Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number 0-22759

 

 

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

ARKANSAS   71-0556208

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

17901 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS   72223
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (501) 978-2265

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a smaller reporting company or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Check one:

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes  ¨    No  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date.

 

Class

 

Outstanding at September 30, 2009

Common Stock, $0.01 par value per share   16,885,340

 

 

 


Table of Contents

BANK OF THE OZARKS, INC.

FORM 10-Q

September 30, 2009

INDEX

 

PART I.    Financial Information   
Item 1.   

Financial Statements

  
  

Consolidated Balance Sheets as of September 30, 2009 and 2008 and December 31, 2008

   1
  

Consolidated Statements of Income for the Three Months Ended September 30, 2009 and 2008 and the Nine Months Ended September 30, 2009 and 2008

   2
  

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2009 and 2008

   3
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008

   4
  

Notes to Consolidated Financial Statements

   5
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   17
  

Selected and Supplemental Financial Data

   38
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

   40
Item 4.   

Controls and Procedures

   41
PART II.    Other Information   
Item 1.   

Legal Proceedings

   42
Item 1A.   

Risk Factors

   42
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   42
Item 3.   

Defaults Upon Senior Securities

   42
Item 4.   

Submission of Matters to a Vote of Security Holders

   42
Item 5.   

Other Information

   42
Item 6.   

Exhibits

   42
Signature       43
Exhibit Index    44


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

 

     Unaudited
September 30,
    December 31,  
     2009     2008     2008  
     (Dollars in thousands, except per share amounts)  
ASSETS       

Cash and due from banks

   $ 36,503      $ 46,254      $ 40,665   

Interest earning deposits

     524        329        317   
                        

Cash and cash equivalents

     37,027        46,583        40,982   

Investment securities—available for sale (“AFS”)

     645,682        721,285        944,783   

Loans and leases

     1,931,372        2,055,400        2,021,199   

Allowance for loan and lease losses

     (39,280     (25,427     (29,512
                        

Net loans and leases

     1,892,092        2,029,973        1,991,687   

Premises and equipment, net

     156,746        147,030        152,586   

Foreclosed assets held for sale, net

     63,946        5,887        10,758   

Accrued interest receivable

     15,500        15,927        18,877   

Bank owned life insurance

     47,841        47,648        46,384   

Intangible assets, net

     5,581        5,692        5,664   

Other, net

     25,271        50,521        21,582   
                        

Total assets

   $ 2,889,686      $ 3,070,546      $ 3,233,303   
                        
LIABILITIES AND STOCKHOLDERS’ EQUITY       

Deposits:

      

Demand non-interest bearing

   $ 209,220      $ 194,104      $ 185,613   

Savings and interest bearing transaction

     781,949        690,948        852,656   

Time

     1,053,987        1,416,474        1,303,145   
                        

Total deposits

     2,045,156        2,301,526        2,341,414   

Repurchase agreements with customers

     52,270        46,329        46,864   

Other borrowings

     361,679        426,524        424,947   

Subordinated debentures

     64,950        64,950        64,950   

Accrued interest payable and other liabilities

     16,218        12,007        27,525   
                        

Total liabilities

     2,540,273        2,851,336        2,905,700   
                        

Commitments and contingencies

      

Stockholders’ equity:

      

Preferred stock; $0.01 par value; 1,000,000 shares authorized:

      

Series A fixed rate cumulative perpetual; liquidation preference of $1,000 per share; 75,000 shares issued and outstanding at September 30, 2009 and December 31, 2008; no shares issued and outstanding at September 30, 2008

     72,296        —          71,880   

Common stock; $0.01 par value; 50,000,000 shares authorized; 16,885,340, 16,854,540 and 16,864,140 shares issued and outstanding at September 30, 2009, September 30, 2008 and December 31, 2008, respectively

     169        168        169   

Additional paid-in capital

     44,099        39,731        43,314   

Retained earnings

     213,793        186,295        193,195   

Accumulated other comprehensive income (loss)

     15,597        (10,384     15,624   
                        

Total stockholders’ equity before noncontrolling interest

     345,954        215,810        324,182   

Noncontrolling interest

     3,459        3,400        3,421   
                        

Total stockholders’ equity

     349,413        219,210        327,603   
                        

Total liabilities and stockholders’ equity

   $ 2,889,686      $ 3,070,546      $ 3,233,303   
                        

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (Dollars in thousands, except per share amounts)  

Interest income:

        

Loans and leases

   $ 30,879      $ 35,857      $ 94,415      $ 106,962   

Investment securities:

        

Taxable

     4,280        5,332        15,180        16,467   

Tax-exempt

     4,742        5,838        18,150        12,083   

Deposits with banks and federal funds sold

     3        3        8        10   
                                

Total interest income

     39,904        45,030        127,753        135,522   
                                

Interest expense:

        

Deposits

     6,406        15,382        25,000        50,314   

Repurchase agreements with customers

     151        174        461        604   

Other borrowings

     3,624        4,015        10,750        11,816   

Subordinated debentures

     491        843        1,713        2,818   
                                

Total interest expense

     10,672        20,414        37,924        65,552   
                                

Net interest income

     29,232        24,616        89,829        69,970   

Provision for loan and lease losses

     (7,500     (3,400     (39,200     (10,725
                                

Net interest income after provision for loan and lease losses

     21,732        21,216        50,629        59,245   
                                

Non-interest income:

        

Service charges on deposit accounts

     3,234        3,102        9,084        8,939   

Mortgage lending income

     672        473        2,630        1,781   

Trust income

     801        649        2,198        1,882   

Bank owned life insurance income

     495        512        1,456        1,500   

Gains (losses) on investment securities

     142        (317     20,660        (297

Gains (losses) on sales of other assets

     (51     (78     (35     35   

Other

     517        530        1,800        1,713   
                                

Total non-interest income

     5,810        4,871        37,793        15,553   
                                

Non-interest expense:

        

Salaries and employee benefits

     7,823        7,728        23,717        22,684   

Net occupancy and equipment

     2,558        2,318        7,584        6,575   

Other operating expenses

     5,118        3,782        18,330        10,917   
                                

Total non-interest expense

     15,499        13,828        49,631        40,176   
                                

Income before taxes

     12,043        12,259        38,791        34,622   

Provision for income taxes

     2,599        3,255        8,387        9,271   
                                

Net income

     9,444        9,004        30,404        25,351   

Net loss attributable to noncontrolling interest

     25        7        2        32   

Preferred stock dividends and amortization of preferred stock discount

     (1,078     —          (3,228     —     
                                

Net income available to common stockholders

   $ 8,391      $ 9,011      $ 27,178      $ 25,383   
                                

Basic earnings per common share

   $ 0.50      $ 0.53      $ 1.61      $ 1.51   
                                

Diluted earnings per common share

   $ 0.50      $ 0.53      $ 1.61      $ 1.50   
                                

Dividends declared per common share

   $ 0.13      $ 0.13      $ 0.39      $ 0.37   
                                

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

 

     Preferred
Stock -
Series A
   Common
Stock
   Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Non-
controlling
Interest
    Total  
     (Dollars in thousands)  

Balances – January 1, 2008

   $ —      $ 168    $ 38,613      $ 167,139      $ (15,091   $ 3,432      $ 194,261   

Comprehensive income:

                

Net income

     —        —        —          25,351        —          —          25,351   

Net loss attributable to noncontrolling interest

     —        —        —          32        —          (32     —     

Other comprehensive income (loss):

                

Unrealized gains/losses on investment securities AFS, net of $2,921 tax effect

     —        —        —          —          4,526        —          4,526   

Reclassification of gains/losses included in net income, net of $116 tax effect

     —        —        —          —          181        —          181   
                      

Total comprehensive income

                   30,058   
                      

Common stock dividends

     —        —        —          (6,227     —          —          (6,227

Issuance of 36,300 shares of common stock for exercise of stock options

     —        —        231        —          —          —          231   

Tax benefit on exercise of stock options

     —        —        236        —          —          —          236   

Stock-based compensation expense

     —        —        651        —          —          —          651   
                                                      

Balances – September 30, 2008

   $ —      $ 168    $ 39,731      $ 186,295      $ (10,384   $ 3,400      $ 219,210   
                                                      

Balances – January 1, 2009

   $ 71,880    $ 169    $ 43,314      $ 193,195      $ 15,624      $ 3,421      $ 327,603   

Comprehensive income:

                

Net income

     —        —        —          30,404        —          —          30,404   

Net loss attributable to noncontrolling interest

     —        —        —          2        —          (2     —     

Other comprehensive income (loss):

                

Unrealized gains/losses on investment securities AFS, net of $8,086 tax effect

     —        —        —          —          12,529        —          12,529   

Reclassification of gains/losses included in net income, net of $8,104 tax effect

     —        —        —          —          (12,556     —          (12,556
                      

Total comprehensive income

                   30,377   
                      

Common stock dividends

     —        —        —          (6,580     —          —          (6,580

Preferred stock dividends

     —        —        —          (2,812     —          —          (2,812

Amortization of preferred stock discount

     416      —        —          (416     —          —          —     

Issuance of 21,200 shares of common stock for exercise of stock options

     —        —        245        —          —          —          245   

Tax benefit (expense) on exercise and forfeiture of stock options

     —        —        (10     —          —          —          (10

Stock-based compensation expense

     —        —        550        —          —          —          550   

Minority interest cash contribution

     —        —        —          —          —          40        40   
                                                      

Balances – September 30, 2009

   $ 72,296    $ 169    $ 44,099      $ 213,793      $ 15,597      $ 3,459      $ 349,413   
                                                      

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

     Nine Months Ended
September 30,
 
     2009     2008  
     (Dollars in thousands)  

Cash flows from operating activities:

    

Net income

   $ 30,404      $ 25,351   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     3,107        2,637   

Amortization

     83        186   

Net loss attributable to noncontrolling interest

     2        32   

Provision for loan and lease losses

     39,200        10,725   

Provision for losses on foreclosed assets

     2,172        553   

Net accretion of investment securities AFS

     (3,924     (676

Net (gains) losses on investment securities AFS

     (20,660     297   

Originations and purchases of mortgage loans for sale

     (150,205     (103,535

Proceeds from sales of mortgage loans for sale

     147,825        105,563   

Losses (gains) on dispositions of premises and equipment and other assets

     35        (35

Deferred income tax benefit

     (74     (905

Increase in cash surrender value of bank owned life insurance

     (1,456     (1,500

Current tax benefit on exercise of stock options

     (110     (236

Compensation expense under stock-based compensation plans

     550        651   

Changes in assets and liabilities:

    

Accrued interest receivable

     3,376        1,493   

Other assets, net

     (6,301     (3,251

Accrued interest payable and other liabilities

     (3,550     (446
                

Net cash provided by operating activities

     40,474        36,904   
                

Cash flows from investing activities:

    

Proceeds from sales of investment securities AFS

     321,163        10,198   

Proceeds from maturities/calls/paydowns of investment securities AFS

     229,015        1,449,127   

Purchases of investment securities AFS

     (232,051     (1,612,219

Net fundings of portfolio loans and leases

     (8,155     (198,313

Purchases of premises and equipment

     (8,094     (21,513

Proceeds from dispositions of premises and equipment and other assets

     16,558        5,969   

Cash received from (paid for) interest in unconsolidated investments and minority interest

     10        (30
                

Net cash provided (used) by investing activities

     318,446        (366,781
                

Cash flows from financing activities:

    

Net (decrease) increase in deposits

     (296,258     244,465   

Net (repayments of) proceeds from other borrowings

     (63,268     89,991   

Net increase in repurchase agreements with customers

     5,406        243   

Proceeds from exercise of stock options

     245        231   

Current tax benefit on exercise of stock options

     110        236   

Cash dividends paid on common stock

     (6,580     (6,227

Cash dividends paid on preferred stock

     (2,530     —     
                

Net cash (used) provided by financing activities

     (362,875     328,939   
                

Net decrease in cash and cash equivalents

     (3,955     (938

Cash and cash equivalents – beginning of period

     40,982        47,521   
                

Cash and cash equivalents – end of period

   $ 37,027      $ 46,583   
                

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BANK OF THE OZARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. Organization and Principles of Consolidation

Bank of the Ozarks, Inc. (the “Company”) is a bank holding company headquartered in Little Rock, Arkansas, which operates under the rules and regulations of the Board of Governors of the Federal Reserve System. The Company owns a wholly-owned state chartered bank subsidiary—Bank of the Ozarks (the “Bank”), four 100%-owned finance subsidiary business trusts—Ozark Capital Statutory Trust II (“Ozark II”), Ozark Capital Statutory Trust III (“Ozark III”), Ozark Capital Statutory Trust IV (“Ozark IV”) and Ozark Capital Statutory Trust V (“Ozark V”) (collectively, the “Trusts”) and, indirectly through the Bank, a subsidiary engaged in the development of real estate. The consolidated financial statements include the accounts of the Company, the Bank and the real estate subsidiary. Significant intercompany transactions and amounts have been eliminated in consolidation.

2. Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) in Article 10 of Regulation S-X and in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information, accounting policies and footnote disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. In the opinion of management all adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. These financial statements were issued on November 5, 2009, with November 4, 2009 as the date through which subsequent events have been evaluated by management for recognition or disclosure purposes. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full year or future periods.

Certain reclassifications of prior period amounts have been made to conform with the current period presentation. These reclassifications had no impact on previously reported net income.

3. Earnings Per Common Share (“EPS”)

Basic EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding after consideration of the dilutive effect, if any, of the Company’s outstanding common stock options and common stock warrant using the treasury stock method. Options to purchase 437,150 shares of the Company’s common stock for the three-month period and options to purchase 455,150 shares of the Company’s common stock for the nine-month period ended September 30, 2009 were not included in the diluted EPS calculation because inclusion would have been antidilutive. Options to purchase 468,400 shares of the Company’s common stock for both the three-month and nine-month periods ended September 30, 2008 were not included in the diluted EPS computation because inclusion would have been antidilutive. Additionally, a warrant for the purchase of 379,811 shares of the Company’s common stock at an exercise price of $29.62 was outstanding at September 30, 2009 (none at September 30, 2008) but was not included in the diluted EPS computation as inclusion would have been antidilutive.

Basic and diluted EPS are computed as follows.

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008
     (In thousands, except per share amounts)

Common shares – weighted-average (basic)

     16,887      16,848      16,878      16,841

Common share equivalents – weighted-average

     18      24      17      25
                           

Common shares – diluted

     16,905      16,872      16,895      16,866
                           

Net income available to common stockholders

   $ 8,391    $ 9,011    $ 27,178    $ 25,383

Basic EPS

   $ 0.50    $ 0.53    $ 1.61    $ 1.51

Diluted EPS

     0.50      0.53      1.61      1.50

 

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Table of Contents

4. Investment Securities

At September 30, 2009 and 2008 and at December 31, 2008, the Company classified all of its investment securities portfolio as available for sale (“AFS”). Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with the unrealized gains and losses, net of related income tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss).

At September 30, 2009 and December 31, 2008, the Company owned stock in Federal Home Loan Bank of Dallas (“FHLB”) and First National Banker’s Bankshares, Inc. (“FNBB”). At September 30, 2008, the Company owned stock in FHLB and Arkansas Bankers’ Bancorporation, Inc. (“ABB”) (ABB was acquired by FNBB via a tax-free exchange of stock on November 30, 2008). The FHLB, FNBB and ABB shares do not have readily determinable fair values and are carried at cost.

The following presents the amortized cost and estimated fair value of investment securities at September 30, 2009 and at December 31, 2008.

