132 $
98 $
106 $
133 $
137 $
155 $
100 $
100 $
100 $
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, 2019 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.
Year Ended December 31,
Income statement data:
Interest income
Interest expense
Net interest income
Provision for loan 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
Total loans
Non-purchased loans
Purchased loans
Allowance for loan losses
Foreclosed assets
Investment securities – AFS
Goodwill and other intangible assets
Deposits
Repurchase agreements with customers
Other borrowings
Subordinated notes
Subordinated debentures
Unfunded balance of closed loans
Total common stockholders’ equity
Loan, 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(2)
Net charge-offs to average total loans
Nonperforming loans to total loans(3)
Nonperforming assets to total assets(3)
Allowance for loan losses as a percentage of:
Non-purchased loans(4)
Nonperforming loans(4)
Capital ratios:
Common equity tier 1
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage
2019
$ 1,162,541
278,360
884,181
26,241
107,527
401,130
425,906
$
3.30
32.19
26.88
0.94
129,006
128,951
$ 23,555,728
17,532,043
16,224,539
1,307,504
108,525
19,096
2,277,389
684,542
18,474,259
11,249
351,387
223,663
119,916
11,325,598
4,150,351
94.90 %
$ 22,759,370
3,971,952
17.45 %
1.87 %
10.72
12.98
4.34
40.27
28.44
0.09 %
0.11
0.15
0.18
0.66 %
448 %
13.76 %
13.76
15.57
15.36
2018
2016
(Dollars in thousands, except per share amounts)
2017
$ 1,100,820 $
209,387
891,433
64,398
107,775
380,752
417,106
$
3.24 $
29.32
23.90
0.795
128,740
128,611
932,593 $
115,164
817,429
28,092
123,858
332,672
421,891
3.35 $
26.98
21.45
0.71
125,809
128,288
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
2015
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
696,461
94,120
25,357
102,264
16,171
$ 22,388,030 $ 21,275,647 $ 18,890,142 $ 9,879,459
8,334,671
17,117,823 16,043,029 14,563,115
6,528,634
15,073,791 12,733,937 9,605,093
1,806,037
2,044,032 3,309,092 4,958,022
60,854
76,541
22,870
43,702
577,780
2,862,340 2,593,873 1,464,391
152,340
720,950
7,971,468
17,938,415 17,192,345 15,574,878
65,800
65,110
204,540
41,903
222,516
—
117,685
118,242
5,804,257
11,364,975 13,192,439 10,070,043
1,464,631
3,770,330 3,460,728 2,791,607
93.50 %
69,331
22,320
222,899
118,800
20,564
96,692
223,281
119,358
709,040
93.31 %
95.43 %
104.56 %
$ 21,911,255 $ 19,654,664 $ 14,270,078 $ 8,621,334
3,598,628 3,127,576 2,068,328
1,217,475
14.49 %
15.91 %
16.42 %
14.12 %
1.90 %
11.59
14.41
4.59
37.93
24.51
0.38 %
0.34
0.23
0.23
0.67 %
284 %
12.56 %
12.56
14.37
14.25
2.15 %
13.49
17.49
4.85
34.88
21.03
0.06 %
0.07
0.10
0.18
0.73 %
717 %
11.17 %
11.17
12.94
13.83
1.89 %
13.05
16.25
4.92
35.84
23.03
0.06 %
0.07
0.15
0.31
0.78 %
521 %
9.99 %
9.99
11.99
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 %
10.79 %
11.62
12.12
14.96
(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 in “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Capital Management” of this Annual
Report on Form 10-K.
(2) Excludes purchased loans and net charge-offs related to such loans.
(3) Excludes purchased loans, except for their inclusion in total assets.
(4) Excludes purchased loans and any allowance for such loans.
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.
March 31
2019 – Three Months Ended
Sept. 30
June 30
Dec. 31
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before taxes
Income taxes
Noncontrolling interest
Net income available to common stockholders
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
(Dollars in thousands, except per share amounts)
289,517 $
(70,737 )
218,780
(7,854 )
26,446
(100,914 )
136,458
(32,574 )
7
103,891 $
0.81 $
0.81 $
296,819 $
(72,283 )
224,536
(6,769 )
26,603
(99,131 )
145,239
(34,726 )
(10 )
110,503 $
0.86 $
0.86 $
295,243 $
(69,355 )
225,888
(6,681 )
24,072
(96,678 )
146,601
(35,889 )
(6 )
110,706 $
0.86 $
0.86 $
280,963
(65,986 )
214,977
(4,938 )
30,406
(104,406 )
136,039
(35,240 )
7
100,806
0.78
0.78
March 31
2018 – Three Months Ended
Sept. 30
June 30
Dec. 31
(Dollars in thousands, except per share amounts)
277,595 $
(56,981 )
220,614
(41,949 )
24,121
(102,942 )
99,844
(25,665 )
1
74,180 $
0.58 $
0.58 $
273,664 $
(49,003 )
224,661
(9,610 )
27,386
(89,107 )
153,330
(38,589 )
10
114,751 $
0.89 $
0.89 $
257,492 $
(39,716 )
217,776
(5,567 )
28,707
(93,810 )
147,106
(33,973 )
11
113,144 $
0.88 $
0.88 $
292,069
(63,687 )
228,382
(7,271 )
27,560
(94,893 )
153,778
(38,750 )
3
115,031
0.89
0.89
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before taxes
Income taxes
Noncontrolling interest
Net income available to common stockholders
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
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, 2019 and 2018 and our results of operations for each of
the years in the three-year period ended December 31, 2019. 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 Information” in Part I as well as the risks discussed under “Part I, 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 OZK (the “Bank”) is subject to regulation by the Arkansas State Bank Department (“ASBD”). Because the Bank is an
insured depository institution that is not a member bank of the Board of Governors of the Federal Reserve System (“FRB”), our
primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”). We are not subject to the FRB’s regulation and
supervision (except such regulations as are made applicable to the Bank by law and regulation of the FDIC). Shares of the Bank’s
common stock are listed in the Nasdaq Global Select Market under the symbol “OZK.”
Our primary business is retail and commercial banking conducted by the Bank and various subsidiaries of the Bank. The Bank
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 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, trust income, bank owned life insurance (“BOLI”) income, other
income from purchased loans, loan service, maintenance and other fees and gains 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 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
(“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 losses (“ALL”), (ii) the fair
value of our investment securities portfolio, and (iii) our accounting for income taxes all involve a higher degree of judgment and
complexity than our other significant accounting policies. Accordingly, we consider each of these to be critical accounting policies.
Provisions to and adequacy of the ALL. The ALL is calculated pursuant to GAAP under the incurred loss methodology and is
established through a provision for such losses charged against income. All or portions of loans deemed to be uncollectible are
charged against the ALL when we believe that collectability of all or some portion of outstanding principal is unlikely. Subsequent
recoveries, if any, of loans previously charged off are credited to the ALL.
The ALL is maintained at a level we believe will be adequate to absorb probable incurred losses in the loan portfolio. Provisions
to and the adequacy of the ALL are based on evaluations of the loan 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 ALL and the need for additions thereto, with consideration given to the nature and mix of the portfolio,
national, regional and local business and economic conditions that may affect borrowers’ ability to pay, concentrations of credit,
changes in the experience, ability and depth of lending management and other relevant staff, changes in the nature and volume of the
portfolio and in the terms of the loans, overall portfolio quality and other relevant factors. Changes in these criteria or the availability
of new information could require adjustment of the ALL in future periods. While a specific allowance has been calculated for
impaired loans, no portion of our ALL is restricted to any individual loan or group of loans, and the entire ALL is available to absorb
losses from any and all loans.
Our internal grading system assigns grades to all non-purchased loans, 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 is determined by the account officer and other senior
lending officers at the time the loan is made and changed from time to time to reflect an ongoing assessment of credit risk. Grades are
reviewed on specific loans from time to time by senior management and as part of our internal credit risk management processes.
42
These risk elements considered in our determination of the appropriate grade for individual loans 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), interest rate stress tolerance
(the project’s ability to withstand increases in applicable interest rates), 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, nature and down payment requirements of contracts
for presale or preleasing, if any, experience and ability of the developer, loan-to-cost (“LTC”) and LTV ratios, interest rate stress
tolerance (the project’s ability to withstand increases in applicable interest rates), permanent refinancing exit rate stress tolerance (the
effect of increases in applicable interest rates on exiting the loan via permanent loan refinancing), sales exit capitalization rate stress
tolerance (the effect of increases in capitalization rates on exiting the loan via a sale of the property), and sales exit margin ratio (the
percentage of individual units (e.g. lots or condos) sold that are needed to repay the loan); (3) for commercial and industrial loans, the
operating results of the commercial, industrial or professional enterprise, the borrower’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, the operating results, experience and ability of the borrower, 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 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”) based on the borrower’s credit score and an expected loss given default (“LGD”)
based on the underlying collateral securing the loan. The PD factor is based on composite third-party information for similar loans
and borrowers that have previously defaulted.
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, recent trends of charge-offs by
loan types 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 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 our expectations established in conjunction with the determination of the Day 1 Fair Values,
such loan is considered in the determination of the provision expense for the reporting period and the required level of ALL. 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
provision expense for the reporting period and the required level of ALL and may result in an allowance allocation or a partial or full
charge-off.
At both December 31, 2019 and 2018, we had established an ALL totaling $1.6 million for our purchased loan portfolio. Such
ALL 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.
The accrual of interest on non-purchased loans and purchased loans without evidence of credit deterioration at the date of
acquisition is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. We
generally place a loan, excluding purchased loans with evidence of credit deterioration on the date of acquisition, on nonaccrual status
when such loan is (i) deemed impaired or (ii) 90 days or more past due, or earlier when doubt exists as to the ultimate collection of
43
payments. We may continue to accrue interest on certain loans contractually past due 90 days or more if such loans are both well
secured and in the process of collection. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected
is reversed and charged against interest income. Nonaccrual loans are generally returned to accrual status when payments are no
longer past due, the loan has performed in accordance with its contractual terms for a reasonable period of time (generally at least six
months), and is expected to continue to perform in accordance with its contractual terms. If a loan is determined to be uncollectible,
the portion of the principal determined to be uncollectible will be charged against the ALL. 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. Income on nonaccrual loans, including impaired
loans, is recognized on a cash basis when and if actually collected. Income on TDRs is recognized on a cash basis until such time as
the TDR has performed in accordance with its modified terms for a reasonable period of time (generally at least six months) and is
expected to continue to perform. Once such performance and expected performance conditions are met, the TDR is returned to
accrual status but continues to be reported as an impaired loan.
All loans deemed to be impaired are evaluated individually. We consider a loan, excluding purchased loans with evidence of
credit deterioration at the date of acquisition, to be impaired when based on current information and events, it is probable that we will
be unable to collect all amounts due according to the contractual terms thereof. We consider a purchased loan with evidence of credit
deterioration at the date of acquisition to be impaired once a decrease in expected cash flows or other deterioration in the loan’s
expected performance, subsequent to the determination of the Day 1 Fair Values, results in an allowance allocation, a partial or full
charge-off or a provision for loan losses. Most of our nonaccrual loans, 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 are dependent upon
collateral for repayment. For such loans, impairment is measured by comparing collateral value and anticipated cash payments, if any,
net of holding and selling costs, to the current investment in the loan. For all other impaired loans, we compare estimated discounted
cash flows to the current investment in the loan. To the extent that our current investment in a particular loan exceeds the estimated net
collateral value or the estimated discounted cash flows, the impaired amount is charged off as a reduction of the ALL. Our practice is
to charge off any estimated loss as soon as management is able to identify and reasonably quantify such potential loss.
We may also include specific ALL allocations for qualitative factors.
Changes in the criteria used in this evaluation or the availability of new information could cause our ALL to be increased or
decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to our
ALL 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, 2019 and 2018, 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,
included in other comprehensive income (loss) and are adjusted for changes in unrealized gains and losses, net of tax, reported in
accumulated other comprehensive income (loss) (“AOCI”), on a specific identification basis. 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 consider 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 in
an acquisition 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 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 unrealized loss and various other factors. 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.
44
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.
Accounting for income taxes. We utilize 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.
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 that results in a change in our estimates and assumptions, an
increase or decrease of the deferred tax asset valuation allowance will be recorded as an adjustment to deferred income tax expense
(benefit).
We are subject to the income tax laws of the United States, its states and the municipalities in which we conduct business.
These laws are complex and subject to different interpretations by the taxpayer and the various taxing authorities. We review income
tax expense and the carrying value of deferred tax assets and liabilities quarterly, and as new information becomes available, we adjust
the balances as appropriate.
In establishing a provision for income tax expense, we must make judgments and interpretations about the application of tax
laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions.
We recognize 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. Actual results could differ significantly from these estimates due to tax law interpretations used in determining the
current and deferred income tax liabilities.
We are subject to routine corporate tax audits by the various tax jurisdictions to which we are subject, and there can be no
assurances that estimates and interpretations used by us in determining income tax assets and liabilities may not be challenged by
federal and state taxing authorities. To the extent that the final tax outcome of these matters is different from the tax positions taken
and amounts recorded based on our interpretation of federal and state income tax laws, such differences will impact income tax
expense (benefit) in the period in which such determination is made.
45
Analysis of Results of Operations
General
The table below shows total assets, investment securities AFS, total 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.
% Change
Total assets
Investment securities AFS
Total 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)
2019
2017
December 31,
2018
(Dollars in thousands, except per share amounts)
$ 23,555,728 $ 22,388,030 $ 21,275,647
2,277,389 2,862,340 2,593,873
17,532,043 17,117,823 16,043,029
18,474,259 17,938,415 17,192,345
4,150,351 3,770,330 3,460,728
421,891
3.35
26.98
21.45
425,906
3.30
32.19
26.88
417,106
3.24
29.32
23.90
2019 from
2018
2018 from
2017
5.2 %
(20.4 )
2.4
3.0
10.1
2.1
1.9
9.8
12.5
5.2 %
10.4
6.7
4.3
8.9
(1.1 )
(3.3 )
8.7
11.4
(1)
The calculation of our tangible book value per common share and the reconciliation to GAAP is included under the section “Capital
Management” in this MD&A.
Highlights of 2019 include the following:
(cid:120) Growth in total assets of 5.2% to $23.56 billion at December 31, 2019;
(cid:120) Growth in total loans of 2.4% to $17.53 billion at December 31, 2019;
(cid:120) Net income available to common stockholders of $425.9 million for 2019, a 2.1% increase from net income available to
common stockholders for 2018;
(cid:120) Return on average assets of 1.87% for 2019;
(cid:120) Returns on average common stockholders’ equity and average tangible common stockholders’ equity of 10.72% and
12.98%, respectively, for 2019 (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 Management”);
(cid:120) Net interest margin, on a fully taxable equivalent (“FTE”) basis, of 4.34% for 2019;
(cid:120) An efficiency ratio (non-interest expense divided by the sum of net interest income, on an FTE basis, and non-interest
income) of 40.3% for 2019;
(cid:120) A net charge-off ratio for total loans of 0.11% for 2019; and
(cid:120) Excluding purchased loans, our ratio of nonperforming loans to total loans was 0.15% at December 31, 2019, and our
ratio of nonperforming assets to total assets was 0.18% at December 31, 2019.
During 2018, we changed our name to Bank OZK, changed our ticker symbol to “OZK,” and adopted a new logo and signage,
all as part of a strategic rebranding. As a result of this name change and strategic rebranding, we incurred pretax expense of
approximately $11.7 million in 2018.
Net Interest Income
Net interest income and net interest margin are analyzed in this discussion on an FTE basis. The adjustment to convert net
interest income to an FTE basis consists of dividing tax-exempt interest income by one minus the statutory federal income tax rate of
21% in 2019 and 2018 and 35% in 2017. Effective December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) reduced the statutory
federal income tax rate to 21%. As a result, the FTE adjustment for comparable amounts of tax-exempt interest income was lower in
2019 and 2018 compared to 2017. The FTE adjustments to net interest income were $4.4 million in 2019, $4.7 million in 2018 and
$12.5 million in 2017. 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.
46
2019 compared to 2018
Net interest income for 2019 decreased to $888.6 million compared to $896.1 million for 2018. Net interest margin decreased
25 basis points (“bps”) to 4.34% for 2019 compared to 4.59% for 2018. The decrease in net interest income was primarily the result of
the decrease in net interest margin partially offset by growth in average earning assets, which increased 4.9% to $20.46 billion for
2019 compared to $19.52 billion for 2018. The decrease in net interest margin for 2019 compared to 2018 was primarily due to the 42
bps increase in rates paid on interest bearing deposits, partially offset by a four bps increase in yield on average earning assets.
Yields on average earning assets were 5.70% for 2019 compared to 5.66% for 2018. The yield on our non-purchased loan
portfolio increased eight bps to 6.19% for 2019 compared to 6.11% for 2018. This increase was primarily due to increases in the
federal funds target rate, Wall Street Journal Prime Rate (“WSJ Prime”) and London Interbank Offered Rates (“LIBOR”) that
occurred during 2018. The effect of those higher interest rates was reduced during the second half of 2019 as those interest rates
moved lower in response to FRB decreases in the federal funds target rate. At December 31, 2019 approximately 74% of our non-
purchased loans were variable interest rate loans and generally reprice with movements in LIBOR or WSJ Prime. Also, during recent
quarters, we have experienced high levels of loan repayments in our non-purchased loan portfolio. These payoffs have resulted in
various amounts of minimum interest, prepayment penalties and such other items. Additionally, our loan yields include accretion of
deferred loan fees and discounts and amortization of deferred loan costs and premiums that vary based on loan prepayments and other
factors. The yield on our purchased loan portfolio decreased 15 bps to 6.44% for 2019 compared to 6.59% for 2018. The yield on our
purchased loan portfolio is significantly affected by both the volume and timing of early payoffs and paydowns which typically result
in any remaining purchase accounting valuation amounts treated as yield adjustments. Because the volume and timing of purchased
loan payoffs and paydowns may vary significantly from period to period, the yield on such loans will also vary from period to period.
At December 31, 2019, approximately 42% of our purchased loan portfolio contained loans with variable interest rates. The yield on
our aggregate investment securities portfolio for 2019 increased 11 bps to 2.74% compared to 2.63% for 2018. This increase was
primarily the result of higher yielding taxable securities that were purchased throughout 2018.
To the extent that the FRB decreases the federal funds target rate in future periods and LIBOR and/or WSJ Prime also decrease,
we would expect our yield on both non-purchased and, to a lesser extent, purchased loans to decrease, although we have endeavored to
reduce the potential effect of any such decreases in interest rates by placing floor rates in many of our variable rate loans. Conversely,
to the extent that there are future increases in the federal funds target rate in future periods and LIBOR and/or WSJ Prime also
increase, we would expect to experience increases in our loan yields in future periods. At December 31, 2019 approximately 99% of
our variable rate non-purchased loans and approximately 47% of our variable rate purchased loans had floor rates.
The overall increase in rates on average interest bearing liabilities, which increased 40 bps for 2019 compared to 2018, was
primarily due to increases in rates on interest bearing deposits, which increased 42 bps for 2019 compared to 2018. The increase in
rates on our interest bearing deposits, the largest component of our interest bearing liabilities, was primarily due to increases in interest
rates in 2018 (although the effect of those higher interest rates was reduced during the second half of 2019 as interest rates moved
lower in response to FRB decreases in the federal funds target rate) and increased competition for deposits. To the extent there are
future decreases in the federal funds target rate, we would expect to experience decreases in the cost of our interest-bearing deposits in
future periods. Conversely, to the extent that there are future increases in the federal funds target rate, we would expect to experience
increases in our costs of interest bearing deposits in future periods. However, future decreases or increases in our costs of interest
bearing deposits may lag future decreases or increases in the federal funds target rate. Additionally, changes in expected deposit
levels necessary to fund future potential growth in earning assets or to otherwise provide on-balance sheet liquidity, or changes in
competitive conditions could significantly affect deposit costs in future periods.
Our other borrowing sources include (i) repurchase agreements with customers (“repos”), (ii) other borrowings comprised
primarily of Federal Home Loan Bank of Dallas (“FHLB”) advances, and, to a lesser extent, federal funds purchased, (iii)
subordinated notes and (iv) subordinated debentures. The rates on repos decreased 40 bps in 2019 compared to 2018 primarily due to
decreases in our administered rates on these accounts. The rates on our other borrowing sources decreased 19 bps for 2019 compared
to 2018, primarily as a result of an increase in capitalized interest associated with the ongoing construction during 2019 of our new
corporate headquarters. Our subordinated notes consist of $225 million in aggregate principal amount of 5.50% fixed-to-floating rate
subordinated notes. The rate on these subordinated notes includes the amortization of debt issuance costs over the estimated holding
period of seven years. The rates paid on our subordinated debentures, which are tied to a spread over the 90-day LIBOR and reset
periodically, decreased 49 bps in 2019 compared to 2018 primarily due to an increase in capitalized interest associated with the
ongoing construction during 2019 of our corporate headquarters.
The increase in average earning assets for 2019 compared to 2018 was due to increases in the average balance of non-purchased
loans, partially offset by a decrease in the average balance of purchased loans and investment securities. Average non-purchased loans
increased $1.82 billion, or 13.0%, to $15.86 billion for 2019 compared to 2018. Average purchased loans decreased $0.97 billion, or
36.9%, to $1.66 billion for 2019 compared to 2018, primarily due to continued paydown and payoff activity in that portfolio. Average
investment securities decreased $95.6 million, or 3.6%, to $2.59 billion for 2019 compared to 2018.
47
2018 compared to 2017
Net interest income for 2018 increased 8.0% to $896.1 million compared to $829.9 million for 2017. Net interest margin
decreased 26 bps to 4.59% for 2018 compared to 4.85% for 2017. The increase in net interest income was primarily the result of the
growth in average earning assets, which increased 14.1% to $19.52 billion for 2018 compared to $17.11 billion for 2017. The decrease
in net interest margin for 2018 compared to 2017 was primarily due to the 53 bps increase in rates paid on interest bearing liabilities,
partially offset by a 14 bps increase in yield on average earning assets.
Yields on average earning assets increased to 5.66% for 2018 compared to 5.52% for 2017 primarily due to an increase in yield
on our non-purchased loan portfolio. This increase was partially offset by decreases in yield on our purchased loan portfolio and our
aggregate investment securities portfolio. The yield on our portfolio of non-purchased loans increased 57 bps to 6.11% for 2018
compared to 5.54% for 2017. This increase was primarily due to recent increases in the federal funds target rate, WSJ Prime and
LIBOR. At December 31, approximately 76% of our non-purchased loans were variable interest rate loans and generally reprice with
movements in LIBOR or the WSJ Prime. The yield on our purchased loan portfolio decreased three bps to 6.59% for 2018 compared
to 6.62% for 2017. The yield on our purchased loan portfolio is significantly affected by both the volume and timing of early payoffs
and paydowns which typically result in any remaining purchase accounting valuation amounts treated as yield adjustments. Because
the volume and timing of purchased loan payoffs and paydowns may vary significantly from period to period, the yield on such loans
will also vary from period to period. At December 31, 2018, approximately 43% of our purchased loan portfolio contained loans with
variable interest rates. The yield on our aggregate investment securities portfolio for 2018 decreased 57 bps to 2.63% compared to
3.20% for 2017. This decrease was primarily the result of (i) the change in mix from tax-exempt securities to taxable securities and
(ii) the lower tax equivalent yield as a result of the Tax Act. Beginning in 2017 and continuing in 2018, we took steps to add on-
balance sheet liquidity and to position our investment securities portfolio for a rising interest rate environment and lower tax rates,
including efforts to maintain or reduce average maturities, modified duration, and the portion of our portfolio invested in tax-exempt
securities. These efforts have been dilutive to both our yield on investment securities and our net interest margin.
The overall increase in rates on average interest bearing liabilities, which increased 53 bps for 2018 compared to 2017, was
primarily due to increases in rates on interest bearing deposits, which increased 54 bps for 2018 compared to 2017. The increase in
rates on our interest bearing deposits, the largest component of our interest bearing liabilities, was primarily due to recent increases in
the federal funds target rate and increased competition for deposits. To the extent that deposit competition continues or there are future
increases in the federal funds target rate, we would expect to experience further increases in the cost of our interest-bearing deposits in
future periods.
Our other borrowing sources include (i) repos, (ii) other borrowings, (iii) subordinated notes and (iv) subordinated
debentures. The rates on repos increased 60 bps in 2018 compared to 2017 primarily due to recent increases in the federal funds target
rate. The rates on our other borrowing sources decreased 26 bps for 2018 compared to 2017, primarily as a result of an increase in
capitalized interest associated with the ongoing construction during 2018 of our new corporate headquarters, partially offset by recent
increases in the federal funds target rate. Our subordinated notes consist of $225 million in aggregate principal amount of 5.50%
fixed-to-floating rate subordinated notes. The rate on these subordinated notes includes the amortization of debt issuance costs over
the estimated holding period of seven years. The rates paid on our subordinated debentures, which are tied to a spread over the 90-day
LIBOR and reset periodically, increased 98 bps in 2018 compared to 2017 primarily due to increases in LIBOR on the applicable reset
dates.
The increase in average earning assets for 2018 compared to 2017 was due to increases in the average balance of non-purchased
loans and investment securities, partially offset by a decrease in purchased loans. Average non-purchased loans increased $3.06
billion, or 27.9%, to $14.04 billion for 2018 compared to 2017, primarily due to growth in loan fundings, partially offset by the
continued elevated levels of paydowns. Average investment securities increased $808 million, or 43.2%, to $2.68 billion for 2018
compared to 2017. The increase in the average balance of investment securities was primarily due to adding on-balance sheet
liquidity and positioning our portfolio for a rising interest rate environment and lower federal income tax rates. Average purchased
loans decreased $1.54 billion, or 36.9%, to $2.63 billion for 2018 compared to 2017, primarily due to continued paydown and payoff
activity in that portfolio.
48
The following table sets forth certain information relating to our average balances of assets and liabilities and our net interest
income for the periods indicated.
Average Consolidated Balance Sheets and Net Interest Analysis
2019
Average
Balance
Income/
Expense
Yield/
Rate
Year Ended December 31,
2018
2017
Average
Balance
(Dollars in thousands)
Income/
Expense
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 – 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
or more
Other time deposits
Total interest bearing
deposits
Repurchase agreements with
customers
Other borrowings(1)
Subordinated notes
Subordinated debentures(1)
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
$
353,528 $
6,758 1.91 % $
160,148 $
3,039 1.90 % $
81,504 $
656 0.81 %
2,099,522
485,946
52,812 2.52 2,143,455
537,616
18,041 3.71
50,021 2.33 1,158,519 25,460 2.20
714,329 34,508 4.83
20,497 3.81
15,861,797 982,430 6.19 14,040,952 858,466 6.11 10,979,369 607,925 5.54
1,661,205 106,908 6.44 2,633,271 173,465 6.59 4,175,146 276,499 6.62
20,461,998 1,166,949 5.70 19,515,442 1,105,488 5.66 17,108,867 945,048 5.52
2,297,372
$ 22,759,370
2,545,797
$ 19,654,664
2,395,813
$ 21,911,255
$ 9,039,984 $ 126,685 1.40 % $ 9,983,075 $ 118,771 1.19 % $ 8,587,404 $ 53,496 0.62 %
3,449,197
2,872,676
73,336 2.13 3,183,108
58,337 2.03 1,651,960
47,691 1.50 3,164,843 31,222 0.99
20,155 1.22 1,560,035 11,365 0.73
15,361,857 258,358 1.68 14,818,143 186,617 1.26 13,312,282 96,083 0.72
13,502
94,399
223,469
119,629
50 0.37
1,531 1.62
12,757 5.71
5,664 4.73
101,682
166,937
223,089
119,076
785 0.77
3,017 1.81
12,757 5.72
6,211 5.22
75,915
62,988
132 0.17
1,305 2.07
222,705 12,620 5.67
5,024 4.24
118,515
15,812,856 278,360 1.76 15,428,927 209,387 1.36 13,792,405 115,164 0.83
2,753,634
2,695,623
2,652,895
217,809
18,784,299
3,971,952
3,119
185,035
18,309,585
3,598,628
3,042
78,684
16,523,984
3,127,576
3,104
$ 22,759,370
$ 21,911,255
$ 19,654,664
$ 888,589
$ 896,101
$ 829,884
4.34 %
4.59 %
4.85 %
(1) The interest expense and rates for “other borrowings” and “subordinated debentures” were impacted by interest capitalized, primarily for
our corporate headquarters facility that is currently under construction. Capitalized interest included in “other borrowings” totaled $0.9
million in 2019, $0.6 million in 2018 and $0.2 million in 2017. Capitalized interest included in “subordinated debentures” totaled $0.9
million in 2019 and none in 2018 or 2017. In the absence of this interest capitalization, these rates on other borrowings would have been
2.58% in 2019, 2.19% in 2018 and 2.44% in 2017 and the rate on subordinated debentures would have been 5.48 % for 2019.
49
Average balances in the previous table are derived from daily average balances for such assets and liabilities. The yields and
rates are derived by dividing interest income or interest expense by the average balance of the related assets or liabilities, respectively.
The average balances of investment securities are computed based on amortized cost adjusted for unrealized gains and losses on
investment securities AFS and other-than-temporary impairment writedowns, if any. The yields on investment securities include
amortization of premiums and accretion of discounts. The average balance of non-purchased loans and purchased loans includes loans
on which we have discontinued accruing interest. The yields on non-purchased loans and purchased loans without evidence of credit
deterioration at date of acquisition include late fees, any prepayment penalties, yield maintenance or minimum interest provisions on
loan repayments and amortization or accretion of certain deferred fees, origination costs, dealer fees (for non-purchased indirect
marine and RV loans) and, for such purchased loans, accretion or amortization of any purchase accounting yield adjustment. The
yields on purchased loans with evidence of credit deterioration at date of acquisition includes accretion of the net present value of
expected future cash flows using the effective yield method over the term of the loans and include late fees and any prepayment
penalties. Interest expense and rates on our other borrowing sources and our subordinated debentures are presented net of interest
capitalized on construction projects and include the amortization of debt issuance costs, if any. Interest expense on subordinated notes
includes amortization of debt issuance costs. The interest expense on the subordinated debentures assumed through an acquisition
includes the amortization of any purchase accounting adjustments.
