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, 2012

 

¨ 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 333-27641

 

 

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

ARKANSAS   71-0556208
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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

None

(Title of Class)

 

 

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

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

Indicate by check mark 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   x    Accelerated filer   ¨
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, 2012

Common Stock, $0.01 par value per share   34,664,580

 

 

 


Table of Contents

BANK OF THE OZARKS, INC.

FORM 10-Q

September 30, 2012

INDEX

 

PART I.

  Financial Information   

Item 1.

  Financial Statements   
 

Consolidated Balance Sheets as of September 30, 2012 and 2011 and December 31, 2011

   1
 

Consolidated Statements of Income for the Three Months ended September 30, 2012 and 2011 and the Nine Months Ended September 30, 2012 and 2011

   2
 

Consolidated Statements of Comprehensive Income for the Three Months ended September 30, 2012 and 2011 and the Nine Months Ended September 30, 2012 and 2011

   3
 

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2012 and 2011

   4
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011

   5
 

Notes to Consolidated Financial Statements

   6

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    32
  Selected and Supplemental Financial Data    68

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk    70

Item 4.

  Controls and Procedures    71

PART II.

  Other Information   

Item 1.

  Legal Proceedings    72

Item 1A.

  Risk Factors    73

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    73

Item 3.

  Defaults Upon Senior Securities    73

Item 4.

  Mine Safety Disclosures    73

Item 5.

  Other Information    73

Item 6.

  Exhibits    73

Signature

   74

Exhibit Index

   75


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

 

     Unaudited
September  30,
    December 31,  
     2012     2011     2011  
     (Dollars in thousands, except per share amounts)  
ASSETS       

Cash and due from banks

   $ 124,995      $ 68,832      $ 58,247   

Interest earning deposits

     1,647        665        680   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     126,642        69,497        58,927   

Investment securities – available for sale (“AFS”)

     429,935        439,596        438,910   

Loans and leases not covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements

     2,033,005        1,863,114        1,885,282   

Loans covered by FDIC loss share agreements

     652,798        860,425        806,922   

Allowance for loan and lease losses

     (38,672     (39,136     (39,169
  

 

 

   

 

 

   

 

 

 

Net loans and leases

     2,647,131        2,684,403        2,653,035   

FDIC loss share receivable

     174,899        324,456        279,045   

Premises and equipment, net

     221,618        183,644        186,533   

Foreclosed assets not covered by FDIC loss share agreements

     13,828        34,338        31,762   

Foreclosed assets covered by FDIC loss share agreements

     57,632        72,740        72,907   

Accrued interest receivable

     11,520        11,641        12,868   

Bank owned life insurance (“BOLI”)

     93,819        61,499        62,078   

Intangible assets, net

     10,680        12,716        12,207   

Other, net

     35,313        37,615        33,379   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,823,017      $ 3,932,145      $ 3,841,651   
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY       

Deposits:

      

Demand non-interest bearing

   $ 528,277      $ 466,938      $ 447,214   

Savings and interest bearing transaction

     1,586,098        1,609,632        1,578,449   

Time

     777,360        969,899        918,256   
  

 

 

   

 

 

   

 

 

 

Total deposits

     2,891,735        3,046,469        2,943,919   

Repurchase agreements with customers

     32,511        46,334        32,810   

Other borrowings

     280,771        289,353        301,847   

Subordinated debentures

     64,950        64,950        64,950   

FDIC clawback payable

     24,934        24,348        24,645   

Accrued interest payable and other liabilities

     46,832        50,340        45,507   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     3,341,733        3,521,794        3,413,678   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ equity:

      

Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding at September 30, 2012 and 2011 or at December 31, 2011

     0        0        0   

Common stock; $0.01 par value; 50,000,000 shares authorized; 34,664,580, 34,277,280 and 34,463,880 shares issued and outstanding at September 30, 2012, September 30, 2011 and December 31, 2011, respectively

     347        343        345   

Additional paid-in capital

     56,873        49,080        51,145   

Retained earnings

     407,671        349,592        363,734   

Accumulated other comprehensive income (loss)

     12,960        7,930        9,327   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity before noncontrolling interest

     477,851        406,945        424,551   

Noncontrolling interest

     3,433        3,406        3,422   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     481,284        410,351        427,973   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,823,017      $ 3,932,145      $ 3,841,651   
  