 

     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair

Value (1)
     (Dollars in thousands)

September 30, 2009:

          

Obligations of state and political subdivisions

   $ 360,067    $ 20,219    $ (513   $ 379,773

U.S. Government agency mortgage-backed securities

     241,856      5,826      —          247,682

Corporate obligations

     1,592      225      —          1,817

Collateralized debt obligation

     100      —        —          100

FHLB and FNBB stock

     16,310      —        —          16,310
                            
   $ 619,925    $ 26,270    $ (513   $ 645,682
                            

December 31, 2008:

          

Obligations of state and political subdivisions

   $ 517,166    $ 31,753    $ (6,179   $ 542,740

U.S. Government agency mortgage-backed securities

     371,110      3,187      (2,736     371,561

Corporate obligations

     6,953      —        —          6,953

Collateralized debt obligation

     1,000      —        (317     683

FHLB and FNBB stock

     22,846      —        —          22,846
                            
   $ 919,075    $ 34,940    $ (9,232   $ 944,783
                            
 
  (1) The Company utilizes an independent third party as its principal pricing source for determining fair value of investment securities. For investment securities traded in an active market, the fair values 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 and pricing matrices. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs or value drivers.

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The following shows gross unrealized losses and estimated fair value of investment securities AFS, aggregated by investment category and length of time that individual investment securities have been in a continuous unrealized loss position, at September 30, 2009 and at December 31, 2008.

 

     Less than 12 Months    12 Months or More    Total
     Estimated
Fair Value
   Unrealized
Losses
   Estimated
Fair Value
   Unrealized
Losses
   Estimated
Fair Value
   Unrealized
Losses
     (Dollars in thousands)

September 30, 2009:

                 

Obligations of state and political subdivisions

   $ 25,894    $ 316    $ 8,422    $ 197    $ 34,316    $ 513
                                         
   $ 25,894    $ 316    $ 8,422    $ 197    $ 34,316    $ 513
                                         

December 31, 2008:

                 

Obligations of state and political subdivisions

   $ 117,686    $ 6,154    $ 2,309    $ 25    $ 119,995    $ 6,179

U.S. Government agency mortgage-backed securities

     69,765      1,781      80,512      955      150,277      2,736

Collateralized debt obligation

     683      317      —        —        683      317
                                         
   $ 188,134    $ 8,252    $ 82,821    $ 980    $ 270,955    $ 9,232
                                         

Management believes that the unrealized losses for all of its investment securities AFS that were reported net of an unrealized loss at September 30, 2009 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of its investments. Accordingly management considers these unrealized losses to be temporary in nature. The Company has both the ability and the intent to hold until maturity, or until such time as fair value recovers above cost, all of its investment securities reported net of an unrealized loss at September 30, 2009.

The following shows the amortized cost and estimated fair value of investment securities AFS by maturity or estimated date of repayment.

 

     September 30, 2009

Maturity or

Estimated Repayment Date

   Amortized
Cost
   Estimated
Fair Value
     (Dollars in thousands)

One year or less

   $ 140,659    $ 144,154

After one year to five years

     152,455      156,679

After five years to ten years

     47,194      49,159

After ten years

     279,617      295,690
             

Total

   $ 619,925    $ 645,682
             

For purposes of this maturity distribution, all investment securities AFS are shown based on their contractual maturity date, except (i) FHLB and FNBB stock with no contractual maturity date are shown in the longest maturity category, (ii) U.S. Government agency mortgage-backed securities are allocated among various maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds and interest rate levels at September 30, 2009 and (iii) mortgage-backed securities issued by housing authorities of states and political subdivisions are allocated among various maturities based on an estimated repayment schedule projected by management as of September 30, 2009. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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Sales activities and other-than-temporary impairment charges in the Company’s investment securities AFS were as follows.

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2009     2008     2008  
     (Dollars in thousands)  

Sales proceeds

   $ 321,163      $ 10,198      $ 13,588   
                        

Gross realized gains

   $ 24,480      $ 60      $ 360   

Gross realized losses

     (2,920     (357     (777

Other-than-temporary impairment charges

     (900     —          (3,016
                        

Net gains (losses) on investment securities

   $ 20,660      $ (297   $ (3,433
                        

5. FHLB Advances

FHLB advances with original maturities exceeding one year totaled $340.8 million at September 30, 2009. Interest rates on these advances ranged from 2.53% to 6.43% at September 30, 2009 with a weighted-average interest rate of 4.27%. At September 30, 2009 aggregate annual maturities and weighted-average interest rates of FHLB advances with an original maturity of over one year were as follows.

 

Maturity

   Amount    Weighted-Average
Interest Rate
 
     (Dollars in thousands)  

2009

   $ 8    4.81

2010

     60,034    6.27   

2011

     31    4.80   

2012

     21    4.63   

2013

     18    4.54   

Thereafter

     280,707    3.84   
         
   $ 340,819    4.27   
         

FHLB advances maturing in 2010 include $60.0 million that mature in May 2010. Included in the above table are $340.0 million of FHLB advances that contain quarterly call features and are callable as follows.

 

     Amount    Weighted-Average
Interest Rate
    Maturity
     (Dollars in thousands)

Callable quarterly

   $ 60,000    6.27   2010

Callable quarterly

     260,000    3.90      2017

Callable quarterly

     20,000    2.53      2018
           
   $ 340,000    4.24     
           

6. Subordinated Debentures

At September 30, 2009 the Company had the following issues of trust preferred securities outstanding and subordinated debentures owed to the Trusts.

 

Description

   Subordinated
Debentures
Owed to Trusts
   Trust Preferred
Securities
of the Trusts
   Interest Rate
Spread to
90-day LIBOR
    Interest Rate at
September 30, 2009
    Final Maturity Date
     (Dollars in thousands)

Ozark III

   $ 14,434    $ 14,000    2.95   3.46   September 25, 2033

Ozark II

     14,433      14,000    2.90      3.18      September 29, 2033

Ozark IV

     15,464      15,000    2.22      2.63      September 28, 2034

Ozark V

     20,619      20,000    1.60      1.90      December 15, 2036
                    
   $ 64,950    $ 63,000       
                    

At September 30, 2009 the Company had $64.9 million of subordinated debentures outstanding and had an asset of $1.9 million representing its investment in the common equity issued by the Trusts. The interest rates on the subordinated debentures and related trust preferred securities are based on a spread over the 90-day LIBOR and reset periodically. The sole assets of the Trusts are the adjustable rate debentures and the liabilities of the Trusts are the trust preferred securities. At September 30, 2009 the Trusts did not have any restricted net assets. The Company has, through various contractual arrangements, unconditionally guaranteed payment of all obligations of the Trusts with respect to the trust preferred securities. There are no restrictions on the ability of the Trusts to transfer funds to the Company in the form of cash dividends, loans or advances.

 

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The trust preferred securities and the subordinated debentures mature at or near the thirtieth anniversary date of their issuance. However, these securities and debentures may be prepaid at par, subject to regulatory approval, prior to maturity at any time on or after September 25 and 29, 2008, respectively, for the Ozark III and Ozark II securities and debentures; on or after September 28, 2009 for the Ozark IV securities and debentures; and on or after December 15, 2011 for the Ozark V securities or debentures, or at an earlier date upon certain changes in tax laws, investment company laws or regulatory capital requirements.

7. Supplemental Data for Cash Flows

Supplemental cash flow information is as follows.

 

     Nine Months Ended
September 30,
     2009    2008
     (Dollars in thousands)

Cash paid during the period for:

     

Interest

   $ 39,842    $ 66,813

Taxes

     13,304      10,841

Supplemental schedule of non-cash investing and financing activities:

     

Net change in unrealized gains and losses on investment securities AFS

     49      7,745

Unsettled AFS investment security trades:

     

Purchases

     3,029      543

Sales/calls

     —        18,625

Loans transferred to foreclosed assets held for sale

     69,607      9,568

Loans advanced for sales of foreclosed assets

     1,324      2,402

8. Guarantees and Commitments

Outstanding standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer in third party arrangements. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2009 was $9.6 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at September 30, 2009 totaled $8.0 million.

At September 30, 2009 the Company had outstanding commitments to extend credit of $221 million. These commitments extend over varying periods of time with the majority to be disbursed or to expire within a one-year period.

9. Stock-Based Compensation

The Company has a nonqualified stock option plan for certain employees of the Company. This plan provides for the granting of incentive nonqualified options to purchase shares of common stock in the Company. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. While the vesting period and the termination date for the employee plan options are determined when options are granted, all such employee options outstanding at September 30, 2009 were issued with a vesting period of three years and expire seven years after issuance.

The Company also has a nonqualified stock option plan for non-employee directors. This plan permits each director who is not otherwise an employee of the Company, or any subsidiary, to receive options to purchase 1,000 shares of the Company’s common stock on the day following his or her election as a director of the Company at each annual meeting of stockholders and up to 1,000 shares upon election or appointment for the first time as a director of the Company. These options are exercisable immediately and expire ten years after issuance.

All shares issued in connection with options exercised under both the employee and non-employee director stock option plans are in the form of newly issued shares.

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The following table summarizes stock option activity for the nine months ended September 30, 2009.

 

     Options     Weighted-
Average

Exercise
Price/Share
   Weighted-
Average
Remaining
Contractual
Life (in years)
   Aggregate
Intrinsic

Value
(in thousands)(1)

Outstanding – January 1, 2009

   553,000      $ 28.39      

Granted

   9,000        24.67      

Exercised

   (21,200     11.56      

Forfeited

   (18,650     30.17      
              

Outstanding – September 30, 2009

   522,150        28.94    4.3    $ 673
                        

Exercisable – September 30, 2009

   245,000      $ 27.89    3.4    $ 673
                        

 

          
  (1) Based on closing price of $26.53 per share on September 30, 2009.

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 the nine months ended September 30, 2009 and 2008 was $0.3 million and $0.6 million, respectively.

Options to purchase 9,000 shares of the Company’s common stock were issued during each of the nine month periods ended September 30, 2009 and 2008. The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. The total grant date fair value of options to purchase shares of the Company’s common stock that vested during the nine months ended September 30, 2009 and 2008 was $0.1 million and $0.4 million, respectively.

Stock-based compensation expense for stock options included in non-interest expense was $0.1 million for the quarter and $0.6 million for the nine months ended September 30, 2009. Stock-based compensation expense for stock options included in non-interest expense was $0.2 million for the quarter and $0.7 million for the nine months ended September 30, 2008. Total unrecognized compensation cost related to nonvested stock-based compensation was $0.7 million at September 30, 2009 and is expected to be recognized over a weighted-average period of 1.7 years.

Effective April 21, 2009, the Company’s shareholders voted to approve adoption of the Company’s restricted stock plan permitting issuance of up to 200,000 shares of restricted stock or restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock plan. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under the restricted stock plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. Shares of common stock issued under the restricted stock plan may be shares of original issuance, shares held in treasury or shares that have been reacquired by the Company. No benefits or awards had been granted under the restricted stock plan as of September 30, 2009, and accordingly, such benefits are not presently determinable.

10. Comprehensive Income

Total comprehensive income consists of net income, net income attributable to noncontrolling interest, unrealized gains and losses on investment securities AFS, net of income taxes, and reclassification adjustments for unrealized gains and losses on investment securities AFS sold, net of income taxes. Total comprehensive income was $15.8 million and $6.7 million, respectively, for the three months ended September 30, 2009 and 2008 and $30.4 million and $30.1 million, respectively, for the nine months ended September 30, 2009 and 2008.

11. Preferred Stock

On December 12, 2008, as part of the United States Department of the Treasury’s (the “Treasury”) Capital Purchase Program made available to certain financial institutions in the U.S. pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”), the Company and the Treasury entered into a Letter Agreement including the Securities Purchase Agreement – Standard Terms incorporated therein (the “Purchase Agreement”) pursuant to which the Company issued to the Treasury, in exchange for aggregate consideration of $75.0 million, (i) 75,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 and liquidation preference $1,000 per share (the “Series A Preferred Stock”), and (ii) a warrant (the “Warrant”) to purchase up to 379,811 shares (the “Warrant Common Stock”) of the Company’s common stock, par value $0.01 per share, at an exercise price of $29.62 per share. The Warrant is immediately exercisable and freely transferable by the Treasury, and has a 10-year

 

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term. The Treasury may not exercise voting power with respect to any shares of Warrant Common Stock until the Warrant has been exercised. On November 4, 2009 the Company redeemed all of the Series A Preferred Stock for $75.0 million, plus accrued and unpaid dividends, with the approval of the Company’s primary regulator in consultation with the Treasury. On the same date, the Company submitted an offer to the Treasury for the repurchase of the Warrant. The repurchase price is subject to negotiation, and there can be no assurance that the Company will repurchase the Warrant.

The Purchase Agreement (i) granted the holders of the Series A Preferred Stock, the Warrant and the Warrant Common Stock certain registration rights, (ii) subjected the Company to certain of the executive compensation limitations included in the EESA and (iii) allowed the Treasury to unilaterally amend any of the terms of the Purchase Agreement to the extent required to comply with any changes after December 12, 2008 in applicable federal statutes.

The Series A Preferred Stock qualified as Tier 1 capital and paid cumulative cash dividends quarterly at a rate of 5% per annum while outstanding. The Series A Preferred Stock was non-voting, other than class voting rights on certain matters that could have adversely affected the Series A Preferred Stock. While the Series A Preferred Stock was outstanding, the Company could not, without Treasury’s consent, increase its dividend rate per share of common stock or repurchase its common stock.

Upon receipt of the aggregate consideration from the Treasury on December 12, 2008, the Company allocated the $75.0 million proceeds on a pro rata basis to the Series A Preferred Stock and the Warrant based on relative fair values. In estimating the fair value of the Warrant, the Company utilized the Black-Scholes model which includes assumptions regarding the Company’s common stock prices, stock price volatility, dividend yield, the risk free interest rate and the estimated life of the Warrant. The fair value of the Series A Preferred Stock was determined using a discounted cash flow methodology and a discount rate of 12%. As a result, the Company assigned $3.1 million of the aggregate proceeds to the Warrant and $71.9 million to the Series A Preferred Stock. The discount assigned to the Series A Preferred Stock was expected to be amortized over a five-year period, which was the expected life of the Series A Preferred Stock at the time it was issued, up to the $75.0 million liquidation value of such preferred stock, with the cost of such amortization being reported as additional preferred stock dividends. This resulted in a total dividend with an effective yield of 5.98% through September 30, 2009. As a result of the redemption of the Series A Preferred Stock, the remaining unamortized discount of $2.7 million will be recognized as an additional preferred stock dividend in the fourth quarter of 2009.

12. Fair Value Measurements

The Company measures certain of its assets and liabilities on a fair value basis using various valuation techniques and assumptions, depending on the nature of the asset or liability. Fair value is defined by Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures,” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, fair value is used either annually or on a non-recurring basis to evaluate certain assets and liabilities for impairment or for disclosure purposes.

In accordance with ASC Topic 820, the Company applied 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 or value drivers are observable.
Level 3       Instruments whose inputs or value drivers are unobservable.

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The following table sets forth the Company’s assets and liabilities for the dates indicated that are accounted for at fair value.