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
2019 over 2018
Yield/
Rate
Volume
Net
Change
(Dollars in thousands)
Volume
2018 over 2017
Yield/
Rate
Net
Change
Increase (decrease) in:
Interest income – FTE:
Interest earning deposits and federal funds
sold
Investment securities:
Taxable
Tax-exempt – FTE
Non-purchased loans – FTE
Purchased loans
Total interest income – FTE
Interest expense:
Savings and interest bearing transaction
Time deposits of $100 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
$
3,696 $
23 $
3,719 $
1,493 $
890 $
2,383
(1,105 )
(1,918 )
112,776
(62,557 )
50,892
3,896
(538 )
22,985
2,791
(6,739 )
(2,456 )
11,188 123,964 187,186
(66,557 ) (101,570 )
(4,000 )
61,461 103,355
10,569
24,561
1,576
(7,272 )
(14,011 )
63,355 250,541
(1,464 ) (103,034 )
57,085 160,440
(13,216 )
5,657
24,790
(324 )
(1,178 )
22
27
15,778
21,130
19,988
13,392
(411 )
(308 )
(22 )
(574 )
53,195
$ 35,114 $ (42,626 ) $
65,275
7,914
16,469
25,645
8,790
38,182
653
(735 )
1,712
(1,486 )
137
—
1,187
(547 )
68,973
94,223
(7,512 ) $ 83,228 $ (17,011 ) $ 66,217
16,605
273
1,122
198
1,879
21
29
20,127
48,670
16,196
7,668
455
(167 )
116
1,158
74,096
Our non-interest income consists primarily of service charges on deposit accounts, trust income, BOLI income, other income
from purchased loans, loan service, maintenance and other fees and net gains on investment securities and from sales of other assets.
50
2019 compared to 2018
Non-interest income for 2019 decreased 0.2% to $107.5 million compared to $107.8 million for 2018.
Service charges on deposit accounts, the largest component of our non-interest income, increased 5.6% to $41.8 million in 2019
compared to $39.5 million in 2018. This increase was primarily due to net growth in the number of core checking accounts during
recent quarters.
Trust income increased 8.9% to $7.6 million in 2019 compared to $6.9 million in 2018. This increase in trust income was
primarily due to growth in both corporate trust income and personal trust income.
BOLI income from the increases in cash surrender value was $20.7 million in both 2019 and 2018. BOLI income from death
benefits was $3.2 million in both 2019 and 2018. BOLI income in the form of increases in cash surrender value helps to offset a
portion of employee benefit costs.
Other income from purchased loans decreased 52.7% to $3.7 million in 2019 compared to $7.8 million in 2018. 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 purchased loan pre-payments and
payoffs, this income item may vary significantly from period to period. Also, concurrent with the adoption of Accounting Standards
Update (“ASU”) 2016-13, effective January 1, 2020, most of our income previously reported as “Other income from purchased loans”
will be included in interest income on purchased loans in future periods. See further discussion of ASU 2016-13 in the MD&A under
“Risk Elements – Credit Risk Management – Credit Management Actions – 2020.”
Loan service, maintenance and other fees, which includes unused line fees and other fees on our non-purchased loans that are
not considered yield adjustments, decreased 12.0% to $17.9 million in 2019 compared to $20.4 million in 2018. Loan service,
maintenance and other fees include unused line of credit fees, asset management fees, certain underwriting fees and various other fees
on non-purchased loans that are not considered yield adjustments. While income from these items may vary significantly from period
to period, we generally expect the income from these items to continue to decrease in 2020.
We had net gains from the sale of investment securities of $0.7 million in 2019 compared to essentially no net gains during
2018. Gains on sales of other assets were $2.2 million in both 2019 and 2018.
2018 compared to 2017
Non-interest income for 2018 decreased 13.0% to $107.8 million compared to $123.9 million for 2017.
Service charges on deposit accounts, the largest component of our non-interest income, decreased 7.7% to $39.5 million in 2018
compared to $42.9 million in 2017. This decrease was primarily due to the effect of the Durbin Amendment, which limits the amount
of interchange fees that may be charged for debit and prepaid card transactions. We became subject to the provisions of the Durbin
Amendment effective July 1, 2017.
Trust income increased 3.6% to $6.9 million in 2018 compared to $6.7 million in 2017. This increase in trust income was
primarily due to growth in personal trust income, partially offset by a decrease in corporate trust income.
BOLI income increased 28.0% to $23.9 million in 2018 compared to $18.7 million in 2017 primarily due to the purchase of $45
million of BOLI during the first and second quarters of 2018 and the purchase of $60 million of BOLI during the fourth quarter of
2017. Additionally, our BOLI income included $3.2 million of tax-exempt BOLI death benefits in 2018 compared to $0.4 million of
such benefits in 2017. BOLI income in the form of increases in cash surrender value helps to offset a portion of employee benefit
costs.
Other income from purchased loans decreased 42.2% to $7.8 million in 2018 compared to $13.5 million in 2017. 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 purchased loan pre-payments and
payoffs, this income item may vary significantly from period to period, but is generally expected to decrease in future periods as our
portfolio of purchased loans decreases.
Loan service, maintenance and other fees, which includes unused line fees and other fees on our non-purchased loans that are
not considered yield adjustments, increased 29.7% to $20.4 million in 2018 compared to $15.7 million in 2017. The increase in loan
51
service, maintenance and other fees during 2018 compared to 2017 was due to our continued efforts to include provisions for such fees
in many of our larger non-purchased loan transactions.
We had essentially no net gains from the sale of investment securities during 2018, compared to $4.0 million in 2017. Gains on
sales of other assets were $2.2 million in 2018 compared to $5.6 million in 2017. Net gains on sales of other assets for 2018 included
a charge of $1.26 million related to the sale of our corporate aircraft.
The following table presents non-interest income for the years indicated.
Non-Interest Income
Service charges on deposit accounts
Trust income
BOLI income:
Increase in cash surrender value
Death benefits
Other income from purchased loans, net
Loan service, maintenance and other fees
Net gains on investment securities
Gains on sales of other assets
Other
Total non-interest income
Non-Interest Expense
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
41,774 $
7,554
39,544 $
6,935
42,853
6,691
20,715
3,194
3,684
17,917
713
2,233
9,743
107,527 $
20,700
3,211
7,784
20,354
17
2,219
7,011
107,775 $
18,246
431
13,456
15,696
4,033
5,553
16,899
123,858
$
Non-interest expense consists of salaries and employee benefits, net occupancy and equipment expense and other operating
expenses.
2019 compared to 2018
Non-interest expense increased 5.4% to $401.1 million in 2019 compared to $380.8 million in 2018. The increase in our non-
interest expense in 2019 compared to 2018 was primarily attributable to our continued expansion and enhancement of our
infrastructure for information technology, cybersecurity, information systems, business resilience, enterprise risk management, credit
risk, internal audit, compliance, Bank Secrecy Act (“BSA”) and anti-money laundering (“AML”) monitoring activities, training and a
number of other important areas, including expanding our human and physical infrastructure to serve low-to-moderate income and
majority-minority markets and customer segments (collectively, “our infrastructure initiatives”). We expect these expenses to remain
elevated in 2020.
Salaries and employee benefits, our largest component of non-interest expense, increased 13.1% to $192.9 million in 2019
compared to $170.5 million in 2018. The increase in salaries and benefits for 2019 compared to 2018 is primarily due to employees
added as we continue to grow, including our focus on our infrastructure initiatives as discussed above. We had 2,774 full-time
equivalent employees at December 31, 2019, compared to 2,563 full-time equivalent employees at December 31, 2018.
Net occupancy and equipment expense increased 4.7% to $59.0 million in 2019 compared to $56.4 million in 2018. At
December 31, 2019 we had 254 offices compared to 251 at December 31, 2018.
Other operating expenses decreased 3.02% to $149.3 million in 2019 compared to $153.9 million in 2018. The decrease in
other operating expense in 2019 compared to 2018 is primarily attributable to our name change and strategic rebranding initiatives
during 2018.
Our efficiency ratio (non-interest expense divided by the sum of net interest income–FTE and non-interest income) was 40.3%
for 2019 compared to 37.9% for 2018. The increase in our efficiency ratio for 2019 compared to 2018 was primarily due to the
increase in non-interest expense due to our infrastructure initiatives discussed above, including the increase in the number of full-time
equivalent employees, and the decrease in our non-interest income-FTE in 2019 compared to 2018.
52
2018 compared to 2017
Non-interest expense increased 14.5% to $380.8 million in 2018 compared to $332.7 million in 2017. The increase in our non-
interest expense in 2018 compared to 2017 was primarily attributable to approximately $11.7 million incurred during 2018 (none in
2017) of non-interest expense related to our name change and strategic rebranding initiatives.
Salaries and employee benefits, our largest component of non-interest expense, increased 12.0% to $170.5 million in 2018
compared to $152.2 million in 2017. The increase in salaries and benefits for 2018 compared to 2017 is primarily due to employees
added as we continue to grow, including our focus on our infrastructure initiatives as discussed above. We had 2,563 full-time
equivalent employees at December 31, 2018, compared to 2,400 full-time equivalent employees at December 31, 2017.
Net occupancy and equipment expense increased 5.9% to $56.4 million in 2018 compared to $53.2 million in 2017. At
December 31, 2018 we had 251 offices compared to 253 at December 31, 2017.
Other operating expenses increased 20.9% to $153.9 million in 2018 compared to $127.3 million in 2017. The increase in other
operating expense in 2018 compared to 2017 is primarily attributable to our name change and strategic rebranding initiatives and our
infrastructure initiatives.
Our efficiency ratio (non-interest expense divided by the sum of net interest income–FTE and non-interest income) was 37.9%
for 2018 compared to 34.9% for 2017. Because non-interest income–FTE is a component of the calculation of our efficiency ratio, the
decrease in the federal income tax rate for 2018 as a result of the Tax Act reduced our FTE adjustment for tax-exempt interest income
which resulted in a modest increase in our efficiency ratio. Additionally, our name change and strategic rebranding initiatives and, to
a lesser extent, our infrastructure initiatives increased our efficiency ratio for 2018 compared to 2017.
The following table presents non-interest expense for the years indicated.
Non-Interest Expense
Salaries and employee benefits
Net occupancy and equipment expense
Other operating expenses:
Professional and outside services
Software and data processing
Deposit insurance and assessments
Travel and meals
Telecommunication services
Postage and supplies
Advertising and public relations
ATM expense
Loan collection and repossession expense
Writedowns of foreclosed assets
Writedowns of signage due to strategic rebranding
Amortization of intangibles
Other
Total non-interest expense
Income Taxes
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
192,851 $
59,018
170,478 $
56,362
152,194
53,198
33,030
19,535
13,425
11,230
10,583
8,684
7,242
4,626
2,818
2,419
—
11,918
23,751
401,130 $
35,867
13,729
14,740
9,650
13,080
9,144
11,557
4,227
3,302
2,996
4,915
12,579
18,126
380,752 $
32,441
10,126
13,114
8,477
13,935
7,769
5,989
5,725
5,303
3,488
—
12,580
8,333
332,672
$
Our provision for income taxes was $138.4 million in 2019 compared to $137.0 million in 2018 and $158.6 million in 2017.
Our effective income tax rates were 24.5% for 2019, 24.7% for 2018 and 27.3% for 2017. The slight decrease in our effective income
tax rate for 2019 compared to 2018 was primarily a result of a decrease in our state income taxes. The decrease in the effective tax
rate for 2018 compared to 2017 is primarily due to a reduction in the federal tax rate from 35% for 2017 to 21% for 2018 as a result of
the Tax Act. This decrease was partially offset by our reduction, in the fourth quarter of 2017 as a result of the Tax Act, of our net
deferred tax liabilities to reflect the federal tax rate of 21% applicable to the periods in which these net deferred tax liabilities are
expected to reverse.
53
The effective tax rates were also affected by various other factors including adjustments to the state income tax apportionment
factors based on changes in business activity and lending volumes in higher income tax rate states and municipalities, changes in
certain non-deductible executive compensation expenses and various other factors related to non-taxable income and non-deductible
expenses. A reconciliation between the statutory federal income tax rates and our effective income tax rates for 2019, 2018 and 2017
is included in note 13 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of
this Annual Report on Form 10-K.
RISK ELEMENTS
Risk is inherent in substantially all of the Bank’s operations, and our business exposes us to strategic risk, credit risk, market
risk, liquidity risk, operational risk, legal and compliance risk and reputational risk. We use an enterprise-wide risk management
framework to identify, measure, monitor, manage and report risks that affect or could affect the achievement of our strategic, financial
and other goals and objectives. Accordingly, risk management is an essential element in managing our operations and is a key
determinant of our overall performance. Our Board of Directors (the “Board”) is responsible for approving our overall risk
management framework, including setting our risk appetite for the Basel risk categories, and establishing risk tolerances for each of
our key risks. The Board Risk Committee (“BRC”), which is a board-level committee, has been assigned oversight responsibility for
our risk management processes. The BRC meets at least quarterly to monitor and review our various enterprise risk management
policies and activities, review and approve our overall risk posture, and such other actions as detailed in its charter document. The
BRC has appointed the Executive Risk Council (“ERC”), which is comprised of senior executives of the Bank and is chaired by the
Chief Risk Officer (“CRO”), to assist BRC in the oversight of our enterprise risk management processes and activities. The ERC,
pursuant to its charter, has responsibility for review and approval of detailed risk management processes and procedures, monitoring
each of our key performance indicators and key risk indicators against our Board-approved risk thresholds, assessing current and
emerging risks, monitoring our risk culture, overseeing compliance with regulatory expectations and requirements, and various other
risk management functions and activities.
Our most significant risk exposure has traditionally been credit risk from the extension of credit to our customers. In addition to
credit risk, we are also exposed to risk from various other areas including liquidity risk, market and interest rate risk, strategic risk,
legal and compliance risk (including regulatory risk), reputational risk and operational risk (including information technology risk,
model risk, third party vendor risk, legal risk and cyber security risk). Both our BRC and our ERC review the overall framework,
policies, procedures and processes employed by us to manage and monitor each of these risks, including strategies for reducing such
risks to appropriate levels consistent with Board-approved risk appetite. Additionally, we utilize various other committees and
management councils to monitor risk for each of these specific risk categories. The activities of such committees and councils are
reviewed and approved by ERC, BRC and/or the Board.
Clearly defined roles and responsibilities are critical to the effective management of risk. We utilize the three lines of defense
concept to clearly designate risk management activities throughout the Bank.
•
•
First line of defense activities provide for the identification, acceptance and ownership of risks. These defense activities are
typically executed by various lines of business personnel and owners.
Second line of defense activities provide for objective oversight of our risk-taking activities and assessment of our
aggregate risk levels. These defense activities are executed under the leadership and guidance of our Corporate Risk
Management Group (“CRMG”) and our CRO, who reports directly to our BRC.
• Third line of defense activities provide for independent reviews and assessments of risk management practices across the
Bank. These defense activities are executed by our Internal Audit department, which reports directly to our Audit
Committee.
While these various risk management activities help us to identify, measure, monitor, manage and report risks, such activities
are not intended to, nor can they eliminate, all risk.
Credit Risk Management
Overview. Credit risk is defined as the risk that arises from the potential that a borrower or counterparty will fail to perform its
financial or contractual obligations. Credit risk arises primarily from our lending activities, including our off-balance sheet credit
instruments comprised primarily of construction loans that have closed but have not yet funded. The Board is responsible for
approving overall credit policies relating to the management of credit risk, along with overseeing and monitoring credit risk. Our
lending policies also contain various measures to limit concentration exposures, including customer and CRE exposures for both
funded balances and unfunded balances in the aggregate, as well as by property type and geography. The Directors’ Loan Committee
(“DLC”) has primary responsibility for monitoring our credit approval process. DLC consists of five or more directors and is chaired
54
by our Chief Credit Officer (“CCO”). Loans and aggregate loan relationships exceeding $20 million up to the limits established by
our Board must be approved by the DLC. At least quarterly, our Board, BRC and/or DLC reviews summary reports of past due loans,
internally classified and watch list loans, lending concentration reports, and various other loan reports.
Credit Management Actions. The daily administration of our lending function is the responsibility of the Chief Executive
Officer (“CEO”), the CCO and the Chief Lending Officer (“CLO”). We maintain a tiered loan limit authorization system. Loan
authority is granted to the CEO, CCO and CLO by the Board. The loan authorities of other lending officers are granted by the DLC on
the recommendation of appropriate senior officers in amounts commensurate with the officer’s skill level and knowledge.
We have detailed, comprehensive standards for evaluating credit risk, both at the point of origination and thereafter, and we
have a comprehensive internal grading system that is used to identify credit risk at the individual loan level. Oversight of credit risk is
provided through loan policy, clearly defined processes and detailed procedures. These policies, procedures and processes place
emphasis on strong underwriting standards and detection of potential credit problems in order to develop and implement any necessary
action plan(s) on a timely basis to mitigate potential losses and are carried out by our lenders and lending support personnel, our credit
administration group, our underwriters and various other officers and personnel in the Bank that have credit management
responsibilities. Additionally, our policies, procedures and processes are subject to review by our Credit Risk Management (“CRM”)
group (second line oversight), our BRC and periodic reviews by our Internal Audit group (third line oversight).
Our CRM function is separate from our lending function and provides second line oversight. CRM is responsible for providing
an independent evaluation of our loan portfolio, including detailed credit reviews performed for the purpose of reviewing the
adequacy of documentation, compliance with loan policy and other credit policies, reviewing individual loan grading, evaluating asset
quality, performing and reporting to ERC and BRC credit risk analytics (which includes assessing the trend of credit risk metrics,
assessing any trends or material transitions of our internal risk ratings or credit grading of individual loan portfolios, and various other
risk analytics), and reviewing the effectiveness of credit administration, among other items. CRM prepares reports that document their
credit risk oversight activities, including identification of underwriting or other deficiencies in the loan approval or credit monitoring
process, establishing recommendations for improvement and outlining management’s proposed action plan(s) for curing the identified
deficiencies. Internal oversight of the CRM function is provided by the Credit Risk Management Council (“CRMC”), which is chaired
by the Managing Director of CRM. The reports produced by CRM are provided to and reviewed by CRMC, ERC and BRC.
Our Internal Audit group performs periodic reviews of various lending and credit-related activities, including underwriting,
closing and funding procedures, credit and asset administration, among others. Internal Audit prepares reports documenting such
reviews, including recommendations for improvement and management’s proposed action plan(s) for remediating such
recommendations. These reports are provided to and reviewed by our Audit Committee.
At December 31, 2019, our total loan portfolio was $17.53 billion, an increase of 2.4% from $17.12 billion at December 31,
2018. At December 31, 2019, our total loan portfolio consisted of 72.8% real estate loans, 3.8% commercial and industrial loans,
16.8% consumer loans and 6.6% 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 outstanding, as of the dates indicated, are reflected in the following table.
Loan Portfolio
2019
2018
December 31,
2017
(Dollars in thousands)
2016
2015
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Total real estate
Commercial and industrial
Consumer
Other
Total loans
230,076
$
998,632 $ 1,049,460 $ 1,174,427 $ 1,259,289 $ 737,206
3,956,579 4,319,388 4,478,876 4,665,401 3,146,413
6,391,429 6,562,185 6,648,061 5,295,860 2,873,398
124,857
94,358
165,088
1,194,192 1,116,026
744,005 580,325
12,770,908 13,212,147 12,959,881 12,089,412 7,431,700
577,335 439,538
35,232
2,934,534 2,345,863 1,472,593 1,028,991
1,164,649
867,377 428,201
$ 17,532,043 $ 17,117,823 $ 16,043,029 $ 14,563,115 $ 8,334,671
150,003
508,514
738,225
872,330
661,952
823,417
736,396
55
Included in “other” loans at December 31, 2019, 2018, 2017, 2016 and 2015 are loans totaling approximately $1.08 billion,
$656 million, $830 million, $835 million and $394 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
instructions for the Federal Financial Institutions Examination Council 041 Consolidated Reports of Condition and Income (“Call
Report”), 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.
Our credit risk management strategies include efforts to diversify our loan portfolio and avoid the risk of undue concentrations
of credit in a particular collateral type, geography or with an individual customer. While our loan portfolio is diversified, we do have
concentrations in commercial real estate (“CRE”) lending. Our Board has adopted and we adhere to various concentration limits on
CRE lending, including limits on CRE lending in various geographies and Metropolitan Statistical Areas (“MSAs”). All of these
limits are monitored and revised as necessary based on the results of our annual CRE stress testing activities and other factors.
The amount of both the funded and unfunded balances of our top ten largest geographies and MSAs for real estate loans, as of
the dates indicated, are included in the following table.
Top Ten Geographies and MSAs for Real Estate Loans
Geography or MSA
December 31, 2019:
New York–Newark–Jersey City, NY–NJ–PA MSA
Miami–Fort Lauderdale–West Palm Beach, FL MSA
Los Angeles–Long Beach–Anaheim, CA MSA
Dallas–Fort Worth–Arlington, TX MSA
Tampa–St. Petersburg–Clearwater, FL MSA
Chicago–Naperville–Elgin, IL–IN–WI MSA
Atlanta–Sandy Springs–Roswell, GA MSA
Phoenix–Mesa–Scottsdale, AZ MSA
San Francisco–Oakland–Hayward, CA MSA
Washington–Arlington–Alexandria, DC–VA–MD–WV–MSA
All other geographies
Total Real Estate Loans
December 31, 2018:
New York–Newark–Jersey City, NY–NJ–PA MSA
Miami–Fort Lauderdale–West Palm Beach, FL MSA
Los Angeles–Long Beach–Anaheim, CA MSA
Dallas–Fort Worth–Arlington, TX MSA
Atlanta–Sandy Springs–Roswell, GA MSA
Chicago–Naperville–Elgin, IL–IN–WI MSA
Denver–Aurora–Lakewood, CO MSA
Phoenix–Mesa–Scottsdale, AZ MSA
Little Rock–North Little Rock–Conway, AR MSA
San Francisco–Oakland–Hayward, CA MSA
All other geographies
Total Real Estate Loans
Funded Balance
Unfunded
Balance
(Dollars in thousands)
Total
Commitment
$
3,398,399 $
1,047,660
702,184
809,761
407,898
375,933
606,212
178,756
292,690
220,354
4,731,061
$ 12,770,908 $
5,577,839
2,179,440 $
2,107,029
1,059,369
1,464,317
762,133
1,182,461
372,700
1,036,535
628,637
926,370
550,437
808,337
202,125
607,979
429,223
601,489
308,799
588,282
367,928
2,893,321
7,624,382
9,754,112 $ 22,525,020
$
3,263,281 $
1,244,251
369,108
766,876
785,244
589,607
475,632
96,979
476,393
152,265
4,992,511
6,267,692
2,824,324
1,554,128
1,058,382
1,037,775
921,082
714,061
556,386
525,544
486,689
7,682,415
$ 13,212,147 $ 10,416,331 $ 23,628,478
3,004,411 $
1,580,073
1,185,020
291,506
252,531
331,475
238,429
459,407
49,151
334,424
2,689,904
Loans originated to acquire promissory notes from non-depository financial institutions are typically collateralized by an
assignment of the promissory note and all related note documents including mortgages, deeds of trust, etc. and the underlying property
may be located in one or more of the geographies or MSAs listed above. The funded balance of these loans are reported as “other”
loans in accordance with FDIC instructions for the Call Report and are excluded from the above table.
56
In addition to the top ten geographies and MSAs shown above, as of December 31, 2019, we had 73 additional geographies and
MSAs that contain total committed balances (both funded and unfunded) of $10 million or more, compared to 87 additional
geographies and MSAs at December 31, 2018.
Given that we have concentrations in CRE lending (i.e., non-farm/non-residential and construction/land development lending),
we have provided further detail on these two groups of loans. The funded 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
Office, including medical offices
Hotels and motels
Retail, including shopping centers and strip centers
Churches and schools
Mixed use properties
Manufacturing and industrial facilities
Restaurants and bars
Nursing homes and assisted living centers
Gasoline stations and convenience stores
Office warehouse, warehouse and mini-storage
Hospitals, surgery centers and other medical
Golf courses, entertainment and recreational facilities
Other non-farm/non-residential
Total
2019
Amount
$
949,119
857,276
431,970
311,027
295,423
264,048
178,307
125,353
88,158
69,512
29,533
29,165
327,688
$ 3,956,579
December 31,
%
(Dollars in thousands)
Amount
2018
%
24.0 % $ 1,005,946
978,959
21.7
560,222
10.9
285,044
7.9
234,887
7.5
274,569
6.7
162,573
4.5
210,869
3.2
100,416
2.2
47,513
1.8
41,479
0.7
33,450
0.7
383,461
8.2
100.0 % $ 4,319,388
23.3 %
22.7
13.0
6.6
5.4
6.4
3.8
4.9
2.3
1.1
1.0
0.8
8.7
100.0 %
The funded 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
2019
Amount
$
237,614
Amount
%
(Dollars in thousands)
3.7 % $
203,127
2018
%
352,100
532,139
5.5
8.3
407,502
576,130
3.1 %
6.2
8.8
5,844
0.1
11,342
0.2
2,031,251
135,377
827,122
2,269,982
$ 6,391,429
2.1
31.8 2,189,475
130,310
12.9 1,616,408
35.6 1,427,891
100.0 % $ 6,562,185
33.4
2.0
24.6
21.7
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, among
others. 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
57
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. As a result of this practice, the borrower’s cash equity
typically goes toward the purchase of the land and early stage hard costs and soft costs. This results in our funding the loan later as the
project progresses, and accordingly, we typically fund the majority of the construction period interest through loan advances.
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 advance
interest reserves as part of the funding process, we believe that the borrowers in effect have in most cases provided for these sums as
part of their initial equity contribution. During the years ended December 31, 2019, 2018 and 2017, there were no situations where
additional interest reserves were advanced outside of the terms of the contractual loan agreement to avoid such loan from becoming
nonperforming. At December 31, 2018 (none at December 31, 2019 or 2017), we had $10.6 million of construction and development
loans with interest reserves that were nonperforming.
During the years ended December 31, 2019, 2018 and 2017, we recognized approximately $292 million, $263 million and $180
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 $297 million, $254 million, and $172
million, respectively, during the years ended December 31, 2019, 2018 and 2017.
The maximum committed balance of all construction and development loans which provide for the use of interest reserves at
December 31, 2019 was approximately $14.8 billion, of which $6.0 billion was outstanding at December 31, 2019 and $8.8 billion
remained to be advanced. The weighted average LTC on such loans, assuming such loans are ultimately fully advanced, was
approximately 51%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately
fully advanced, was approximately 49%. The weighted average LTV ratio on such loans, based on the most recent appraisals and
assuming such loans are ultimately fully advanced, was approximately 43%.
Between 2010 and 2016, we made fifteen acquisitions and continue to have substantial balances of purchased loans. Purchased
loans, which are the remaining loans from our fifteen acquisitions, accounted for 7.5% of our total loan portfolio at December 31,
2019 (11.9% at December 31, 2018), and will continue to decrease as purchased loans are repaid. 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,
2019
2018
(Dollars in thousands)
$
$
1,243,327 $
(17,022 )
1,226,305
101,741
(20,542 )
81,199
1,307,504 $
1,943,962
(27,580 )
1,916,382
157,853
(30,203 )
127,650
2,044,032
58
The following table presents a summary, during the years indicated, of the activity of our purchased loans with evidence of
credit deterioration at the date of acquisition.
Purchased Loan Activity with Evidence of Credit Deterioration at Date of Acquisition
Balance – beginning of year
Accretion
Transfer to foreclosed assets
Net payments received
Loans sold
Net charge-offs
Other activity, net
Balance – end of year
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
$
127,650 $
15,060
(436 )
(59,741 )
—
(1,327 )
(7 )
81,199 $
175,221 $
24,459
(1,621 )
(69,325 )
—
(1,095 )
11
127,650 $
241,619
38,925
(2,678 )
(98,815 )
(1,717 )
(918 )
(1,195 )
175,221
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
Accretable difference – beginning of year
Transfers to foreclosed assets
Purchased loans paid off
Cash flow revisions as a result of renewals and/or modifications
Accretion
Accretable difference – end of year
$
$
2019
Year Ended December 31,
2018
(Dollars in thousands)
45,182
$
(114 )
—
15,393
(24,459 )
36,002
$
$
$
36,002
(48 )
—
2,918
(15,060 )
23,812
2017
65,152
(300 )
(352 )
19,607
(38,925 )
45,182
During the years ended December 31, 2019, 2018 and 2017, we recognized accretion income totaling $25.2 million, $43.9
million and $78.6 million, respectively, on our purchased loan portfolio. The valuation discounts on our purchased loan portfolio
totaled $37.6 million at December 31, 2019 and $57.8 million at December 31, 2018.
Nonperforming Assets
Nonperforming assets consist of (1) nonaccrual loans, (2) accruing loans 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 obligations or upon foreclosure. Purchased loans are not
included in nonperforming assets, except for their inclusion in total assets.