 

 

   

 

 

   

 

 

 

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,
 
   2012     2011     2012     2011  
   (Dollars in thousands, except per share amounts)  

Interest income:

        

Loans and leases not covered by FDIC loss share agreements

   $ 29,486      $ 27,793      $ 85,197      $ 83,715   

Loans covered by FDIC loss share agreements

     15,347        19,089        47,710        48,119   

Investment securities:

        

Taxable

     757        838        2,177        2,324   

Tax-exempt

     3,864        4,177        12,083        12,610   

Deposits with banks and federal funds sold

     2        5        5        31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     49,456        51,902        147,172        146,799   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,912        4,389        7,138        14,367   

Repurchase agreements with customers

     7        35        40        153   

Other borrowings

     2,628        2,712        8,020        8,096   

Subordinated debentures

     465        430        1,398        1,288   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     5,012        7,566        16,596        23,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     44,444        44,336        130,576        122,895   

Provision for loan and lease losses

     (3,080     (1,500     (9,212     (7,500
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     41,364        42,836        121,364        115,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges on deposit accounts

     5,000        4,734        14,601        13,158   

Mortgage lending income

     1,672        815        4,101        2,130   

Trust income

     865        810        2,527        2,395   

Bank owned life insurance income

     598        585        1,740        1,728   

Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable

     1,699        2,861        6,039        7,783   

Other loss share income, net

     2,270        2,976        7,450        4,931   

Gains on investment securities

     0        638        403        989   

Gains on sales of other assets

     1,425        1,727        4,377        2,839   

Gains on FDIC-assisted acquisitions

     0        0        0        65,708   

Other

     962        925        2,774        2,458   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     14,491        16,071        44,012        104,119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     15,040        14,597        43,666        41,061   

Net occupancy and equipment

     4,105        4,301        11,633        11,182   

Other operating expenses

     9,537        12,902        29,272        40,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     28,682        31,800        84,571        93,191   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     27,173        27,107        80,805        126,323   

Provision for income taxes

     7,883        8,220        24,417        42,605   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     19,290        18,887        56,388        83,718   

Net (income) loss attributable to noncontrolling interest

     (15     17        (11     33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 19,275      $ 18,904      $ 56,377      $ 83,751   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.56      $ 0.55      $ 1.63      $ 2.45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.55      $ 0.55      $ 1.62      $ 2.43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.13      $ 0.095      $ 0.36      $ 0.27   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands)  

Net income

   $ 19,290      $ 18,887      $ 56,388      $ 83,718   

Unrealized gains and losses on investment securities AFS

     2,482        8,208        6,381        14,312   

Tax effect of unrealized gains and losses on investment securities AFS

     (974     (3,220     (2,503     (5,614

Reclassification of gains and losses on investment securities AFS included in net income

     0        (638     (403     (989

Tax effect of reclassification of gains and losses on investment securities AFS included in net income

     0        250        158        388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 20,798      $ 23,487      $ 60,021      $ 91,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

 

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

Balances – January 1, 2011

   $ 341       $ 45,107       $ 275,074      $ (167   $ 3,415      $ 323,770   

Net income

     0         0         83,718        0        0        83,718   

Net loss attributable to noncontrolling interest

     0         0         33        0        (33     0   

Unrealized gains/losses on investment securities AFS, net of taxes

     0         0         0        8,698        0        8,698   

Reclassification of gains/losses included in net income, net of taxes

     0         0         0        (601     0        (601

Common stock dividends

     0         0         (9,233     0        0        (9,233

Issuance of 171,600 shares of common stock for exercise of stock options

     2         2,665         0        0        0        2,667   

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

     0         285         0        0        0        285   

Stock-based compensation expense

     0         1,023         0        0        0        1,023   

Forfeiture of 1,600 shares of unvested common stock under restricted stock plan

     0         0         0        0        0        0   

Proceeds received from noncontrolling interest

     0         0         0        0        24        24   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – September 30, 2011

   $ 343       $ 49,080       $ 349,592      $ 7,930      $ 3,406      $ 410,351   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – January 1, 2012