 

     Level 1    Level 2    Level 3     Total  
     (Dollars in thousands)  

September 30, 2009:

  

Assets:

          

Investment securities AFS(1):

          

Obligations of state and political subdivisions

   $ —      $ 363,183    $ 16,590      $ 379,773   

U.S. Government agency mortgage-backed securities

     —        247,682      —          247,682   

Corporate obligations

     —        1,817      —          1,817   

Collateralized debt obligation

     —        —        100        100   
                              

Total investment securities AFS

     —        612,682      16,690        629,372   

Impaired loans and leases

     —        —        15,918        15,918   

Investments in tax credit investments

     —        —        2,707        2,707   

Foreclosed assets held for sale, net

     —        —        63,946        63,946   

Derivative assets – interest rate lock commitments (“IRLC”) and forward sales commitments (“FSC”)

     —        —        179        179   

Liabilities:

          

Derivative liabilities – IRLC and FSC

     —        —        (179     (179

December 31, 2008:

          

Assets:

          

Investment securities AFS(2):

          

Obligations of state and political subdivisions

   $ 85,275    $ 435,081    $ 22,384      $ 542,740   

U.S. Government agency mortgage-backed securities

     —        371,561      —          371,561   

Corporate obligations

     —        —        6,953        6,953   

Collateralized debt obligation

     —        —        683        683   
                              

Total investment securities AFS

     85,275      806,642      30,020        921,937   

Impaired loans and leases

     —        —        12,448        12,448   

Investments in tax credit investments

     —        —        2,860        2,860   

Foreclosed assets held for sale, net

     —        —        10,758        10,758   

Derivative assets – IRLC and FSC

     —        —        477        477   

Liabilities:

          

Derivative liabilities – IRLC and FSC

     —        —        (477     (477

 

(1) Does not include $16.3 million of FHLB and FNBB stock that do not have readily determinable fair values and are carried at cost.
(2) Does not include $22.8 million of FHLB and FNBB stock that do not have readily determinable fair values and are carried at cost.

The following methods and assumptions are used to estimate the fair value of the Company’s financial assets and liabilities that were accounted for at fair value.

Investment securities – The Company utilizes an independent third party as its principal pricing source for determining fair value of investment securities. For investment securities traded in an active market, fair values are measured on a recurring basis and 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 and pricing matrices. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs or value drivers.

The Company has determined that certain of its investment securities had a limited to non-existent trading market at September 30, 2009. As a result, the Company considers these investments as Level 3 in the fair value hierarchy. The following is a description of those investment securities and the fair value methodology used for such securities.

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Obligations of state and political subdivisions – The fair values of certain obligations of state and political subdivisions consisting of unrated Arkansas private placement special improvement district bonds (“SID bonds”) in the amount of $16.6 million at September 30, 2009 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 SID bonds and the private placement nature of such SID bonds. The SID bonds are prepayable at par value at the option of the issuer. As a result, management believes the SID bonds should be valued at the lower of (i) the matrix pricing provided by the Company’s third party pricing service for comparable unrated municipal securities or (ii) par value. At September 30, 2009, the third party pricing matrix valued the Company’s total portfolio of SID bonds at $17.6 million which exceeded the aggregate par value of the SID bonds by $1.0 million. Accordingly, at September 30, 2009 the Company reported the SID bonds at par value of $16.6.

Collateralized debt obligation – At September 30, 2009, the Company’s investment securities portfolio included one security categorized as a collateral debt obligation (“CDO”). This CDO has performed in accordance with its terms and is not in default, but, because of its credit rating being downgraded to below investment grade and other factors, the Company determined during the third quarter of 2009 that it no longer expects to hold this security until maturity or until such time as fair value recovers to or above cost. As a result of the Company’s intent to dispose of this security, the Company recorded a $0.9 million charge during the third quarter of 2009 to reduce the carrying value of this security to $0.1 million.

Impaired loans and leases – Fair values are measured on a nonrecurring basis and are based on the underlying collateral value of the impaired loan or lease, net of holding and selling costs, or the estimated discounted cash flows for such loan or lease. In accordance with the provisions of ASC Topic 310, “Receivables,” the Company has reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $6.4 million to the estimated fair value of $15.9 million for such loans and leases at September 30, 2009. The $6.4 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $4.8 million of partial charge-offs, which has reduced the carrying value to $17.5 million, and $1.6 million of specific loan and lease loss allocations.

Investments in tax credit investments – Fair values are measured on a recurring basis and are based upon total credits and deductions remaining to be allocated and total estimated credits and deductions to be allocated.

Foreclosed assets held for sale, net – Fair values of repossessed personal properties and real estate acquired through or in lieu of foreclosure are measured on a nonrecurring basis and are based on estimated fair value less estimated cost to sell.

Derivative assets and liabilities – The fair values of IRLC and FSC derivative assets and liabilities are measured on a recurring basis and are based primarily on the fluctuation of interest rates between the date on which the IRLC and FSC were entered and the measurement date.

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The following table presents additional information for the periods indicated about assets and liabilities measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs or value drivers to determine fair value.

 

     Investment
Securities
AFS
    Investments
in Tax
Credit
Investments
    Derivative
Assets –
IRLC and
FSC
    Derivative
Liabilities
– IRLC
and FSC
 
     (Dollars in thousands)  

Balances – January 1, 2009

   $ 30,020      $ 2,860      $ 477      $ (477

Total realized gains/(losses) included in earnings

     (3,753     (183     (298     298   

Purchases, sales, issuances and settlements, net

     (9,577     30        —          —     

Transfers in and/or out of Level 3

     —          —          —          —     
                                

Balances – September 30, 2009

   $ 16,690      $ 2,707      $ 179      $ (179
                                

Balances – January 1, 2008

   $ —        $ 6,490      $ 80      $ (80

Total realized gains/(losses) included in earnings

     —          (172     7        (7

Purchases, sales, issuances and settlements, net

     —          30        —          —     

Transfers in and/or out of Level 3

     28,394        —          —          —     
                                

Balances – September 30, 2008

   $ 28,394      $ 6,348      $ 87      $ (87
                                

13. Fair Value of Financial Instruments

The following table presents the estimated fair values of the Company’s financial instruments:

 

     September 30, 2009    December 31, 2008
     Carrying
Amount
   Estimated
Fair

Value
   Carrying
Amount
   Estimated
Fair

Value
     (Dollars in thousands)

Financial assets:

           

Cash and cash equivalents

   $ 37,027    $ 37,027    $ 40,982    $ 40,982

Investment securities AFS

     645,682      645,682      944,783      944,783

Loans and leases, net of ALLL

     1,892,092      1,889,857      1,991,687      1,982,418

Derivative assets – IRLC and FSC

     179      179      477      477

Financial liabilities:

           

Demand, NOW, savings and money market account deposits

   $ 991,169    $ 991,169    $ 1,038,269    $ 1,038,269

Time deposits

     1,053,987      1,057,563      1,303,145      1,313,996

Repurchase agreements with customers

     52,270      52,270      46,864      46,864

Other borrowings

     361,679      445,183      424,947      519,517

Subordinated debentures

     64,950      64,767      64,950      64,950

Derivative liabilities – IRLC and FSC

     179      179      477      477

The following methods and assumptions were used to estimate the fair value of financial instruments.

Cash and due from banks – For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities – The Company utilizes an independent third party as its principal pricing source for determining fair value of investment securities. For investment securities traded in an active market, fair values are measured on a recurring basis and 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 and pricing matrices. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs or value drivers.

Loans and leases – The fair value of loans and leases is estimated by discounting the future cash flows using the current rate at which similar loans or leases would be made to borrowers or lessees with similar credit ratings and for the same remaining maturities.

 

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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 certificates is estimated using the rate currently available for deposits of similar remaining maturities.

Repurchase agreements – For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Other borrowed funds – For these short-term instruments, the carrying amount is a reasonable estimate of fair value. The fair value of long-term instruments is estimated based on the current rates available to the Company for borrowings with similar terms and remaining maturities.

Subordinated debentures – The fair values of these instruments are based primarily on the fluctuation of 90-day LIBOR from the most recent rate set date and the measurement date.

Derivative assets and liabilities – The fair values of IRLC and FSC derivative assets and liabilities are based primarily on the fluctuation of interest rates between the date on which the IRLC and FSC were entered and the measurement date.

Off-balance sheet instruments The fair values of commercial loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and were not material at either September 30, 2009 or December 31, 2008.

The fair values of certain of these instruments were calculated by discounting expected cash flows, which contain numerous uncertainties and involve significant judgments by management. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown above represent values at which the respective financial instruments could be sold individually or in the aggregate.

14. Litigation Matter

On August 3, 2009 a lawsuit was filed in the Circuit Court of Benton County, Arkansas, Civil Division, Docket Number CV-2009-002391-5, styled “Rainbow Development, LLC; William A. Lazenby; and Donel Heckathorn, plaintiffs v. Bank of the Ozarks, Inc.; Bank of the Ozarks; James Matthews; and George Gleason, defendants.” The plaintiffs were borrowers or guarantors of certain loans secured by mortgages on various parcels of real estate in Benton County, Arkansas and in Washington County, Arkansas.

At the time of the filing of the complaint, the loans for which the plaintiffs were either the borrowers or guarantors totaled $15.3 million. The borrowers subsequently defaulted on the loans, which resulted in the loans becoming past due and moving to nonaccrual status. The Company had previously performed an impairment analysis on certain of the loans assuming such loans would become solely collateral dependant, and had previously provided for the estimated shortfalls in the value of the underlying collateral. At June 30, 2009, the Company had allocated $3.6 million of its allowance for loan and lease losses for these loans, and this special allocation was substantially equal to the net charge-offs incurred in the third quarter of 2009 in connection with these loans.

On September 29, 2009, a settlement agreement was executed by all parties to the above described lawsuit. On September 30, 2009, an order of dismissal with prejudice was entered by the court pursuant to the settlement agreement. The settlement resulted in plaintiffs paying cash equal to the estimated value of one piece of collateral to obtain its release, and conveying to the Company’s bank subsidiary all remaining collateral securing the related loans and dismissing all claims against the Company and the other defendants. In return, the Company and the other defendants agreed to release all claims, including any potential claim for a deficiency judgment, against the plaintiffs. The Company concluded that any potential recovery from a deficiency judgment would not significantly exceed, and might even be less than, the costs of obtaining and collecting such deficiency judgment. As of September 30, 2009, the collateral conveyed to the Company’s bank subsidiary pursuant to this settlement was held as other real estate owned at its estimated fair value.

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15. Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 amends FASB Interpretation No. 46(R) (“FIN 46R”) by requiring an enterprise to perform an ongoing analysis to determine whether its variable interest gives it a controlling financial interest in a variable interest entity. Such analysis should identify the primary beneficiary of a variable interest entity as the enterprise that has both (i) the power to direct the activities of a variable interest that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity that could be significant to the variable interest entity or the right to receive benefits from the entity that could be significant to the variable interest entity. SFAS No. 167 also eliminates the quantitative approach previously required by FIN 46R for determining the primary beneficiary of a variable interest entity and requires enhanced disclosures about an enterprise’s involvement in a variable interest entity. The provisions of SFAS No. 167 are effective at the beginning of the annual reporting period that begins after November 15, 2009. Management does not expect the adoption of SFAS No. 167 will have a material impact on the Company’s financial position, results of operations or liquidity.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140.” SFAS No. 166 clarifies that the objective of SFAS No. 140 is to determine whether a transferor and all of the entities included in a transferor’s financial statements have surrendered control over transferred financial assets and established specific considerations for reporting a transfer of a portion of a financial asset as a sale. SFAS No. 166 also requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale, and enhances disclosures by requiring greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. The provisions of SFAS No. 166 are effective at the beginning of the annual reporting period that begins after November 15, 2009. Management does not expect the adoption of SFAS No. 166 will have a material impact on the Company’s financial position, results of operations or liquidity.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Measuring Liabilities at Fair Value.” ASU 2009-05 supplements and amends the guidance in ASC 820, “Fair Value Measurements and Disclosures,” to clarify how an entity should measure the fair value of liabilities. Alternative valuation methods and a hierarchy for their use are outlined. ASU 2009-05 also clarifies that restrictions preventing the transfer of a liablity should not be considered as a separate input or adjustment in the measurement of its fair value. ASU 2009-05 is effective for the Company as of October 1, 2009. Management does not expect the adoption of ASU 2009-05 to have a material impact on the Company’s financial position, results of operations or liquidity.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

Net income available to common stockholders for Bank of the Ozarks, Inc. (the “Company”) was $8.4 million for the third quarter of 2009, a 6.9% decrease from net income available to common stockholders of $9.0 million for the comparable quarter in 2008. Diluted earnings per common share were $0.50 for the quarter ended September 30, 2009, a 5.7% decrease from $0.53 for the quarter ended September 30, 2008. For the nine months ended September 30, 2009, net income available to common stockholders totaled $27.2 million, a 7.1% increase from net income of $25.4 million for the first nine months of 2008. Diluted earnings per common share for the first nine months of 2009 were $1.61 compared to $1.50 for the comparable period in 2008, a 7.3% increase.

The Company’s annualized return on average assets was 1.14% for the third quarter of 2009 compared to 1.18% for the third quarter of 2008. Its annualized return on average common stockholders’ equity was 12.46% for the third quarter of 2009 compared to 16.70% for the third quarter of 2008. The Company’s annualized return on average assets was 1.19% for the first nine months of 2009 compared to 1.14% for the comparable period of 2008. Its annualized return on average common stockholders’ equity was 13.64% for the first nine months of 2009 compared to 16.23% for the comparable period of 2008.

Total assets were $2.89 billion at September 30, 2009 compared to $3.23 billion at December 31, 2008. Loans and leases were $1.93 billion at September 30, 2009 compared to $2.02 billion at December 31, 2008. Deposits were $2.05 billion at September 30, 2009 compared to $2.34 billion at December 31, 2008.

Common stockholders’ equity was $274 million at September 30, 2009 compared to $252 million at December 31, 2008. Book value per common share was $16.21 at September 30, 2009 compared to $14.96 at December 31, 2008. Changes in common stockholders’ equity and book value per common share reflect earnings, dividends paid, stock option and warrant transactions and changes in unrealized gains and losses on investment securities available for sale.

Annualized results for these interim periods may not be indicative of results for the full year or future periods.

ANALYSIS OF RESULTS OF OPERATIONS

The Company is a bank holding company whose primary business is commercial banking conducted through its wholly-owned state chartered bank subsidiary – Bank of the Ozarks (the “Bank”). The Company’s results of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans, leases and investments, and the interest expense incurred on interest bearing liabilities, such as deposits, borrowings and subordinated debentures. The Company also generates non-interest income, including service charges on deposit accounts, mortgage lending income, trust income, bank owned life insurance (“BOLI”) income, other charges and fees and gains and losses on investment securities and from sales of other assets.

The Company’s non-interest expense consists of employee compensation and benefits, net occupancy and equipment and other operating expenses. The Company’s results of operations are significantly impacted by its provision for loan and lease losses and its provision for income taxes. The following discussion provides a comparative summary of the Company’s operations for the three and nine months ended September 30, 2009 and 2008 and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report.

Net Interest Income

Net interest income is analyzed in the discussion and the following tables on a fully taxable equivalent (“FTE”) basis. The adjustment to convert certain income to a FTE basis consists of dividing federal tax-exempt income by one minus the Company’s statutory federal income tax rate of 35%. The FTE adjustments to net interest income were $2.6 million and $2.1 million, respectively, for the quarters ended September 30, 2009 and 2008 and $9.8 million and $6.5 million, respectively, for the nine months ended September 30, 2009 and 2008. No adjustments have been made in this analysis for income exempt from state income taxes or for interest expense deductions disallowed under the provisions of the Internal Revenue Code as a result of investment in certain tax-exempt securities.

Net interest income for the third quarter of 2009 increased 19.1% to $31.8 million compared to $26.7 million for the third quarter of 2008. Net interest income increased 30.2% to $99.6 million for the nine months ended September 30, 2009 compared to $76.5 million for the nine months ended September 30, 2008. Net interest margin was 4.80% during the third quarter of 2009 compared to 3.82% during the third quarter of 2008. Net interest margin was 4.77% during the first nine months of 2009 compared to 3.76% during the first nine months of 2008.