The accrual of interest on non-purchased loans and purchased loans without evidence of credit deterioration at the date of
acquisition is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. We
generally place a loan, excluding purchased loans with evidence of credit deterioration at the date of acquisition, on nonaccrual status
when such loan 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 contractually past due 90 days or more if such loans are both well
secured and in the process of collection. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected
is reversed and charged against interest income. Nonaccrual loans are generally returned to accrual status when payments are no
longer past due, the loan has performed in accordance with its contractual terms for a reasonable period of time (generally at least six
months), and is expected to continue to perform in accordance with its contractual terms. If a loan is determined to be uncollectible,
the portion of the principal determined to be uncollectible will be charged against the ALL. 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. Income on nonaccrual loans, including impaired loans, is recognized on a cash
basis when and if actually collected. Income on TDRs is recognized on a cash basis until such time as the TDR has performed in
accordance with its modified terms for a reasonable period of time (generally at least six months) and is expected to continue to
59
perform. Once such performance and expected performance conditions are met, the TDR is returned to accrual status but continues to
be reported as an impaired loan.
The following table presents information, excluding purchased loans, concerning nonperforming assets, including nonaccrual
loans, TDRs, and foreclosed assets as of the dates indicated.
Nonaccrual loans(1)
Accruing loans 90 days or more past due
TDRs – nonaccruing
TDRs – accruing
Total nonperforming loans
Foreclosed assets(2)
Total nonperforming assets
Nonperforming loans to total loans(3)
Nonperforming assets to total assets(3)
Nonperforming Assets
2019
2018
December 31,
2017
(Dollars in thousands)
2016
2015
$
$
19,337 $
—
3,884
656
23,877
19,096
42,973 $
0.15 %
0.18
30,884 $
—
3,878
627
35,389
16,171
51,560 $
0.23 %
0.23
12,899 $
—
—
—
12,899
25,357
38,256 $
0.10 %
0.18
14,371 $
—
—
—
14,371
43,702
58,073 $
0.15 %
0.31
13,194
—
—
—
13,194
22,870
36,064
0.20 %
0.37
(1) Excludes all nonaccrual non-purchased loans that are considered TDRs.
(2) Repossessed personal properties and real estate acquired through or in lieu of foreclosure, excluding purchased foreclosed assets, are recorded at
estimated fair value less estimated cost to sell at the date of repossession or foreclosure. Purchased foreclosed assets are 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 fair value net of estimated selling costs, if lower, until disposition.
(3) Excludes purchased loans, except for their inclusion in total assets.
The elevated level of nonaccrual loans at December 31, 2018 was primarily due to two non-purchased credits. As of December
31, 2018, these two unrelated projects located in South Carolina and North Carolina had been in our portfolio since 2007 and 2008,
and were previously classified as substandard. The combined balance of these two credits, after the charge-offs, was $20.6 million at
December 31, 2018. Both credits were past due, were on nonaccrual status and were deemed impaired at December 31, 2018. During
the second quarter of 2019, we transferred to foreclosed assets the underlying collateral securing these two credits. During the fourth
quarter of 2019, we sold the assets previously securing the South Carolina credit. The carrying value of this asset at disposition was
$9.8 million, and we recognized a gain on sale of $1.1 million. The carrying value of the assets securing the North Carolina credit was
$7.7 million at December 31, 2019.
Once a loan 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, we evaluate the underlying collateral on impaired loans 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, 2019, we had reduced the carrying value of our non-purchased loans deemed impaired (most of which were
included in nonaccrual loans) to the estimated fair value of such loans of $22.0 million. The adjustment to reduce the carrying value of
impaired loans to estimated fair value consisted of $1.5 million of partial or full charge-offs and $1.9 million of specific loan loss
allocations. Impaired non-purchased loans at December 31, 2019 and 2018, respectively, included $0.7 million and $0.6 million of
accruing loans that were determined to be TDRs. These amounts do not include the balance of, any partial or full charge-offs on, or
any specific ALL allocations related to our $10.9 million of impaired purchased loans at December 31, 2019.
60
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,
2019
2018
(Dollars in thousands)
$
$
2,201 $
3,989
12,153
—
18,343
4
749
19,096 $
823
4,407
10,628
164
16,022
31
118
16,171
The following table is a summary of activity within foreclosed assets during the periods indicated.
Activity Within Foreclosed Assets
Balance – beginning of year
Loans and other assets transferred into foreclosed assets
Sales of foreclosed assets
Writedowns of foreclosed assets
Balance – end of year
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
$
16,171 $
31,709
(26,365 )
(2,419 )
19,096 $
25,357 $
11,540
(17,891 )
(2,835 )
16,171 $
43,702
17,193
(32,050 )
(3,488 )
25,357
The following table presents information concerning the geographic location of nonperforming assets, excluding purchased
loans, at December 31, 2019. Nonperforming loans 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
North Carolina
Florida
Georgia
Texas
South Carolina
Alabama
All other
Total
Nonperforming
Loans
Foreclosed
Assets and
Repossessions
(Dollars in thousands)
Total
Nonperforming
Assets
$
$
9,197 $
1,816
3,436
3,650
2,089
1,788
198
1,703
23,877 $
5,233 $
9,250
2,703
247
692
—
513
458
19,096 $
14,430
11,066
6,139
3,897
2,781
1,788
711
2,161
42,973
61
As of December 31, 2019, 2018 and 2017, 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 $6.4 million during 2019, $3.5 million during 2018 and $3.6 million during 2017 for such loans. We also recorded provision
of $6.4 million during 2019, $3.5 million during 2018 and $3.6 million during 2017 for purchased loans. Additionally, we transferred
certain of these purchased loans to foreclosed assets. As a result of these actions, we had $10.9 million of impaired purchased loans at
December 31, 2019, $7.8 million of impaired purchased loans at December 31, 2018 and $10.0 million of impaired purchased loans at
December 31, 2017. We had $1.6 million of ALL at December 31, 2019, 2018 and 2017 to absorb probable incurred losses in our
purchased loan portfolio that had not previously been charged off.
The following table is a summary, as of the dates indicated, of impaired purchased loans.
Impaired Purchased Loans
2019
2018
December 31,
2017
(Dollars in thousands)
2016
2015
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
$
7,935 $
2,822 $
4,797 $
1,243 $
771
$
2,975
10,910 $
0.83 %
4,979
7,801 $
0.38 %
5,222
10,019 $
0.30 %
5,273
6,516 $
0.13 %
7,283
8,054
0.45 %
Allowance for Loan Losses
Our ALL was $108.5 million at December 31, 2019 compared to $102.3 million at December 31, 2018 and $94.1 million at
December 31, 2017. At December 31, 2019, 2018 and 2017, we allocated $1.6 million of ALL to our purchased loan portfolio.
Excluding purchased loans, our ALL as a percentage of total non-purchased loans was 0.66% at December 31, 2019, compared to
0.67% at December 31, 2018 and 0.73% at December 31, 2017. Excluding purchased loans, our ALL as a percentage of
nonperforming loans was 448% at December 31, 2019 compared to 284% at December 31, 2018 and 717% at December 31, 2017.
Our practice is to charge off any estimated loss as soon as we are able to identify and reasonably quantify such potential loss. The
amount of ALL and provision to the ALL is based on our analysis of the adequacy of the ALL utilizing the criteria discussed in the
Critical Accounting Policies caption of this MD&A.
The provision for loan losses for 2019 was $26.2 million, including $19.8 million for non-purchased loans and $6.4 million for
purchased loans, compared to $64.4 million in 2018, including $60.9 million for non-purchased loans and $3.5 million for purchased
loans, and $28.1 million in 2017, including $24.5 million for non-purchased loans and $3.6 million for purchased loans. The increase
in our provision for loan losses during 2018 was primarily attributable to two credits which we charged off during the third quarter of
2018.
62
The following table is an analysis of the ALL for the periods indicated.
Analysis of the ALL
Balance, beginning of period
Non-purchased loans 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
Other
Total non-purchased loans charged off
Recoveries of non-purchased loans 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
Other
Total recoveries
Net charge-offs – non-purchased loans
Purchased loans charged off
Recoveries of purchased loans previously charged off
Net charge-offs – purchased loans
Net charge-offs – total loans
Provision for loan losses:
Non-purchased loans
Purchased loans
Total provision
Balance, end of period
ALL allocated to non-purchased loans
ALL allocated to purchased loans
Total ALL
$
$
$
2019
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
2015
$
102,264 $
94,120 $
76,541 $
60,854 $
52,918
(514 )
(4,590 )
(528 )
(46 )
—
(5,678 )
(2,194 )
(3,839 )
(3,635 )
(15,346 )
(220 )
(20,540 )
(25,584 )
(97 )
—
(46,441 )
(3,139 )
(1,449 )
(3,332 )
(54,361 )
(340 )
(881 )
(1,020 )
(2 )
—
(2,243 )
(3,440 )
(689 )
(2,282 )
(8,654 )
(406 )
(323 )
(42 )
(37 )
—
(808 )
(3,261 )
(228 )
(1,744 )
(6,041 )
(794 )
(857 )
(2,760 )
(27 )
(228 )
(4,666 )
(3,803 )
(148 )
(1,474 )
(10,091 )
174
38
117
7
—
336
301
427
743
1,807
(13,539 )
(8,997 )
2,556
(6,441 )
(19,980 )
169
169
59
30
—
427
157
207
768
1,559
(52,802 )
(5,647 )
2,195
(3,452 )
(56,254 )
11
594
86
43
—
734
171
166
662
1,733
(6,921 )
(6,119 )
2,527
(3,592 )
(10,513 )
52
10
68
—
14
144
114
37
533
828
(5,213 )
(5,675 )
2,783
(2,892 )
(8,105 )
19,800
6,441
26,241
60,946
3,452
64,398
108,525 $ 102,264 $
106,925 $ 100,664 $
1,600
108,525 $ 102,264 $
1,600
24,500
3,592
28,092
94,120 $
92,520 $
1,600
94,120 $
20,500
3,292
23,792
76,541 $
74,941 $
1,600
76,541 $
86
15
83
—
—
184
326
54
563
1,127
(8,964 )
(2,982 )
467
(2,515 )
(11,479 )
15,700
3,715
19,415
60,854
59,654
1,200
60,854
63
The following is a summary of our net charge-off and various ALL ratios as of and for the periods indicated.
Net Charge-Off and ALL Ratios
2019
As of and for the Year Ended December 31,
2017
2016
2018
2015
Net charge-offs of non-purchased loans to
total average non-purchased loans(1)
Net charge-offs of purchased loans to
total average purchased loans
Net charge-offs of total loans to
total average loans
ALL for non-purchased loans to total
non-purchased loans(2)
ALL for purchased loans to total purchased loans
ALL to total loans
ALL to nonperforming loans(2)
0.09 %
0.38 %
0.06 %
0.06 %
0.18 %
0.39
0.13
0.09
0.09
0.14
0.11
0.34
0.07
0.07
0.17
0.66
0.12
0.62
448 %
0.67
0.08
0.60
284 %
0.73
0.05
0.59
717 %
0.78
0.03
0.53
521 %
0.91
0.07
0.73
452 %
(1)
(2)
Excludes purchased loans and net charge-offs related to such loans.
Excludes purchased loans and ALL allocated to such loans.
The following table sets forth the sum of the amounts of the ALL and the percentage of non-purchased loans to total non-
purchased loans as of the dates indicated. The amounts shown in the previous table are not necessarily indicative of the actual future
losses that may occur within particular categories.
Allocation of the ALL
2019
2018
December 31,
2017
2016
2015
Allowance
% of
Loans(1) Allowance
% of
Loans(1) Allowance
% of
Loans(1) Allowance
% of
Loans(1) Allowance
% of
Loans(1)
(Dollars in thousands)
ALL for non-purchased
loans:
Real estate:
Residential 1-4 family
Non-farm/non-
residential
Construction/land
development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total ALL for non-
purchased loans
ALL for purchased loans
Total ALL
$ 14,008 4.6 % $ 13,754 4.7 % $ 12,829 4.9 % $ 10,225 5.0 % $ 8,672 5.4 %
17,289 20.3
18,456 21.9 26,855 23.0 21,555 24.8 16,796 30.8
26,295 39.2
1,719 1.4
5,477 7.1
5,961 3.9
30,866 16.3
5,310 7.2
27,103 42.5 27,422 49.4 20,673 49.6 18,176 43.3
1,343 1.1 1,093 1.1 2,787 1.0 3,388 1.1
6,208 7.0 2,395 2.9 2,447 4.5 3,031 6.8
9,256 5.1 10,448 4.9 13,043 3.8 6,409 5.8
707 0.4
4,162 4.9 2,620 6.7 2,266 9.0 2,475 6.4
20,382 12.8 8,858 7.1 1,945 2.3
106,925
1,600
$ 108,525
100,664
1,600
$ 102,264
92,520
1,600
$ 94,120
74,941
1,600
$ 76,541
59,654
1,200
$ 60,854
(1)
Excludes purchased loans.
64
We maintain an internally classified loan list that, along with the list of nonaccrual loans and the list of impaired loans, among
other items, helps us assess the overall quality of the loan portfolio and the adequacy of our ALL. Loans 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. Loans classified as “doubtful” have characteristics similar to
substandard loans, but also have an increased risk that a loss may occur or at least a portion of the loan may require a charge-off if
liquidated. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans
may include some that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as “loss” are
charged off.
At December 31, 2019 substandard loans, excluding purchased loans, not designated as impaired, nonaccrual or 90 days past
due, totaled $71.2 million, compared to $10.0 million at December 31, 2018 and $71.6 million at December 31, 2017. No loans were
designated as doubtful or loss at December 31, 2019, 2018 or 2017. The increase in substandard loans not deemed impaired,
nonaccrual or 90 days past due at December 31, 2019 compared to December 31, 2018 is primarily due to a single credit at our Real
Estate Specialty Group that was downgraded to substandard during the fourth quarter of 2019. This credit, which is collateralized by a
lot development and townhouse construction project near Lake Tahoe, California, had an outstanding balance of $57.0 million at
December 31, 2019. The downgrade of this credit was in conjunction with the quarterly analysis of the credit and underlying project
performance and was primarily due to several lot sales expected to close in late 2019 being cancelled or delayed, along with a lower
expected volume of pending lot sales going into 2020. This credit was not past due at December 31, 2019.
Credit Management Actions – 2020. Effective January 1, 2020, we implemented a dual risk rating scale that utilizes
quantitative models and qualitative factors (“score cards”) in determining the risk rating for our commercial loans. This dual risk
rating methodology incorporates an obligor risk rating (“ORR”) and a facility risk rating (“FRR”) which are combined to create a two-
dimensional risk rating for commercial loans. The ORR is influenced by a loan’s PD as determined from the score cards, with such
score card PDs affected by various financial metrics, such as projected cash flow, LTV, property and/or market characteristics,
borrower financial strength and other financial and loan characteristics. Thus, the higher a loan’s PD, the more adverse the loan’s
ORR. The FRR is influenced by a loan’s LGD as determined from the score cards. Score card LGDs are affected by the estimated
loss when a borrower cannot or will not repay the loan. Estimated losses take into consideration our underwriting standards and
protections including collateral and collateral margin requirements, loan covenants, support required from guarantors, insurance and
other factors. The higher a loan’s LGD, the more adverse the loan’s FRR. The combined dual risk rating provides an annualized
expected loss estimate for each commercial loan and, based on such loss estimates, a risk rating is assigned. While our consumer
loans are not risk rated, we do utilize output from the score cards on consumer loans for purposes of determining the necessary
allowance for credit losses (“ACL”) for consumer loans.
Also, effective January 1, 2020, we adopted the provisions of Financial Accounting Standards Board (“FASB”) ASU 2016-13
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This new guidance
replaces the current incurred loss method that is utilized in estimating our ALL at December 31, 2019 with a method that required us
to estimate credit losses expected to occur over the life of the financial instrument and to recognize those estimated losses at adoption
of ASU 2016-13 and subsequent to adoption, at the time of the loan origination. This revised method is what FASB describes as the
current expected credit loss (“CECL”) method. Key drivers in estimating our ACL under the CECL method include individual loan
score card results, reasonable and supportable forecast periods, loss reversion estimates and numerous other inputs and assumptions,
all of which are subject to significant judgments and estimates that could materially affect the estimated ACL under CECL.
The adoption of ASU 2016-13 is expected to result in an overall increase in our ACL ranging from $70 million to $95 million
and will be recorded as a cumulative effect adjustment to retained earnings. This expected overall increase will be comprised of an
increase in our ACL for the outstanding balance of our loan portfolio expected to range from $25 million to $40 million and an ACL
for the closed but unfunded portion of our loan portfolio expected to range from $45 million to $55 million. As required by ASU
2016-13, the portion of the ACL for the outstanding balance of our loan portfolio will continue to be reported as a contra-asset on our
consolidated balance sheet and the ACL for our closed but unfunded loans will be reported as a liability on our consolidated balance
sheet. As a result of the adoption of CECL, we expect we will have increased volatility in our ongoing provision for credit losses
based on potential volatility in our loan growth, changes in our balance of unfunded closed loans and changes in economic forecasts
and other assumptions, among other factors. Also, concurrent with the adoption of CECL, most of our income previously reported as
“Other income from purchased loans” will now be included in interest income on purchased loans.
Liquidity Risk Management
Overview. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability
to liquidate assets or obtain adequate funding (referred to as “funding liquidity risk”) or that we cannot easily unwind or offset specific
exposures without significantly lowering market prices because of inadequate market depth or market disruptions (referred to as
“market liquidity risk”). Our assets and liability committee (“ALCO”) has primary responsibility for oversight of our liquidity, funds
65
management, asset/liability (interest rate risk) position and capital and 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 (including
our ability to fund our significant balance of closed but unfunded loans) 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 and monitoring liquidity risk. On a quarterly basis, we perform a comprehensive liquidity stress test.
This stress test is intended to identify and quantify sources of potential liquidity strain and vulnerabilities related to liquidity and to
analyze possible impacts on our Bank for a variety of institution-specific and market-wide events across multiple time horizons. Also,
pursuant to these various liquidity and funds management policies, we maintain a buffer of highly liquid assets to protect against cash
outflows in the event of a liquidity crisis.
Liquidity management actions. Generally, we rely on deposits, repayments of loans, 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 secondary funding sources, including wholesale deposit sources such as
brokered deposits, FHLB advances, federal funds purchased and other sources of short-term borrowings to make loans, acquire
investment securities and other assets and to fund continuing operations.
Given that our lending and investing activities are funded primarily by deposits, we continue to focus substantial efforts in order
to grow our existing deposit base. Our deposits increased $536 million in 2019 and $746 million in 2018. The amount of deposits by
account type as of the dates indicated and their respective percentage of total deposits are reflected in the following table.
Deposits – By Account Type
Non-interest bearing
Interest bearing:
Transaction (NOW)
Savings and money market
Time deposits less than $100
Time deposits of $100 or more
Total deposits
December 31,
2019
2018
(Dollars in thousands)
$
2,795,251
15.1 % $
2,748,273
15.3 %
2,706,426
5,601,181
3,321,446
4,049,955
14.7
30.3
18.0
21.9
2,359,299
7,323,414
2,297,101
3,210,328
13.2
40.8
12.8
17.9
$ 18,474,259 100.0 % $ 17,938,415 100.0 %
The amount of deposits by customer type as of the dates indicated and their respective percentage of total deposits are reflected
in the following table.
Deposits – By Customer Type
Consumer
Commercial
Public Funds
Brokered
Reciprocal
Total deposits
December 31,
2019
2018
(Dollars in thousands)
$
7,526,014
4,334,366
3,782,415
2,115,193
716,271
40.7 % $
23.5
20.5
11.4
3.9
7,212,856
4,446,537
3,562,462
2,035,158
681,402
40.2 %
24.8
19.9
11.3
3.8
$ 18,474,259 100.0 % $ 17,938,415 100.0 %
At December 31, 2019, we had outstanding brokered deposits of $2.12 billion, or approximately 11.4% of total deposits,
compared to $2.04 billion, or approximately 11.3% of total deposits at December 31, 2018. 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) ALCO, which reports to the board of directors, monitors our use of brokered deposits on a regular basis,
including interest rates and the total volume of such deposits in relation to our total deposits.
66
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
2019
Average
Balance
Average
Rate
Paid
Year Ended December 31,
2018
Average
Rate
Average
Balance
Paid
(Dollars in thousands)
2017
Average
Balance
Average
Rate
Paid
$ 2,753,634
— $ 2,695,623
— $ 2,652,895
—
2,571,389
6,468,595
2,872,676
3,449,197
$ 18,115,491
1.02 % 3,385,298
1.55 6,597,777
2.03 1,651,960
2.13 3,183,108
1.68 $ 17,513,766
1.08 % 2,860,591
1.25 5,726,813
1.22 1,560,035
1.50 3,164,843
1.26 $ 15,965,177
0.61 %
0.63
0.73
0.99
0.72
Non-interest bearing
Interest bearing:
Transaction (NOW)
Savings and money market
Time deposits less than $100
Time deposits of $100 or more
Total deposits
The calculation of the average rate paid on total deposits of 1.68% for 2019, 1.26% for 2018 and 0.72% for 2017 includes
interest paid and average balances of all categories of interest bearing deposits. The average rate paid for all deposits, including both
interest bearing and non-interest bearing deposits, was 1.43% for 2019, 1.07% for 2018 and 0.60% for 2017.
The following table sets forth time deposits by time remaining to maturity as of the date indicated.
Maturity Distribution of Time Deposits
3 months or less
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
Total
Time Deposits
Under $100,000
$
$
998,825
1,201,780
950,197
170,644
3,321,446
$
December 31, 2019
Time Deposits
Over $100,000
(Dollars in thousands)
$
1,129,045 $
1,418,040
1,347,387
155,483
4,049,955 $
Total Time
Deposits
2,127,870
2,619,820
2,297,584
326,127
7,371,401
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
2019
December 31,
2018
Deposits Attributable to Offices In
Amount
Arkansas
Georgia
Texas
Florida
New York
North Carolina
Alabama
South Carolina
Total
$
7,054,860
3,967,304
2,411,661
2,391,056
1,350,774
1,123,269
90,805
84,530
$ 18,474,259
%
%
Amount
(Dollars in thousands)
6,988,931
3,783,868
1,953,273
2,615,278
1,396,934
996,838
125,041
78,252
100.0 % $ 17,938,415
38.2 % $
21.5
13.1
12.9
7.3
6.1
0.5
0.4
39.0 % $
21.1
10.9
14.6
7.8
5.6
0.7
0.3
5,280,075
4,088,723
2,158,392
2,757,852
1,765,957
927,635
111,907
101,804
100.0 % $ 17,192,345
30.7 %
23.8
12.6
16.0
10.3
5.4
0.7
0.5
100.0 %
2017
Amount
%
67
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.
In addition to customer deposits, cash flows from our loan portfolio provide us with a significant source of liquidity. The
following table reflects total loans grouped by remaining maturities at December 31, 2019 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 floating 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 Maturities
1 Year or
Less
Over 1
Through
5 Years
Over
5 Years
Total
Real estate
Commercial and industrial
Consumer
Other
Total
Fixed rate
Floating rate (not at a floor or ceiling rate) (1)
Floating rate (at floor rate) (1)
Floating rate (at ceiling rate)
Total
(Dollars in thousands)
$ 4,480,065 $ 6,369,981 $ 1,920,862 $ 12,770,908
661,952
2,934,534
1,164,649
$ 5,248,827 $ 7,379,894 $ 4,903,322 $ 17,532,043
124,745
71,112 2,846,514
11,201
114,452
16,908
637,402
516,046
422,755
$
7,890,644
3,444,386
64,498
631,952 $ 1,800,115 $ 2,574,908 $ 5,006,975
8,307,499
367,995
4,152,989
574,410
64,580
82
$ 12,031,480 $ 2,742,602 $ 2,757,961 $ 17,532,043
48,860
134,193
—
(1) We have included a floor rate in many of our floating rate non-purchased loans. As a result of such floor rates, floating rate loans may
not immediately reprice in a rising rate environment if the interest rate index and margin on such loans continue to result in a computed
interest rate less than the applicable floor rate.
Loan repayments are generally a relatively stable source of funds but are subject to the borrowers’ ability to repay the loans,
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 generally are not readily convertible to cash.
At December 31, 2019, we had $11.33 billion in unfunded balances on loans already closed, the vast majority of which is
attributable to construction and development 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.
68
Cash flows from our investment securities portfolio also provide us with an additional source of liquidity. The following table
reflects the expected maturity distribution of our investment securities, at estimated fair value, at December 31, 2019 and weighted-
average yields (for tax-exempt obligations on an FTE basis) of such securities. The maturity for all investment securities is shown
based on each security’s contractual maturity date, except (1) mortgage-backed securities, which are allocated among various
maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds or other estimates of
prepayment speeds and interest rate levels at December 31, 2019 and (2) callable investment securities for which we have received
notification of call, which are included in the maturity category in which the call occurs or is expected to occur. Actual maturities will
differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties. The weighted-average yields – FTE are calculated based on the coupon rate and amortized cost for such securities and do
not include any projected discount accretion or premium amortization.
Expected Maturity Distribution of Investment Securities
1 Year
Or Less
Over 1
Through 5
Years
Over 5
Through
10 Years
(Dollars in thousands)
Over 10
Years
Total
Obligations of states and political subdivisions
U.S. Government agency mortgage-backed securities
Corporate Obligations
Total
Percentage of total
Cumulative percentage of total
Weighted-average yield – FTE
9,278 $
$
436,064 1,067,098 224,750
—
27,244 $ 101,952 $ 383,156 $ 521,630
22,449 1,750,361
5,398
$ 445,342 $ 1,099,740 $ 326,702 $ 405,605 $ 2,277,389
5,398
—
—
19.6 %
19.6 %
1.87 %
48.3 %
67.8 %
1.89 %
14.3 %
82.2 %
2.64 %
17.8 %
100.0 %
2.90 %
100.0 %
2.15 %
Given that deposit levels, loan repayments and cash flow from our investment securities portfolio may be affected by a number
of factors, we may be required from time to time to rely on secondary sources of liquidity to meet growth in loans and deposit
withdrawal demands or otherwise fund operations. Such secondary sources include, among others, repurchase agreements with
customers, secured and unsecured federal funds lines of credit from correspondent banks, other borrowings (primarily FHLB advances
and, to a lesser extent, federal funds purchased), FRB borrowings, subordinated notes, subordinated debentures and/or accessing the
capital markets.
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 (1)
Total other interest bearing liabilities
2019
Average
Balance
Average
Rate
Paid
Year Ended December 31,
2018
Average
Rate
Average
Balance
Paid
(Dollars in thousands)
2017
Average
Balance
Average
Rate
Paid
$ 13,502
94,399
223,469
119,629
$ 450,999
0.37 % $ 101,682
1.62 166,937
5.71 223,089
4.73 119,076
4.44 $ 610,784
0.77 % $ 75,915
1.81 62,988
5.72 222,705
5.22 118,515
3.73 $ 480,123
0.17 %
2.07
5.67
4.24
3.97
(1) The interest expense and rates for “other borrowings” and “subordinated debentures” were impacted by interest capitalized, primarily for
our corporate headquarters facility that is currently under construction. Capitalized interest included in “other borrowings” totaled $0.9
million in 2019, $0.6 million in 2018 and $0.2 million in 2017. Capitalized interest included in “subordinated debentures” totaled $0.9
million in 2019 and none in 2018 and 2017. In the absence of this interest capitalization, these rates on other borrowings would have been
2.58% in 2019, 2.19% in 2018 and 2.44% in 2017 and the rate on subordinated debentures would have been 5.48 % for 2019.
At December 31, 2019, we had substantial unused borrowing availability. This availability was primarily comprised of the
following four options: (1) $2.8 billion of available blanket borrowing capacity with the FHLB, (2) $1.6 billion of investment
securities available to pledge for federal funds or other borrowings, (3) $720 million of available unsecured federal funds borrowing
lines and (4) up to $119 million of available borrowing capacity from borrowing programs of the FRB.
69
We anticipate we will continue to rely primarily on deposits, repayments of loans 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 $425 million in 2019, $705 million in 2018 and $384
million in 2017. 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 decrease in net cash provided by operating activities for 2019 compared
to 2018 was primarily due to the collection in 2018 of the majority of our current income taxes receivable balance recorded as of
December 31, 2017.
Investing activities provided net cash of $0.12 billion in 2019 and used net cash of $1.53 billion in 2018 and $2.63 billion in
2017. The decrease in net cash used by investing activities in 2019 compared to 2018 and 2018 compared to 2017 was primarily the
result of a lower level of net purchases in our investment securities portfolio, which provided $653 million in 2019, used $316 million
in 2018, and used $1.14 billion in 2017, and lower growth in our non-purchased loan portfolio, which used $1.10 billion in 2019, used
$2.18 billion in 2018 and used $2.85 billion in 2017, partially offset by less cash provided by payoffs from our purchased loan
portfolio, which provided $0.64 billion in 2019, provided $1.07 billion in 2018 and provided $1.42 billion in 2017.
Financing activities provided net cash of $660 million in 2019, $671 million in 2018 and $1.82 billion in 2017. While the net
cash provided by financing activities was relatively unchanged from 2018 to 2019, we did experience less growth in deposits in 2019
compared to 2018, primarily in an effort to reduce our use of higher cost wholesale deposits that are typically more rate sensitive than
our retail deposits. The decrease in net cash provided by financing activities for 2018 compared to 2017 was primarily the result of
lower growth of deposits needed to fund our lending and investing activities. Deposit growth provided $0.75 billion in 2018 and
provided $1.62 billion in 2017. Additionally, in 2017 we received net proceeds of $300 million from the sale of 6.6 million shares of
our common stock (none in 2018).
Contractual Obligations. The following table presents, as of December 31, 2019, 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
Over 1
Trough
3 Years
Total
Over
5 Years
Over 3
Through
5 Years
(Dollars in thousands)
282 $ 7,436,586
45,889 $
— 11,102,973
—
11,250
—
—
351,827
—
9
326,200
264,181
24,794
195,615
172,393
9,284
91,459
55,492
12,794
3,025
137,243
12,128
95,795 $ 504,476 $ 19,653,153
$ 7,101,492 $ 288,923 $
—
11,102,973
—
11,250
929
350,889
24,794
12,431
9,284
4,654
14,665
8,508
13,972
108,118
$ 18,700,315 $ 352,567 $
(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, 2019. 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, 2019.