   $ 345       $ 51,145       $ 363,734      $ 9,327      $ 3,422      $ 427,973   

Net income

     0         0         56,388        0        0        56,388   

Net income attributable to noncontrolling interest

     0         0         (11     0        11        0   

Unrealized gains/losses on investment securities AFS, net of taxes

     0         0         0        3,878        0        3,878   

Reclassification of gains/losses included in net income, net of taxes

     0         0         0        (245     0        (245

Common stock dividends

     0         0         (12,440     0        0        (12,440

Issuance of 200,700 shares of common stock for exercise of stock options

     2         3,120         0        0        0        3,122   

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

     0         843         0        0        0        843   

Stock-based compensation expense

     0         1,765         0        0        0        1,765   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – September 30, 2012

   $ 347       $ 56,873       $ 407,671      $ 12,960      $ 3,433      $ 481,284   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

     Nine Months Ended  
     September 30,  
     2012     2011  
     (Dollars in thousands)  

Cash flows from operating activities:

    

Net income

   $ 56,388      $ 83,718   

Adjustments to reconcile net income to net cash (used) provided by operating activities:

    

Depreciation

     4,657        3,902   

Amortization

     1,527        1,168   

Net (income) loss attributable to noncontrolling interest

     (11     33   

Provision for loan and lease losses

     9,212        7,500   

Provision for losses on foreclosed assets

     1,182        8,877   

Writedown of other assets

     0        1,250   

Net amortization of investment securities AFS

     26        264   

Net gains on investment securities AFS

     (403     (989

Originations of mortgage loans for sale

     (182,611     (99,529

Proceeds from sales of mortgage loans for sale

     172,345        99,840   

Accretion of loans covered by FDIC loss share agreements

     (47,710     (48,119

Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable

     (6,039     (7,783

Gains on sales of other assets

     (4,377     (2,839

Gains on FDIC-assisted acquisitions

     0        (65,708

Deferred income tax expense

     765        28,875   

Increase in cash surrender value of BOLI

     (1,740     (1,728

Current tax benefit on exercise of stock options

     (1,213     (488

Stock-based compensation expense

     1,765        1,023   

Changes in assets and liabilities:

    

Accrued interest receivable

     1,348        2,779   

Other assets, net

     1,613        (303

Accrued interest payable and other liabilities

     (18,092     2,489   
  

 

 

   

 

 

 

Net cash (used) provided by operating activities

     (11,368     14,232   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales of investment securities AFS

     8,525        96,743   

Proceeds from maturities/calls/paydowns of investment securities AFS

     46,252        20,349   

Purchases of investment securities AFS

     (26,678     (7,586

Net advances of loans and leases not covered by FDIC loss share agreements

     (136,315     (2,853

Payments received on loans covered by FDIC loss share agreements

     157,929        148,041   

Payments received from FDIC under loss share agreements

     122,722        58,728   

Net decrease in covered assets and FDIC loss share receivable

     12,689        18,265   

Purchases of premises and equipment

     (40,889     (16,845

Proceeds from sales of other assets

     46,311        26,174   

Purchase of BOLI

     (30,000     0   

Cash received from (invested in) unconsolidated investments and noncontrolling interest

     200        (1,735

Net cash received in FDIC-assisted acquisitions

     0        365,394   
  

 

 

   

 

 

 

Net cash provided by investing activities

     160,746        704,675   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net decrease in deposits

     (52,183     (609,017

Net repayments of other borrowings

     (21,076     (85,605

Net (decrease) increase in repurchase agreements with customers

     (299     2,261   

Proceeds from exercise of stock options

     3,122        2,667   

Current tax benefit on exercise of stock options

     1,213        488   

Cash dividends paid on common stock

     (12,440     (9,233
  

 

 

   

 

 

 

Net cash used by financing activities

     (81,663     (698,439
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     67,715        20,468   

Cash and cash equivalents – beginning of period

     58,927        49,029   
  

 

 

   

 

 

 

Cash and cash equivalents – end of period

   $ 126,642      $ 69,497   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


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, a subsidiary that owns private aircraft and various other entities that hold foreclosed assets or tax credits or engage in other activities. The Company and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. The consolidated financial statements include the accounts of the Company, the Bank, the real estate subsidiary, the aircraft subsidiary and certain of those various other entities in accordance with accounting principles generally accepted in the United States (“GAAP”). 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 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, 2011.