The growth in net interest income for the third quarter of 2009 compared to the comparable period in 2008 was a result of the improvement in the Company’s net interest margin, which increased 98 basis points (“bps”), partially offset by a decline in the Company’s average earnings assets, which decreased 5.4%. The growth in net interest income for the first nine months of 2009

 

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compared to the same period in 2008 was due primarily to the improvement in the Company’s net interest margin, which increased 101 bps. The Company’s improvement in its net interest margin for both the third quarter and the first nine months of 2009 resulted from a combination of factors including (i) improvement in the Company’s spread between yields on loans and leases and rates paid on deposits and other funding sources and (ii) favorable yields achieved on certain tax-exempt securities purchased during the last four quarters.

Yields on average earning assets decreased 33 bps in the third quarter of 2009 and 40 bps for the first nine months of 2009 compared to the same periods in 2008. This decrease was due primarily to an 80 bps decline for the third quarter and an 88 bps decline for the first nine months of 2009 in loan and lease yields, which was partially offset by a 98 bps increase for the third quarter and an 88 bps increase for the first nine months of 2009 in the aggregate yield on the Company’s investment securities.

The decrease in loan and lease yields was due primarily to the repricing of the Company’s loan and lease portfolio at lower interest rates during 2008 and the first nine months of 2009. Beginning in September 2007 and continuing through December 2008, the Federal Open Market Committee (“FOMC”) decreased its federal funds target rate a total of 500 bps, resulting in many of the Company’s variable rate loans repricing to lower rates throughout 2008 and the first nine months of 2009. Additionally, the Company’s newly originated and renewed loans and leases generally priced at lower rates throughout 2008 and the first nine months of 2009 as a result of these FOMC interest rate decreases.

The increase in the Company’s aggregate yield on its investment securities was the result of an increase in yield on both taxable and tax-exempt investment securities in 2009 compared to 2008 and a shift in the composition of the portfolio to include a higher proportion of tax-exempt investment securities with generally higher FTE yields than the Company’s taxable investment securities.

The decrease in average earning asset yields discussed above was more than offset by a 129 bps decrease for the third quarter and a 138 bps decrease for the first nine months of 2009 in the rates on average interest bearing liabilities compared to the same periods in 2008, resulting in the Company’s overall increase in net interest margin. The decrease in the rates on interest bearing liabilities was primarily attributable to a 158 bps decrease for the third quarter and a 162 bps decrease for the first nine months of 2009 in the rates of interest bearing deposits, the largest component of the Company’s interest bearing liabilities, compared to the same periods in 2008. This decrease in rates on interest bearing deposits was attributable to (i) the FOMC interest rate decreases, which resulted in decreases in rates paid on both time deposits and savings and interest bearing transaction deposits as such deposits were renewed or repriced and (ii) the decrease in the Company’s aggregate time deposits, which generally pay higher rates than its other interest bearing deposits, as a percent of total interest bearing deposits.

The Company’s other funding sources include (i) repurchase agreements with customers (“repos”), (ii) other borrowings, comprised primarily of Federal Home Loan Bank of Dallas (“FHLB”) advances, and, to a lesser extent, Federal Reserve Bank (“FRB”) borrowings and federal funds purchased, and (iii) subordinated debentures. The rates paid on repos decreased 51 bps for the third quarter and 76 bps for the nine months ended September 30, 2009 compared to the same periods in 2008, primarily as a result of decreases in the FOMC federal funds target rate and other rate indices. The rates paid on the Company’s other borrowings increased 9 bps for the third quarter but decreased 2 bps for the nine months ended September 30, 2009 compared to the comparable periods in 2008. The rates paid on the subordinated debentures, which are tied to a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically, declined 216 bps for the third quarter and 227 bps for the nine months ended September 30, 2009 compared to the same periods of 2008 as a result of the decrease in 90-day LIBOR.

Analysis of Net Interest Income – FTE

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (Dollars in thousands)  

Interest income

   $ 39,904      $ 45,030      $ 127,753      $ 135,522   

FTE adjustment

     2,557        2,074        9,785        6,532   
                                

Interest income – FTE

     42,461        47,104        137,538        142,054   

Interest expense

     10,672        20,414        37,924        65,552   
                                

Net interest income – FTE

   $ 31,789      $ 26,690      $ 99,614      $ 76,502   
                                

Yields on earning assets – FTE

     6.41     6.74     6.59     6.99

Rates on interest bearing liabilities

     1.81        3.10        2.03        3.41   

Net interest margin – FTE

     4.80        3.82        4.77        3.76   

 

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Average Consolidated Balance Sheets and Net Interest Analysis—FTE

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2009     2008     2009     2008  
    Average
Balance
  Income/
Expense
  Yield/
Rate
    Average
Balance
  Income/
Expense
  Yield/
Rate
    Average
Balance
  Income/
Expense
  Yield/
Rate
    Average
Balance
  Income/
Expense
  Yield/
Rate
 
    (Dollars in thousands)  
ASSETS                        

Earning assets:

                       

Interest earning deposits and federal funds sold

  $ 517   $ 3   1.95   $ 575   $ 3   2.14   $ 529   $ 8   2.03   $ 428   $ 10   3.15

Investment securities:

                       

Taxable

    296,700     4,280   5.72        392,819     5,332   5.40        353,242     15,180   5.75        397,039     16,467   5.54   

Tax-exempt – FTE

    353,491     7,296   8.19        342,565     5,905   6.86        438,739     27,922   8.51        334,637     18,589   7.42   

Loans and leases – FTE

    1,978,863     30,882   6.19        2,042,307     35,864   6.99        1,998,154     94,428   6.32        1,984,426     106,988   7.20   
                                                       

Total earning assets – FTE

    2,629,571     42,461   6.41        2,778,266     47,104   6.74        2,790,664     137,538   6.59        2,716,530     142,054   6.99   

Non-interest earning assets

    281,080         258,386         275,457         256,686    
                                       

Total assets

  $ 2,910,651       $ 3,036,652       $ 3,066,121       $ 2,973,216    
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY                        

Interest bearing liabilities:

                       

Deposits:

                       

Savings and interest bearing transaction

  $ 765,878   $ 1,664   0.86   $ 645,338   $ 2,500   1.54   $ 825,141   $ 5,220   0.85   $ 588,675   $ 6,902   1.57

Time deposits of $100,000 or more

    686,517     2,756   1.59        906,137     8,347   3.66        722,864     11,414   2.11        929,586     28,431   4.09   

Other time deposits

    375,755     1,986   2.10        510,430     4,535   3.53        433,294     8,366   2.58        509,703     14,981   3.93   
                                                       

Total interest bearing deposits

    1,828,150     6,406   1.39        2,061,905     15,382   2.97        1,981,299     25,000   1.69        2,027,964     50,314   3.31   

Repurchase agreements with customers

    54,922     151   1.09        43,442     174   1.60        54,436     461   1.13        42,637     604   1.89   

Other borrowings

    392,705     3,624   3.66        446,899     4,015   3.57        395,626     10,750   3.63        431,973     11,816   3.65   

Subordinated debentures

    64,950     491   3.00        64,950     843   5.16        64,950     1,713   3.53        64,950     2,818   5.80   
                                                       

Total interest bearing liabilities

    2,340,727     10,672   1.81        2,617,196     20,414   3.10        2,496,311     37,924   2.03        2,567,524     65,552   3.41   

Non-interest bearing liabilities:

                       

Non-interest bearing deposits

    211,940         191,225         206,016         182,216    

Other non-interest bearing liabilities

    15,233         10,206         21,875         11,186    
                                       

Total liabilities

    2,567,900         2,818,627         2,724,202         2,760,926    

Preferred stock

    72,228         —           72,090         —      

Common stockholders’ equity

    267,082         214,623         266,383         208,871    

Noncontrolling interest

    3,441         3,402         3,446         3,419    
                                       

Total liabilities and stockholders’ equity

  $ 2,910,651       $ 3,036,652       $ 3,066,121       $ 2,973,216    
                                                       

Net interest income – FTE

    $ 31,789       $ 26,690       $ 99,614       $ 76,502  
                                       

Net interest margin – FTE

      4.80       3.82       4.77       3.76
                                       

 

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Non-Interest Income

The Company’s non-interest income consists primarily of (1) service charges on deposit accounts, (2) mortgage lending income, (3) trust income, (4) BOLI income, (5) appraisal fees, credit life commissions and other credit related fees, (6) safe deposit box rental, operating lease income, brokerage fees and other miscellaneous fees and (7) gains and losses on investment securities and sales of other assets. Non-interest income for the third quarter of 2009 increased 19.3% to $5.8 million compared to $4.9 million for the third quarter of 2008. Non-interest income for the nine months ended September 30, 2009 increased 143.0% to $37.8 million compared to $15.6 million for the nine months ended September 30, 2008. This large increase for the nine months ended September 30, 2009 compared to the same period in 2008 was primarily attributable to significant gains on investment securities during the first and second quarters of 2009.

Service charges on deposit accounts, traditionally the Company’s largest source of non-interest income, increased 4.3% for the third quarter of 2009 to $3.23 million compared to $3.10 million for the same period in 2008. Service charges on deposit accounts increased 1.6% for the nine months ended September 30, 2009 to $9.08 million compared to $8.94 million for the same period in 2008.

Mortgage lending income increased 42.1% for the third quarter of 2009 to $0.67 million compared to $0.47 million for the same period in 2008. Mortgage lending income increased 47.7% for the nine months ended September 30, 2009 to $2.63 million compared to $1.78 million for the same period in 2008. The volume of originations of mortgage loans available for sale increased 28.8% and 43.8%, respectively, for the third quarter and first nine months of 2009 compared to the same periods in 2008. During the third quarter of 2009, approximately 46% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 54% were related to new home purchases, compared to approximately 39% for refinancings and approximately 61% for new home purchases in the third quarter of 2008. During the first nine months of 2009, approximately 65% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 35% were related to new home purchases, compared to approximately 49% for refinancings and approximately 51% for new home purchases in the first nine months of 2008.

Trust income increased 23.4% for the third quarter of 2009 to $0.80 million compared to $0.65 million for the same period in 2008. Trust income increased 16.8% for the nine months ended September 30, 2009 to $2.20 million compared to $1.88 million for the same period in 2008. The increase in trust income for the quarter and nine months ended September 30, 2009 was primarily due to growth in the Company’s corporate trust and investment management business as the Company continued to add new customers.

Net gains on investment securities and from sales of other assets were $0.09 million for the third quarter of 2009 compared to net losses of $0.40 million for the same period in 2008. Net gains on investment securities and from sales of other assets were $20.63 million for the nine months ended September 30, 2009 compared to net losses of $0.26 million for the same period in 2008. During the third quarter and first nine months of 2009, the Company sold approximately $22 million and approximately $301 million, respectively, of its investment securities AFS. During the third quarter and first nine months of 2008, the Company sold approximately $2 million and approximately $10 million, respectively, of its investment securities AFS.

Non-interest income from all other sources was $1.01 million in the third quarter of 2009 compared to $1.04 million for the same period of 2008, and was $3.26 million for the nine months ended September 30, 2009 compared to $3.21 million for the same period in 2008.

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The following table presents non-interest income for the three and nine months ended September 30, 2009 and 2008.

Non-Interest Income

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (Dollars in thousands)  

Service charges on deposit accounts

   $ 3,234      $ 3,102      $ 9,084      $ 8,939   

Mortgage lending income

     672        473        2,630        1,781   

Trust income

     801        649        2,198        1,882   

BOLI income

     495        512        1,456        1,500   

Appraisal fees, credit life commissions and other credit related fees

     59        96        443        344   

Safe deposit box rental, operating lease income, brokerage fees and other miscellaneous fees

     300        308        925        909   

Gains (losses) on investment securities

     142        (317     20,660        (297

Gains (losses) on sales of other assets

     (51     (78     (35     35   

Other

     158        126        432        460   
                                

Total non-interest income

   $ 5,810      $ 4,871      $ 37,793      $ 15,553   
                                

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Non-Interest Expense

Non-interest expense increased 12.1% for the third quarter of 2009 to $15.5 million compared to $13.8 million for the same period in 2008. Non-interest expense increased 23.5% for the nine months ended September 30, 2009 to $49.6 million compared to $40.1 million for the same period in 2008. The increase in non-interest expense for the nine months ended September 30, 2009 compared to the same period in 2008 was due to a number of factors, including (i) a special assessment levied by the Federal Deposit Insurance Corporation (“FDIC”) on all insured institutions during the second quarter of 2009 which resulted in the Company incurring a $1.3 million expense, (ii) higher FDIC base insurance premium assessments applicable to all FDIC insured institutions which resulted in the Company incurring increased expenses of $1.4 million during the first nine months of 2009 compared to the same period in 2008, (iii) higher expenses related to write downs of the carrying value of items in other real estate owned which increased expenses by $1.6 million for the nine months ended September 30, 2009 compared to the same period in 2008, and (iv) higher accrual of delinquent and current property taxes associated with other real estate owned which resulted in the Company incurring increased expenses of $0.9 million during the first nine months of 2009 compared to the same period in 2008.

At September 30, 2009 the Company had 73 offices, including 72 full service banking offices and one loan production office, compared to 73 offices, including 71 full service banking offices and two loan production offices, at September 30, 2008. The Company had 705 full time equivalent employees at September 30, 2009 compared to 703 full time equivalent employees at September 30, 2008.

The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 41.2% for the quarter ended September 30, 2009 compared to 43.8% for the quarter ended September 30, 2008. The Company’s efficiency ratio for the nine months ended September 30, 2009 was 36.1% compared to 43.6% for the same period in 2008. Approximately 639 bps of the 749 bps improvement in the Company’s efficiency ratio for the nine months ended September 30, 2009 was due to the higher volume of net gains on investment securities during 2009 compared to 2008, and 110 bps of such improvement was due to other factors.

The following table presents non-interest expense for the three and nine months ended September 30, 2009 and 2008.

Non-Interest Expense

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008
     (Dollars in thousands)

Salaries and employee benefits

   $ 7,823    $ 7,728    $ 23,717    $ 22,684

Net occupancy and equipment

     2,558      2,318      7,584      6,575

Other operating expenses:

           

Postage and supplies

     378      397      1,162      1,242

Advertising and public relations

     229      308      765      867

Telephone and data lines

     471      318      1,386      1,232

Professional and outside services

     436      338      1,393      1,034

ATM expense

     149      169      570      478

Software expense

     400      319      1,114      918

FDIC insurance

     683      283      3,601      842

FDIC and state assessments

     171      168      536      482

Other real estate and foreclosure expense

     1,308      468      4,861      1,002

Amortization of intangibles

     27      55      83      186

Other

     866      959      2,859      2,634
                           

Total non-interest expense

   $ 15,499    $ 13,828    $ 49,631    $ 40,176
                           

Income Taxes

The provision for income taxes was $2.6 million for the third quarter of 2009 and $8.4 million for the first nine months of 2009 compared to $3.3 million for the third quarter and $9.3 million for the first nine months of 2008. The effective income tax rate was 21.6% for both the third quarter and the first nine months of 2009 compared to 26.5% for the third quarter and 26.8% for the first nine months of 2008. The primary factor in the decrease in the effective tax rate in the third quarter and first nine months of 2009 compared to the same periods in 2008 was the increase in the Company’s tax-exempt income, principally as a result of the increase in investment securities, both in volume and as a percentage of earning assets, which are exempt from federal and/or state income taxes.