70
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. See note 16 to the
consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of the Annual Report on Form
10-K for further discussion of off-balance sheet commitments. The following table details the amounts and expected maturities of
significant off-balance sheet commitments as of December 31, 2019. 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
Market and Interest Rate Risk Management
1 Year
or Less
Over 1
Through 3
Years
Over 3
Through 5
Years
(Dollars in thousands)
$ 1,643,861 $ 6,254,598 $ 3,201,703 $ 225,436 $ 11,325,598
10,764
$ 1,653,832 $ 6,255,391 $ 3,201,703 $ 225,436 $ 11,336,362
Over
5 Years
9,971
793
—
—
Total
Overview. Market risk is the risk to a financial institution’s condition resulting from adverse movements in market rates or
prices, including, but not limited to, interest rates, foreign exchange rates, commodity prices, or equity prices. Security price risk is
the risk that arises from security price volatility – the risk of a decline in the value of a security or a portfolio. Equity price risk can be
either systematic or unsystematic risk. Unsystematic risk can be mitigated through diversification, whereas systematic cannot be. In a
global economic crisis, equity price risk is systematic because it affects multiple asset classes. Interest rate risk is the risk of increased
volatility due to a change of interest rates. There are different types of risk exposures that can arise when there is a change of interest
rates, such as basis risk, options risk, term structure risk and repricing risk. We are exposed to both interest rate risk and market risk.
Our Board is responsible to approving the overall policies related to the management of financial risks, including interest rate
risk and market risk. The Board has delegated to ALCO, which is chaired by our Chief Financial Officer, the responsibility of
managing interest rate and market risk consistent with Board-approved policies and limits.
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.
Interest Rate Risk Management Actions. 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, which analyzes the expected change in near term (one year) net interest income in response
to changes in interest rates, and economic value of equity (“EVE”), which measures the expected change in the fair value of equity in
response to changes in interest rates, to analyze our interest rate risk and interest rate sensitivity.
Our 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 ceiling and floor rates on
various assets and liabilities, (6) expected changes in administered rates on interest bearing transaction, savings, money market and
time deposit accounts and the expected impact of competition on the pricing or repricing of such accounts, (7) the timing and amount
of cash flows expected to be received on investment securities and purchased loans, (8) the need, if any, 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, down 100 bps, down 200 bps, and down 300 bps. Based on
current conditions, we believe that modeling our change in net interest income assuming interest rates go down 300 bps is not
71
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.
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, 2020. 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)
+300
+200
+100
-100
-200
% Change in
Projected Baseline
Net Interest Income
10.7%
6.7
2.8
(2.0)
(2.0)
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 and deposits.
EVE is calculated as the fair value of all assets minus the fair value of liabilities. We measure changes in the dollar amount of
EVE for parallel shifts in interest rates. Due to embedded optionality and asymmetric rate risk, changes in EVE can be useful in
quantifying risks not apparent for small rate changes.
EVE Model Results
Change in
Interest Rates
(in bps)
+200
-200
% Change in
Projected Baseline EVE
3.8%
(4.3)
At December 31, 2019, approximately 71% of our total loans had variable rates, including 74% of our non-purchased loans and
42% of our purchased loans. Additionally, 99% of our variable rate non-purchased loans and 47% of our variable rate purchased
loans had floor rates. The following table reflects a summary, at December 31, 2019, of the funded balance of our variable rate loans
at a floor given changes in interest rates.
Variable Rate Loan Analysis
Changes in Interest Rate
Currently at floor
Down 25 bps
Down 50 bps
Down 75 bps
Down 100 bps
Down 150 bps
Down 200 bps
Down 250 bps
Percentage of Variable Rate Loans at Floor
Purchased
22%
26%
27%
30%
31%
42%
45%
47%
Non-purchased
34%
41%
48%
59%
67%
93%
99%
99%
Total
33%
40%
47%
58%
66%
90%
96%
97%
72
The following table reflects total loans as of December 31, 2019 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 either by adjusting rates on existing loans or reinvesting principal cash flow in new loans. For non-
purchased loans 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 Cash Flows or Repricing
1 Year or
Less
Over 1
Through
2 Years
Over 2
Through
3 Years
Over 3
Through
5 Years
(Dollars in thousands)
Over 5
Years
Total
Fixed rate
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
631,952 $ 528,073 $ 512,539 $ 759,503 $ 2,574,908 $ 5,006,975
$
7,890,644 114,224 99,120 154,651
48,860 8,307,499
3,444,386 149,993 122,468 301,949 134,193 4,152,989
64,580
$ 12,031,480 $ 792,329 $ 734,128 $ 1,216,145 $ 2,757,961 $ 17,532,043
64,498
42
39
—
1
68.6 %
68.6 %
4.5 %
73.1 %
4.2 %
77.3 %
6.9 %
84.3 %
15.8 %
100.0 %
100.0 %
(1) We have included a floor rate in many of our floating rate non-purchased loans. As a result of such floor rates, floating rate loans may not
immediately reprice in a rising rate environment if the interest rate index and margin on such loans continue to result in a computed interest
rate less than the applicable floor rate.
At December 31, 2019, most of our floating rate loans are tied to three major benchmark interest rates, the 1-month LIBOR, 3-
month LIBOR and WSJ Prime. 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)
40,547
$ 2,742,430 $ 6,651,528 $
477,792
1,173,912 1,101,269
76,910
$ 4,152,989 $ 8,307,499 $
196,100
— $ 9,393,958
518,339
—
2,339,761
64,580
273,010
—
64,580 $ 12,525,068
While changes in these contractual interest rate indices are typically affected by changes in the federal funds target rate, the
effect on our floating rate loan portfolio may not be immediate and proportional to changes in the federal funds target rate.
LIBOR is expected to be phased out after 2021. As a result, we are assessing the impacts of such phase out and exploring
alternatives, including the Secured Overnight Financing Rate (“SOFR”) and other interest rate indices, to use in place of LIBOR. Our
subordinated debentures and related trust preferred securities, our subordinated notes and significant portions of our loan portfolio are
tied to LIBOR. Currently, we are unable to determine the effect that the phase out of LIBOR might have on those financial
instruments tied to LIBOR.
Market Risk Management Actions. We are exposed to market risk primarily through changes in fair value of our fixed income
investment securities portfolio. Investment portfolio strategies are set by senior management and are subject to the oversight and
direction of ALCO. At December 31, 2019 and 2018, 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 related income
tax, reported as a separate component of stockholders’ equity and included in other comprehensive income (loss). At December 31,
2019, we had $36.1 million of net unrealized gain in our investment securities portfolio that was reported, net of applicable income
taxes, in AOCI.
73
The following table presents the amortized cost and estimated fair value of investment securities–AFS as of the dates indicated.
Investment Securities – AFS
December 31,
2019
2018
Amortized
Cost
Estimated Fair
Value
Amortized
Cost
Estimated Fair
Value
Obligations of states and political subdivisions
U.S. Government agency mortgage-backed securities
Other U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Total
503,399 $
615,328 $
(Dollars in thousands)
$
521,630
1,732,671 1,750,361
—
—
5,229
5,398
—
—
$ 2,241,299 $ 2,277,389
$
606,616
2,248,065 2,212,546
26,936
15,183
1,059
$ 2,907,228 $ 2,862,340
27,538
15,188
1,109
Our investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $37.6 million
and gross unrealized losses of $1.5 million at December 31, 2019 and gross unrealized gains of $7.1 million and gross unrealized
losses of $52.0 million at December 31, 2018. We believe that all of the unrealized losses on individual investment securities at
December 31, 2019 and 2018 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. While we periodically evaluate our
investment strategy relative to current economic and business conditions, we currently do not have the intent to sell these investment
securities with unrealized losses 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, 2019:
Obligations of states and political subdivisions
U.S. Government agency mortgage-backed securities
Corporate obligations
Total
December 31, 2018:
Obligations of states and political subdivisions
U.S. Government agency mortgage-backed securities
Other U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Total
Amortized
Cost
Unaccreted
Discount
Unamortized
Premium
Par
Value
(Dollars in thousands)
$
503,399 $
1,732,671
5,229
$ 2,241,299 $
$
615,328 $
2,248,065
27,538
15,188
1,109
$ 2,907,228 $
1,260 $
254
93
1,607 $
1,423 $
442
—
134
—
1,999 $
(18,241 ) $
486,418
(33,131 ) 1,699,794
5,322
(51,372 ) $ 2,191,534
—
(25,410 ) $
591,341
(47,488 ) 2,201,019
27,000
15,322
1,109
(73,436 ) $ 2,835,791
(538 )
—
—
We recognized premium amortization, net of discount accretion, of $17.8 million during 2019, $22.1 million during 2018 and
$16.0 million during 2017. Any premium amortization or discount accretion is considered an adjustment to the yield of our investment
securities.
We had net gains of $0.7 million from the sale of approximately $96 million of investment securities AFS in 2019, compared to
essentially no net gains from the sale of investment securities AFS in 2018 and net gains of $4.0 million from the sale of
approximately $239 million of investment securities AFS in 2017. Investment securities AFS totaling $552 million in 2019, $497
million in 2018 and $245 million in 2017 matured, were called or were otherwise paid down by the issuer. We purchased essentially
no investment securities AFS in 2019, compared to $0.82 billion in 2018 and $1.61 billion in 2017.
74
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, corporate tax rates, current market factors, interest rate risk and interest rate environment, current and projected
liquidity needs and other relevant factors. During 2017 and 2018, we took steps to add on-balance sheet liquidity and to reposition our
investment securities portfolio for a rising interest rate environment and lower tax rates, including efforts to maintain or reduce
average maturities, modified duration, and the portion of our portfolio invested in tax-exempt securities.
At December 31, 2019, approximately 95% of our investment securities had an investment grade credit rating (i.e., the
equivalent of a rating of BBB- or better) and approximately 5% of our investment securities were not rated. For those securities that
were not rated, we have performed our own evaluation of the security and/or the underlying issuer and believe that such security or its
issuer has credit characteristics equivalent to those which would warrant an investment grade credit rating.
Capital Management
Overview. The primary function of capital is to support our operations, including growth expectations, and act as a cushion to
absorb unanticipated losses. Accordingly, our management has developed and our Board has approved a detailed capital policy that
addresses, among other things, capital adequacy, considers capital planning strategies for expected future growth, provides plans and
actions for capital contingency needs, provides a capital distribution strategy and includes provisions and procedures for developing,
reviewing and modifying our capital strategy and our internal capital guidelines and limits based on the results of budgeting and
forecasting activities, capital stress testing results and other factors. Oversight of our capital management plan and capital monitoring
activities has been delegated to our ALCO.
Capital Management Actions. We primarily rely on our common stockholders’ equity, comprised of common stock, additional
paid-in capital, our retained earnings and our accumulated other comprehensive income (loss) to support our operations and act as a
cushion to absorb unanticipated losses. Our common stockholders’ equity totaled $4.15 billion at December 31, 2019 compared to
$3.77 billion at December 31, 2018. Additionally, our common stockholders’ equity is augmented by our subordinated notes, our
subordinated debentures, and, to a limited extent, our ALL.
Subordinated Notes. 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”). 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 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. 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.
As previously discussed, LIBOR is expected to be phased out after 2021. Currently, we are unable to determine the effect, if
any, that the phase out of LIBOR might have on our financial instruments tied to LIBOR.
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.
75
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”), 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 “Trusts”). At December 31, 2019, we had
the following issues of trust preferred securities and subordinated debentures owed to the Trusts.
Subordinated
Debentures Owed
to Trust
Unamortized
Discount
Carrying Value
of Subordinated
Debentures
(Dollars in thousands)
Trust
Preferred
Securities
of the
Trusts
Contractual
Interest Rate
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 $
— $
—
—
—
(277 )
(321 )
(584 )
(554 )
(1,736 ) $
14,433 $
14,434
15,464
20,619
15,187
15,143
14,880
9,756
119,916 $
14,000
14,000
15,000
20,000
15,000
15,000
15,000
10,000
118,000
4.84 % September 29, 2033
4.94 September 25, 2033
4.13 September 28, 2034
3.49 December 15, 2036
4.85 September 17, 2033
4.69 March 17, 2034
4.31 September 20, 2034
3.54 December 15, 2036
Our subordinated debentures and trust preferred securities are tied to a spread over the 90-day LIBOR. As previously discussed,
LIBOR is expected to be phased out after 2021. Currently, we are unable to determine the effect, if any, that the phase out of LIBOR
might have on our financial instruments tied to LIBOR. Our subordinated debentures and trust preferred securities generally mature
30 years after issuance and may be prepaid at par, subject to regulatory approval. These subordinated debentures and the related trust
preferred securities provide us additional regulatory capital to support our expected future growth and expansion. See “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 bank, 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. 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. Other than common
stock, any issuance of equity or debt by us will require the prior approval of the ASBD, and may be accompanied by time delays
associated with obtaining such approval. If market conditions change during any time delays associated with obtaining regulatory
approval, we may not be able to issue equity or debt on as favorable of terms as were contemplated at the time of commencement of
the process, or at all.
76
Common Stockholders’ Equity and Reconciliation of Non-GAAP Financial Measures. We use non-GAAP financial measures,
specifically, tangible common stockholders’ equity, tangible common stockholders’ equity to total tangible assets, tangible book value
per common share and return on average tangible common stockholders’ equity as important measures of the strength of our capital
and our ability to generate earnings on tangible common equity invested by our shareholders. We believe presentation of these non-
GAAP financial measures provides useful supplemental information that contributes to a proper understanding of our financial results
and capital levels. These non-GAAP disclosures should not be viewed as a substitute for financial results determined in accordance
with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the
following tables as of and for the years indicated.
Calculation of Total 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
2019
December 31,
2018
(Dollars in thousands)
2017
$
4,150,351 $
3,770,330 $
3,460,728
(660,789 )
(23,753 )
(684,542 )
3,465,809 $
(660,789 )
(48,251 )
(709,040 )
$
2,751,688
$ 23,555,728 $ 22,388,030 $ 21,275,647
(660,789 )
(35,672 )
(696,461 )
3,073,869 $
(660,789 )
(23,753 )
(684,542 )
(660,789 )
(48,251 )
(709,040 )
$ 22,871,186 $ 21,691,569 $ 20,566,607
(660,789 )
(35,672 )
(696,461 )
Ratio of total common stockholders’ equity to total assets
Ratio of total tangible common stockholders’ equity to total
tangible assets
17.62 %
16.84 %
16.27 %
15.15 %
14.17 %
13.38 %
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
2019
December 31,
2016
2017
2018
(In thousands, except per share amounts)
2015
$ 4,150,351 $ 3,770,330 $ 3,460,728 $ 2,791,607 $ 1,464,631
(660,789 )
(660,789 )
(660,789 )
(660,119 )
(125,442 )
(35,672 )
(696,461 )
(23,753 )
(684,542 )
(48,251 )
(709,040 )
(26,898 )
(152,340 )
$ 3,465,809 $ 3,073,869 $ 2,751,688 $ 2,070,657 $ 1,312,291
90,612
16.16
14.48
128,288
26.98 $
21.45 $
128,951
32.19 $
26.88 $
121,268
23.02 $
17.08 $
128,611
29.32 $
23.90 $
(60,831 )
(720,950 )
$
$
77
Calculation of Average Tangible Common Stockholders’ Equity and
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
2019
Year Ended December 31,
2017
(Dollars in thousands)
$ 425,906 $ 417,106 $ 421,891 $ 269,979 $ 182,253
2016
2018
2015
$ 3,971,952 $ 3,598,628 $ 3,127,576 $ 2,068,328 $ 1,217,475
(660,789 ) (660,789 ) (660,632 ) (363,324 ) (118,013 )
(29,784 )
(28,660 )
(690,573 ) (703,104 ) (715,334 ) (406,947 ) (146,673 )
$ 3,281,379 $ 2,895,524 $ 2,412,242 $ 1,661,381 $ 1,070,802
(42,315 )
(43,623 )
(54,702 )
10.72 %
12.98 %
11.59 %
14.41 %
13.49 %
17.49 %
13.05 %
16.25 %
14.97 %
17.02 %
Goodwill. Between 2010 and 2016, we have made fifteen acquisitions, including seven FDIC-assisted transactions and eight
traditional merger and acquisition (“M&A”) transactions. In conjunction with several of the traditional M&A transactions, our
purchase price exceeded the fair value of the net assets acquired, resulting in the recording of goodwill. At December 31, 2019 and
2018, we had goodwill totaling $660.8 million. This resultant goodwill is the most significant intangible asset we have and is the
largest item in adjusting our total common stockholders’ equity before noncontrolling interest to our tangible common stockholders’
equity. As a result and consistent with requirements under GAAP, we review goodwill annually, or more frequently if events or
changes in circumstances indicate the carrying value might be impaired. This impairment analysis compares the estimated fair value
of our banking operations (the reporting unit) with the Bank’s net book value. We performed our annual impairment test of goodwill
as of September 30, 2019. Subsequent to our September 30, 2019 annual impairment test, we performed an additional goodwill
impairment test as of December 31, 2019. Both impairment tests included various valuation considerations including comparable peer
data, precedent transaction comparables, overall financial performance, share price of our common stock and other factors. Neither
the September 30, 2019 nor the December 31, 2019 impairment test indicated any impairment of goodwill. There can be no assurance
that future evaluations of our goodwill will not result in impairment of such goodwill.
Common Stock Dividend Policy. In 2019 we paid dividends of $0.94 per common share, compared to $0.795 per common share
in 2018 and $0.71 per common share in 2017. On January 2, 2020, our board of directors approved a dividend of $0.26 per common
share that was paid on January 24, 2020 to shareholders of record on January 17, 2020. The determination of future dividends on our
common stock will depend on conditions existing at that time and approval of our board of directors. In addition, our ability to pay
dividends to our shareholders is subject to the restrictions set forth in Arkansas law, by our federal regulators, and by certain
covenants contained in the indentures governing the trust preferred securities, the subordinated debentures and the subordinated notes.
See note 18 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.
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.
In recent years, the FDIC and other federal banking regulators revised the risk-based capital requirements applicable to insured
depository institutions, including us, to make them consistent with agreements 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 us 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.
78
Under the Basel III Rules, common equity tier 1 capital consists of common stock and paid-in capital (net of treasury stock) and
retained earnings. Common equity tier 1 capital is reduced by goodwill, certain intangible assets, net of associated deferred tax
liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and
certain other items as specified by the Basel III Rules.
Tier 1 capital includes common equity tier 1 capital and certain additional tier 1 items as provided under the Basel III Rules. Our
tier 1 capital consists of common equity tier 1 capital and, 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 required trust preferred securities 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. Pursuant to the Basel III Rules, our trust preferred securities are no longer included in tier 1 capital but 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 AOCI 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
ALL, the trust preferred securities and the subordinated notes.
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” in addition to the amount necessary to meet minimum risk-based capital requirements for
common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets. The capital conservation buffer began phasing in
January 1, 2016 at 0.625% of risk-weighted assets, and increases each year until fully implemented at 2.5% on January 1, 2019. At
December 31, 2019, the Basel III Rules required us 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%.
79
The following table presents actual and required capital ratios as of the dates indicated under the Basel III Rules. The minimum
required capital amounts presented include the minimum required capital levels as of December 31, 2019 and 2018, respectively,
based on the phase-in provisions of the Basel III Rules and the minimum required capital levels in 2019 when the Basel III Rules were
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. At December 31, 2019 and 2018, our capital levels exceed all minimum
capital requirements under the Basel III Rules on a fully phased-in basis. Additionally, our capital levels exceed all capital
requirements to be considered well capitalized based upon prompt corrective action regulations, as amended by the Basel III Rules.
Actual
Capital
Amount
Ratio
Minimum Capital
Required – Basel III
Phase-In Schedule
Capital
Amount
Minimum Capital
Required – Basel III
Fully Phased-In
Capital
Amount
Ratio
Required to be
Considered Well
Capitalized
Capital
Amount
Ratio
Ratio
(Dollars in thousands)
December 31, 2019:
Common equity tier 1 to risk-
weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Tier 1 leverage to average assets
December 31, 2018:
Common equity tier 1 to risk-
weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Tier 1 leverage to average assets
$ 3,422,832 13.76 % $ 1,741,897 7.00 % $ 1,741,897 7.00 % $ 1,617,475 6.50 %
3,422,832 13.76 2,115,160 8.50 2,115,160 8.50 1,990,739 8.00
3,874,357 15.57 2,612,845 10.50 2,612,845 10.50 2,488,424 10.00
3,422,832 15.36 891,109 4.00 891,109 4.00 1,113,887 5.00
$ 3,091,128 12.56 % $ 1,569,242 6.375 % $ 1,723,089 7.00 % $ 1,600,011 6.50 %
3,091,128 12.56 1,938,475 7.875 2,092,322 8.50 1,969,245 8.00
3,536,393 14.37 2,430,786 9.875 2,584,633 10.50 2,461,556 10.00
3,091,128 14.25 867,549 4.00 867,549 4.00 1,084,436 5.00
Capital Stress Testing. We completed our annual capital stress tests utilizing multiple economic scenarios, including an
adverse idiosyncratic scenario unique to our Bank. The results of each stress test reflected that we would maintain well-capitalized
status for all capital ratios over the stress test time horizon.
Growth. In 2019, we (i) opened loan production offices in Alpharetta, Georgia and Irvine, California for our Indirect RV &
Marine lending team, an office in Greenville, North Carolina for our Community Banking agricultural lending team, and a loan
production office in Jacksonville Beach, Florida; (ii) opened retail banking offices in Ft. Worth, Texas and Dallas, Texas; (iii) closed
three retail banking offices, including one in Magnolia, Arkansas, one in Clarksville, Arkansas and one in Mobile, Alabama; (iv)
replaced an existing leased facility with a bank-owned facility in Winston-Salem, North Carolina; and (v) converted a loan production
office in East Point, Georgia to a retail banking office. In 2020, among other things, we expect to complete construction on our new
corporate headquarters in Little Rock, Arkansas.
We may open additional branches and loan production offices as our needs and resources permit. Additionally, as we have done
in recent quarters, we may relocate offices and we may close certain offices and consolidate the business of such offices into other
nearby offices. Opening new offices is subject to local banking market conditions, availability of satisfactory 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 or close current offices as a result of a variety of
factors including our financial results, changes in economic or competitive conditions, strategic opportunities, individual office
profitability metrics or other factors
During 2019, we spent $99 million on capital expenditures for premises and equipment. Our capital expenditures for 2020 are
expected to be in the range of $40 million to $50 million, including progress payments on construction projects expected to be
completed in 2020, 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 obtaining or
inability to obtain required approvals, potential premises and equipment expenditures associated with acquisitions, if any, and other
factors.
80
Operational Risk Management
Overview. Operational risk is the risk to current or anticipated earnings or capital arising from inadequate or failed internal
processes or systems, human errors or misconduct, reputational damage or adverse external events. Operational risk is inherent in all
of our businesses. To assist in our operational risk management, in addition to monitoring our operational risk appetite using key
performance and risk metrics, we utilize risk control and self-assessments across the Bank to identify key operational risks and
associated key internal controls. We have in place a number of controls that assist in the management of operational risk including, but
not limited to, transactional documentation requirements; systems and procedures to monitor transactions; systems and procedures to
detect and mitigate attempts to commit fraud, penetrate our systems, access customer data, and/or deny access to our systems by
legitimate customers; regulatory compliance reviews; and periodic reviews by various components of our CRMG and our Internal
Audit function. Reconciliation procedures have also been established to ensure that data processing systems accurately capture data
and transactions. Further, we have programs and procedures to maintain contingency and business continuity plans for operational
support in the event of disruptions to our business. We also mitigate certain operational risks through the purchase of insurance. Our
Operational Risk Management group, which reports to our CRO, also has responsibilities for assisting the business units in
identifying, managing and monitoring various other risks including risks resulting from the use of technology, cyber security risk,
third party vendor management risk, risks associated with the introduction of new products and services, and various other operational
risks.
Model risk is the risk that the various models and tools utilized throughout the Bank do not provide accurate results, particularly
in times of market stress or other unforeseen circumstances, or prove to be inadequate or inaccurate because of flaws in their design or
implementation. We have an internal Model Risk Management group, which reports to our CRO, that has developed a model
framework, in compliance with FRB Supervision and Regulation Letter SR 11-7: Guidance on Model Risk Management, whereby all
models and tools utilized throughout the Bank are inventoried, assessed, and validated in accordance with this framework.
As part of our operational risk management program, we also actively monitor our legal risk exposure. Legal risk arises from the
potential that unenforceable contracts, lawsuits or adverse judgments can disrupt or otherwise negatively affect our operations or
condition. These risks are inherent in all of our businesses. Legal risk exposures are actively and primarily managed by our business
units in conjunction with our legal department. Our ERC, BRC and our Board oversee our legal risk management. Specifically, our
legal department is responsible for providing advice, interpreting and identifying developments regarding laws, regulations, regulatory
guidance and litigation, and setting standards for communicating relevant changes to our Corporate Compliance group, each of our
lines of business managers and our Internal Audit group. Our legal department also identifies and communicates legal risk associated
with new products and business practices.
Reputational Risk Management
Reputational risk is the risk that adverse perceptions regarding our business practices or financial health, or adverse
developments, customer sentiment or other external perceptions regarding the practices of our competitors, or the financial services
industry, may adversely impact our reputation and business prospects. We have a team of bankers and risk professionals that monitor
our reputational risk exposure by tracking and measuring a variety of social media posts, and enforcing detailed policies and
procedures that are intended to govern our employees regarding the use of social media, websites and other external communications
made by employees. Additionally, we also monitor our reputational risk exposure by frequently monitoring other financial and non-
financial reputational risk-related metrics.
Strategic Risk Management
Strategic risk is the risk to current or anticipated earnings or capital, or franchise or enterprise value arising from adverse
business decisions, poor implementation of business decisions, deteriorations in national or regional macro-economic conditions, or
lack of responsiveness to changes in the financial services industry and operating environment. This risk is a function of the
compatibility of our strategic goals, business strategies, resources, and quality of implementation. The assessment of strategic risk
includes more than an analysis of our written strategic plan. It focuses on opportunity costs and how plans, systems, and
implementation affect our franchise or enterprise value. It also incorporates how management analyzes external factors, such as
economic, technological, competitive, regulatory, and other environmental changes, that affect our strategic direction. Our strategic
risk exposure is measured against our Board-approved strategic risk appetite, which monitors our performance against our strategic
objectives in addition to measuring our financial performance against our peer group. Also, as part of our strategic risk monitoring
process, the current and expected systemic macroeconomic environment is monitored using a combination of metrics, models and
various other tools.
81
Compliance Risk Management
Compliance risk is the risk of legal or regulatory sanctions, financial loss or damage to reputation resulting from failure to
comply with laws, regulations, rules, other regulatory requirements, or codes of conduct and other standards of self-regulatory
organizations applicable to us. Compliance risk exposures are actively and primarily managed by our business units in conjunction
with our Corporate Compliance group and the associated compliance programs operated under our compliance framework and
compliance management system govern the management of compliance risk. Our ERC and BRC oversee our compliance program.
Risks related to compliance matters are heightened by the heavily regulated environment in which we operate. We have
designed our processes and systems and provide education of applicable regulatory standards to our employees in an effort to comply
with these requirements. Our Corporate Compliance group and various other teams throughout the Bank perform various monitoring
and testing activities, and our Internal Audit Group performs periodic reviews of our various compliance programs, including reviews
of our Corporate Compliance group.
Recently Issued Accounting Standards
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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is included in “Market and Interest Rate Risk Management” in MD&A beginning on page 71
and is hereby incorporated by reference.
82
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Bank OZK
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Bank OZK and its subsidiaries (the “Bank”) as of December
31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the
“consolidated financial statements”). We also have audited the Bank's internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Bank as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December
31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Bank's management is responsible for these consolidated 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 Report of
Management on the Bank’s Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on the Bank’s consolidated financial statements and on the Bank's internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. 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 audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
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.
83
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Subjective Criteria
As described in Notes 1 and 4 to the consolidated financial statements, management assesses the adequacy of the allowance for
loan losses based on evaluations of the loan portfolio utilizing objective and subjective criteria. As of December 31, 2019 the Bank
had an allowance for loan losses of $108.5 million on a total loan balance of $17.53 billion. The objective criteria primarily include an
internal grading system and specific allowances for impaired loans. The Bank subjectively assesses the adequacy of the allowance for
loan losses and the need for additions thereto, with consideration given to historical loss percentages over various time periods and
other subjective criteria such as the nature and mix of the portfolio, national, regional and local business and economic conditions that
may affect borrowers’ ability to pay, concentrations of credit, changes in the experience, ability and depth of lending management and
other relevant staff, changes in the nature and volume of the portfolio and in the terms of the loans, overall portfolio quality, and other
relevant factors.
The principal considerations for our determination that performing procedures relating to the allowance for loan losses –
subjective criteria is a critical audit matter are (i) there was significant judgment by management in assessing the historical loss
percentages over various time periods and other subjective criteria used in the determination of the allowance for loan losses, which in
turn led to a high degree of auditor judgment and subjectivity in performing procedures relating to the historical loss percentages over
various time periods and other subjective criteria; (ii) significant audit effort was necessary in evaluating the historical loss
percentages over various time periods and other subjective criteria; and (iii) there was a high degree of auditor judgment in evaluating
the audit evidence related to the reasonableness of the historical loss percentages over various time periods and other subjective
criteria.
The approach to addressing the matter involved performing procedures and evaluating audit evidence in connection with
forming the overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls
relating to the allowance for loan losses including the subjective criteria. These procedures also included, among others, testing
management’s process for determining the allowance for loan losses, testing significant data inputs used within the calculation for
completeness and accuracy, evaluating the reasonableness of management’s historical loss percentages over various time periods and
other subjective criteria, and the appropriateness of management’s methodology given changes in the current macroeconomic
environment and characteristics of the loan portfolio.
/s/PricewaterhouseCoopers LLP
Little Rock, Arkansas
February 28, 2020
We have served as the Bank’s auditor since 2016.
84
BANK OZK
CONSOLIDATED BALANCE SHEETS
$
$
$
ASSETS
Cash and cash equivalents
Investment securities – available for sale (“AFS”)
Federal Home Loan Bank of Dallas ("FHLB") and other banker's bank stocks
Non-purchased loans
Purchased loans
Allowance for loan losses
Net loans
Premises and equipment, net
Foreclosed assets
Accrued interest receivable
Bank owned life insurance (“BOLI”)
Goodwill and 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; 100,000,000 shares
authorized; no shares issued or outstanding at
December 31, 2019 or 2018
Common stock; $0.01 par value; 300,000,000 shares authorized;
128,951,024 and 128,611,049 shares issued and outstanding
at December 31, 2019 and 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity before noncontrolling interest
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
See accompanying notes to the Consolidated Financial Statements.
85
December 31,
2019
2018
(Dollars in thousands, except
per share amounts)
1,495,757 $
2,277,389
21,855
16,224,539
1,307,504
(108,525 )
17,423,518
711,541
19,096
75,208
738,860
684,542
107,962
23,555,728 $
2,795,251 $
8,307,607
7,371,401
18,474,259
11,249
351,387
223,663
119,916
221,786
19,402,260
290,672
2,862,340
25,941
15,073,791
2,044,032
(102,264 )
17,015,559
567,189
16,171
81,968
721,238
696,461
110,491
22,388,030
2,748,273
9,682,713
5,507,429
17,938,415
20,564
96,692
223,281
119,358
216,355
18,614,665
—
—
1,289
2,251,824
1,869,983
27,255
4,150,351
3,117
4,153,468
23,555,728 $
1,286
2,237,948
1,565,201
(34,105 )
3,770,330
3,035
3,773,365
22,388,030
BANK OZK
CONSOLIDATED STATEMENTS OF INCOME
2019
Year Ended December 31,
2018
(Dollars in thousands, except per share amounts)
2017
Interest income:
Non-purchased loans
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 losses
Net interest income after provision for loan losses
Non-interest income:
Service charges on deposit accounts
Trust income
BOLI income:
Increase in cash surrender value
Death benefits
Other income from purchased loans
Loan service, maintenance and other fees
Gains on sales of other assets
Net gains on investment securities
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
$
981,811 $
106,908
858,102 $
173,465
607,548
276,499
52,812
14,252
6,758
1,162,541
50,021
16,193
3,039
1,100,820
258,358
50
1,531
12,757
5,664
278,360
884,181
26,241
857,940
186,617
785
3,017
12,757
6,211
209,387
891,433
64,398
827,035
41,774
7,554
39,544
6,935
20,715
3,194
3,684
17,917
2,233
713
9,743
107,527
192,851
59,018
149,261
401,130
564,337
138,429
425,908
(2 )
425,906 $
3.30 $
3.30 $
20,700
3,211
7,784
20,354
2,219
17
7,011
107,775
170,478
56,362
153,912
380,752
554,058
136,977
417,081
25
417,106 $
3.24 $
3.24 $
25,460
22,430
656
932,593
96,083
132
1,305
12,620
5,024
115,164
817,429
28,092
789,337
42,853
6,691
18,246
431
13,456
15,696
5,553
4,033
16,899
123,858
152,194
53,198
127,280
332,672
580,523
158,586
421,937
(46 )
421,891
3.36
3.35
$
$
$
See accompanying notes to the Consolidated Financial Statements.
86
BANK OZK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss):
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
425,908 $
417,081 $
421,937
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
81,691
(19,793 )
(27,080 )
5,687
27,291
(8,134 )
(713 )
—
(4,033 )
175
61,360
487,268 $
—
(21,393 )
395,688 $
1,492
16,616
438,553
$
See accompanying notes to the Consolidated Financial Statements.
87
BANK OZK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Balances – December 31, 2016
Cumulative effect of change in
accounting principles
Balances – January 1, 2017, as
adjusted
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income
Common stock dividends
paid, $0.71 per share
Dividend paid to
noncontrolling interest
Issuance of 283,535 shares
of common stock for
exercise of stock options
Issuance of 238,794 shares
of unvested restricted
common stock
Stock-based compensation
expense
Forfeiture of 116,876 shares
of unvested restricted
common stock
Issuance of 14,476 shares of
common stock to non-
employee directors
Issuance of 6,600,000 shares
of common stock, net of
issuance costs of $247
Balances – December 31, 2017
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interest
Total
(Dollars in thousands, except per share amounts)
$
1,213 $ 1,901,880 $
914,434 $
(25,920 ) $
3,264 $ 2,794,871
—
1,133
2,720
(3,408 )
—
445
1,213 1,903,013
—
—
917,154
421,937
(29,328 )
—
3,264 2,795,316
421,937
—
—
—
(46 )
—
46
—
—
—
—
16,616
—
16,616
—
—
(88,732 )
—
—
—
—
—
—
(88,732 )
(250 )
(250 )
3
6,846
—
—
—
6,849
2
(2 )
—
—
12,329
—
—
—
—
—
—
12,329
(1 )
1
—
—
—
—
—
—
—
—
—
—
66
—
1,283 $ 2,221,844 $ 1,250,313 $
299,657
—
(12,712 ) $
—
299,723
3,060 $ 3,463,788
$
See accompanying notes to the Consolidated Financial Statements.
88
BANK OZK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interest
Total
(Dollars in thousands, except per share amounts)
Balances – December 31, 2017
$
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
loss
Common stock dividends
paid, $0.795 per share
Issuance of 223,840 shares
of common stock for
exercise of stock options
Issuance of 220,326 shares
of unvested restricted
common stock
Repurchase and cancellation of
71,750 shares of common stock
Stock-based compensation
expense
Forfeiture of 48,917 shares
of unvested restricted
common stock
Balances – December 31, 2018
$
1,283 $ 2,221,844 $ 1,250,313 $
417,081
—
—
(12,712 ) $
—
3,060 $ 3,463,788
417,081
—
—
—
25
—
(25 )
—
—
—
—
—
(21,393 )
—
(21,393 )
—
(102,218 )
—
—
(102,218 )
2
5,740
—
—
—
5,742
2
(2 )
—
(1 )
(3,769 )
—
—
14,135
—
—
—
—
—
—
—
(3,770 )
—
14,135
—
—
1,286 $ 2,237,948 $ 1,565,201 $
—
—
(34,105 ) $
—
—
3,035 $ 3,773,365
See accompanying notes to the Consolidated Financial Statements.
89
BANK OZK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Balances – December 31, 2018
$
Net income
Earnings attributable to
noncontrolling interest
Total other comprehensive
income
Common stock dividends
paid, $0.94 per share
Noncontrolling interest cash
contribution
Issuance of 83,500 shares
of common stock for
exercise of stock options
Issuance of 406,074 shares
of unvested restricted
common stock
Repurchase and cancellation of
63,716 shares of common stock
Stock-based compensation
expense
Forfeiture of 85,883 shares
of unvested restricted
common stock
Balances – December 31, 2019
$
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interest
Total
(Dollars in thousands, except per share amounts)
1,286 $ 2,237,948 $ 1,565,201 $
425,908
—
—
(34,105 ) $
—
3,035 $ 3,773,365
425,908
—
—
—
(2 )
—
2
—
—
—
—
61,360
—
61,360
—
—
(121,124 )
—
—
—
—
—
—
(121,124 )
80
80
1
1,384
—
—
—
1,385
4
(4 )
—
(1 )
(1,674 )
—
—
14,169
—
—
—
—
—
—
—
(1,675 )
—
14,169
(1 )
—
1,289 $ 2,251,824 $ 1,869,983 $
1
—
27,255 $
—
—
3,117 $ 4,153,468
See accompanying notes to the Consolidated Financial Statements.
90
BANK OZK
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 losses
Provision for losses on foreclosed and other assets
Writedown of signage due to strategic rebranding
Net amortization of investment securities AFS
Net gains on investment securities AFS
Amortization of operating lease right-of-use assets
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
Income tax benefit from revaluation of deferred tax assets
and liabilities
Deferred income tax (benefit) expense
Increase in cash surrender value of BOLI
BOLI death benefits in excess of cash surrender value
Stock-based compensation expense
Changes in assets and liabilities:
Accrued interest receivable
Income taxes receivable and other assets, net
Accrued interest payable and other liabilities
Net cash provided by operating activities
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
425,908 $
417,081 $
421,937
22,258
12,859
(2 )
26,241
2,419
—
17,800
(713 )
7,392
—
—
(25,248 )
(2,233 )
—
(100,903 )
(20,715 )
(3,194 )
14,169
6,710
33,003
8,893
424,644
21,920
13,520
25
64,398
3,220
4,915
22,076
(17 )
—
—
8,313
(43,870 )
(2,219 )
—
33,057
(20,700 )
(3,211 )
14,135
(17,360 )
186,683
3,348
705,314
20,550
13,520
(46 )
28,092
3,488
—
15,972
(4,033 )
—
(207,166 )
219,261
(78,639 )
(5,553 )
(49,812 )
248,449
(18,246 )
(431 )
12,329
(12,689 )
(221,634 )
(869 )
384,480
See accompanying notes to the Consolidated Financial Statements.
91
BANK OZK
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
Proceeds from sale of FHLB and other bankers' bank stock
Purchases of FHLB and other bankers' bank stock
Net increase of non-purchased loans
Net payments received on purchased loans
Purchases of premises and equipment
Proceeds from sales of other assets
Purchases of BOLI
Proceeds from BOLI death benefits
Cash invested in unconsolidated investments and
noncontrolling interest
Net cash provided (used) by investing activities
Cash flows from financing activities:
Net increase in deposits
Repayment of fixed-rate callable FHLB advances
Net proceeds from (repayments of) other borrowings
Net (decrease) increase in repurchase agreements with customers
Proceeds from exercise of stock options
Proceeds from issuance of common stock
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
$
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
97,210 $
551,633
—
30,979
(26,893 )
(1,095,383 )
638,276
(98,691 )
46,770
—
4,774
— $
496,618
(815,413 )
37,975
(34,992 )
(2,178,639 )
1,072,735
(86,752 )
30,970
(45,000 )
5,820
243,282
244,943
(1,605,321 )
—
(22,768 )
(2,851,239 )
1,421,951
(38,864 )
40,939
(60,000 )
1,475
(28,044 )
120,631
(9,781 )
(1,526,459 )
(4,795 )
(2,630,397 )
535,844
—
254,695
(9,315 )
1,385
—
(1,675 )
(121,124 )
659,810
1,205,085
290,672
1,495,757 $
746,070
(20,000 )
94,373
(48,767 )
5,741
—
(3,770 )
(102,218 )
671,429
(149,716 )
440,388
290,672 $
1,617,467
(20,000 )
417
4,221
6,849
299,723
—
(88,732 )
1,819,945
(425,972 )
866,360
440,388
See accompanying notes to the Consolidated Financial Statements.
92
Bank OZK
Notes to Consolidated Financial Statements
December 31, 2019, 2018 and 2017
1. Organization and Regulation
Bank OZK (the “Bank”) is headquartered in Little Rock, Arkansas and provides a wide range of retail and commercial banking
services. At December 31, 2019 the Bank conducted operations through more than 250 offices, including offices in Arkansas,
Georgia, Florida, North Carolina, Texas, Alabama, South Carolina, California, New York and Mississippi. The Bank owns 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”), 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 “Trusts”). In addition, the Bank owns a subsidiary that holds its available for sale (“AFS”)
investment securities, a subsidiary engaged in the development of real estate, a subsidiary that holds an ownership interest in a private
aircraft and various other entities that hold loans, foreclosed assets or tax credits or engage in other activities.
The Bank is an Arkansas state banking corporation and is subject to regulation by the Arkansas State Bank Department
(“ASBD”). Because the Bank is an insured depository institution that is not a member bank of the Board of Governors of the Federal
Reserve System (“FRB”), its primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”).
Basis of presentation, use of estimates, principles of consolidation and changes in accounting policy – 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 these consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
These consolidated financial statements include the accounts of the Bank, the investment subsidiary, the real estate subsidiary,
the aircraft subsidiary and various other entities that hold loans, foreclosed assets or tax credits or engage in other activities. In
addition, subsidiaries in which the Bank has majority voting interest (principally defined as owning a voting or economic interest
greater than 50%) or where the Bank 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 Bank 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 Bank 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 Bank 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 Bank’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. All 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 Bank’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 Bank has determined that the 100%-owned finance subsidiary Trusts are VIEs, but
that the Bank is not the primary beneficiary of the Trusts. Accordingly, the Bank 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.
On January 1, 2017, the Bank adopted Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-
Based Payment Accounting.” In accordance with the provisions of ASU 2016-09, the Bank elected to account for forfeitures of stock-
based compensation awards as they occur. Prior to the adoption of ASU 2016-09, the Bank estimated forfeiture rates and the impact
that such estimated forfeitures would have on stock-based awards that were expected to vest. The Bank believes this forfeiture policy
election is a more efficient method of accounting for forfeitures. The adoption of ASU 2016-09 resulted in a cumulative adjustment to
increase total stockholders’ equity at January 1, 2017 by approximately $0.4 million.
93
In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02 “Reclassification of Tax Effects
from Other Comprehensive Income” which permits entities to reclassify tax effects stranded in accumulated other comprehensive
income (loss) as a result of the Tax Cuts and Jobs Act (the “Tax Act”) that was enacted on December 22, 2017. ASU 2018-02 was
effective for interim and annual periods beginning after December 15, 2018; however, early adoption was permitted. The Bank
adopted the provisions of ASU 2018-02 effective as of the beginning of 2017 as a cumulative effect adjustment by reclassifying $3.4
million from accumulated other comprehensive income (loss) to retained earnings. The adoption of ASU 2018-02 during 2017
allowed the Bank to align the tax effects included in accumulated other comprehensive income (loss) with the revised federal tax rates
included in the Tax Act.
Cash and cash equivalents – For cash flow purposes, cash and cash equivalents include cash on hand, amounts due from banks,
interest earning deposits with banks, and amounts on deposit with the FRB.
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, 2019 and 2018, the Bank has classified all of its
investment securities as AFS.
Investment securities AFS are reported at estimated fair value, with the unrealized gains and losses determined on a specific
identification basis. Such unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity,
included in other comprehensive income (loss) and are adjusted for changes in unrealized gains and losses, net of tax, reported in
accumulated other comprehensive income (loss), on a specific identification basis. The Bank 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
Bank considers estimates of fair values from at least two independent pricing sources for the majority of its individual securities in 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 that are not traded or that are
traded in a market that is not active, fair value is determined using unobservable inputs. Additionally, the valuation of investment
securities acquired in an acquisition may include certain unobservable inputs. All fair value estimates received by the Bank for its
investment securities are reviewed on a quarterly basis.
At December 31, 2019 and 2018, the Bank owned shares in the Federal Home Loan Bank of Dallas (“FHLB”), First National
Banker’s Bankshares, Inc. and certain other bankers’ bank stock, 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 Bank for
other-than-temporary impairment. Factors considered during such review include 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 impairment and various other
factors. The Bank 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 Bank’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 Bank’s financial condition, results of operations and
liquidity.
Interest and dividends on investment securities, including the amortization of premiums and accretion of discounts are included
in interest income. Any discount or premium on investment securities is accreted or amortized through maturity, through the earliest
call date for investment securities that are callable, or in the case of mortgage-backed securities, over the estimated life of the security.
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 – Non-purchased loans include all loans except loans acquired in previous acquisitions. 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 accretion or amortization of deferred fees or costs. Interest on non-
94
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. Minimum interest, yield maintenance income and prepayment penalties are recorded as adjustments to yield
on the related loan when such items are earned. Loan service, maintenance and various other fees that are not considered yield
adjustments are recorded as non-interest income when such items are earned and collection appears likely.
In the ordinary course of business, the Bank 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.
Purchased loans – Purchased loans consist of all loans acquired in previous acquisitions. 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 cash flows. 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 an 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, 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, Day 1 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 the Bank’s 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 the
Bank’s 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 Bank that provides material insight regarding the loan’s performance, the status of the borrower or the
quality, condition or value of the underlying collateral. To the extent that current information indicates it is probable that the Bank 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 losses (“ALL”). To the extent that current information indicates it is probable
that the Bank will not be able to collect all amounts according to the contractual terms thereof, such loan is rated FV77, is included in
certain of the Bank’s credit quality metrics, is considered impaired and is considered in the determination of the provision expense for
the reporting period and the required level of ALL.
In determining the Day 1 Fair Values of purchased loans without evidence of credit deterioration at the date of acquisition,
management includes (i) no carryover of any previously recorded ALL 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 Day 1 Fair Value of each loan. This evaluation includes no carryover of any previously recorded ALL. In
determining the Day 1 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 such purchased loans) and an accretable difference (the
yield component of such 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 losses. Subsequent increases
in expected cash flows following any previous decrease will result in a reversal of the provision for loan losses to the extent of prior
charges and then an adjustment to accretable yield.
95
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.
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 Bank that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality,
condition 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 credit quality ratios, is not considered to be an impaired loan,
and is not considered in the determination of the required ALL. 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 Bank’s credit
quality metrics, is considered an impaired loan, and is considered in the determination of the provision expense for the reporting
period and the required level of ALL; however, in accordance with GAAP, the Bank 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 losses to
the extent of prior charges and then an adjustment to accretable yield.
Allowance for loan losses (“ALL”) – The ALL is calculated pursuant to GAAP under the incurred loss methodology and is
established through a provision for such losses charged against income. All or portions of loans deemed to be uncollectible are
charged against the ALL when management believes that collectability of all or some portion of outstanding principal is unlikely.
Subsequent recoveries, if any, of loans previously charged off are credited to the ALL.
The ALL is maintained at a level management believes will be adequate to absorb probable incurred losses in the loan portfolio.
Provision to and the adequacy of the ALL are based on evaluations of the loan 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 Bank
subjectively assesses the adequacy of the ALL and the need for additions thereto, with consideration given to the nature and mix of the
portfolio, national, regional and local business and economic conditions that may affect borrowers’ ability to pay, concentrations of
credit, changes in the experience, ability and depth of lending management and other relevant staff, changes in the nature and volume
of the portfolio and in the terms of the loans, overall portfolio quality and other relevant factors. Changes in these criteria or the
availability of new information could require adjustment of the ALL in future periods. While a specific allowance has been calculated
for impaired loans, no portion of the Bank’s ALL is restricted to any individual loan or group of loans, and the entire ALL is available
to absorb losses from any and all loans.
The Bank’s internal grading system assigns grades to all non-purchased loans, 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 is determined by the account officer and other
senior lending officers at the time the loan is made and changed from time to time to reflect an ongoing assessment of credit risk.
Grades are reviewed on specific loans from time to time by senior management and as part of the Bank’s internal credit risk
management processes. The risk elements considered by management in its determination of the appropriate grade for individual loans
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),
interest rate stress tolerance (the project’s ability to withstand increases in applicable interest rates), 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, nature and down payment
requirements of contracts for presale or preleasing, if any, experience and ability of the developer, loan-to-cost (“LTC”) and LTV
ratios, interest rate stress tolerance (the project’s ability to withstand increases in applicable interest rates), permanent refinancing exit
rate stress tolerance (the effect of increases in applicable interest rates on exiting the loan via permanent loan refinancing), sales exit
capitalization rate stress tolerance (the effect of increases in capitalization rates on exiting the loan via a sale of the property) and sales
exit margin ratio (the percentage of individual units (e.g. lots or condos) sold that are needed to repay the loan); (3) for commercial
and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business,
96
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, the operating results, experience
and ability of the borrower, historical and expected market conditions and the age, condition, value, nature, quality and marketability
of collateral. In addition, for each category the Bank considers secondary sources of income and the financial strength of the borrower
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”) based on the borrower’s credit score and an expected loss given default (“LGD”)
based on the underlying collateral securing the loan. The PD factor is based on composite third-party information for similar loans
and borrowers that have previously defaulted.
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, recent trends of
charge-offs by loan types and a variety of other 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 provision expense for the reporting period and the required level of
ALL. 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 Bank
will not be able to collect all amounts according to the contractual terms thereof, such loan is considered in the determination of the
provision expense for the reporting period and the required level of ALL and may result in an allowance allocation or a partial or full
charge-off.
At both December 31, 2019 and 2018, the Bank established an ALL totaling $1.6 million for its purchased loan portfolio. Such
ALL was based on the Bank’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 not otherwise been considered
in establishing the Day 1 Fair Values.
The accrual of interest on non-purchased loans and purchased loans without evidence of credit deterioration at the date of
acquisition is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. The
Bank generally places a loan, excluding purchased loans with evidence of credit deterioration at the date of acquisition, on nonaccrual
status when such loan 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 Bank may continue to accrue interest on certain loans contractually past due 90 days or more if such loans are both
well secured and in the process of collection. At the time a loan is placed on nonaccrual status, interest previously accrued but
uncollected is reversed and charged against interest income. Nonaccrual loans are generally returned to accrual status when payments
are no longer past due, the loan has performed in accordance with its contractual terms for a reasonable period of time (generally at
least six months), and is expected to continue to perform in accordance with its contractual terms. If a loan is determined to be
uncollectible, the portion of the principal determined to be uncollectible is charged against the ALL. 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 Bank are considered troubled debt restructurings (“TDRs”) and are included in impaired loans. Income on nonaccrual
loans, including impaired loans, is recognized on a cash basis when and if actually collected. Income on TDRs is recognized on a cash
basis until such time as the TDR has performed in accordance with its modified terms for a reasonable period of time (generally at
least six months) and is expected to continue to perform. Once such performance and expected performance conditions are met, the
TDR is returned to accrual status but continues to be reported as an impaired loan.
All loans deemed to be impaired are evaluated individually. The Bank considers a loan, 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 Bank will be unable to collect all amounts due according to the contractual terms thereof. The Bank 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
97
allocation, a partial or full charge-off or a provision for loan losses. Most of the Bank’s nonaccrual loans, excluding purchased loans
with evidence of credit deterioration at the date of acquisition, and all TDRs are considered impaired. The majority of the Bank’s
impaired loans are dependent upon collateral for repayment. For such loans, impairment is measured by comparing collateral value
and anticipated cash payments, if any, net of estimated holding and selling costs, to the current investment in the loan. For all other
impaired loans, the Bank compares estimated discounted cash flows to the current investment in the loan. To the extent that the
Bank’s current investment in a particular loan exceeds its estimated net collateral value or its estimated discounted cash flows, the
impaired amount is charged off as a reduction of the ALL. The Bank’s practice is to charge off any estimated loss as soon as
management is able to identify and reasonably quantify such potential loss.
The Bank may also include specific ALL allocations for qualitative factors.
Changes in the criteria used in this evaluation or the availability of new information could cause the ALL to be increased or
decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the
ALL 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 fair value less estimated cost to sell 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 considers a
number of factors including, among others, appraised value, estimated selling price, estimated holding periods and net present value 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 Bank 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 that results in a change in management’s estimates and assumptions, an increase or decrease of the deferred tax asset
valuation allowance will be recorded as an adjustment to deferred income tax expense (benefit).
The Bank 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.
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The Bank files consolidated tax returns. The Bank and the other consolidated entities provide for income taxes on a separate
return basis and remit to the Bank amounts determined to be currently payable. The Bank 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 Bank is
no longer subject to income tax examinations by U.S. federal tax authorities for years prior to 2016 and state and local tax authorities
prior to 2015.
Service charges on deposit accounts – Service charges on deposit accounts typically represent fees for monthly account
maintenance and transaction activity. This revenue is generally recognized when the performance obligation has been achieved or
transaction completed and payment is generally received when the performance obligation has been satisfied.
Bank owned life insurance (“BOLI”) – BOLI consists of life insurance purchased by the Bank on (i) a qualifying group of
officers with the Bank designated as owner and beneficiary of the policies and (ii) one of the Bank’s executive officers with the Bank
designated as owner and both the Bank 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 Bank’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.
Goodwill and Intangible assets – Intangible assets consist primarily of goodwill and core deposit intangibles. Goodwill
represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The Bank had goodwill of
$660.8 million at both December 31, 2019 and 2018. The Bank performed its annual impairment test of goodwill as of September 30,
2019. This test indicated no impairment of the Bank’s goodwill. During much of 2019, the Bank experienced a decline in market
capitalization as a result of a decline in the share price of the Bank’s common stock. As a result, the Bank periodically performed
additional goodwill impairment tests during 2019 including a test performed as of December 31, 2019. The tests performed during
2019 as well as the December 31, 2019 impairment test included various valuation considerations including comparable peer data,
precedent transaction comparables, overall Bank financial performance, share price of the Bank’s common stock and other factors.
The tests performed during 2019 as well as the December 31, 2019 impairment test indicated no impairment of goodwill.
Core deposit intangibles represent premiums paid for deposits acquired via acquisition and are being amortized over three to
seven years. Core deposit intangibles totaled $75.0 million and $77.5 million at December 31, 2019 and 2018, respectively, less
accumulated amortization of $51.1 million and $42.3 million at December 31, 2019 and 2018, respectively.
The aggregate amount of amortization expense for the Bank’s core deposit intangibles is expected to be $9.1 million in 2020,
$6.4 million in 2021, $5.5 million in 2022 and $2.7 million in 2023.
Stock-based compensation – The Bank has an equity incentive plan for officers and employees and non-employee directors.
This plan is described more fully in Note 15. The Bank 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 and, in the case of certain long-term incentive agreements, based on
the expected performance achievement levels over the term of the agreements. Such cost is recognized over the vesting period of the
award.
Earnings per common share – Earnings per common share (“EPS”) are computed using the two-class method. Basic EPS are
computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding
during the applicable period. Diluted EPS 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 Bank’s common stock options
using the treasury stock method and the Bank’s non-vested performance stock units under its long-term incentive agreements. The
Bank has determined that its outstanding non-vested restricted stock awards granted under its restricted stock plan and the
nonemployee director stock plan are participating securities. The calculations of basic and diluted EPS are included in Note 23.
Segment disclosures – The Bank operates in only one segment – community banking. Accordingly, there is no requirement to
report segment information in the Bank’s consolidated financial statements. No single external customer comprises more than 10% of
the Bank’s revenues. Interest income on loans where the underlying collateral is located outside the United States was not material
during 2019, 2018 or 2017.
Recent accounting pronouncements – In February 2016, Financial Accounting Standards Board (“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 are 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, the lessee may elect to not apply the recognition provisions of ASU 2016-02 but rather, elect to recognize the lease
payments in net income on a straight line basis over the lease term. ASU 2016-02 was effective for interim periods and fiscal years
99
beginning after December 15, 2018. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Impairments”
which provided additional transition options including allowing entities to not apply the new lease standard to the comparative periods
presented in their financial statements in the year of adoption. The Bank adopted ASU 2016-02 beginning January 1, 2019 and chose
not to restate previous periods. As a result of adopting the provisions of ASU 2016-02, the Bank recorded approximately $60 million
of leased assets and related lease liabilities on its balance sheet. The Bank elected certain transition relief provisions whereby it did not
reassess (i) whether any expired or existing contract is a lease or contains a lease, (ii) the lease classification of any expired or existing
leases and (iii) initial direct costs for any existing leases.
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 method that is utilized in estimating the ALL with a method that requires management to estimate
credit losses expected to occur over the life of the financial instrument and to recognize those estimated losses at origination. This
revised method is what FASB describes as the current expected credit loss (“CECL”) method, and FASB believes the CECL method
will result in more timely recognition of credit losses since the CECL method 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 was
effective for interim and annual periods beginning after December 15, 2019. The Bank currently expects that the adoption of ASU
2016-13 will result in an overall increase in our ACL ranging from $70 million to $95 million and will be recorded as a cumulative
effect adjustment to retained earnings. This expected overall increase will be comprised of an increase in our ACL for the outstanding
balance of our loan portfolio expected to range from $25 million to $40 million and an ACL for the closed but unfunded portion of our
loan portfolio expected to range from $45 million to $55 million. The Bank’s adoption of CECL and its estimate of credit losses is still
being evaluated and influenced by continued refinement of assumptions, methodologies and judgments. Key drivers in estimating our
ACL under the CECL method include individual loan score card results, reasonable and supportable forecast periods, loss reversion
estimates and numerous other inputs and assumptions, all of which are subject to significant judgments and estimates that could
materially affect the estimated ACL under CECL. Subsequent to the adoption of CECL, the Bank may experience increased volatility
in its quarterly provision for ACL.
In January 2017, FASB issued ASU 2017-04 “Intangibles-Goodwill and Other (Topic 350)” which amends the requirement
that entities compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test.
As a result, entities should perform their annual or interim goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount and recognize an impairment if the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is
effective for annual periods beginning after December 15, 2019. The Bank currently expects the adoption of ASU 2017-04 will not
have a significant effect on its annual goodwill impairment test or its financial position or results of operations.
In March 2017, FASB issued ASU 2017-08 “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)” which
amends the accounting for the amortization of premiums for certain purchased callable debt securities by shortening the amortization
period to the earliest call date. The Bank adopted the provisions of ASU 2017-08 beginning January 1, 2019. The adoption of ASU
2017-08 did not have a material effect on the Bank’s financial position or results of operations.
In August 2018, FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies various disclosure requirements on fair value
measurements in Topic 820. These modifications include, but are not limited to, the removal of the requirement to disclose the reasons
for and amounts of transfers between Level 1 and Level 2 assets and liabilities, and certain other disclosures that are no longer
considered cost beneficial. In addition, ASU 2018-13 requires additional disclosures related to certain Level 3 unobservable inputs as
well as disclosures related to changes in unrealized gains and losses for Level 3 assets and liabilities. ASU 2018-13 was effective for
interim and annual periods beginning after December 15, 2019. The Bank adopted ASU 2018-13 beginning January 1, 2020 and the
adoption of the provisions of ASU 2018-13 did not have a significant effect on the Bank’s financial statement disclosures.