 

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ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Portfolio

At September 30, 2009 the Company’s loan and lease portfolio was $1.93 billion, compared to $2.02 billion at December 31, 2008 and $2.06 billion at September 30, 2008. Real estate loans, the Company’s largest category of loans, consist of all loans secured by real estate as evidenced by mortgages or other liens, including all loans made to finance the development of real property construction projects, provided such loans are secured by real estate. Total real estate loans were $1.64 billion at September 30, 2009, compared to $1.67 billion at December 31, 2008 and $1.70 billion at September 30, 2008. The amount and type of loans and leases outstanding at September 30, 2009 and 2008 and at December 31, 2008 and their respective percentage of the total loan and lease portfolio are reflected in the following table.

Loan and Lease Portfolio

 

     September 30,     December 31,
2008
 
     2009     2008    
     (Dollars in thousands)  

Real estate:

               

Residential 1-4 family

   $ 283,334    14.7   $ 276,349    13.5   $ 275,281    13.6

Non-farm/non-residential

     635,737    32.9        555,616    27.0        551,821    27.3   

Construction/land development

     586,974    30.4        673,202    32.8        694,527    34.4   

Agricultural

     84,113    4.3        90,341    4.4        84,432    4.2   

Multifamily residential

     49,729    2.6        101,489    4.9        61,668    3.0   
                                       

Total real estate

     1,639,887    84.9        1,696,997    82.6        1,667,729    82.5   

Commercial and industrial

     162,004    8.4        203,445    9.9        206,058    10.2   

Consumer

     67,384    3.5        79,521    3.9        75,015    3.7   

Direct financing leases

     42,368    2.2        51,128    2.5        50,250    2.5   

Agricultural (non-real estate)

     17,177    0.9        21,382    1.0        19,460    1.0   

Other

     2,552    0.1        2,927    0.1        2,687    0.1   
                                       

Total loans and leases

   $ 1,931,372    100.0   $ 2,055,400    100.0   $ 2,021,199    100.0
                                       

The amount and type of non-farm/non-residential loans at September 30, 2009 and 2008 and at December 31, 2008, and their respective percentage of the total non-farm/non-residential loan portfolio are reflected in the following table.

Non-Farm/Non-Residential Loans

 

     September 30,     December 31,
2008
 
     2009     2008    
     (Dollars in thousands)  

Retail, including shopping centers and strip centers

   $ 201,599    31.7   $ 149,814    27.0   $ 143,565    26.0

Churches and schools

     58,625    9.2        80,035    14.4        75,371    13.7   

Office, including medical offices

     57,423    9.0        63,076    11.3        62,644    11.3   

Office warehouse, warehouse and mini-storage

     63,690    10.0        42,439    7.6        41,253    7.5   

Gasoline stations and convenience stores

     17,732    2.8        17,052    3.1        15,938    2.9   

Hotels and motels

     32,757    5.2        23,771    4.3        24,046    4.4   

Restaurants and bars

     45,664    7.2        48,184    8.7        47,489    8.6   

Manufacturing and industrial facilities

     29,947    4.7        25,908    4.7        25,933    4.7   

Nursing homes and assisted living centers

     30,348    4.8        15,319    2.8        22,516    4.1   

Hospitals, surgery centers and other medical

     56,758    8.9        49,067    8.8        52,715    9.5   

Golf courses, entertainment and recreational facilities

     15,296    2.4        11,739    2.1        12,873    2.3   

Other non-farm/non residential

     25,898    4.1        29,212    5.2        27,478    5.0   
                                       

Total

   $ 635,737    100.0   $ 555,616    100.0   $ 551,821    100.0
                                       

 

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The amount and type of construction/land development loans at September 30, 2009 and 2008 and at December 31, 2008, and their respective percentage of the total construction/land development loan portfolio are reflected in the following table.

Construction/Land Development Loans

 

     September 30,     December 31,  
     2009     2008     2008  
     (Dollars in thousands)  

Unimproved land

   $ 101,849    17.4   $ 90,444    13.4   $ 92,118    13.3

Land development and lots:

               

1-4 family residential and multifamily

     192,082    32.7        215,906    32.1        219,174    31.6   

Non-residential

     75,468    12.9        105,688    15.7        102,598    14.8   

Construction:

               

1-4 family residential:

               

Owner occupied

     15,393    2.6        18,790    2.8        19,537    2.8   

Non-owner occupied:

               

Pre-sold

     11,287    1.9        15,729    2.3        14,791    2.1   

Speculative

     58,554    10.0        78,728    11.7        75,233    10.8   

Multifamily

     61,684    10.5        21,968    3.3        17,830    2.6   

Industrial, commercial and other

     70,657    12.0        125,949    18.7        153,246    22.0   
                                       

Total

   $ 586,974    100.0   $ 673,202    100.0   $ 694,527    100.0
                                       

The establishment of interest reserves for construction and development loans is an established banking practice, but the handling of such interest reserves varies widely within the industry. Many of the Company’s construction and development loans provide for the use of interest reserves, and based upon its knowledge of general industry practices, the Company believes that its practices related to such interest reserves, discussed below, are appropriate and conservative. When the Company underwrites construction and development loans, it considers the expected total project costs, including hard costs such as land, site work and construction costs and soft costs such as architectural and engineering fees, closing costs, leasing commissions and construction period interest. Based on the total project costs and other factors, the Company determines the required borrower cash equity contribution and the maximum amount the Company is willing to loan. In the vast majority of cases, the Company requires that all of the borrower’s cash equity contribution be contributed prior to any material loan advances. This ensures that the borrower’s cash equity required to complete the project will in fact be available for such purposes. As a result of this practice, the borrower’s cash equity typically goes toward the purchase of the land and early stage hard costs and soft costs. This results in the Company funding the loan later as the project progresses, and accordingly the Company typically funds the majority of the construction period interest through loan advances. However, when the Company initially determines the borrower’s cash equity requirement, the Company typically requires borrower’s cash equity in an amount 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. In the third quarter of 2009, the Company advanced construction period interest totaling approximately $2.4 million on construction and development loans. While the Company advanced these sums as part of the funding process, the Company believes that the borrowers in effect had in most cases already provided for these sums as part of their initial equity contribution. Specifically, the maximum committed balance of all construction and development loans which provide for the use of interest reserves at September 30, 2009 was approximately $472 million, of which $358 million was outstanding at September 30, 2009 and $114 million remained to be advanced. The weighted average loan to cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 66%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 34%. The weighted average final loan to value ratio on such loans, based on the most recent appraisals and assuming such loans are ultimately fully advanced, is expected to be approximately 57%.

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The amount and type of the Company’s real estate loans at September 30, 2009 based on the metropolitan statistical area (“MSA”) and other geographic areas in which the principal collateral is located are reflected in the following table.

Geographic Distribution of Real Estate Loans

 

     Residential
1-4

Family
   Non-Farm/Non
Residential
   Construction/
Land
Development
   Agricultural    Multifamily
Residential
   Total
     (Dollars in thousands)

Arkansas:

  

Little Rock – North Little Rock, AR MSA

   $ 75,212    $ 181,604    $ 92,783    $ 5,552    $ 7,746    $ 362,897

Fayetteville – Springdale – Rogers, AR MSA

     9,351      18,285      24,776      6,175      —        58,587

Fort Smith, AR MSA

     39,965      47,463      9,921      6,848      3,293      107,490

Hot Springs, AR MSA

     7,194      8,825      7,887      —        1,635      25,541

Western Arkansas (1)

     30,596      43,597      8,367      15,282      1,836      99,678

Northern Arkansas (2)

     86,799      38,964      16,523      46,608      617      189,511

All other Arkansas (3)

     8,389      14,339      2,875      2,003      —        27,606
                                         

Total Arkansas

     257,506      353,077      163,132      82,468      15,127      871,310
                                         

Texas:

                 

Dallas – Fort Worth – Arlington, TX MSA

     3,345      123,323      198,022      —        23,702      348,392

Houston – Baytown – Sugar Land, TX MSA

     —        11,942      39,477      —        —        51,419

San Antonio, TX MSA

     —        —        14,623      —        —        14,623

Austin – Round Rock, TX MSA

     —        —        13,486      —        —        13,486

Texarkana, TX – Texarkana, AR MSA

     9,891      11,531      3,516      524      4,134      29,596

All other Texas (3)

     725      15,319      10,532      —        —        26,576
                                         

Total Texas

     13,961      162,115      279,656      524      27,836      484,092
                                         

North Carolina/South Carolina:

                 

Charlotte – Gastonia – Concord, NC/SC MSA

     1,902      30,596      35,597      —        2,475      70,570

All other North Carolina (3)

     72      21,957      44,931      —        —        66,960

All other South Carolina (3)

     5,939      6,983      7,007      —        —        19,929
                                         

Total North Carolina/ South Carolina

     7,913      59,536      87,535      —        2,475      157,459
                                         

California

     —        2,680      31,653      —        —        34,333

Virginia

     —        1,053      17,513      —        —        18,566

Oklahoma (4)

     97      15,217      1,781      —        —        17,095

All other states (3) (5)

     3,857      42,059      5,704      1,121      4,291      57,032
                                         

Total real estate loans

   $ 283,334    $ 635,737    $ 586,974    $ 84,113    $ 49,729    $ 1,639,887
                                         

 

(1) This geographic area includes the following counties in Western Arkansas: Conway, Johnson, Logan, Pope and Yell counties.
(2) This geographic area includes the following counties in Northern Arkansas: Baxter, Boone, Carroll, Fulton, Marion, Newton, Searcy and Van Buren counties.
(3) These geographic areas include all MSA and non-MSA areas that are not separately reported.
(4) This geographic area includes all loans in Oklahoma except loans in Le Flore and Sequoyah counties which are included in the Fort Smith, AR MSA above.
(5) Data for individual states is separately presented when the aggregate outstanding balance of real estate loans in that state exceeds $10 million.

 

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The amount and percentage of the Company’s loan and lease portfolio originated at its offices in Arkansas, Texas and North Carolina are reflected in the following table.

Loan and Lease Portfolio by State of Originating Office

 

     September 30,     December 31,  

Loans and Leases Attributable to Offices In

   2009     2008     2008  
     (Dollars in thousands)  

Arkansas

   $ 1,185,242    61.4   $ 1,406,902    68.4   $ 1,333,420    66.0

Texas

     630,246    32.6        554,627    27.0        588,875    29.1   

North Carolina

     115,884    6.0        93,871    4.6        98,904    4.9   
                                       

Total

   $ 1,931,372    100.0   $ 2,055,400    100.0   $ 2,021,199    100.0
                                       

The following table reflects loans and leases as of September 30, 2009 grouped by expected amortizations, expected paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing schedule approximates the Company’s ability to reprice the outstanding principal of loans and leases either by adjusting rates on existing loans and leases or reinvesting principal cash flow in new loans and leases.

Loan and Lease Cash Flows or Repricing

 

     1 Year or
Less
    Over 1
Through

2 Years
    Over 2
Through

3 Years
    Over
3 Years
    Total  
     (Dollars in thousands)  

Fixed rate

   $ 341,205      $ 223,880      $ 178,401      $ 160,588      $ 904,074   

Floating rate (not at a floor or ceiling rate)

     138,143        403        3,566        1,203        143,315   

Floating rate (at floor rate)

     882,473        —          163        1,298        883,934   

Floating rate (at ceiling rate)

     49        —          —          —          49   
                                        

Total

   $ 1,361,870      $ 224,283      $ 182,130      $ 163,089      $ 1,931,372   
                                        

Percentage of total

     70.5     11.6     9.5     8.4     100.0

Cumulative percentage of total

     70.5        82.1        91.6        100.0     

Nonperforming Assets

Nonperforming assets consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days or more past due, (3) certain restructured loans and leases providing for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower or lessee and (4) real estate or other assets that have been acquired in partial or full satisfaction of loan or lease obligations or upon foreclosure.

The Company generally places a loan or lease on nonaccrual status when payments are contractually past due 90 days, or earlier when significant doubt exists as to the ultimate collection of payments. At the time a loan or lease is placed on nonaccrual status, interest previously accrued but uncollected is generally reversed and charged against interest income. Nonaccrual loans and leases are generally returned to accrual status when payments are less than 90 days past due and the Company reasonably expects to collect all payments. If a loan or lease is determined to be uncollectible, the portion of the principal determined to be uncollectible will be charged against the allowance for loan and lease losses. Income on nonaccrual loans or leases is recognized on a cash basis when and if actually collected.

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Table of Contents

The following table presents information concerning nonperforming assets, including nonaccrual and certain restructured loans and leases, foreclosed assets held for sale and repossessions at September 30, 2009 and 2008 and at December 31, 2008.

Nonperforming Assets

 

     September 30,     December 31,  
     2009     2008     2008  
     (Dollars in thousands)  

Nonaccrual loans and leases

   $ 19,311      $ 14,416      $ 15,382   

Accruing loans and leases 90 days or more past due

     —          —          —     

Restructured loans and leases(1)

     —          —          —     
                        

Total nonperforming loans and leases

     19,311        14,416        15,382   

Foreclosed assets held for sale and repossessions(2)

     63,946        5,887        10,758   
                        

Total nonperforming assets

   $ 83,257      $ 20,303      $ 26,140   
                        

Nonperforming loans and leases to total loans and leases

     1.00     0.70     0.76

Nonperforming assets to total assets

     2.88        0.66        0.81   

 

(1) All restructured loans and leases as of the dates shown were on nonaccrual status and are included as nonaccrual loans and leases in this table.
(2) Foreclosed assets held for sale and repossessions are generally written down to estimated market value net of estimated selling and holding costs at the time of transfer from the loan and lease portfolio. The value of such assets is reviewed from time to time throughout the holding period with the value adjusted to the then estimated market value net of estimated selling and holding costs, if lower, until disposition.

While many of the Company’s markets appear to have been less significantly impacted during the past two years by weaker economic conditions nationally, the Company has not been immune to the effects of the slower economic conditions and the slow down in housing activity, particularly in the Fayetteville-Springdale-Rogers, AR MSA in northwest Arkansas and in the Carolinas.

The increase in nonperforming assets at September 30, 2009 is primarily attributable to three credit relationships which were placed on non-accrual status during the third quarter of 2009 and then transferred into other real estate owned at the estimated fair value of the collateral received by the Company in satisfaction of the debts.

In accordance with the provisions of ASC Topic 310, “Receivables,” the Company has reduced the carrying value of its impaired loans and leases (all of which were included in nonaccrual loans and leases) by $6.4 million to the estimated fair value of $15.9 million for such loans and leases at September 30, 2009. The $6.4 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $4.8 million of partial charge-offs, which has reduced the carrying value to $17.5 million, and $1.6 million of specific loan and lease loss allocations.

The following table presents information concerning the geographic location of nonperforming assets at September 30, 2009. For the Company’s nonaccrual loans and leases, the location reported is the physical location of the principal collateral. Other real estate owned of $63.7 million is reported in the physical location of the asset. Repossessions of $0.2 million 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

 

     Nonaccrual
Loans and
Leases
   Other
Real Estate
Owned and
Repossessions
   Total
Nonperforming
Assets
     (Dollars in thousands)

Arkansas

   $ 12,888    $ 32,341    $ 45,229

Texas

     1,633      30,058      31,691

North Carolina

     915      550      1,465

South Carolina

     3,822      774      4,596

All other

     53      223      276
                    

Total

   $ 19,311    $ 63,946    $ 83,257
                    

 

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Table of Contents

Allowance and Provision for Loan and Lease Losses

Allowance for Loan and Lease Losses: The following table shows an analysis of the allowance for loan and lease losses for the nine-month periods ended September 30, 2009 and 2008 and the year ended December 31, 2008.