In August 2018, FASB issued ASU 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU
2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a
service contract is not affected by these amendments. ASU 2018-15 was effective for interim and annual periods beginning after
December 15, 2019. The Bank adopted ASU 2018-15 on a prospective basis beginning January 1, 2020 and will apply the provisions
of ASU 2018-15 to cloud computing arrangements entered into on or after January 1, 2020.
In December 2019, FASB issued ASU 2019-12 “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes”
which eliminates some exceptions to ACS 740 and simplifies the accounting related to franchise taxes and other taxes partially based
100
on income. In addition, ASU 2019-12 clarifies when a step-up in basis should be considered as part of a business combination, as well
as when entities should recognize enacted changes in tax law. ASU 2019-12 is effective for annual reporting periods beginning after
December 15, 2020 with early adoption permitted. The Bank is currently evaluating the effect that ASU 2019-12 may have, if any, on
its financial position or results of operations.
Reclassifications – Certain reclassifications of prior years’ amounts have been made to conform with the 2019 financial
statements presentation. These reclassifications had no impact on prior years’ net income, as previously reported.
2. Investment Securities
The following table is a summary, as of the dates indicated, of the amortized cost and estimated fair values of investment
securities, all of which are classified as AFS.
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair
Value
December 31, 2019:
Obligations of states and political subdivisions
U.S. Government agency mortgage-backed securities
Corporate obligations
Total investment securities AFS
December 31, 2018:
Obligations of states and political subdivisions
U.S. Government agency mortgage-backed securities
Other U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Total investment securities AFS
$
503,399 $
1,732,671
5,229
$ 2,241,299 $
18,250 $
19,170
169
37,589 $
(19 ) $
521,630
(1,480 ) 1,750,361
5,398
(1,499 ) $ 2,277,389
—
$
615,328 $
2,248,065
27,538
15,188
1,109
$ 2,907,228 $
3,435 $
3,656
—
22
—
7,113 $
(12,147 ) $
606,616
(39,175 ) 2,212,546
26,936
15,183
1,059
(52,001 ) $ 2,862,340
(602 )
(27 )
(50 )
The following table shows estimated fair value of investment securities AFS having gross unrealized losses and the amount of
such unrealized losses, aggregated by investment category and length of time that individual investment securities have been in a
continuous unrealized loss position, as of the dates indicated.
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, 2019:
Obligations of states and political subdivisions
997 $
U.S. Government agency mortgage-backed securities 176,631
$ 177,628 $
Total temporarily impaired investment securities
$
December 31, 2018:
Obligations of states and political subdivisions
$ 198,351 $
U.S. Government agency mortgage-backed securities 242,951
1,085
Other U.S. Government agency securities
9,973
Corporate obligations
—
CRA qualified investment fund
$ 452,360 $
Total temporarily impaired investment securities
2 $
4,945 $
387 280,526
389 $ 285,471 $
17 $
5,942 $
1,093 457,157
1,110 $ 463,099 $
19
1,480
1,499
3,255 $ 249,761 $
2,004 1,440,618 37,171 1,683,569
26,937
9,973
1,059
8,892 $ 448,112 $ 12,147
39,175
602
27
50
5,301 $ 1,717,290 $ 46,700 $ 2,169,650 $ 52,001
25,852
—
1,059
587
—
50
15
27
—
At December 31, 2019 and 2018, 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 considers these unrealized losses
to be temporary in nature. While the Bank primarily evaluates its investment strategy relative to current economic and business
conditions and may reposition its investment securities portfolio from time to time, at the present time, the Bank does not have the
intent to sell these investment securities and, with unrealized losses, more likely than not, would not be required to sell these
investment securities before fair value recovers to amortized cost.
101
The following table shows the amortized cost and estimated fair value of investment securities AFS by maturity on estimated
date of repayment as of December 31, 2019.
One year or less
After one year to five years
After five years to ten years
After ten years
Total
Amortized
Cost
Estimated
Fair Value
(Dollars in thousands)
440,726 $
1,088,415
318,838
393,320
2,241,299 $
445,342
1,099,740
326,702
405,605
2,277,389
$
$
For purposes of this maturity or estimated repayment distribution, all investment securities AFS are shown based on their
contractual maturity date or estimated date of repayment, except (i) U. S. Government agency mortgage-backed securities are
allocated among various maturities or repayment categories based on an estimated repayment schedule utilizing Bloomberg median
prepayment speeds or other estimates of prepayment speeds and interest rate levels at the measurement date and (ii) callable
investment securities for which the Bank has received notification of call are included in the maturity or repayment category in which
the calls occurs or is expected to occur. Expected maturities may differ from contractual maturities because issuers 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 Bank’s investment securities AFS during the years indicated.
Sales proceeds
Gross realized gains
Gross realized losses
Net gains on investment securities
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
$
$
97,210 $
1,071 $
(358 )
713 $
— $
17 $
—
17 $
243,282
4,836
(803 )
4,033
Investment securities with carrying values of $661 million and $797 million at December 31, 2019 and 2018, respectively, were
pledged to secure public funds and trust deposits and for other purposes required or permitted by law.
At December 31, 2019 and 2018, the Bank had no holdings of investment securities of any one issuer, other than U.S.
Government agency mortgage-backed securities issued by the Federal National Mortgage Association, in an amount greater than 10%
of total common stockholders’ equity.
3. Loans
Total Loans
The following table is a summary of the total 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 loans
December 31,
2019
2018
(Dollars in thousands)
998,632
$
3,956,579
6,391,429
230,076
1,194,192
12,770,908
661,952
2,934,534
1,164,649
$ 17,532,043
5.7 % $ 1,049,460
22.6 4,319,388
36.4 6,562,185
165,088
1.3
6.8 1,116,026
72.8 13,212,147
823,417
3.8
16.8 2,345,863
736,396
6.6
100.0 % $ 17,117,823
6.1 %
25.2
38.4
1.0
6.5
77.2
4.8
13.7
4.3
100.0 %
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Non-Purchased Loans
The following table is a summary of the non-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 non-purchased loans
December 31,
2019
2018
(Dollars in thousands)
745,924
$
3,288,130
6,356,893
228,331
1,161,514
11,780,792
637,573
2,645,574
1,160,600
$ 16,224,539
703,197
4.6 % $
20.3 3,306,994
39.2 6,411,631
161,780
1.4
7.1 1,050,987
72.6 11,634,589
772,470
3.9
16.3 1,935,592
731,140
7.2
100.0 % $ 15,073,791
4.7 %
21.9
42.5
1.1
7.0
77.2
5.1
12.8
4.9
100.0 %
The above table includes deferred costs, net of deferred fees, that totaled $58.1 million at December 31, 2019 and $19.4 million
at December 31, 2018.
Non-purchased loans on which the accrual of interest has been discontinued totaled $23.2 million and $34.8 million at
December 31, 2019 and 2018, respectively. Interest income collected and recognized during 2019, 2018 and 2017 for nonaccrual loans
at December 31, 2019, 2018 and 2017 was $0.5 million, $2.2 million and $0.3 million, respectively. Under the original terms, these
loans would have reported $2.4 million, $4.3 million and $0.9 million of interest income during 2019, 2018 and 2017, respectively.
Purchased Loans
The following table is a summary, as of the dates indicated, of the purchased loan portfolio by principal category and purchased
loans (i) without evidence of credit deterioration at the date of acquisition and (ii) with evidence of credit deterioration at the date of
acquisition.
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
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,
2019
2018
(Dollars in thousands)
$
$
252,708
668,449
34,536
1,745
32,678
990,116
24,379
288,960
4,049
19.3 % $
51.1
2.6
0.1
2.5
75.6
1.9
22.1
0.4
1,307,504 100.0 % $
346,263
1,012,394
150,554
3,308
65,039
1,577,558
50,947
410,271
5,256
16.9 %
49.5
7.4
0.2
3.2
77.2
2.5
20.1
0.2
2,044,032 100.0 %
$
1,226,305
93.8 % $
1,916,382
93.8 %
81,199
6.2
1,307,504 100.0 % $
127,650
6.2
2,044,032
100.0 %
$
Purchased loans on which the accrual of interest has been discontinued totaled $20.6 million and $21.4 million at December 31,
2019 and 2018, respectively. Interest income collected and recognized during 2019, 2018 and 2017 for nonaccrual purchased loans at
December 31, 2019, 2018 and 2017 was $1.2 million, $1.5 million and $1.5 million, respectively. Under the original terms, these
loans would have reported $2.7 million of interest income in each of 2019, 2018 and 2017.
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The following table presents a summary, during the years indicated, of the activity of the Bank’s purchased loans with evidence
of credit deterioration at the date of acquisition.
Balance – beginning of year
Accretion
Transfer to foreclosed assets
Net payments received
Loans sold
Net charge-offs
Other activity, net
Balance – end of year
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
$
127,650 $
15,060
(436 )
(59,741 )
—
(1,327 )
(7 )
81,199 $
175,221 $
24,459
(1,621 )
(69,325 )
—
(1,095 )
11
127,650 $
241,619
38,925
(2,678 )
(98,815 )
(1,717 )
(918 )
(1,195 )
175,221
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 – beginning of year
Accretion
Adjustments to accretable difference due to:
Loans transferred to foreclosed assets
Loans paid off
Cash flow revisions as a result of renewals
and/or modifications
Accretable difference – end of year
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
36,002 $
(15,060 )
45,182 $
(24,459 )
65,152
(38,925 )
(48 )
—
(114 )
—
(300 )
(352 )
$
2,918
23,812 $
15,393
36,002 $
19,607
45,182
4. Allowance for Loan Losses (“ALL”) and Credit Quality Indicators
Allowance for Loan Losses
The following table is a summary of activity within the ALL during the years indicated.
Balance – beginning of year
Non-purchased loans charged off
Recoveries of non-purchased loans previously
charged off
Net charge-offs – non-purchased loans
Purchased loans charged off
Recoveries of purchased loans previously charged off
Net charge-offs – purchased loans
Net charge-offs – total loans
Provision for loan losses:
Non-purchased loans
Purchased loans
Total provision
Balance – end of year
ALL Allocated to non-purchased loans
ALL Allocated to purchased loans
Total ALL
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
102,264 $
(15,346 )
94,120 $
(54,361 )
1,807
(13,539 )
(8,997 )
2,556
(6,441 )
(19,980 )
19,800
6,441
26,241
108,525 $
106,925 $
1,600
108,525 $
1,559
(52,802 )
(5,647 )
2,195
(3,452 )
(56,254 )
60,946
3,452
64,398
102,264 $
100,664 $
1,600
102,264 $
$
$
$
104
76,541
(8,654 )
1,733
(6,921 )
(6,119 )
2,527
(3,592 )
(10,513 )
24,500
3,592
28,092
94,120
92,520
1,600
94,120
The following table is a summary of the Bank’s ALL for the years indicated.
Year ended December 31, 2019:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Purchased loans
Total
Year ended December 31, 2018:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Purchased loans
Total
Year ended December 31, 2017:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Purchased loans
Total
Beginning
Balance
Charge-offs Recoveries
Provision
(Dollars in thousands)
Ending
Balance
$
13,754 $
18,456
27,103
1,343
6,208
9,256
20,382
4,162
1,600
$ 102,264 $
(514 ) $
(4,590 )
(528 )
(46 )
—
(2,194 )
(3,839 )
(3,635 )
(8,997 )
(24,343 ) $
174 $
38
117
7
—
301
427
743
2,556
4,363 $
594 $
14,008
3,385
17,289
(397 )
26,295
415
1,719
(731 )
5,477
(1,402 )
5,961
13,896
30,866
4,040
5,310
1,600
6,441
26,241 $ 108,525
$
$
$
$
12,829 $
26,855
27,422
1,093
2,395
10,448
8,858
2,620
1,600
94,120 $
(220 ) $
(20,540 )
(25,584 )
(97 )
—
(3,139 )
(1,449 )
(3,332 )
(5,647 )
(60,008 ) $
169 $
169
59
30
—
157
207
768
2,195
3,754 $
13,754
976 $
18,456
11,972
27,103
25,206
1,343
317
6,208
3,813
9,256
1,790
20,382
12,766
4,162
4,106
3,452
1,600
64,398 $ 102,264
10,225 $
21,555
20,673
2,787
2,447
13,043
1,945
2,266
1,600
76,541 $
(340 ) $
(881 )
(1,020 )
(2 )
—
(3,440 )
(689 )
(2,282 )
(6,119 )
(14,773 ) $
11 $
594
86
43
—
171
166
662
2,527
4,260 $
2,933 $
5,587
7,683
(1,735 )
(52 )
674
7,436
1,974
3,592
28,092 $
12,829
26,855
27,422
1,093
2,395
10,448
8,858
2,620
1,600
94,120
105
The following table is a summary of the Bank’s ALL and recorded investment in non-purchased loans, as of the dates indicated.
ALL
Non-Purchased Loans
ALL for
Individually
Evaluated
Impaired
Loans
ALL for
All Other
Loans
Total
ALL(1)
Individually
Evaluated
Impaired
Loans
(Dollars in thousands)
All Other
Loans
Total
Loans
December 31, 2019:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total
December 31, 2018:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total
$
$
$
$
1,272 $ 12,736 $ 14,008 $
159 17,130 17,289
6 26,289 26,295
1,717
1,719
2
5,477
5,477
—
5,961
5,727
234
190 30,676 30,866
5,310
5,310
9,886 $
745,924
736,038 $
6,439 3,281,691 3,288,130
3,469 6,353,424 6,356,893
228,331
227,333
— 1,161,514 1,161,514
637,573
636,040
1,533
1,177 2,644,397 2,645,574
375 1,160,225 1,160,600
1,863 $ 105,062 $ 106,925 $ 23,877 $ 16,200,662 $ 16,224,539
998
—
6,006 $
697,191 $
716 $ 13,038 $ 13,754 $
703,197
24 18,432 18,456 13,648 3,293,346 3,306,994
60 27,043 27,103 11,409 6,400,222 6,411,631
848
—
161,780
637 1,050,350 1,050,987
81
772,470
263
354 1,935,238 1,935,592
731,140
1,201 $ 99,463 $ 100,664 $ 35,389 $ 15,038,402 $ 15,073,791
1,343
6,208
9,256
57 20,325 20,382
4,162
—
1,343
6,127
8,993
770,017
731,106
160,932
4,162
2,453
34
(1) Excludes $1.6 million of ALL allocated to the Bank’s purchased loans at both December 31, 2019 and 2018.
106
The following table is a summary of impaired loans, excluding purchased loans, as of and for the years indicated.
Principal
Balance
Net
Charge-offs
to Date
Principal
Balance,
Net of
Charge-offs
(Dollars in thousands)
Specific
ALL
Weighted
Average
Carrying
Value
$
$
$
As of and for the year ended December 31, 2019:
Impaired loans for which there is a related ALL:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total impaired loans with a related ALL
Impaired loans for which there is not a related ALL:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Other
Total impaired loans without a related ALL
Total impaired loans
As of and for the year ended December 31, 2018:
Impaired loans for which there is a related ALL:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total impaired loans with a related ALL
Impaired loans for which there is not a related ALL:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total impaired loans without a related ALL
Total impaired loans
$
8,799 $
3,175
94
35
—
1,324
1,177
6
14,610
1,244
3,601
3,948
992
133
296
388
10,602
25,212 $
5,138 $
970
401
—
538
1,345
353
—
8,745
— $
—
—
—
—
—
—
—
—
(279 )
(337 )
(573 )
(29 )
(133 )
(87 )
(19 )
(1,457 )
(1,457 ) $
— $
—
—
—
—
—
—
—
—
1,192
33,425
36,559
883
232
1,208
7
40
73,546
82,291 $
(324 )
(20,747 )
(25,551 )
(35 )
(133 )
(100 )
(6 )
(6 )
(46,902 )
(46,902 ) $
8,799 $
3,175
94
35
—
1,324
1,177
6
14,610
965
3,264
3,375
963
—
209
369
9,145
23,755 $
5,138 $
970
401
—
538
1,345
353
—
8,745
868
12,678
11,008
848
99
1,108
1
34
26,644
35,389 $
1,272 $
159
6
2
—
234
190
—
1,863
—
—
—
—
—
—
—
—
1,863 $
716 $
24
60
—
81
263
57
—
1,201
—
—
—
—
—
—
—
—
—
1,201 $
6,714
2,392
382
63
1,043
935
603
13
12,145
896
8,479
5,494
1,143
40
440
230
16,722
28,867
3,972
757
576
14
134
860
309
35
6,657
930
6,878
5,015
1,058
40
695
60
34
14,710
21,367
Management has determined that certain of the Bank’s impaired loans do not require any specific allowance at December 31,
2019 and 2018 because (i) management’s analysis of such individual loans resulted in no impairment or (ii) all identified impairment
on such loans has previously been charged off.
Interest income on impaired loans is recognized on a cash basis when and if actually collected. Total interest income recognized
on impaired loans for the years ended December 31, 2019, 2018 and 2017 was not material.
107
Credit Quality Indicators
Non-Purchased Loans
The following table is a summary of credit quality indicators for the Bank’s non-purchased loans as of the dates indicated.
December 31, 2019:
Real estate:
Residential 1-4 family(1)
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer(1)
Other(1)
Total
December 31, 2018:
Real estate:
Residential 1-4 family(1)
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer(1)
Other(1)
Total
Satisfactory Moderate
Watch
(Dollars in thousands)
Substandard
Total
727,237 $
$
— $
2,215,171 1,016,861
580,359
5,706,437
199,239
21,616
83,308
1,075,692
470,397
162,040
—
2,642,236
1,101,260
58,904
$ 13,651,689 $ 2,409,068 $
8,418 $
40,352
9,071
5,242
1,559
1,509
2,216
13
68,380 $
10,269 $
745,924
15,746 3,288,130
61,026 6,356,893
228,331
2,234
955 1,161,514
3,627
637,573
1,122 2,645,574
423 1,160,600
95,402 $ 16,224,539
$
691,019 $
2,422,985
5,888,359
31,883
951,082
326,951
1,934,567
692,828
6,831 $
61,480
54,980
6,116
1,811
3,823
873
26
$ 12,939,674 $ 1,955,146 $ 135,940 $
— $
805,483
456,265
121,903
96,465
436,832
—
38,198
5,347 $
703,197
17,046 3,306,994
12,027 6,411,631
161,780
1,878
1,629 1,050,987
772,470
4,864
152 1,935,592
731,140
43,031 $ 15,073,791
88
(1)
The Bank does not risk rate its residential 1-4 family loans (including consumer construction loans on 1-4 family properties), consumer
loans, and certain “other” loans. However, for purposes of the above table, the Bank 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 Bank.
Satisfactory – Loans in this category are considered to be a satisfactory credit risk and are generally considered to be collectible
in full.
Moderate – Loans in this category are considered to be a marginally satisfactory credit risk and are generally considered to be
collectible in full.
Watch – Loans in this category are presently protected from apparent loss; however, weaknesses exist which could cause future
impairment of repayment of principal or interest.
Substandard – Loans in this category are characterized by deterioration in quality exhibited by a number of weaknesses
requiring corrective action and posing risk of some loss.
108
The following table is an aging analysis of past due non-purchased loans as of the dates indicated.
December 31, 2019:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total
December 31, 2018:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total
30-89 Days
Past Due(1)
90 Days
or More(2)
Total
Past Due
(Dollars in thousands)
Current(3)
Total
$
$
$
$
10,651 $
3,882
180
77
—
1,031
2,677
7
18,505 $
7,720 $
3,127
621
122
538
1,453
916
—
14,497 $
3,230 $
2,516
3,375
997
—
991
256
366
11,731 $
3,209 $
11,574
11,409
27
99
1,718
109
35
28,180 $
745,924
732,043 $
13,881 $
6,398 3,281,732 3,288,130
3,555 6,353,338 6,356,893
228,331
227,257
1,074
— 1,161,514 1,161,514
2,022
637,573
635,551
2,933 2,642,641 2,645,574
373 1,160,227 1,160,600
30,236 $ 16,194,303 $ 16,224,539
10,929 $
703,197
692,268 $
14,701 3,292,293 3,306,994
12,030 6,399,601 6,411,631
149
161,780
161,631
637 1,050,350 1,050,987
772,470
769,299
3,171
1,025 1,934,567 1,935,592
731,140
731,105
42,677 $ 15,031,114 $ 15,073,791
35
Includes $4.2 million and $2.2 million of loans on nonaccrual status at December 31, 2019 and 2018, respectively.
(1)
(2) All loans greater than 90 days past due were on nonaccrual status at December 31, 2019 and 2018.
(3)
Includes $7.3 million and $4.4 million of loans on nonaccrual status at December 31, 2019 and 2018, respectively.
109
Purchased Loans
The following table is a summary of credit quality indicators for the Bank’s purchased loans as of the dates indicated.
Purchased Loans Without
Evidence of Credit Deterioration at Date of Acquisition
FV 55
FV 36
FV 44
FV 33
FV 77
(Dollars in thousands)
Purchased Loans
With
Evidence of Credit
Deterioration at
Date of Acquisition
FV 66
FV 88
Total
Purchased
Loan
December 31, 2019:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total
December 31, 2018:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agricultural
Multifamily residential
Commercial and industrial
Consumer
Other
Total
2,221
177
4,333
2,659
$ 31,198 $ 137,825 $ 31,652 $ 22,454 $ 677 $ 27,722 $ 1,180 $ 252,708
221 6,066 39,940 1,695 668,449
76,392 410,455 133,680
34,536
3,754
3,439
339
77
912
1,745
13
692 —
35 —
32,678
19
914 —
484 —
24,379
2,323
23
72 —
9 — 288,960
133,874 135,190 19,486
280
121
4,049
— —
58 — —
$ 254,187 $ 749,472 $ 190,985 $ 23,726 $ 7,935 $ 78,224 $ 2,975 $ 1,307,504
23,794
828
26,928
13,794
5,508
3,333
658
96
13,898
8,393
6,373
665
2,785
3,374
184,635 193,390 31,408
$ 49,105 $ 181,169 $ 47,573 $ 30,511 $ 489 $ 35,525 $ 1,891 $ 346,263
117,578 641,182 174,063 1,450 1,759 73,342 3,020 1,012,394
21 150,554
37,630 101,478
650
4,122
280
1,092
3,308
1,407 —
48 —
65,039
46,120
1,712 —
524 —
50,947
32,542
47
6,353
18
220
119 — 410,271
276
443
5,256
211 — —
$ 415,228 $ 1,198,034 $ 266,452 $ 33,846 $ 2,822 $ 122,671 $ 4,979 $ 2,044,032
91 —
1,061
3,893
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 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.
110
The following table is an aging analysis of past due purchased loans as of the dates indicated.
December 31, 2019:
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, 2018:
Real estate:
Residential 1-4 family
Non-farm/non-residential
Construction/land development
Agriculture
Multifamily residential
Commercial and industrial
Consumer
Other
Total
30-89 Days
Past Due(1)
90 Days
or More(2)
Total
Past Due
(Dollars in thousands)
Current(3)
Total
Purchased
Loans
$
$
6,577 $
4,909
91
219
—
—
3,794
—
15,590 $
2,353 $
14,975
1,063
120
—
812
506
—
19,829 $
8,930 $ 243,778 $ 252,708
668,449
648,565
19,884
34,536
33,382
1,154
1,745
1,406
339
32,678
32,678
—
24,379
23,567
812
288,960
284,660
4,300
4,049
4,049
—
35,419 $ 1,272,085 $ 1,307,504
$
13,074 $
12,762 $
25,836 $ 1,200,469 $ 1,226,305
2,516
15,590 $
7,067
19,829 $
9,583
81,199
35,419 $ 1,272,085 $ 1,307,504
71,616
8,950 $
17,243
346
—
—
527
2,828
—
29,894 $
2,818 $
14,015
1,179
204
—
785
644
—
19,645 $
11,768 $ 334,495 $ 346,263
981,136 1,012,394
31,258
150,554
149,029
1,525
3,308
3,104
204
65,039
65,039
—
50,947
49,635
1,312
410,271
406,799
3,472
5,256
5,256
—
49,539 $ 1,994,493 $ 2,044,032
$
$
$
Purchased loans without evidence of credit deterioration
at date of acquisition
Purchased loans with evidence of credit deterioration
at date of acquisition
Total
$
25,304 $
10,165 $
35,469 $ 1,880,913 $ 1,916,382
4,590
29,894 $
9,480
19,645 $
14,070
127,650
113,580
49,539 $ 1,994,493 $ 2,044,032
$
(1)
(2)
(3)
Includes $2.3 million and $1.5 million of loans on nonaccrual status at December 31, 2019 and 2018, respectively.
Includes $12.8 million and $10.2 million of loans on nonaccrual status at December 31, 2019 and 2018, respectively.
Includes $5.1 million and $9.7 million of loans on nonaccrual status at December 31, 2019 and 2018, respectively.
111
5. Foreclosed Assets
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
December 31,
2019
2018
(Dollars in thousands)
$
$
2,201 $
3,989
12,153
—
18,343
4
749
19,096 $
823
4,407
10,628
164
16,022
31
118
16,171
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
Balance – end of year
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
$
16,171 $
31,709
(26,365 )
(2,419 )
19,096 $
25,357 $
11,540
(17,891 )
(2,835 )
16,171 $
43,702
17,193
(32,050 )
(3,488 )
25,357
6. Premises and Equipment
The following table is a summary of premises and equipment as of the dates indicated.
Land
Construction in process
Buildings and improvements
Leasehold improvements
Equipment
Lease right-of-use assets
Gross premises and equipment
Accumulated depreciation
Premises and equipment, net
December 31,
2019
2018
(Dollars in thousands)
146,404 $
119,733
362,269
16,803
121,536
71,316
838,061
(126,520 )
711,541 $
147,199
48,289
354,133
16,825
117,561
—
684,007
(116,818 )
567,189
$
$
The Bank capitalized interest on construction projects totaling $1.8 million, $0.6 million and $0.2 million during 2019, 2018
and 2017, respectively. Included in occupancy expense is rent of $10.9 million, $8.6 million and $8.7 million incurred under
noncancelable operating leases in 2019, 2018 and 2017, respectively, for leases of real estate, buildings and premises. These leases
contain certain renewal and purchase options according to the terms of the agreements. Rental income recognized for leases of
buildings and premises under operating leases was $3.4 million during 2019, $3.0 million during 2018 and $2.8 million during 2017.
7. Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” which required lessees to recognize on the lessee’s
balance sheet a right-of-use asset and lease liability related to their leasing agreements. The Bank adopted ASU 2016-02 effective
January 1, 2019 and, as a result, recorded an operating lease right-of-use asset and operating lease liability of $59.6 million at
adoption. The Bank’s right-of-use asset is included in premises and equipment, net and the Bank’s lease liability is included in
accrued interest payable and other liabilities on the Bank’s consolidated balance sheets. At December 31, 2019, the Bank’s leases
112
were comprised primarily of building and ground leases associated with certain of its branch locations or loan production offices. A
portion of the Bank’s leases are tied to the consumer price index and rent escalations associated with these leases are measured on a
periodic basis. The majority of the Bank’s lease agreements do not contain residual value guarantees or restricted covenants. In
addition, many of the Bank’s ground leases contain renewal options. The Bank is reasonably certain that such options will be
exercised; thus, the Bank has included the effects of extending these ground leases in the determination of the lease term.
ASU 2016-02 also requires that lessees evaluate other contracts to determine whether any embedded leases are included in such
contracts. In evaluating such contracts for potential embedded leases, the Bank considered whether a contract contained an identified
asset, did the Bank have the right to obtain substantially all of the economic benefits from the use of the identified asset, and did the
Bank have the right to direct how and for what purposes the identified asset is used.
For the year ended December 31, 2019, the Bank incurred $10.9 million in operating cost that is included in net occupancy and
equipment expense in the Bank’s consolidated statements of income. The Bank’s variable lease costs were not material for the year
ended December 31, 2019. At December 31, 2019, the Bank’s weighted average remaining lease term and weighted average interest
rate for its lease liabilities were 16.5 years and 3.4%, respectively.
The following table is a summary of future amounts due under these non-cancelable leases at December 31, 2019.
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less imputed interest
Total operating lease liabilities
December 31, 2019
(Dollars in thousands)
$
$
8,508
7,435
7,230
7,168
5,626
55,492
91,459
(26,940 )
64,519
For leases whose term is less than one year, the Bank elected to apply the short-term measurement and recognition exception
provided under Topic 842. Additionally, the Bank elected certain transition relief provisions whereby the Bank did not reassess (i)
whether any expired or existing contract is a lease or contains a lease, (ii) the lease classification of any expired or existing lease, and
(iii) initial direct costs for any existing leases. Also, the Bank elected not to restate previous periods as a result of adoption.
8. 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,
2019
2018
(Dollars in thousands)
$
$
7,045,274 $
227,043
55,708
28,324
14,989
63
$
7,371,401
4,778,460
502,966
90,344
78,761
46,750
10,148
5,507,429
The aggregate amount of time deposits that meet or exceed $250,000 was $1.94 billion and $1.40 billion at December 31, 2019
and 2018, respectively.
113
9. Repurchase Agreements With Customers
At December 31, 2019 and 2018, securities sold under agreements to repurchase (“repurchase agreements”) totaled $11.2
million and $20.6 million, respectively. Securities utilized as collateral for repurchase agreements are primarily U.S. Government
agency mortgage-backed securities and are maintained by the Bank’s safekeeping agents. These securities are reviewed by the Bank
on a daily basis, and the Bank may be required to provide additional collateral due to changes in the fair market value of these
securities. The terms of the Bank’s repurchase agreements are continuous but may be cancelled at any time by the Bank or the
customer.