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2009     2008     2008  
     (Dollars in thousands)  

Balance, beginning of period

   $ 29,512      $ 19,557      $ 19,557   

Loans and leases charged off:

      

Real estate

     26,190        2,215        5,585   

Commercial and industrial

     2,139        1,135        1,259   

Consumer

     826        1,031        1,566   

Direct financing leases

     513        315        734   

Agricultural (non-real estate)

     304        372        270   

Other

     129        161        217   
                        

Total loans and leases charged off

     30,101        5,229        9,631   
                        

Recoveries of loans and leases previously charged off:

      

Real estate

     272        86        160   

Commercial and industrial

     155        26        51   

Consumer

     77        162        222   

Direct financing leases

     60        20        21   

Agricultural (non-real estate)

     43        4        12   

Other

     62        76        95   
                        

Total recoveries

     669        374        561   
                        

Net loans and leases charged off

     29,432        4,855        9,070   

Provision charged to operating expense

     39,200        10,725        19,025   
                        

Balance, end of period

   $ 39,280      $ 25,427      $ 29,512   
                        

Net charge-offs to average loans and leases outstanding during the periods indicated

     1.97 %(1)      0.33 %(1)      0.45

Allowance for loan and lease losses to total loans and leases

     2.03     1.24     1.46

Allowance for loan and lease losses to nonperforming loans and leases

     203     176     192

 

(1) Annualized.

Provisions to and the adequacy of the allowance for loan and lease losses are determined in accordance with ASC Topic 310, “Receivables” and ASC Topic 450, “Contingencies,” and are based on the Company’s judgment and evaluation of the loan and lease portfolio utilizing objective and subjective criteria. The objective criteria utilized by the Company to assess the adequacy of its allowance for loan and lease losses and required additions to such allowance consists primarily of an internal grading system and specific allowances determined in accordance with ASC Topic 310. The Company also utilizes a peer group analysis and an historical analysis in an effort to validate the overall adequacy of its allowance for loan and lease losses. In addition to these objective criteria, the Company subjectively assesses the adequacy of the allowance for loan and lease losses and the need for additions thereto, with consideration given to the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans and leases, national, regional and local business and economic conditions that may affect the borrowers’ or lessees’ ability to pay, the value of collateral securing the loans and leases, and other relevant factors.

The Company’s allowance for loan and lease losses was $39.3 million at September 30, 2009, or 2.03% of total loans and leases, compared with $29.5 million, or 1.46% of total loans and leases, at December 31, 2008 and $25.4 million, or 1.24% of total loans and leases, at September 30, 2008. The Company’s allowance for loan and lease losses was equal to 203% of its total nonperforming loans and leases at September 30, 2009 compared to 192% at December 31, 2008 and 176% at September 30, 2008. The increase in the Company’s allowance for loan and lease losses in 2009 is due to a number of factors including changes in loss estimates for individual loans and leases and certain categories of loans and leases and uncertainty regarding economic conditions in general. While management believes the current allowance is appropriate, changing economic and other conditions may require future adjustments to the allowance for loan and lease losses. The unallocated portion of the Company’s allowance for loan and lease losses at September 30, 2009 was 21.7% of the total allowance for loan and lease losses and reflects the uncertainty surrounding current economic conditions and trends.

 

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Net Charge-offs: Net charge-offs were $11.9 million for the quarter ended September 30, 2009 compared to $1.4 million for the same period in 2008. Net charge-offs were $29.4 million for the nine months ended September 30, 2009 compared to $4.9 million for the same period in 2008. The Company’s annualized net charge-off ratio was 2.38% for the quarter ended September 30, 2009 compared to 0.27% for the quarter ended September 30, 2008. The Company’s annualized net charge-off ratio was 1.97% for the nine months ended September 30, 2009 compared to 0.33% for the nine months ended September 30, 2008. During the third quarter of 2009, the Company charged-off $7.0 million related to two credit relationships which the Company had previously identified as potential problems and for which it had established $5.1 million of special allocations within its allowance for loan and lease losses as of June 30, 2009.

Provision for Loan and Lease Losses: The loan and lease loss provision is based on management’s judgment and evaluation of the loan and lease portfolio utilizing the criteria discussed above. The provision for loan and lease losses was $7.5 million for the third quarter and $39.2 million for the nine months ended September 30, 2009 compared to $3.4 million for the third quarter and $10.7 million for the nine months ended September 30, 2008.

Investment Securities

The Company’s investment securities portfolio provides a significant source of revenue to the Company. At September 30, 2009 and 2008 and at December 31, 2008, the Company classified all of its investment securities portfolio as available for sale (“AFS”). Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with the unrealized gains and losses, net of related income tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss).

At September 30, 2009 and December 31, 2008, the Company owned stock in FHLB and First National Banker’s Bankshares, Inc. (“FNBB”). At September 30, 2008, the Company owned stock in FHLB and Arkansas Bankers’ Bancorporation, Inc. (“ABB”) (ABB was acquired by FNBB via a tax-free exchange of stock on November 30, 2008). The FHLB, ABB and FNBB shares do not have readily determinable fair values and are carried at cost.

The following table presents the amortized cost and estimated fair value of investment securities AFS at September 30, 2009 and 2008 and at December 31, 2008.

Investment Securities

 

     September 30,    December 31,
     2009    2008    2008
     Amortized
Cost
   Fair
Value(1)
   Amortized
Cost
   Fair
Value(1)
   Amortized
Cost
   Fair
Value(1)
     (Dollars in thousands)

Obligations of state and political subdivisions

   $ 360,067    $ 379,773    $ 333,206    $ 336,094    $ 517,166    $ 542,740

U.S. Government agency mortgage-backed securities

     241,856      247,682      371,421      353,033      371,110      371,561

Corporate obligations

     1,592      1,817      9,967      8,537      6,953      6,953

Collateralized debt obligation

     100      100      1,000      844      1,000      683

FHLB and FNBB/ABB Stock

     16,310      16,310      22,777      22,777      22,846      22,846
                                         

Total

   $ 619,925    $ 645,682    $ 738,371    $ 721,285    $ 919,075    $ 944,783
                                         

 

(1) The Company utilizes an independent third party as its principal pricing source for determining fair value of investment securities. For investment securities traded in an active market, the fair values 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 and pricing matrices. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs or value drivers.

The Company’s investment securities portfolio is reported at estimated fair value, which included unrealized gains of $25.8 million at September 30, 2009 and $25.7 million at December 31, 2008, and unrealized losses of $17.1 million at September 30, 2008. Management believes that the unrealized losses for all of its investment securities AFS that were reported net of an unrealized loss at September 30, 2009 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of its investments. Accordingly management considers these unrealized losses to be temporary in nature. The Company has both the ability and the intent to hold until maturity or until such time as fair value recovers above cost all of its investment securities reported net of an unrealized loss at September 30, 2009.

 

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The following table presents unaccreted discounts and unamortized premiums of the Company’s investment securities for the dates indicated.

Unaccreted Discounts and Unamortized Premiums

 

     Amortized
Cost
   Unaccreted
Discount
   Unamortized
Premium
    Par Value
     (Dollars in thousands)

September 30, 2009:

          

Obligations of states and political subdivisions

   $ 360,067    $ 11,292    $ (19   $ 371,340

U.S. Government agency mortgage-backed securities

     241,856      3,642      (37     245,461

Corporate obligations

     1,592      277      —          1,869

Collateralized debt obligation

     100      900      —          1,000

FHLB and FNBB stock

     16,310      —        —          16,310
                            

Total

   $ 619,925    $ 16,111    $ (56   $ 635,980
                            

September 30, 2008:

          

Obligations of states and political subdivisions

   $ 333,206    $ 3,404    $ (21   $ 336,589

U.S. Government agency mortgage-backed securities

     371,421      8,472      (146     379,747

Corporate obligations

     9,967      33      —          10,000

Collateralized debt obligation

     1,000      —        —          1,000

FHLB and ABB stock

     22,777      —        —          22,777
                            

Total

   $ 738,371    $ 11,909    $ (167   $ 750,113
                            

During the quarter ended September 30, 2009, the Company recognized discount accretion, net of premium amortization, which is considered an adjustment to yield of its investment securities, of $1.1 million compared to $0.1 million during the same period in 2008. During the nine months ended September 30, 2009, the Company recognized discount accretion, net of premium amortization, of $3.9 million compared to $0.7 million during the same period in 2008.

The Company had net gains of $0.1 million from the sale of approximately $22 million of investment securities in the third quarter of 2009 compared with net losses of $0.3 million from the sale of approximately $2 million of investment securities in the third quarter of 2008. The Company had net gains of $20.7 million from the sale of approximately $301 million of investment securities in the first nine months of 2009 compared with net losses of $0.3 from the sale of approximately $10 million of investment securities in the first nine months of 2008. During the quarters ended September 30, 2009 and 2008, respectively, investment securities totaling approximately $50 million and approximately $310 million matured, were called or were paid down by the issuer. During the first nine months ended September 30, 2009 and 2008, respectively, investment securities totaling approximately $229 million and approximately $1.45 billion matured, were called or were paid down by the issuer. The Company also purchased approximately $47 million and approximately $281 million of investment securities, respectively, during the third quarter of 2009 and 2008 and approximately $232 million and approximately $1.62 billion of investment securities, respectively, during the first nine months of 2009 and 2008.

The Company invests in securities it believes offer good relative value at the time of purchase, and it will from time to time reposition its investment securities portfolio. In making its decisions to sell or purchase securities, the Company considers credit ratings, call features, maturity dates, relative yields, current market factors, interest rate risk and other relevant factors.

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The following table presents the types and estimated fair values of the Company’s investment securities AFS at September 30, 2009 based on credit ratings by one or more nationally-recognized credit rating agencies.

Credit Ratings of Investment Securities

 

     AAA(1)     AA(2)     A(3)     BBB(4)     B(5)     Non-
Rated(6)
    Total  
     (Dollars in thousands)  

Obligations of states and political subdivisions:

              

Arkansas

   $ 10,419      $ 3,786      $ 55,834      $ 10,272      $ —        $ 165,726      $ 246,037   

Non-Arkansas

     74,613        8,311        19,179        14,200        —          17,433        133,736   

U.S. Government agency mortgage-backed securities

     247,682        —          —          —          —          —          247,682   

Corporate obligations

     —          —          —          1,817        —          —          1,817   

Collateralized debt obligation

     —          —          —          —          100        —          100   

FHLB and FNBB stock

     15,927        —          —          —          —          383        16,310   
                                                        

Total

   $ 348,641      $ 12,097      $ 75,013      $ 26,289      $ 100      $ 183,542      $ 645,682   
                                                        

Percentage of total

     54.0     1.9     11.6     4.1     0.0     28.4     100.0

Cumulative percentage of total

     54.0        55.9        67.5        71.6        71.6        100.0  

 

(1) Includes securities rated Aaa by Moody’s, AAA by Standard & Poor’s (“S&P”) or a comparable rating by other nationally-recognized credit rating agencies.
(2) Includes securities rated Aa1 to Aa3 by Moody’s, AA+ to AA- by S&P or a comparable rating by other nationally-recognized credit rating agencies.
(3) Includes securities rated A1 to A3 by Moody’s, A+ to A- by S&P or a comparable rating by other nationally-recognized credit rating agencies.
(4) Includes securities rated Baa1 to Baa3 by Moody’s, BBB+ to BBB- by S&P or a comparable rating by other nationally-recognized credit rating agencies.
(5) Includes securities rated B1 to B3 by Moody’s, B+ to B- by S&P or a comparable rating by other nationally-recognized credit rating agencies.
(6) Includes all securities that are not rated or securities that are not rated but that have a rated credit enhancement where the Company has ignored such credit enhancement. For these securities, the Company has performed its own evaluation of the security and/or the underlying issuer and believes that such security or its issuer would warrant a credit rating of investment grade (i.e., Baa3 by Moody’s or BBB- by S&P or a comparable rating by another nationally-recognized credit rating agency or better).

Deposits

The Company’s lending and investment activities are funded primarily by deposits. The amount and type of deposits outstanding at September 30, 2009 and 2008 and at December 31, 2008 and their respective percentage of the total deposits are reflected in the following table.

Deposits

 

     September 30,     December 31,
2008
 
     2009     2008    
     (Dollars in thousands)  

Non-interest bearing

   $ 209,220    10.2   $ 194,104    8.4   $ 185,613    7.9

Interest bearing:

               

Transaction (NOW)

     406,287    19.9        397,722    17.3        430,037    18.4   

Savings

     33,884    1.7        29,406    1.3        29,438    1.3   

Money market

     341,778    16.7        263,820    11.5        393,181    16.8   

Time deposits less than $100,000

     346,818    16.9        531,331    23.1        506,780    21.6   

Time deposits of $100,000 or more

     707,169    34.6        885,143    38.4        796,365    34.0   
                                       

Total deposits

   $ 2,045,156    100.0   $ 2,301,526    100.0   $ 2,341,414    100.0
                                       

 

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During the nine months ended September 30, 2009, the Company’s total deposits decreased $296 million to $2.05 billion at September 30, 2009 compared to $2.34 billion at December 31, 2008. This decrease was comprised of a reduction of brokered deposits of approximately $308 million, partially offset by an increase in non-brokered deposits of approximately $12 million. The Company’s time deposits comprised 51.5% of its total deposits at September 30, 2009 compared to 55.6% at December 31, 2008 and 61.5% at September 30, 2008. The Company’s non-CD’s, which include non-interest bearing, transaction, savings and money market accounts, comprised 48.5% of its total deposits at September 30, 2009 compared to 44.4% at December 31, 2008 and 38.5% at September 30, 2008.

The amount and percentage of the Company’s deposits attributable to its offices located in Arkansas and Texas are reflected in the following table.

Deposits by State of Originating Office

 

Deposits Attributable to Offices In

   September 30,     December 31,
2008
 
   2009     2008    
     (Dollars in thousands)  

Arkansas

   $ 1,771,287    86.6   $ 2,022,034    87.9   $ 2,032,335    86.8

Texas

     273,869    13.4        279,492    12.1        309,079    13.2   
                                       

Total

   $ 2,045,156    100.0   $ 2,301,526    100.0   $ 2,341,414    100.0
                                       

As of September 30, 2009, the Company had outstanding brokered deposits of $77 million compared to $385 million at December 31, 2008 and $450 million at September 30, 2008. All brokered deposits are assigned to Arkansas offices.

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CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Preferred Stock and Common Stock Warrant. On December 12, 2008, as part of the United States Department of the Treasury’s (the “Treasury”) Capital Purchase Program made available to certain financial institutions in the U.S. pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”), the Company and the Treasury entered into a Letter Agreement including the Securities Purchase Agreement – Standard Terms incorporated therein (the “Purchase Agreement”) pursuant to which the Company issued to the Treasury, in exchange for aggregate consideration of $75.0 million, (i) 75,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 and liquidation preference $1,000 per share (the “Series A Preferred Stock”), and (ii) a warrant (the “Warrant”) to purchase up to 379,811 shares (the “Warrant Common Stock”) of the Company’s common stock, par value $0.01 per share, at an exercise price of $29.62 per share. The Warrant is immediately exercisable and freely transferable by the Treasury, and has a 10-year term. The Treasury may not exercise voting power with respect to any shares of Warrant Common Stock until the Warrant has been exercised. On November 4, 2009 the Company redeemed all of the Series A Preferred Stock for $75.0 million, plus accrued and unpaid dividends, with the approval of the Company’s primary regulator in consultation with the Treasury. On the same date, the Company submitted an offer to the Treasury for the repurchase of the Warrant. The repurchase price is subject to negotiation, and there can be no assurance that the Company will repurchase the Warrant.

The Purchase Agreement (i) granted the holders of the Series A Preferred Stock, the Warrant and the Warrant Common Stock certain registration rights, (ii) subjected the Company to certain of the executive compensation limitations included in the EESA and (iii) allowed the Treasury to unilaterally amend any of the terms of the Purchase Agreement to the extent required to comply with any changes after December 12, 2008 in applicable federal statutes.

The Series A Preferred Stock qualified as Tier 1 capital and paid cumulative cash dividends quarterly at a rate of 5% per annum while outstanding. The Series A Preferred Stock was non-voting, other than class voting rights on certain matters that could have adversely affected the Series A Preferred Stock. While the Series A Preferred Stock was outstanding, the Company could not, without Treasury’s consent, increase its dividend rate per share of common stock or repurchase its common stock.

Upon receipt of the aggregate consideration from the Treasury on December 12, 2008, the Company allocated the $75.0 million proceeds on a pro rata basis to the Series A Preferred Stock and the Warrant based on relative fair values. In estimating the fair value of the Warrant, the Company utilized the Black-Scholes model which includes assumptions regarding the Company’s common stock prices, stock price volatility, dividend yield, the risk free interest rate and the estimated life of the Warrant. The fair value of the Series A Preferred Stock was determined using a discounted cash flow methodology and a discount rate of 12%. As a result, the Company assigned $3.1 million of the aggregate proceeds to the Warrant and $71.9 million to the Series A Preferred Stock. The discount assigned to the Series A Preferred Stock was expected to be amortized over a five-year period, which was the expected life of the Series A Preferred Stock at the time it was issued, up to the $75.0 million liquidation value of such preferred stock, with the cost of such amortization being reported as additional preferred stock dividends. This resulted in a total dividend with an effective yield of 5.98% through September 30, 2009. As a result of the redemption of the Series A Preferred Stock, the remaining unamortized discount of $2.7 million will be recognized as an additional preferred stock dividend in the fourth quarter of 2009.

Preferred Stock Dividend. The Series A Preferred Stock paid cumulative quarterly cash dividends at a rate of 5% per annum while it was outstanding. These cash dividends and the amortization of the discount on issuance of the Series A Preferred Stock resulted in total dividends of $1.1 million in the third quarter and $3.2 million in the first nine months of 2009. With the repayment of the Series A Preferred Stock on November 4, 2009, the total dividend for the fourth quarter of 2009 is expected to be $3.0 million, which includes the $2.7 million of the previously unrecognized discount.

Tangible Common Equity. The Company uses its tangible common equity ratio as the principal measure of the strength of its capital. The tangible common equity ratio is calculated by dividing total common equity less intangible assets by total assets less intangible assets. The Company’s tangible common equity ratio was 9.29% at September 30, 2009 compared to 7.64% at December 31, 2008 and 6.86% at September 30, 2008.

Common Stock Dividend Policy. During the quarter ended September 30, 2009, the Company paid a dividend of $0.13 per common share compared to $0.13 per common share in the quarter ended September 30, 2008. On October 20, 2009, the Company’s board of directors approved a dividend of $0.13 per common share to be paid during the fourth quarter of 2009. The determination of future dividends on the Company’s common stock will depend on conditions existing at that time. Subject to certain limitations, prior to the date on which the Series A Preferred Stock was redeemed, the Company could not, without the Treasury’s approval, increase its quarterly dividend rate above $0.13 per common share.

 

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Capital Compliance

Bank regulatory authorities in the United States impose certain capital standards on all bank holding companies and banks. These capital standards require compliance with certain minimum “risk-based capital ratios” and a minimum “leverage ratio.” The risk-based capital ratios consist of (1) Tier 1 capital (i.e. common stockholders’ equity excluding goodwill, certain intangibles and net unrealized gains and losses on AFS investment securities, and including, subject to limitations, trust preferred securities (“TPS”), certain types of preferred stock and other qualifying items) to risk-weighted assets and (2) total capital (Tier 1 capital plus Tier 2 capital, including the qualifying portion of the allowance for loan and lease losses and the portion of TPS not counted as Tier 1 capital) to risk-weighted assets. The leverage ratio is measured as Tier 1 capital to adjusted quarterly average assets.

The Company’s and the Bank’s risk-based capital and leverage ratios exceeded these minimum requirements, as well as the minimum requirements to be considered “well capitalized”, at both September 30, 2009 and December 31, 2008, and are presented in the following tables.

Consolidated Capital Ratios

 

     September 30,
2009
    December 31,
2008
 
     (Dollars in thousands)  

Tier 1 capital:

    

Common stockholders’ equity

   $ 273,658      $ 252,302   

Preferred stock, net of unamortized discount

     72,296        71,880   

Allowed amount of trust preferred securities

     63,000        63,000   

Net unrealized gains on investment securities AFS

     (15,597     (15,624

Less goodwill and certain intangible assets

     (5,581     (5,664
                

Total tier 1 capital

     387,776        365,894   

Tier 2 capital:

    

Qualifying allowance for loan and lease losses

     29,713        29,512   
                

Total risk-based capital

   $ 417,489      $ 395,406   
                

Risk-weighted assets

   $ 2,367,467      $ 2,574,881   
                

Adjusted quarterly average assets

   $ 2,905,070      $ 3,143,959   
                

Ratios at end of period:

    

Tier 1 leverage

     13.35     11.64

Tier 1 risk-based capital

     16.38        14.21   

Total risk-based capital

     17.63        15.36   

Minimum ratio guidelines:

    

Tier 1 leverage (1)

     3.00     3.00

Tier 1 risk-based capital

     4.00        4.00   

Total risk-based capital

     8.00        8.00   

Minimum ratio guidelines to be “well capitalized”:

    

Tier 1 leverage

     5.00     5.00

Tier 1 risk-based capital

     6.00        6.00   

Total risk-based capital

     10.00        10.00   

 

(1) Regulatory authorities require institutions to operate at varying levels (ranging from 100-200 bps) above a minimum Tier 1 leverage ratio of 3% depending upon capitalization classification.

Capital Ratios of the Bank

 

     September 30,
2009
    December 31,
2008
 
     (Dollars in thousands)  

Stockholders’ equity – Tier 1

   $ 366,017      $ 346,941   

Tier 1 leverage ratio

     12.68     11.09

Tier 1 risk-based capital ratio

     15.55        13.48   

Total risk-based capital ratio

     16.80        14.63   

 

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Liquidity

Bank Liquidity. Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Generally the Company relies on deposits, loan and lease repayments and repayments of its investment securities as its primary sources of funds. The principal deposit sources utilized by the Company include consumer, commercial and public funds customers in the Company’s markets. The Company has used these funds, together with brokered deposits, FHLB advances, federal funds purchased and other sources of short-term borrowings, to make loans and leases, acquire investment securities and other assets and to fund continuing operations.

Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other factors. Loan and lease repayments are a relatively stable source of funds but are subject to the borrowers’ and lessees’ ability to repay the loans and leases, which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and other factors. Furthermore, loans and leases generally are not readily convertible to cash. Accordingly, the Company may be required to rely from time to time on other sources of liquidity to meet loan, lease and deposit withdrawal demands or otherwise fund operations. Such sources include FHLB advances, secured and unsecured federal funds lines of credit from correspondent banks and FRB borrowings.

At September 30, 2009 the Company had unused borrowing availability that was primarily comprised of the following four sources: (1) $352 million of available blanket borrowing capacity with the FHLB, (2) $45 million of investment securities available to pledge for federal funds or other borrowings, (3) $42 million of available unsecured federal funds borrowing lines and (4) $123 million from borrowing programs of the FRB.

The Company anticipates it will continue to rely on deposits, loan and lease repayments and repayments of its investment securities to provide liquidity, as well as other funding sources as appropriate. Additionally, when necessary, the sources of borrowed funds described above will be used to augment the Company’s primary funding sources.

Emergency Economic Stabilization Act of 2008 and FDIC Temporary Liquidity Guaranty Program. On October 3, 2008, Congress passed, and the President signed into law, the EESA. The EESA, among other things, included a provision for an increase in the amount of deposits insured by the FDIC from $100,000 to $250,000 through December 31, 2013.

On October 14, 2008, the FDIC announced a new program – the Temporary Liquidity Guaranty Program (“TLGP”) that both provides unlimited deposit insurance on certain transaction accounts and provides a guarantee of newly issued senior unsecured debt. The Bank elected to participate in both aspects of the TLGP, although it has not issued any senior unsecured debt under the TLGP to date. The senior unsecured debt guarantee program expired on October 31, 2009.

The unlimited deposit insurance covers funds to the extent such funds are not otherwise covered by the existing deposit insurance limit of $250,000 in (i) non-interest bearing transaction deposit accounts and (ii) certain interest bearing transaction deposit accounts where the participating institution agrees to pay interest on such deposits at a rate not to exceed 50 bps. Such covered transaction accounts were initially insured through December 31, 2009 at a fee of 10 bps per annum paid by the Company’s bank subsidiary to the FDIC on deposit amounts in excess of $250,000. In August 2009, the FDIC extended the unlimited deposit insurance through June 30, 2010. The fee payable by the Company to the FDIC to continue to participate in this insurance program increases to 15 bps per annum on deposits in excess of $250,000 and is effective beginning January 1, 2010.

Sources and Uses of Funds. Net cash provided by operating activities totaled $40.5 million and $36.9 million, respectively, for the nine months ended September 30, 2009 and 2008. Net cash provided by operating activities is comprised primarily of net income, adjusted for certain non-cash items and for changes in operating assets and liabilities.

Investing activities provided $318.4 million in the nine months ended September 30, 2009 and used $366.8 million in the nine months ended September 30, 2008. The Company’s primary sources and uses of cash for investing activities include net loan and lease fundings, which used $8.2 million and $198.3 million, respectively, in the nine months ended September 30, 2009 and 2008, purchases of premises and equipment in conjunction with its growth and de novo branching strategy, which used $8.1 million and $21.5 million, respectively, in the nine months ended September 30, 2009 and 2008 and net activity in its investment securities portfolio, which provided $318.1 million in the nine months ended September 30, 2009 and used $152.9 million in the nine months ended September 30, 2008. The Company also had proceeds from dispositions of premises and equipment and other assets of $16.6 million and $6.0 million for the nine months ended September 30, 2009 and 2008, respectively.

 

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Financing activities used $362.9 million in the nine months ended September 30, 2009 and provided $328.9 million in the nine months ended September 30, 2008. The Company’s primary financing activities include net changes in deposit accounts, which used $296.3 million in the nine months ended September 30, 2009 and provided $244.5 million in the nine months ended September 30, 2008 and net proceeds from, or repayments of, other borrowings and repurchase agreements with customers, which used $57.9 million in the nine months ended September 30, 2009 and provided $90.2 million in the nine months ended September 30, 2008. In addition the Company paid common stock cash dividends of $6.6 million and $6.2 million, respectively, in the nine months ended September 30, 2009 and 2008. The Company paid cash dividends on its Series A Preferred Stock of $2.5 million during the nine months ended September 30, 2009 but none during the same period in 2008.

Growth and Expansion

At September 30, 2009 the Company, through its state chartered subsidiary bank, conducted operations through 73 offices, including 66 banking offices in 34 communities throughout northern, western and central Arkansas, six Texas banking offices, and a loan production office in Charlotte, North Carolina.

The Company expects to continue its growth and de novo branching strategy, although it has slowed the pace of new office openings in recent years. In September 2009 the Company opened a new banking office in downtown Little Rock, Arkansas. During the fourth quarter of 2009, the Company expects to add a new banking office in Allen, Texas and close a small office in North Little Rock, Arkansas where the leased space is no longer available. The Company’s new operations center in Ozark, Arkansas is expected to open during the first quarter of 2010. Additionally, the Company expects to open its third banking office in Benton, Arkansas and banking offices in McKinney and Sasche, Texas during the second half of 2010 and in 2011.

Opening new offices is subject to availability of qualified personnel and suitable sites, designing, constructing, equipping and staffing such offices, obtaining regulatory and other approvals and many other conditions and contingencies that the Company cannot predict with certainty. The Company may increase or decrease its expected number of new offices as a result of a variety of factors including the Company’s financial results, changes in economic or competitive conditions, strategic opportunities or other factors.

During the first nine months of 2009, the Company spent $8.1 million on capital expenditures for premises and equipment. The Company’s capital expenditures for the full year of 2009 are expected to be in the range of $9 million to $12 million including progress payments on construction projects expected to be completed in 2009 or 2010, 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 sites acquired for future development, progress or delays encountered on ongoing and new construction projects, delays in or inability to obtain required approvals and other factors.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. The Company’s determination of the adequacy of the allowance for loan and lease losses and determination of the fair value of its investment securities portfolio involve a higher degree of judgment and complexity than its other significant accounting policies. Accordingly, the Company considers the determination of the adequacy of the allowance for loan and lease losses and the determination of the fair value of its investment securities portfolio to be critical accounting policies.

Provisions to and the adequacy of the allowance for loan and lease losses are determined in accordance with ASC Topic 310, “Receivables” and ASC Topic 450, “Contingencies,” and are based on the Company’s evaluation of the loan and lease portfolio utilizing objective and subjective criteria as described in this report. See the “Analysis of Financial Condition” section of Management’s Discussion and Analysis for a detailed discussion of the Company’s allowance for loan and lease losses. Changes in the criteria used in this evaluation or the availability of new information could cause the allowance to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan and lease losses based on their judgments and estimates.

The Company has classified all of its investment securities as AFS. Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income taxes, reported as a separate component of stockholders’ equity and any related changes are included in accumulated other comprehensive income (loss).

 

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The Company utilizes an independent third party as its principal pricing source for determining fair value of its investment securities. For investment securities traded in an active market, the fair values 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 and pricing matrices. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs or value drivers.

The fair values of the Company’s investment securities traded in both active and inactive markets can be volatile and may be influenced by a number of factors including market interest rates, prepayment speeds, discount rates, credit quality of the issuer, general market conditions including market liquidity conditions and other factors. Factors and conditions are constantly changing and fair values could be subject to material variations that may significantly impact the Company’s financial condition, results of operations and liquidity.

Recently Issued Accounting Standards

See Note 15 to the Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.

Forward-Looking Information

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, other filings made by the Company with the Securities and Exchange Commission and other oral and written statements or reports by the Company and its management include certain forward-looking statements including, without limitation, statements about economic, real estate market, competitive, employment and interest rate conditions, plans, goals, beliefs, expectations and outlook for revenue growth, net income and earnings per common share, net interest margin, net interest income, non-interest income, including service charges on deposit accounts, mortgage lending and trust income, gains (losses) on investment securities and sales of other assets, non-interest expense, including the cost of opening new offices and the cost of FDIC deposit insurance assessments, efficiency ratio, anticipated future operating results and financial performance, asset quality, including the effects of current economic and real estate market conditions, nonperforming loans and leases, nonperforming assets, net charge-offs, past due loans and leases, litigation, interest rate sensitivity, including the effects of possible interest rate changes, future growth and expansion opportunities, including plans for opening new offices, opportunities and goals for future market share growth, expected capital expenditures, loan, lease and deposit growth, changes in the volume, yield and value of the Company’s investment securities portfolio, availability of unused borrowings and other similar forecasts and statements of expectation. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “look,” “seek,” “may,” “will,” “could,” “trend,” “target,” “goal,” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs, plans and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.

Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management due to certain risks, uncertainties and assumptions. Certain factors that may affect operating results of the Company include, but are not limited to, potential delays or other problems in implementing the Company’s growth and expansion strategy, including delays in identifying satisfactory sites, hiring qualified personnel, obtaining regulatory or other approvals, obtaining permits and designing, constructing and opening new offices; the ability to attract new deposits, loans and leases; the ability to generate future revenue growth or to control future growth in non-interest expense; interest rate fluctuations, including interest rate changes and/or changes in the yield curve between short-term and long-term interest rates; competitive factors and pricing pressures, including their effect on the Company’s net interest margin; general economic, unemployment, credit market and real estate market conditions, including their effect on the creditworthiness of borrowers and lessees, collateral values and the value of investment securities; changes in legal and regulatory requirements; changes in regular or special assessment rates by the FDIC for deposit insurance; recently enacted and potential legislation including legislation intended to stabilize economic conditions and credit markets and legislation intended to protect homeowners; changes in U.S. government monetary and fiscal policy; adoption of new accounting standards or changes in existing standards; and adverse results in future litigation as well as other factors described in this and other Company reports and statements. Should one or more of the foregoing risks materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described in the forward-looking statements.

 

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SELECTED AND SUPPLEMENTAL FINANCIAL DATA

The following tables set forth selected consolidated financial data of the Company for the three and nine months ended September 30, 2009 and 2008 and supplemental quarterly financial data of the Company for each of the most recent eight quarters beginning with the fourth quarter of 2007 through the third quarter of 2009. These tables are qualified in their entirety by the consolidated financial statements and related notes presented elsewhere in this report.

Selected Consolidated Financial Data

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (Dollars in thousands, except per share amounts)  

Income statement data:

        

Interest income

   $ 39,904      $ 45,030      $ 127,753      $ 135,522   

Interest expense

     10,672        20,414        37,924        65,552   

Net interest income

     29,232        24,616        89,829        69,970   

Provision for loan and lease losses

     7,500        3,400        39,200        10,725   

Non-interest income

     5,810        4,871        37,793        15,553   

Non-interest expense

     15,499        13,828        49,631        40,176   

Non-controlling interest

     25        7        2        32   

Preferred stock dividends

     1,078        —          3,228        —     

Net income available to common stockholders

     8,391        9,011        27,178        25,383   

Common share and per common share data:

        

Earnings – diluted

   $ 0.50      $ 0.53      $ 1.61      $ 1.50   

Book value

     16.21        12.80        16.21        12.80   

Dividends

     0.13        0.13        0.39        0.37   

Weighted-average diluted shares outstanding (thousands)

     16,905        16,872        16,895        16,866   

End of period shares outstanding (thousands)

     16,885        16,855        16,885        16,855   

Balance sheet data at period end:

        

Total assets

   $ 2,889,686      $ 3,070,546      $ 2,889,686      $ 3,070,546   

Total loans and leases

     1,931,372        2,055,400        1,931,372        2,055,400   

Allowance for loan and lease losses

     39,280        25,427        39,280        25,427   

Total investment securities

     645,682        721,285        645,682        721,285   

Total deposits

     2,045,156        2,301,526        2,045,156        2,301,526   

Repurchase agreements with customers

     52,270        46,329        52,270        46,329   

Other borrowings

     361,679        426,524        361,679        426,524   

Subordinated debentures

     64,950        64,950        64,950        64,950   

Preferred stock, net of unamortized discount

     72,296        —          72,296        —     

Total common stockholders’ equity

     273,658        215,810        273,658        215,810   

Loan and lease to deposit ratio

     94.44     89.31     94.44     89.31

Average balance sheet data:

        

Total average assets

   $ 2,910,651      $ 3,036,652      $ 3,066,121      $ 2,973,216   

Total average common stockholders’ equity

     267,082        214,623        266,383        208,871   

Average common equity to average assets

     9.18     7.07     8.69     7.03

Performance ratios:

        

Return on average assets*

     1.14     1.18     1.19     1.14

Return on average common stockholders’ equity*

     12.46        16.70        13.64        16.23   

Net interest margin – FTE*

     4.80        3.82        4.77        3.76   

Efficiency ratio

     41.22        43.79        36.12        43.61   

Common stock dividend payout ratio

     26.15        24.29        24.21        24.53   

Asset quality ratios:

        

Net charge-offs to average total loans and leases*

     2.38     0.27     1.97     0.33

Nonperforming loans and leases to total loans and leases

     1.00        0.70        1.00        0.70   

Nonperforming assets to total assets

     2.88        0.66        2.88        0.66   

Allowance for loan and lease losses as a percentage of:

        

Total loans and leases

     2.03     1.24     2.03     1.24

Nonperforming loans and leases

     203     176     203     176

Capital ratios at period end:

        

Tier 1 leverage

     13.35     9.35     13.35     9.35

Tier 1 risk-based capital

     16.38        11.34        16.38        11.34   

Total risk-based capital

     17.63        12.35        17.63        12.35   

 

* Ratios annualized based on actual days.

 

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Bank of the Ozarks, Inc.

Supplemental Quarterly Financial Data

(Dollars in Thousands, Except Per Share Amounts)

Unaudited

 

    12/31/07     3/31/08     6/30/08     9/30/08     12/31/08     3/31/09     6/30/09     9/30/09  

Earnings Summary:

               

Net interest income

  $ 20,406      $ 21,751      $ 23,603      $ 24,616      $ 28,731      $ 30,334      $ 30,262      $ 29,232   

Federal tax (FTE) adjustment

    974        1,691        2,767        2,074        3,950        4,169        3,060        2,557   
                                                               

Net interest income (FTE)

    21,380        23,442        26,370        26,690        32,681        34,503        33,322        31,789   

Provision for loan and lease losses

    (2,700     (3,325     (4,000     (3,400     (8,300     (10,600     (21,100     (7,500

Non-interest income

    5,975        5,125        5,557        4,871        3,796        9,373        22,610        5,810   

Non-interest expense

    (12,508     (12,881     (13,467     (13,828     (14,233     (16,187     (17,945     (15,499
                                                               

Pretax income (FTE)

    12,147        12,361        14,460        14,333        13,944        17,089        16,887        14,600   

FTE adjustment

    (974     (1,691     (2,767     (2,074     (3,950     (4,169     (3,060     (2,557

Provision for income taxes

    (3,437     (2,905     (3,111     (3,255     (655     (2,537     (3,250     (2,599

Noncontrolling interest

    1        —          25        7        (21     (23     —          25   

Preferred stock dividend

    —          —          —          —          (227     (1,074     (1,076     (1,078
                                                               

Net income available to common stockholders

  $ 7,737      $ 7,765      $ 8,607      $ 9,011      $ 9,091      $ 9,286      $ 9,501      $ 8,391   
                                                               

Earnings per common share – diluted

  $ 0.46      $ 0.46      $ 0.51      $ 0.53      $ 0.54      $ 0.55      $ 0.56      $ 0.50   

Non-interest Income:

               

Service charges on deposit accounts

  $ 3,176      $ 2,871      $ 2,967      $ 3,102      $ 3,067      $ 2,803      $ 3,047      $ 3,234   

Mortgage lending income

    526        672        636        473        434        861        1,096        672   

Trust income

    661        604        629        649        712        647        751        801   

Bank owned life insurance income

    489        489        499        512        2,630        477        484        495   

Gains (losses) on investment securities

    106        20        —          (317     (3,136     3,999        16,519        142   

Gains (losses) on sales of other assets

    461        (93     206        (78     (579     48        (32     (51

Other

    556        562        620        530        668        538        745        517   
                                                               

Total non-interest income

  $ 5,975      $ 5,125      $ 5,557      $ 4,871      $ 3,796      $ 9,373      $ 22,610      $ 5,810   

Non-interest Expense:

               

Salaries and employee benefits

  $ 7,399      $ 7,332      $ 7,624      $ 7,728      $ 7,448      $ 7,916      $ 7,978      $ 7,823   

Net occupancy expense

    2,101        2,074        2,183        2,318        2,306        2,578        2,449        2,558   

Other operating expenses

    2,943        3,410        3,594        3,727        4,452        5,666        7,490        5,091   

Amortization of intangibles

    65        65        66        55        27        27        28        27   
                                                               

Total non-interest expense

  $ 12,508      $ 12,881      $ 13,467      $ 13,828      $ 14,233      $ 16,187      $ 17,945      $ 15,499   

Allowance for Loan and Lease Losses:

               

Balance at beginning of period

  $ 19,067      $ 19,557      $ 21,063      $ 23,432      $ 25,427      $ 29,512      $ 36,949      $ 43,635   

Net charge-offs

    (2,210     (1,819     (1,631     (1,405     (4,215     (3,163     (14,414     (11,855

Provision for loan and lease losses

    2,700        3,325        4,000        3,400        8,300        10,600        21,100        7,500   
                                                               

Balance at end of period

  $ 19,557      $ 21,063      $ 23,432      $ 25,427      $ 29,512      $ 36,949      $ 43,635      $ 39,280   

Selected Ratios:

               

Net interest margin - FTE*

    3.47     3.69     3.77     3.82     4.52     4.73     4.80     4.80

Efficiency ratio

    45.72        45.09        42.10        43.79        39.08        36.95        32.08        41.22   

Net charge-offs to average loans and leases*

    0.47        0.38        0.33        0.27        0.83        0.64        2.89        2.38   

Nonperforming loans and leases/total loans and leases

    0.35        0.68        0.74        0.70        0.76        1.15        0.90        1.00   

Nonperforming assets/total assets

    0.36        0.58        0.59        0.66        0.81        1.17        1.37        2.88   

Loans and leases past due 30 days or more, including past due non-accrual loans and leases, to total loans and leases

    1.14        1.30        0.92        0.94        2.68        2.24        2.34        1.77   

 

* Annualized based on actual days.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk results from timing differences in the repricing of assets and liabilities or from changes in relationships between interest rate indexes. The Company’s interest rate risk management is the responsibility of the ALCO and Investments Committee (“ALCO”), which reports to the board of directors. The ALCO oversees the asset/liability (interest rate risk) position, liquidity and funds management and investment portfolio functions of the Company.

The Company regularly reviews its exposure to changes in interest rates. Among the factors considered are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and repricing periods. Typically, the ALCO reviews on at least a quarterly basis the Company’s relative ratio of rate sensitive assets (“RSA”) to rate sensitive liabilities (“RSL”) and the related cumulative gap for different time periods. However, the primary tool used by ALCO to analyze the Company’s interest rate risk and interest rate sensitivity is an earnings simulation model.

This earnings simulation modeling process projects a baseline net interest income (assuming no changes in interest rate levels) and estimates changes to that baseline net interest income resulting from changes in interest rate levels. The Company relies primarily on the results of this model in evaluating its interest rate risk. This model incorporates a number of additional factors including: (1) the expected exercise of call features on various assets and liabilities, (2) the expected rates at which various RSA and RSL will reprice, (3) the expected growth in various interest earning assets and interest bearing liabilities and the expected interest rates on new assets and liabilities, (4) the expected relative movements in different interest rate indexes which are used as the basis for pricing or repricing various assets and liabilities, (5) existing and expected contractual cap and floor rates on various assets and liabilities, (6) expected changes in administered rates on interest bearing transaction, savings, money market and time deposit accounts and the expected impact of competition on the pricing or repricing of such accounts and (7) other relevant factors. Inclusion of these factors in the model is intended to more accurately project the Company’s expected changes in net interest income resulting from interest rate changes. The Company models its change in net interest income assuming interest rates go up 100 bps, up 200 bps, down 100 bps and down 200 bps. For purposes of this model, the Company has assumed that the change in interest rates phases in over a 12-month period. While the Company believes this model provides a reasonably accurate projection of its interest rate risk, the model includes a number of assumptions and predictions which may or may not be correct and may impact the model results. These assumptions and predictions include inputs to compute baseline net interest income, growth rates, expected changes in administered rates on interest bearing deposit accounts, competition and a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the earnings simulation model will accurately reflect future results.

The following table presents the earnings simulation model’s projected impact of a change in interest rates on the projected baseline net interest income for the 12-month period commencing October 1, 2009. 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.

 

Shift in

Interest Rates

(in bps)

   % Change in
Projected Baseline
Net Interest Income
+200    (1.1)%
+100    (2.0)   
-100    Not meaningful
-200    Not meaningful

In the event of a shift in interest rates, management may take certain actions intended to mitigate the negative impact to net interest income or to maximize the positive impact to net interest income. These actions may include, but are not limited to, restructuring of interest earning assets and interest bearing liabilities, seeking alternative funding sources or investment opportunities and modifying the pricing or terms of loans, leases and deposits.

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Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation as of the end of the period covered by this quarterly report was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures,” which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting.

The Company’s management, including the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer and Chief Accounting Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the quarterly period covered by this report and has concluded that there was no change during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On August 3, 2009 a lawsuit was filed in the Circuit Court of Benton County, Arkansas, Civil Division, Docket Number CV-2009-002391-5, styled “Rainbow Development, LLC; William A. Lazenby; and Donel Heckathorn, plaintiffs v. Bank of the Ozarks, Inc.; Bank of the Ozarks; James Matthews; and George Gleason, defendants.” The plaintiffs were borrowers or guarantors of certain loans secured by mortgages on various parcels of real estate in Benton County, Arkansas and in Washington County, Arkansas.

On September 29, 2009, a settlement agreement was executed by all parties to the above described lawsuit. On September 30, 2009, an order of dismissal with prejudice was entered by the court pursuant to the settlement agreement. The settlement resulted in plaintiffs paying cash equal to the estimated value of one piece of collateral to obtain its release, and conveying to the Company’s bank subsidiary all remaining collateral securing the related loans and dismissing all claims against the Company and the other defendants. In return, the Company and the other defendants agreed to release all claims, including any potential claim for a deficiency judgment, against the plaintiffs. The Company concluded that any potential recovery from a deficiency judgment would not significantly exceed, and might even be less than, the costs of obtaining and collecting such deficiency judgment.

The Company is party to various legal proceedings arising in the ordinary course of business. While the ultimate resolution of these various proceedings cannot be determined at this time, management of the Company believes that such proceedings, individually or in the aggregate, will not have a material adverse effect on the future results of operations, financial condition or liquidity of the Company.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in the Company’s 2008 annual report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2009.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company had no unregistered sales of equity securities and did not purchase any shares of its common stock during the period covered by this report.

 

Item 3. Defaults Upon Senior Securities

Not Applicable.

 

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable.

 

Item 5. Other Information

Not Applicable.

 

Item 6. Exhibits

Reference is made to the Exhibit Index set forth immediately following the signature page of this report.

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SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Bank of the Ozarks, Inc.
DATE: November 5, 2009    
      /s/ Paul Moore
   

Paul Moore

Chief Financial Officer and

Chief Accounting Officer

 

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Bank of the Ozarks, Inc.

Exhibit Index

 

Exhibit

Number

   
3 (i) (a)   Amended and Restated Articles of Incorporation of the Registrant, dated May 22, 1997 (previously filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Commission on May 22, 1997, as amended, Commission File No. 333-27641, and incorporated herein by this reference).
3 (i) (b)   Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant dated December 9, 2003 (previously filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the Commission on March 12, 2004 for the year ended December 31, 2003, and incorporated herein by this reference).
3 (i) (c)   Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant dated December 10, 2008 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 10, 2008, and incorporated herein by this reference).
3 (ii)   Amended and Restated Bylaws of the Registrant, dated December 11, 2007 (previously filed as Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007, and incorporated herein by this reference).
31.1   Certification of Chairman and Chief Executive Officer.
31.2   Certification of Chief Financial Officer and Chief Accounting Officer.
32.1   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.
32.2   Certification of Chief Financial Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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