10. 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,
2019
2018
(Dollars in thousands)
92,923 $
350,000
500,000
164,925
95,000
550,000
2.56 %
1.35 %
2.19 %
2.70 %
At December 31, 2019, the Bank had fixed rate FHLB advances with original maturities exceeding one year of $1.4 million.
These fixed rate advances bear interest at rates ranging from 1.30% to 4.54% at December 31, 2019, are collateralized by a blanket
lien on a substantial portion of the Bank’s real estate loans and are subject to prepayment penalties if repaid prior to maturity date. At
December 31, 2019, the Bank had $2.8 billion of unused FHLB borrowing availability.
11. Subordinated Notes
On June 23, 2016, the Bank 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 are unsecured, subordinated debt obligations of the Bank and mature on July 1, 2026.
From and including the date of issuance to, but excluding July 1, 2021, the Notes bear interest at 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 carrying value of the Notes was $223.7 million and $223.3 million
at December 31, 2019 and 2018, respectively.
The Bank 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 Bank may also redeem the Notes at any time, including prior to
July 1, 2021, at the Bank’s option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the
Bank 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 Bank is required to register as an
investment bank 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.
114
12. Subordinated Debentures
At December 31, 2019, the Bank had the following issues of trust preferred securities outstanding and subordinated debentures
owed to the Trusts.
Subordinated
Debentures
Owed to
Trust
Unamortized
Discount
Carrying Value
of Subordinated
Debentures
Trust Preferred
Securities
of the Trust
(Dollars in thousands)
$
$
14,433 $
14,434
15,464
20,619
15,464
15,464
15,464
10,310
121,652 $
— $
—
—
—
(277 )
(321 )
(584 )
(554 )
(1,736 ) $
14,433 $
14,434
15,464
20,619
15,187
15,143
14,880
9,756
119,916 $
14,000
14,000
15,000
20,000
15,000
15,000
15,000
10,000
118,000
Interest Rate
Final Maturity
Date
4.84 % September 29, 2033
4.94 September 25, 2033
4.13 September 28, 2034
3.49 December 15, 2036
4.85 September 17, 2033
4.69 March 17, 2034
4.31 September 20, 2034
3.54 December 15, 2036
Ozark II
Ozark III
Ozark IV
Ozark V
Intervest II
Intervest III
Intervest IV
Intervest V
Total
On September 25, 2003, Ozark III sold to investors in a private placement offering $14 million of adjustable rate trust preferred
securities, and on September 29, 2003, Ozark II sold to investors in a private placement offering $14 million of adjustable rate trust
preferred securities (collectively, “2003 Securities”). The 2003 Securities bear interest, adjustable quarterly, at 90-day 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 Bank 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
Bank 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
Bank 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 Bank. 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 Bank.
On February 10, 2015, in conjunction with the acquisition of Intervest Bancshares Corporation (“Intervest”), the Bank 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 Bank recorded the assumed subordinated debentures 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. In addition to
subordinated debentures, the Bank also acquired $1.7 million of trust common equity.
The trust preferred securities issued by Intervest II and the related subordinated debentures bear interest, adjustable quarterly, at
90-day LIBOR plus 2.95%. The trust preferred securities issued by Intervest III and the related subordinated debentures bear interest,
adjustable quarterly, at 90-day LIBOR plus 2.79%. The trust preferred securities issued by Intervest IV and the related subordinated
debentures bear interest, adjustable quarterly, at 90-day LIBOR plus 2.40%. The trust preferred securities issued by Intervest V and
the related subordinated debentures bear interest, adjustable quarterly, at 90-day LIBOR plus 1.65%.
At December 31, 2019, the Bank had an aggregate of $121.7 million of subordinated debentures outstanding (with an aggregate
carrying value of $119.9 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.
115
At both December 31, 2019 and 2018, the Trusts had aggregate common equity of $3.7 million and did not have any restricted net
assets. The Bank 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 Bank in the form of cash dividends, loans or advances. The Bank has the option to defer interest payments on
the subordinated debentures from time to time for a period not to exceed five consecutive years. These trust preferred securities
generally mature at or near the 30th anniversary date of each issuance. However, the trust preferred securities and related subordinated
debentures may be prepaid at par, subject to regulatory approval.
13. Income Taxes
The following table is a summary of the components of the provision (benefit) for income taxes for the years indicated.
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Provision for income taxes
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
$
172,851 $
66,481
239,332
(72,388 )
(28,515 )
(100,903 )
138,429 $
75,889 $
28,031
103,920
21,931
11,126
33,057
136,977 $
(32,788 )
(7,263 )
(40,051 )
156,460
42,177
198,637
158,586
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
Deferred tax adjustment related to reduction of
statutory federal income tax rate
Other, net
Effective income tax rate
2019
Year Ended December 31,
2018
2017
21.0 %
21.0 %
35.0 %
5.1
(0.6 )
(0.9 )
—
(0.1 )
24.5 %
5.6
(0.7 )
(0.9 )
—
(0.3 )
24.7 %
4.1
(1.4 )
(1.1 )
(8.6 )
(0.7 )
27.3 %
On December 22, 2017, the Tax Act was enacted, which, among other changes, reduced the federal corporate income tax rate
from 35% to 21% effective January 1, 2018 and changed or limited certain tax deductions. As a result of the Tax Act, the Bank’s
deferred tax assets and liabilities were revalued and resulted in a one-time income tax benefit of approximately $49.8 million during
the fourth quarter of 2017.
In accordance with ASU 2016-09, income tax (expense) benefit from the exercise of stock options and vesting of common stock
under the Bank’s restricted stock and incentive plan in the amount of $(0.7) million, $2.0 million and $2.1 million were recorded as
income tax (expense) benefit in 2019, 2018 and 2017, respectively.
At December 31, 2019, current income taxes payable of $18.0 million were included in other liabilities. At December 31, 2018,
current income taxes receivable of $33.6 million were included in other assets.
116
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:
Differences in amounts reflected in the financial statements
and income tax basis for loans
Operating lease liability
Stock-based compensation
Deferred compensation
Foreclosed assets
Net operating loss and tax credit carryforwards
Investment securities AFS
Other, net
Total gross deferred tax assets
Less valuation allowance
Deferred tax asset, net of valuation allowance
Deferred tax liabilities:
Differences in amounts reflected in the financial statements
and income tax basis for loans
Accelerated depreciation on premises and equipment
Deferred loan costs
Acquired intangible assets
Investment securities AFS
Operating lease right-of-use asset
Total gross deferred tax liabilities
Net deferred tax liabilities
December 31,
2019
2018
(Dollars in thousands)
19,525 $
17,455
10,081
2,323
1,189
15,543
—
4,328
70,444
(265 )
70,179
—
36,374
49,419
3,040
9,767
17,293
115,893
(45,714 ) $
—
—
8,795
2,201
1,334
17,110
8,619
4,821
42,880
(265 )
42,615
88,529
32,929
43,255
4,900
—
—
169,613
(126,998 )
$
$
Federal net operating loss carryforwards were acquired in certain of the Bank’s acquisitions. Such federal net operating loss
carryforwards acquired totaled $80.9 million, of which $51.2 million remained to be utilized as of December 31, 2019 and will expire
at various dates beginning in 2029 to 2034.
State net operating loss carryforwards were acquired in previous acquisitions. Such state net operating loss carryforwards
acquired totaled $116.2 million, of which $38.2 million remained to be utilized as of December 31, 2019 and will expire at various
dates beginning in 2025 to 2031.
At December 31, 2019 and 2018, the Bank had a deferred tax valuation allowance of $0.3 million to reflect its assessment that
the realization of the benefits from the recovery of certain acquired net operating loss carryforwards are expected to be subject to
section 382 limitations of the IRC.
14. Employee Benefit Plans
The Bank 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 Bank to defer a portion of their compensation in accordance with
the provisions of Section 401(k) of the IRC. The Bank’s 401(k) Plan qualifies as a Safe-Harbor Cost or Deferred Arrangement (“Safe-
Harbor CODA”). As a result, (i) certain key employees are eligible to make salary deferrals into the 401(k) Plan, (ii) the 401(k) Plan is
not subject to any provisions of the average deferral percentage test described in IRC section 401(k)(3) or the average contribution
percentage test described in IRC section 401(m)(2), (iii) the basic matching contribution is (a) 100% of the amount of the employee’s
deferrals that do not exceed 3% of the employee’s compensation for the year plus (b) 50% of the amount of the employee’s elective
deferrals that exceed 3% but do not exceed 5% of the employee’s compensation for the year, and (iv) all employer matching
contributions made under the provisions of the Safe-Harbor CODA are non-forfeitable. Certain other statutory limitations with respect
to the Bank’s contribution under the 401(k) Plan also apply.
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, or
termination of employment. The Bank made matching cash contributions to the 401(k) Plan during 2019, 2018 and 2017 of $5.6
117
million, $4.9 million and $4.6 million, respectively. The 401(k) Plan also provides for participant loans, subject to certain provision
and limitations.
The Bank also maintains the Bank OZK 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 Bank’s executive officers and is
considered a general obligation of the Bank. 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 Bank or upon other specified events as defined in the Plan. The Bank does not make 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 Bank or its affiliates). At December 31, 2019 and 2018, respectively, the Bank had Plan assets, along with an equal amount of
liabilities, totaling $6.3 million and $6.2 million, recorded on the accompanying consolidated balance sheet.
The Bank has 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 employment continues past age 70, such benefit
will commence at an increased amount upon separation from service, and 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 Bank
at such retirement date. The Bank accrued $0.3 million during each of the years ended December 31, 2019, 2018 and 2017 for the
future benefits payable under the SERP. The SERP is an unfunded plan and is considered a general contractual obligation of the Bank.
15. Stock-Based Compensation
On May 6, 2019 (the “Effective Date”), the Bank’s shareholders approved the Bank OZK 2019 Omnibus Equity Incentive Plan
(the “Omnibus Plan”). The Omnibus Plan replaces the Nonqualified Stock Option Plan for officers and employees (“Option Plan”),
the Restricted Stock and Incentive Plan for officers and employees (“2009 Plan”) and the Non-Employee Director Stock Plan
(“Director Plan” and together with the Option Plan and the 2009 Plan, the “Prior Plans”). After the Effective Date of the Omnibus
Plan, no new awards may be granted under the Prior Plans, it being understood that (i) outstanding awards will continue to be
governed by the terms and conditions of the Prior Plan under which they were granted, and (ii) to the extent that any outstanding
award under the Prior Plans is forfeited, terminates, expires or lapses without shares being issued, the shares subject to such award not
delivered as a result thereof will be available for awards under the Omnibus Plan. Directors, executive officers and employees are
eligible to participate in the Omnibus Plan, and the total number of shares available for grant is 3,400,000, subject to adjustment as
described in the Omnibus Plan. Awards granted under the Omnibus Plan may be in the form of stock options, stock appreciation
rights, restricted stock, restricted stock units, or other stock based awards and must contain a minimum vesting period of at least one
year from the date of grant (provided that awards for up to 5% of the shares of common stock authorized for issuance under the
Omnibus Plan may provide for a shorter vesting period at the time of grant). The Omnibus Plan provides that a non-employee director
may not receive stock awards with a grant date fair market value in excess of $100,000 worth of shares during any calendar year. The
benefits received by or allocated to directors, executive officers or employees under the Omnibus Plan are determined within the
discretion of the Personnel and Compensation Committee (“P&C Committee”) of the Board of Directors.
The Bank previously had a nonqualified stock option plan for non-employee directors. No options were granted under this plan
during 2019 or 2018. All options previously granted under this plan were exercisable immediately and expire ten years after issuance.
All employee options previously granted under the Option Plan and outstanding at December 31, 2019 were issued with a
vesting date three years after issuance and an expiration date seven years after issuance.
The following table summarizes stock option activity for the period indicated.
Weighted-
Average
Exercise
Price/Share
Weighted-
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Options
Outstanding – January 1, 2019
Granted
Exercised
Forfeited
Outstanding – December 31, 2019
Fully vested and exercisable at December 31, 2019
1,877,123 $
280,558
(83,500 )
(216,969 )
1,857,212
730,646 $
46.68
31.66
16.60
48.05
45.60
43.26
(1) Based on closing price of $30.51 per share on December 31, 2019.
4.1 $
2.6 $
805 (1)
805 (1)
118
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 2019, 2018 and 2017 was $1.1 million, $5.6 million and $7.0
million, respectively.
Options to purchase 280,558 shares, 573,143 shares and 603,614 shares, respectively, were granted during 2019, 2018 and 2017
with a weighted-average grant date fair value of $7.72, $12.52 and $15.49, 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,
2019
2018
2017
2.58 %
3.10 %
33.7 %
5.0
2.42 %
1.59 %
28.5 %
5.0
1.93 %
1.40 %
35.6 %
5.0
The Bank 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 Bank’s common stock at the
date of grant. Expected stock volatility is based on historical volatilities of the Bank’s common stock. The expected life of the options
is calculated based on the “simplified” method as provided for under Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin No. 110.
The total fair value of options to purchase shares of the Bank’s common stock that vested during 2019, 2018 and 2017 was $0.2
million, $6.3 million and $2.9 million, respectively. Stock-based compensation expense for stock options included in non-interest
expense was $3.9 million, $5.6 million and $4.9 million for 2019, 2018 and 2017, respectively. Total unrecognized compensation cost
related to non-vested stock option grants was $3.5 million at December 31, 2019 and is expected to be recognized over a weighted-
average period of 1.4 years.
During 2019, the Bank issued 383,874 shares of restricted common stock under the 2009 Plan. These grants of restricted stock
cliff vest 100% three years after issuance, assuming continuous employment by the participant during this period.
During 2019, the Bank issued 22,200 shares, or $50,000 worth of shares per recipient rounded down to the nearest whole share,
of restricted common stock under the Director Plan. The restricted stock awarded to each non-employee director under the Director
Plan contained a one-year vesting period.
The following table summarizes non-vested restricted stock activity related to the 2009 Plan and Director Plan for the year
indicated.
Outstanding – January 1, 2019
Granted
Forfeited
Earned and issued
Outstanding – December 31, 2019
Weighted-average grant date fair value
Shares
543,999
406,074
(85,883 )
(181,990 )
682,200
40.89
$
Restricted stock awards totaling 406,074 shares with a weighted-average grant date fair value of $31.77 were granted pursuant
to the 2009 Plan and the Director Plan during 2019. The fair value of the restricted stock awards is amortized to compensation expense
over the vesting period and is based on the market price of the Bank’s common stock at the date of grant multiplied by the number of
shares granted. Stock-based compensation expense for restricted stock included in non-interest expense was $8.6 million, $8.5 million
and $6.6 million for 2019, 2018 and 2017, respectively. Unrecognized compensation expense for non-vested restricted stock awards
was $10.7 million at December 31, 2019 and is expected to be recognized over a weighted-average period of 1.7 years.
In January 2019, pursuant to the 2009 Plan, the P&C Committee awarded its executive officers an aggregate of 170,003
performance-based restricted stock units (“PSUs”), based on target performance, with each PSU representing the right to receive one
share of common stock at a future date. The PSUs granted contain both performance and market conditions. The PSUs will be earned
and vest depending on the Bank’s relative performance with respect to total shareholder return (“TSR”), return on average common
119
equity (“ROAE”) and return on average assets (“ROAA”), over a three-year period, compared to the companies that comprise the
KBW Regional Banking Index (“KRX”) at January 1, 2019 (for the TSR component) and compared to the Bank’s 2018 executive
compensation peer group (for the ROAE and ROAA component) over the same three-year period. Measurement is determined on a
percentile basis relative to the KRX or the Bank’s peer group. For each metric, if the Bank’s performance over the performance
period is: (i) at or below the 25th percentile compared to the applicable peer group, no PSUs for that metric would be earned; (ii) at
threshold performance (26th percentile), 4% of the target would be earned; (iii) at target performance (50th percentile), 100% of the
target would be earned; (iv) at the 75th percentile, 150% of the target would be earned; and (v) at maximum performance (95th
percentile), 200% of the target would be earned. Achievement of results between levels previously described will result in award
payouts determined based on a linear interpolation between payout levels. In the event the Bank’s TSR over the performance period is
negative, no more than 100% of the target PSUs for the relative TSR component will be earned, and the value of a PSU earned at the
end of the performance period for the relative TSR component cannot exceed six times (6x) the grant date stock price. The PSUs
contain a three-year vesting period followed by a one-year post-vest hold period and are eligible to accrue dividend equivalents that
are subject to the same vesting criteria as the underlying PSUs.
Compensation expense for PSU awards included in non-interest expense was $1.7 million for 2019 and none in 2018.
Unrecognized compensation expense for non-vested PSU awards was $3.8 million at December 31, 2019 and is expected to be
recognized over a weighted-average period of 2.1 years.
The fair value of the PSUs granted is amortized to compensation expense over the vesting period. In determining PSUs fair
value, since the PSUs granted contain a one-year post-vest hold period, an estimated discount for illiquidity was applied to the market
price of the Bank’s stock. The fair value of each PSU grant is estimated on the date of grant using various valuation and liquidity
models. The following table is a summary of the key assumptions used in those models.
Risk-free interest rate
Expected dividend yield
Expected stock volatility
Post-vest hold period
Year Ended
December 31, 2019
2.57 %
2.79 %
45.06 %
1 year
The following table summarizes non-vested PSU activity related to the PSUs granted during 2019.
Outstanding – January 1, 2019
Granted
Forfeited
Outstanding – December 31, 2019
PSUs
—
170,003
(28,133 )
141,870
The Valuation Date Stock price index was 122% for the TSR component and 100% for the ROAE and ROAA component. The
weighted average PSU grant date fair values were $32.47 for TSR and $26.69 for both ROAE and ROAA.
On January 22, 2020, the Bank’s P&C Committee approved the issuance of restricted stock awards for 447,085 shares of
restricted common stock that vest on January 22, 2023. Total compensation expense for the restricted stock awards is expected to be
approximately $12.6 million and is expected to be recognized ratably over the three-year vesting period. In addition, the Bank’s P&C
Committee awarded its executive officers an aggregate of 175,065 PSUs. The PSUs granted contain both performance and market
conditions. The PSUs will be earned and vest depending on the Bank’s relative performance with respect to TSR, ROAE and ROAA,
over a three-year period, compared to the companies that comprise the KRX at January 1, 2020 (for the TSR component) and
compared to the Bank’s 2019 executive compensation peer group (for the ROAE and ROAA component) over the same three-year
period. Measurement is determined on a percentile basis relative to the KRX or the Bank’s peer group. For each metric, if the Bank’s
performance over the performance period is: (i) at or below the 25th percentile compared to the applicable peer group, no PSUs for that
metric would be earned; (ii) at threshold performance (26th percentile), 4% of the target would be earned; (iii) at target performance
(50th percentile), 100% of the target would be earned; (iv) at the 75th percentile, 150% of the target would be earned; and (v) at
maximum performance (95th percentile), 200% of the target would be earned. Achievement of results between levels previously
described will result in award payouts determined based on a linear interpolation between payout levels. In the event the Bank’s TSR
over the performance period is negative, no more than 100% of the target PSUs for the relative TSR component will be earned, and
the value of a PSU earned at the end of the performance period for the relative TSR component cannot exceed six times (6x) the grant
date stock price. The PSUs contain a three-year vesting period followed by a one-year post-vest hold period and are eligible to accrue
dividend equivalents that are subject to the same vesting criteria as the underlying PSUs. The total compensation expense for the
PSUs granted is expected to be approximately $4.4 million and is expected to be recognized over the three year vesting period.
120
16. Commitments and Contingencies
The Bank 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 Bank generally to guarantee the performance of
a customer in third party borrowing arrangements. The maximum amount of future payments the Bank could be required to make
under these letters of credit at December 31, 2019 and 2018 is $10.8 million and $21.4 million, respectively. The Bank holds collateral
to support letters of credit when deemed necessary. Collateralized commitments at December 31, 2019 and 2018 totaled $10.0 million
and $19.5 million, respectively.
The Bank’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 Bank 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, may require payment of a fee and
may expire without being drawn upon. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the
counterparty. The type of collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and
other real or personal property.
At December 31, 2019, the Bank had outstanding commitments totaling $11.33 billion to extend credit, consisting primarily of
loans closed but not yet funded. These commitments may or may not fund in whole or part prior to maturity; however, such funding is
subject to a number of factors, including, among others, economic conditions, real estate market conditions and competitive factors.
The following table shows, as of the date indicated, the contractual maturities of such outstanding commitments.
Maturity
2020
2021
2022
2023
2024
Thereafter
Total
Contractual Maturities at
December 31, 2019
(Dollars in thousands)
$
$
1,643,861
3,066,987
3,187,612
2,324,876
876,827
225,435
11,325,598
The Bank is a party as both plaintiff and defendant to various claims arising in the ordinary course of business, including
administrative and/or legal proceedings that may include employment-related claims as well as claims of lender liability, breach of
contract, and other similar lending-related claims encountered on a routine basis. While the ultimate resolution of these ordinary
course 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 Bank’s financial condition or results of operations.
17. Related Party Transactions
The Bank has, in the ordinary course of business, lending transactions with certain of its officers, directors 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
Effect of changes in composition of related parties
Balance – end of year
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
$
922 $
180
(761 )
(120 )
221 $
1,024 $
382
(484 )
—
922 $
731
2,070
(1,777 )
—
1,024
The Bank had outstanding commitments to extend credit to related parties totaling $0.3 million and $1.7 million at December
31, 2019 and 2018, respectively.
121
18. Regulatory Capital and Other Matters
The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank’s financial condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures
of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classification are also subject to qualitative judgments by the regulators about component risk weightings and other
factors.
In recent years, the FDIC and other federal banking regulators revised the risk-based capital requirements applicable to insured
depository institutions, including the Bank, to make them consistent with agreements 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 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 the Bank 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 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. Pursuant to the Basel III Rules, the Bank’s trust preferred securities are no longer included in tier 1 capital, but
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 (loss) in regulatory capital and instead effectively use the existing treatment under the
general risk-based capital rules. The 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
ALL, and, for the Bank, the trust preferred securities and the Notes.
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” in addition to the amount necessary to meet minimum risk-based capital requirements for
common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets. The capital conservation buffer began phasing in
January 1, 2016 at 0.625% of risk-weighted assets, and increased each year until fully implemented at 2.5% on January 1, 2019. As of
January 1, 2019, the fully phased-in Basel III Rules requires 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%,
(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%, (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%, and (iv) a minimum leverage ratio of 4.0%. Additionally,
in order to be considered well-capitalized under the Basel III Rules, 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%.
122
The following table presents actual and required capital ratios as of the dates indicated under the Basel III Rules. The minimum
required capital amounts presented include the minimum required capital levels as of December 31, 2018, based on the then current
phase-in provisions of the Basel III Rules. The minimum required capital amounts presented as of December 31, 2019 are the
minimum capital levels as of January 1, 2019 when the Basel III Rules were 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. At
December 31, 2019 and 2018, capital levels exceeded all minimum capital requirements under the Basel III Rules on a fully phased-in
basis.
Actual
Capital
Amount
Ratio
Minimum Capital
Required – Basel III
Phase-In Schedule
Capital
Amount
Minimum Capital
Required – Basel III
Fully Phased-In
Capital
Amount
Ratio
Required to be
Considered Well
Capitalized
Capital
Amount
Ratio
Ratio
(Dollars in thousands)
December 31, 2019:
Common equity tier 1 to risk-
weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Tier 1 leverage to average assets
December 31, 2018:
Common equity tier 1 to risk-
weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Tier 1 leverage to average assets
$ 3,422,832 13.76 % $ 1,741,897 7.00 % $ 1,741,897 7.00 % $ 1,617,475 6.50 %
3,422,832 13.76 2,115,160 8.50 2,115,160 8.50 1,990,739 8.00
3,874,357 15.57 2,612,845 10.50 2,612,845 10.50 2,488,424 10.00
3,422,832 15.36 891,109 4.00 891,109 4.00 1,113,887 5.00
$ 3,091,128 12.56 % $ 1,569,242 6.375 % $ 1,723,089 7.00 % $ 1,600,011 6.50 %
3,091,128 12.56 1,938,475 7.875 2,092,322 8.50 1,969,245 8.00
3,536,393 14.37 2,430,786 9.875 2,584,633 10.50 2,461,556 10.00
3,091,128 14.25 867,549 4.00 867,549 4.00 1,084,436 5.00
As of December 31, 2019 and 2018, the most recent notification from the regulators categorized 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 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, 2019 and 2018, respectively, approximately $434 million and $453 million were available for payment of dividends by
the Bank without the approval of regulatory authorities. Additionally, the Bank’s ability to pay dividends may be restricted by certain
covenants in the indentures governing its trust preferred securities, its subordinated debentures and its subordinated notes.
Under federal banking regulation, the Bank is also limited as to the amount it may loan to its affiliates, and such loans must be
collateralized by specific types of collateral. The maximum amount available for loans from the Bank to its affiliates is limited to 10%
of the Bank’s capital and surplus or approximately $412 million and $377 million at December 31, 2019 and 2018, respectively.
19. Fair Value Measurements
The Bank 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
on a periodic basis, typically at least quarterly, or on a non-recurring basis to evaluate certain assets and liabilities for impairment or
for disclosure purposes. At December 31, 2019 and 2018, the Bank had no material liabilities that were accounted for at fair value.
The Bank 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.
123
The following table sets forth the Bank’s assets, as of the dates indicated, that are accounted for at fair value.
December 31, 2019:
Investment securities AFS:
U.S. Government agency mortgage-backed securities
Obligations of state and political subdivisions
Corporate obligations
Total investment securities AFS
Impaired non-purchased loans
Impaired purchased loans
Foreclosed assets
Total assets at fair value
December 31, 2018:
Investment securities AFS:
U.S. Government agency mortgage-backed securities
Obligations of state and political subdivisions
Other U.S. Government agency securities
Corporate obligations
CRA qualified investment fund
Total investment securities AFS
Impaired non-purchased loans
Impaired purchased loans
Foreclosed assets
Total assets at fair value
$
$
$
$
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
$ 1,750,361
$
—
507,527
—
5,398
—
2,263,286
—
—
—
—
—
—
—
— $ 2,263,286 $
$ 1,750,361
—
521,630
14,103
5,398
—
2,277,389
14,103
22,014
22,014
10,910
10,910
19,096
19,096
66,123 $ 2,329,409
$ 2,212,546
—
—
—
—
1,059
1,059
$
591,380
26,936
15,183
—
2,846,045
—
—
—
1,059 $ 2,846,045 $
—
—
—
$ 2,212,546
—
606,616
15,236
26,936
—
15,183
—
1,059
—
2,862,340
15,236
34,188
34,188
7,801
7,801
16,171
16,171
73,396 $ 2,920,500
The following table presents information related to Level 3 non-recurring fair value measurements as of the date indicated.
Description
Fair Value at
December 31,
2019
Impaired non-purchased loans
$
22,014
Technique
(Dollars in thousands)
Third party appraisal(1)
or discounted cash flows
Impaired purchased loans
$
10,910
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
Foreclosed assets
$
19,096
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 Bank 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 Bank’s assets that are accounted for at fair
value.
Investment securities – The Bank 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 Bank considers 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
124
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 Bank’s investment securities are reviewed on
a quarterly basis.
The Bank has determined that certain of its investment securities had a limited to non-existent trading market at December 31,
2019 and 2018. As a result, the Bank 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 $14.1 million and $15.2 million at December 31, 2019 and 2018, 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 Bank’s third party pricing services for
comparable unrated municipal securities or (ii) par value. At December 31, 2019 and 2018, the third party pricing matrices valued the
Bank’s total portfolio of private placement bonds at approximately $14.1 million and $15.2 million, respectively, which was
approximately the same as the par value of the private placement bonds. Accordingly, at December 31, 2019 and 2018 the Bank
reported the private placement bonds at $14.1 million and $15.2 million, respectively.
Impaired non-purchased loans – Fair values are measured on a non-recurring basis based on the underlying collateral value of
the impaired loan, reduced for estimated holding and selling costs, or the estimated discounted cash flows for such loan. The Bank has
reduced the carrying value of its impaired non-purchased loans to the estimated fair value of $22.0 million and $34.2 million,
respectively, for such loans at December 31, 2019 and 2018. These adjustments to reduce the carrying value of impaired non-
purchased loans to estimated fair value at December 31, 2019 and 2018 consisted of $1.5 million and $46.9 million, respectively, of
partial or full charge-offs and $1.9 million and $1.2 million, respectively, of specific loan loss allocations. Impaired non-purchased
loans at December 31, 2019 and 2018, respectively, included $0.7 million and $0.6 million of accruing loans that were determined to
be TDRs.
Impaired purchased loans – Impaired purchased loans are measured at fair value on a non-recurring basis. At December 31,
2019 and 2018, the Bank had identified purchased loans where management had determined it was probable that the Bank 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 Bank
recorded net charge-offs, totaling $6.4 million during 2019 and $3.5 million during 2018 for such loans. The Bank recorded $6.4
million during 2019 and $3.5 million during 2018 of provision for purchased loans. Additionally, the Bank transferred certain of these
purchased loans to foreclosed assets. As a result of these actions, the Bank had $10.9 million of impaired purchased loans at December
31, 2019 and $7.8 million of impaired purchased loans at December 31, 2018.
Foreclosed assets – Repossessed personal properties and real estate acquired through or in lieu of foreclosure, excluding
purchased foreclosed assets, are initially recorded at fair value less estimated cost to sell 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
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.
125
The following table presents additional information for the periods indicated about assets measured at fair value on a recurring
basis and for which the Bank has utilized Level 3 inputs to determine fair value.
Balances – December 31, 2017
Total realized gains included in earnings
Total unrealized gains/(losses) included in other comprehensive loss
Paydowns and maturities
Sales
Transfers in and/or out of Level 3
Balances – December 31, 2018
Total realized gains included in earnings
Total unrealized gains/(losses) included in other comprehensive income
Paydowns and maturities
Sales
Transfers in and/or out of Level 3
Balances – December 31, 2019
Investment
Securities
AFS
(Dollars in thousands)
16,425
—
(131 )
(1,058 )
—
—
15,236
—
250
(1,383 )
—
—
14,103
$
$
20. 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 Bank 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 Bank 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 Bank’s investment securities are reviewed on
a quarterly basis.
Loans – The fair value of loans, including purchased loans, is estimated by discounting the future cash flows using the current
rate at which similar loans would be made to borrowers 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 Bank 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, 2019 and 2018.
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
126
market exists for certain of these financial instruments, the Bank 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 Bank’s financial instruments.
December 31,
2019
2018
Fair
Value
Hierarchy
Carrying
Amount
Estimated
Fair
Value
(Dollars in thousands)
Carrying
Amount
Estimated
Fair
Value
Financial assets:
Cash and cash equivalents
Investment securities AFS
Loans, net of ALL
Financial liabilities:
Demand, savings and interest bearing transaction
deposits
Time deposits
Repurchase agreements with customers
Other borrowings
Subordinated notes
Subordinated debentures
21. Supplemental Cash Flow Information
Level 1
Levels 1,
2 and 3
Level 3
Level 1
Level 2
Level 1
Level 2
Level 2
Level 2
$ 1,495,757 $ 1,495,757 $
290,672 $
290,672
2,277,389 2,277,389 2,862,340 2,862,340
17,423,518 17,487,910 17,015,559 16,735,923
$ 11,102,858 $ 11,102,858 $ 12,430,986 $ 12,430,986
7,371,401 7,372,832 5,507,429 5,532,908
20,564
96,686
217,571
107,712
11,249
351,392
224,651
106,494
11,249
351,387
223,663
119,916
20,564
96,692
223,281
119,358
The following is a summary of supplemental cash flow information for the periods indicated:
Cash paid during the period for:
Interest
Income taxes
Supplemental schedule of non-cash investing and financing activities:
Loans and other assets transferred to foreclosed assets
Loans advanced for sales of foreclosed assets
Net change in unrealized gains and losses on investment securities AFS
Lease liabilities recorded for right-of-use assets
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
275,351 $
182,215
204,863 $
90,476
114,765
172,890
31,709
—
80,978
71,310
11,540
1,068
(28,268 )
—
17,193
—
23,258
—
127
22. Other Operating Expenses
The following is a summary of other operating expenses for the periods indicated.
Professional and outside services
Software and data processing
Deposit insurance and assessments
Travel and meals
Telecommunication services
Postage and supplies
Advertising and public relations
ATM expense
Loan collection and repossession expense
Writedowns of foreclosed assets
Writedown of signage due to strategic rebranding
Amortization of intangible assets
Other
Total other operating expenses
23. Earnings Per Common Share (“EPS”)
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
$
33,030 $
19,535
13,425
11,230
10,583
8,684
7,242
4,626
2,818
2,419
—
11,918
23,751
149,261 $
35,867 $
13,729
14,740
9,650
13,080
9,144
11,557
4,227
3,302
2,996
4,915
12,579
18,126
153,912 $
32,441
10,126
13,114
8,477
13,935
7,769
5,989
5,725
5,303
3,488
—
12,580
8,333
127,280
The following table sets forth the computation of basic and diluted EPS for the periods indicated.
2019
Year Ended December 31,
2018
(In thousands, except per share amounts)
2017
Numerator:
Distributed earnings allocated to common stockholders
Undistributed earnings allocated to common stockholders
Net earnings allocated to common stockholders
$
$
121,124 $
304,782
425,906 $
102,218 $
314,888
417,106 $
Denominator:
Denominator for basic EPS – weighted-average common shares
Effect of dilutive securities – stock options and restricted stock units
128,926
80
128,595
145
Denominator for diluted EPS – weighted-average
common shares and assumed conversions
Basic EPS
Diluted EPS
129,006
3.30 $
3.30 $
128,740
3.24 $
3.24 $
$
$
88,732
333,159
421,891
125,465
344
125,809
3.36
3.35
Options to purchase 1,815,500 shares, 1,493,384 shares and 1,109,870 shares, respectively, of the Bank’s common stock at a
weighted-average exercise price of $47.27 per share, $51.98 per share and $52.51 per share, respectively, were outstanding during
2019, 2018 and 2017, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the
average market price of the Bank’s common stock and inclusion would have been antidilutive.
128
24. Changes In and Reclassification From Accumulated Other Comprehensive Income (Loss) (“AOCI”)
The following table presents changes in AOCI for the periods indicated.
Beginning balance of AOCI – unrealized gains and losses
on investment securities AFS
Cumulative effect of change in accounting principal
Beginning balance of AOCI, as adjusted – 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
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
$
(34,105 ) $
—
(12,712 ) $
—
(25,920 )
(3,408 )
(34,105 )
(12,712 )
(29,328 )
81,691
(27,080 )
27,291
(19,793 )
(713 )
175
61,360
5,687
—
—
(21,393 )
(8,134 )
(4,033 )
1,492
16,616
$
27,255 $
(34,105 ) $
(12,712 )
The Bank adopted the provisions of ASU 2018-02 effective as of the beginning of 2017 as a cumulative affect adjustment by
reclassifying $3.4 million from AOCI to retained earnings.
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.
129
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 Bank’s Chairman and Chief Executive Officer (principal executive officer) and its Chief Financial 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 Bank’s disclosure controls and procedures were effective.
(b) Changes in Internal Control Over Financial Reporting.
The Bank’s management, including the Bank’s Chairman and Chief Executive Officer and its Chief Financial Officer, have
evaluated any changes in the Bank’s internal control over financial reporting that occurred during the Bank’s fourth quarter ended
December 31, 2019 and have concluded that there was no change during the Bank’s fourth quarter ended December 31, 2019 that has
materially affected, or is reasonably likely to materially affect, the Bank’s internal control over financial reporting.
(c) Report of Management on the Bank’s Internal Control Over Financial Reporting
February 28, 2020
Management of Bank OZK 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 OZK, including the Chief Executive Officer and the Chief Financial Officer, has assessed the
effectiveness of the Bank’s internal control over financial reporting as of December 31, 2019, 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). Based on this assessment, management has concluded that the Bank’s internal
control over financial reporting was effective as of December 31, 2019, based on the specified criteria.
PricewaterhouseCoopers, LLP, the independent registered public accounting firm that audited the Bank’s consolidated financial
statements included in this Annual Report on Form 10-K, has also audited the effectiveness of the Bank’s internal control over
financial reporting as of December 31, 2019. 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
(principal executive officer)
/s/ Greg McKinney
Greg McKinney
Chief Financial Officer
(principal financial officer)
130
Item 9B. OTHER INFORMATION
On February 23, 2020, the Personnel and Compensation Committee (“Compensation Committee”) of the Board of Directors of
the Bank approved the 2020 Executive Management Cash-Based Performance Plan (“2020 Cash Incentive Plan”). The Compensation
Committee believes that subjecting a portion of the executive officer’s cash compensation to achievement of pre-established
performance targets, as provided under the 2020 Cash Incentive Plan, will ensure the continued alignment of executive compensation,
Bank performance and strategic goal attainment.
The Bank’s performance metrics (each a “Performance Metric”) and relative weighting for each metric under the 2020 Cash
Incentive Plan is set forth below. Awards under the 2020 Cash Incentive Plan will be calculated based on the Bank’s consolidated
financial results for the period beginning on January 1, 2020 and ending on December 31, 2020 (the “Performance Period”).
2020 Cash Incentive Plan Metrics
Weight
Diluted Earnings Per Share (“EPS”) ................................................
Efficiency Ratio ...............................................................................
Net Charge-Off Ratio ......................................................................
Net Interest Margin (fully taxable equivalent) .................................
Ratio of Nonperforming Assets to Total Assets ..............................
20%
20%
20%
20%
20%
The Compensation Committee determines incentive opportunities payable to each participant based on the level of performance
attained for the particular Performance Metric over the Performance Period. Payouts under each Performance Metric will depend on
the level of performance achieved with respect to the particular Performance Metric. If the Bank’s performance is below the threshold
performance level set for the particular Performance Metric, the payout related to that metric is zero. Bank performance that is at or
above the maximum performance level set for the particular Performance Metric may result in payment up to the maximum amount of
the incentive opportunity for that particular Performance Metric. Following the Performance Period, the Compensation Committee
shall determine whether and to what extent each Performance Metric has been met and the amounts, if any, payable to each participant
for the Performance Period. Awards under the 2020 Cash Incentive Plan will be settled solely in cash. All awards received by any
participant pursuant to the 2020 Cash Incentive Plan may be subject to recovery by the Bank under the Bank’s Incentive
Compensation Clawback Policy.
131
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
Bank’s Proxy Statement to be filed with the FDIC within 120 days of the Bank’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 Bank’s Proxy Statement to be filed with the FDIC within 120 days of the Bank’s fiscal year-end.
In accordance with Item 406 of Regulation S-K, the Bank has adopted a code of ethics that applies to certain Bank executives,
including the principal executive officer, principal financial officer and principal accounting officer. The code of ethics is posted on
the Bank’s Investor Relations website at http://ir.ozk.com under “Corporate Governance Documents.” For more information about the
Bank’s code of ethics, see “Available Information under Part I, Item 1.”
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 Bank’s Proxy Statement to be filed with the FDIC within 120 days of the Bank’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 Bank’s
Proxy Statement to be filed with the FDIC within 120 days of the Bank’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 Bank’s Proxy Statement to
be filed with the FDIC within 120 days of the Bank’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 Bank’s Proxy Statement to be filed with the FDIC within 120 days of the
Bank’s fiscal year-end.
132
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 which immediately follows Item 16 below.
(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
None.
133
The following exhibits are filed with this report or are incorporated by reference to previously filed material.
EXHIBIT INDEX
Exhibit No.
2.1
3.1
3.2
3.3
4.1
4.2
4.3
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Agreement and Plan of Merger among Bank of the Ozarks, Inc. and Bank of the Ozarks, dated as of April 10, 2017
(previously filed as Exhibit 2.1 to the Bank’s Current Report on Form 10-K filed with the FDIC on June 26, 2017, and
incorporated herein by reference)
Amended and Restated Articles of Incorporation of Bank of the Ozarks (previously filed as Exhibit 3.1 to the Bank’s
Current Report on Form 8-K filed with the FDIC on June 26, 2017, and incorporated herein by reference)
Articles of Amendment to the Amended and Restated Articles of Incorporation of Bank OZK (previously filed as
Exhibit 3.1 to the Bank’s Current Report on Form 8-K filed with the FDIC on July 16, 2018, and incorporated herein by
reference)
Second Amended and Restated Bylaws of Bank OZK (previously filed as Exhibit 3.1 to the Bank’s Current Report on
Form 8-K filed with the FDIC on August 10, 2018, and incorporated herein by reference)
Form of Common Stock Certificate (previously filed as Exhibit 4.2 to the Bank’s Current Report on Form 8-K filed with
the FDIC on July 16, 2018, and incorporated herein by reference)
Instruments defining the rights of security holders, including indentures. The Bank hereby agrees to furnish to the FDIC
upon request copies of instruments defining the rights of holders of long-term debt of the Bank and its consolidated
subsidiaries; no issuance of debt exceeds ten percent of the assets of the Bank and its subsidiaries on a consolidated basis
Description of Bank OZK’s common stock registered under Section 12 of the Securities Exchange Act of 1934, filed
herewith
Form of Indemnification Agreement for directors and executive officers (previously filed as Exhibit 10.1 to the Bank’s
Annual Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by reference)
Amended and Restated Deferred Compensation Plan, as amended effective June 26, 2017 (previously filed as Exhibit
10.2 to the Bank’s Annual Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by
reference)
Split Dollar Insurance Agreement with Bank OZK (previously Bank of the Ozarks) as Trustee of the Linda and George
Gleason Insurance Trust, effective as of May 4, 2010 (previously filed as Exhibit 10.3 to the Bank’s Annual Report on
Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by reference)
Split Dollar Insurance Agreement with George G. Gleason, II, effective as of May 4, 2010 (previously filed as Exhibit
10.4 to the Bank’s Annual Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by
reference)
Split Dollar Designation by Bank OZK (previously 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 Bank’s Annual Report on Form 10-K filed with the
FDIC on February 27, 2018, and incorporated herein by reference)
Supplemental Executive Retirement Plan for George G. Gleason, II, effective May 4, 2010 (previously filed as Exhibit
10.6 to the Bank’s Annual Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by
reference)
Executive Life Insurance Agreement for George G. Gleason, II, effective May 4, 2010 (previously filed as Exhibit 10.7
to the Bank’s Annual Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by
reference)
Agreement to Terminate Executive Life Insurance Agreement dated December 29, 2017 by and between George
Gleason and the Bank (previously Bank of the Ozarks) (previously filed as Exhibit 99.1 to the Bank’s Current Report on
Form 8-K filed with the FDIC on December 29, 2017, and incorporated herein by reference)
Third Amended and Restated Non-Employee Director Stock Option Plan as of April 15, 2013 (previously filed as
Exhibit 10.9 to the Bank’s Annual Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated
herein by reference)
10.10*
10.11*
Form of Stock Option Agreement for Non-Employee Directors (previously filed as Exhibit 10.10 to the Bank’s Annual
Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by reference)
Bank of the Ozarks, Inc. Amended and Restated Stock Option Plan, effective May 18, 2015 (previously filed as Exhibit
10.11 to the Bank’s Annual Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by
reference)
134
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
Form of Stock Option Grant Agreement for employees under the Amended and Restated Stock Option Plan, effective
May 18, 2015 (previously filed as Exhibit 10.12 to the Bank’s Annual Report on Form 10-K filed with the FDIC on
February 27, 2018, 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 10.15 to the Bank’s Annual Report on Form 10-K filed with the FDIC on February 27,
2018, and incorporated herein by reference)
Form of Notice of Grant of Restricted Stock and Award Agreement for grants under the Second Amended and Restated
Restricted Stock and Incentive Plan, effective May 16, 2016 (previously filed as Exhibit 10.16 to the Bank’s Annual
Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by reference)
Third Amended and Restated Non-Employee Director Stock Plan dated May 7, 2018 (previously filed as Exhibit 10.1 to
the Bank’s Current Report on Form 8-K filed with the FDIC on May 7, 2018, and incorporated herein by reference)
Form of Restricted Stock Award Agreement for grants under the Third Amended and Restated Non-Employee Director
Stock Plan dated May 7, 2018 (previously filed as Exhibit 10.2 to the Bank’s Current Report on Form 8-K filed with the
FDIC on May 7, 2018, and incorporated herein by reference)
Bank of the Ozarks, Inc. 2017 Stock-Based Performance Award Plan (previously filed as Exhibit 10.20 to the Bank’s
Annual Report on Form 10-K filed with the FDIC on February 27, 2018, and incorporated herein by reference)
Bank of the Ozarks 2018 Executive Management Stock-Based Performance Plan (previously filed as Exhibit 10.1 to the
Bank’s Current Report on Form 8-K filed with the FDIC on February 27, 2018, and incorporated herein by reference)
Form of 2019 Performance Based Restricted Stock Unit Award Agreement for Executive Officers (“2019 LTIP
Award”)(previously filed as Exhibit 10.1 to the Bank’s Current Report on Form 8-K filed with the FDIC on January 29,
2019, and incorporated herein by reference)
Bank OZK 2019 Executive Management Cash-Based Performance Plan (previously filed as Exhibit 10.24 to the Bank’s
Annual Report on Form 10-K filed with the FDIC on February 27, 2019, and incorporated herein by reference)
Bank OZK 2019 Omnibus Equity Incentive Plan dated May 6, 2019 (previously filed as Exhibit 10.1 to the Bank’s
Current Report on Form 8-K filed with the FDIC on May 7, 2019, and incorporated herein by reference)
Form of Restricted Stock Award Agreement for Employees under the 2019 Omnibus Equity Incentive Plan (previously
filed as Exhibit 10.2 to the Bank’s Current Report on Form 8-K filed with the FDIC on May 7, 2019, and incorporated
herein by reference)
Form of Restricted Stock Award Agreement for Non-Employee Directors under the 2019 Omnibus Equity Incentive
Plan (previously filed as Exhibit 10.3 to the Bank’s Current Report on Form 8-K filed with the FDIC on May 7, 2019,
and incorporated herein by reference)
Form of Stock Option Award Agreement for Employees under the 2019 Omnibus Equity Incentive Plan (previously
filed as Exhibit 10.4 to the Bank’s Current Report on Form 8-K filed with the FDIC on May 7, 2019, and incorporated
herein by reference)
10.25*
Form of 2020 Performance Based Restricted Stock Unit Award Agreement for Executive Officers (“2020 LTIP
Award”), filed herewith
10.26*
Bank OZK 2020 Executive Management Cash-Based Performance Plan, filed herewith
21
31.1
31.2
32.1
32.2
List of Subsidiaries of the Registrant, filed herewith
Certification of Chairman and Chief Executive Officer, filed herewith
Certification of Chief Financial 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 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, furnished herewith
* Management contract or a compensatory plan or arrangement.
135
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 OZK
By:
/s/ Greg McKinney
Chief Financial Officer
(Principal Financial Officer and Authorized Officer)
Date: February 28, 2020
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/ Greg McKinney
Greg McKinney
/s/ Stan Thomas
Stan Thomas
/s/ Nicholas Brown
Nicholas Brown
/s/ Paula Cholmondeley
Paula Cholmondeley
/s/ Beverly Cole
Beverly Cole
/s/ Robert East
Robert East
/s/ Kathleen Franklin
Kathleen Franklin
/s/ Catherine B. Freedberg
Catherine B. Freedberg
/s/ Jeff Gearhart
Jeff Gearhart
/s/ Peter Kenny
Peter Kenny
/s/ William Koefoed
William Koefoed
/s/ Jack Mullen
Jack Mullen
/s/ Chris Orndorff
Chris Orndorff
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
136
DATE
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
/s/ Robert Proost
Robert Proost
/s/ John Reynolds
John Reynolds
/s/ Steven Sadoff
Steven Sadoff
/s/ Ross Whipple
Ross Whipple
Director
Director
Director
Director
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
137
DESCRIPTION OF SECURITIES REGISTERED UNDER
SECTION 12 OF THE SECURITIES EXCHANGE ACT
Exhibit 4.3
As of December 31, 2019, Bank OZK (“we,” “our” or “Bank”) has one class of securities registered under the
Securities Exchange Act of 1934, as amended, consisting of our common stock, par value $0.01 per share (“Common
Stock”). The following description of our Common Stock is a summary only, does not purport to be complete, and is
subject to and qualified in its entirety by reference to our Amended and Restated Articles of Incorporation, as amended
(“Articles”), and our Second Amended and Restated Bylaws (“Bylaws”), which are incorporated by reference as
Exhibits 3.1, 3.2 and 3.3 to the Annual Report on Form 10-K.
The rights of the Bank’s shareholders are governed by the Arkansas Banking Code and (to the extent it does
not conflict with the provisions of the Arkansas Banking Code) the Arkansas Business Corporation Act (the “ABCA”),
as well as the Articles and Bylaws. We encourage you to read the Articles, the Bylaws and the applicable provisions of
relevant law for additional information.
Authorized Shares
The Articles authorize the issuance of 300,000,000 shares of Common Stock and 100,000,000 shares of
preferred stock, $0.01 par value. All issued and outstanding shares of Common Stock are fully paid and non-
assessable. As of December 31, 2019, no shares of preferred stock were outstanding.
The Board of Directors (“Board”) may authorize the issuance of authorized but unissued shares of Common
Stock without shareholder approval, unless such approval is required in a particular case by applicable laws or
regulations or requirements of any national securities exchange on which the Common Stock is traded. The authorized
but unissued shares of Common Stock are issuable from time to time for any corporate purpose, including, without
limitation, stock splits, stock dividends, employee benefit and compensation plans, acquisitions, and public or private
sales for cash as a means of raising capital. These shares could be used to dilute the stock ownership of persons
seeking to obtain control of the Bank. In addition, the sale of a substantial number of shares of Common Stock to
persons who have an understanding with the Bank concerning the voting of such shares, or the distribution or
declaration of a Common Stock dividend to the shareholders, may have the effect of discouraging or increasing the
cost of unsolicited attempts to acquire control of the Bank.
As permitted under Arkansas law, the Articles allow the Board to issue preferred stock from time to time in
one or more series with such designations, powers, preferences and rights as the Board may from time to time
determine. The Board can, without shareholder approval (but only with the approval of the Arkansas State Bank
Department), issue preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting
strength of the Common Stock and may assist management in impeding an unfriendly takeover or attempted takeover.
The approval of the Arkansas State Bank Commissioner is required in order for us to repurchase shares of our capital
stock (other than payments to shareholders who have perfected dissenters’ rights in connection with a transaction).
Dividend and Liquidation Rights
Holders of Common Stock are entitled to receive such dividends, if any, as may be declared by the Board out
of legally available funds in compliance with the provisions of the Arkansas Banking Code and the ABCA, subject to
the rights of holders of any senior securities then outstanding (including trust preferred securities, subordinated
debentures, subordinated notes and preferred stock), and the regulations and other restrictions of the appropriate
regulatory authorities, including regulations of the FDIC and the Arkansas State Bank Department that limit our ability
to pay dividends to our shareholders without such agencies’ prior approval.
In the event of the liquidation, dissolution or winding up of the Bank, holders of Common Stock are entitled
to receive a ratable distribution of the assets of the Bank remaining after payment of liabilities, including but not
limited to the liquidation preference of any then outstanding preferred stock or other senior security.
Voting Rights
Holders of Common Stock are entitled to one vote for each share of record held on all matters properly
submitted to the shareholders for their vote or other action, including the election of directors, except as otherwise
required by law. The Articles expressly prohibit cumulative voting for the election of directors.
Shareholder action on a proposal to increase the Bank’s capital stock or bonded indebtedness may be taken
without a meeting if one or more written consents, setting forth the action so taken, shall be signed by all of the
shareholders. Any other action required or permitted to be taken at a meeting of shareholders may be taken without a
meeting if one or more written consents, setting forth the action so taken, shall be signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Preemptive and Other Rights
Holders of Common Stock are not entitled to any preemptive, subscription, redemption, exchange or
conversion rights, and no sinking fund is applicable to the Common Stock.
No Director Classification
The Articles do not authorize the Board to divide the directors into staggered classes. Under Arkansas law,
the number of directors may be fixed or changed by the shareholders or by the directors if so authorized by the Articles
or Bylaws. The Articles and Bylaws provide that the number of directors shall be fixed from time to time by resolution
of the Board and shall not be less than three (3) nor more than twenty (20).
Amendment of Corporate Charter and Bylaws
Under the Arkansas Banking Code and the Bylaws, any amendment to the Articles must be approved first by
the Board, and thereafter by a majority of each class of stock entitled to vote on the proposed amendment; provided,
that the affirmative vote of the holders of at least two-thirds of the shares entitled to vote on the matter, voting together
as a single class, as well as such additional vote of any preferred stock, if then issued and outstanding, as may be
required by the provisions thereof, is required to amend provisions of the Articles relating to the number, election and
removal of directors. Any amendment to the Articles must also be approved by the Arkansas State Banking Board and
the Arkansas State Bank Commissioner.
The Bylaws may be amended by the Board or the shareholders. Amendment of the Bylaws by the Board
requires the affirmative vote of a majority of the directors then in office. Shareholders can amend the Bylaws at an
annual meeting at which a quorum is present. A shareholder amendment of the Bylaws requires the affirmative vote of
a majority of the shares voted thereon.
Listing
“OZK.”
Our Common Stock is listed for trading on the Nasdaq Global Select Market under the trading symbol
Exhibit 21
Subsidiaries of the Bank
1. Ozark Capital Statutory Trust II, a Connecticut business trust
2. Ozark Capital Statutory Trust III, a Delaware business trust
3. Ozark Capital Statutory Trust IV, a Delaware business trust
4. Ozark Capital Statutory Trust V, a Delaware business trust
5. The Highlands Group, Inc., a 100% owned Arkansas subsidiary of Bank OZK
6. Arlington Park, LLC, a 50% owned Arkansas subsidiary of The Highlands Group, Inc.
7. BOTO, LLC, a 100% owned Arkansas subsidiary of Bank OZK
8. BOTO FL Properties LLC, a 100% owned Florida subsidiary of Bank OZK
9. PAB State Credits LLC, a 100% owned Georgia subsidiary of Bank OZK
10. FCB Properties LLC, a 100% owned Georgia subsidiary of Bank OZK
11. BOTO NC Properties, LLC, a 100% owned North Carolina subsidiary of Bank OZK
12. BOTO GA Properties, LLC, a 100% owned Georgia subsidiary of Bank OZK
13. BOTO-AR Properties, LLC, a 100% owned Arkansas subsidiary of Bank OZK
14. BOTO SC Properties, LLC, a 100% owned South Carolina subsidiary of Bank OZK
15. Omnibank Center Business Condominium Owners Association, Inc., a 75.2% owned Texas subsidiary of Bank
OZK
16. Summit Real Estate Investments, Inc., a 100% owned Arkansas subsidiary of Bank OZK
17. Intervest Statutory Trust II, a Connecticut business trust
18. Intervest Statutory Trust III, a Connecticut business trust
19. Intervest Statutory Trust IV, a Delaware business trust
20. Intervest Statutory Trust V, a Delaware business trust
21. BOTO Holdings, Inc., a 100% owned Texas subsidiary of Bank OZK
22. Hughes Meadows Apartments, LP, a 99.99% owned Arkansas subsidiary of Summit Real Estate Investments, Inc.
23. Keiser Apartments Limited Partnership, a 99% owned Arkansas subsidiary of Summit Real Estate Investments, Inc.
24. Ridgecrest Limited Partnership, a 95% owned Arkansas subsidiary of Summit Real Estate Investments, Inc.
25. East Atlantic Properties, LLC, a 100% owned North Carolina subsidiary of BOTO NC Properties, LLC
26. BOTC, LLC, a 100% owned North Carolina subsidiary of Bank OZK
27. Twin Points Road Clubhouse Properties, LLC, a 100% owned Arkansas subsidiary of Bank OZK
28. Highway 7 Properties, LLC, a 100% owned Arkansas subsidiary of Bank OZK
29. BOTO Bankmobile, LLC, a 100% owned Florida subsidiary of Bank OZK
30. Deltona Inn Properties, LLC, a 100% owned Florida subsidiary of Bank OZK
31. Elizabeth Station, LLC, a 33.34% owned Georgia subsidiary of Bank OZK
I, George Gleason, certify that:
CERTIFICATION
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Bank OZK;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 28, 2020
/s/ George Gleason
George Gleason
Chairman and Chief Executive Officer
I, Greg McKinney, certify that:
CERTIFICATION
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Bank OZK;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 28, 2020
/s/ Greg McKinney
Greg McKinney
Chief Financial 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 OZK (the Bank) on Form 10-K for the period ended December 31, 2019
as filed with the Federal Deposit Insurance Corporation (the FDIC) on the date hereof (the Report), I, George Gleason, Chairman and
Chief Executive Officer of the Bank, 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 Bank.
February 28, 2020
/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 FDIC 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 OZK (the Bank) on Form 10-K for the period ended December 31, 2019
as filed with the Federal Deposit Insurance Corporation (the FDIC) on the date hereof (the Report), I, Greg McKinney, Chief
Financial Officer of the Bank, 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 Bank.
February 28, 2020
/s/ Greg McKinney
Greg McKinney
Chief Financial Officer
In accordance with SEC Release No. 34-47986, this Exhibit 32.2 is furnished to the FDIC 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.
A History of Excellence
2020
2019
Top Fintechs to Work For,
American Banker, 2020
Best Bank in the South,
2019–2020 Money.com
Forbes Best Banks, 2020
Top Fintechs to Work For,
American Banker, 2019
World's Best Banks, Forbes, 2019
50 Most Important Leaders in
Commercial Real Estate Finance,
The Commercial Observer, 2019
50 Most Important Leaders
in Commercial Real Estate
Finance, The Commercial
Observer, 2018
Top Fintechs to Work For,
American Banker, 2018
World's Best Employers,
Forbes, 2018
2018
Top Performing Bank, Bank
Director Magazine, 2018
Assets: $5 Billion–$50 Billion
Nation’s Top Performing
Regional Bank, S&P Global
Market Intelligence, 2018
Assets: $10 Billion–$50 Billion
2017
Nation’s Top Performing
Regional Bank, S&P Global
Market Intelligence, 2017
Assets: $10 Billion–$50 Billion
2016
Best Bank in North Carolina,
Money Magazine, 2017
Top Performing Bank, Bank
Director Magazine, 2017
Assets: $5 Billion–$50 Billion
Top Performing Bank, Bank
Director Magazine, 2016
Top Performing Regional Bank,
S&P Global Market Intelligence, 2016
Assets: $5 Billion–$50 Billion
2015
2014
Top Performing Bank, Bank
Director Magazine, 2015
Top Performing Regional Bank,
S&P Global Market Intelligence, 2015
Top Performing Bank, Bank
Director Magazine, 2014
Assets: $5 Billion–$50 Billion
Assets: $1 Billion–$5 Billion
2013
2012
Top Performing Bank, Bank
Director Magazine, 2013
Top Performing Regional Bank,
S&P Global Market Intelligence, 2012
Top Performing Bank, ABA
Banking Journal, 2012
Assets: $1 Billion–$5 Billion
Assets: $1 Billion–$10 Billion
2011
2010
Top Performing Bank, ABA
Banking Journal, 2011
Community Banker of the
Year, American Banker, 2010
Assets: over $3 Billion
Little Rock, Arkansas
(501) 978-2265, Fax (501) 320 - 4078
NASDAQ: OZK
ozk.com
For additional information, contact:
Transfer Agent:
Investor Relations
Bank OZK
17901 Chenal Park way
Little Rock, AR 72223
Trust and Wealth Division
Bank OZK
17901 Chenal Park way
Little Rock, AR 72223
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com