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. Actual results could differ from those estimates. 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. Operating results for the quarter or the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the full year or future periods.

On August 16, 2011, the Company completed a 2-for-1 stock split in the form of a stock dividend, effected by issuing one share of common stock for each share of such stock outstanding on August 5, 2011. All share and per share information in the consolidated financial statements and the notes to the consolidated financial statements has been adjusted to give effect to this stock split.

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. Additionally, as provided for under GAAP, management has up to 12 months following the date of a business combination transaction, including Federal Deposit Insurance Corporation (“FDIC”)-assisted acquisitions, to finalize the fair values of acquired assets and assumed liabilities. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the day 1 fair values (“Day 1 Fair Values”). During 2011 and the first quarter of 2012, the Company made adjustments to the acquired assets and assumed liabilities for certain of its FDIC-assisted acquisitions in the determination of such Day 1 Fair Values. As a result, certain amounts previously reported in the Company’s consolidated balance sheets have been recast.

 

3. Acquisitions

2011 Acquisitions

On January 14, 2011, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Oglethorpe Bank (“Oglethorpe”) with offices in Brunswick and St. Simons Island, Georgia.

On April 29, 2011, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former First Choice Community Bank (“First Choice”) with offices in Dallas, Newnan (2), Senoia, Sharpsburg, Douglasville and Carrollton, Georgia. On July 1, 2011, the Company closed one of the offices in Newnan, Georgia, and on October 26, 2011, the Company closed the office in Carrollton, Georgia.

 

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Table of Contents

On April 29, 2011, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former The Park Avenue Bank (“Park Avenue”) with offices in Valdosta (3), Bainbridge (2), Cairo, Lake Park, Stockbridge, McDonough, Oakwood and Athens, Georgia and in Ocala, Florida. On October 21, 2011, the Company closed the office in Stockbridge, Georgia.

Subsequent to the reporting of the assets acquired and the liabilities assumed in the Oglethorpe, First Choice and Park Avenue acquisitions, the Company made certain adjustments to these values prior to the one-year anniversary of each acquisition in order to finalize the Day 1 Fair Values. As a result of those adjustments, the Company has recast certain of the assets acquired and liabilities assumed in the Oglethorpe, First Choice and Park Avenue acquisitions to reflect the Day 1 Fair Values. The following tables provide a summary of the Day 1 Fair Values of assets acquired and liabilities assumed, including recast adjustments, for the Company’s 2011 FDIC-assisted acquisitions. These adjustments impacted the net assets acquired and the resulting pre-tax gains on these acquisitions. However, because the net effect on net assets acquired and resulting gains was not material, management recorded the impact of such adjustments as an increase or decrease to non-interest income during the quarter or quarters in which the adjustments were determined.

A summary of the assets acquired and liabilities assumed in the Oglethorpe acquisition, including recast adjustments, is as follows:

 

     January 14, 2011  
     As Recorded
by
Oglethorpe
    Fair Value
Adjustments
         Recast
Adjustments
    As Recorded
by  the
Company (1)
 
     (Dollars in thousands)  

Assets acquired:

           

Cash and cash equivalents

   $ 14,710      $ 0         $ 0      $ 14,710   

Loans not covered by FDIC loss share agreements

     6,532        (3,447   b      0        3,085   

Loans covered by FDIC loss share agreements

     154,018        (73,342   b      758        81,434   

FDIC loss share receivable

     0        52,395      c      (1,292     51,103   

Foreclosed assets covered by FDIC loss share agreements

     16,554        (9,410   d      (59     7,085   

Core deposit intangible

     0        401      e      0        401   

Other assets

     1,054        (621   f      726        1,159   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total assets acquired

     192,868        (34,024        133        158,977   
  

 

 

   

 

 

      

 

 

   

 

 

 

Liabilities assumed:

           

Deposits

     195,067        0      i      0        195,067   

FDIC clawback payable

     0        924      h      133        1,057   

Other liabilities

     333        100      f      0        433   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total liabilities assumed

     195,400        1,024           133        196,557   
  

 

 

   

 

 

      

 

 

   

 

 

 

Net assets acquired

     (2,532   $ (35,048      $ 0        (37,580
    

 

 

      

 

 

   

Asset discount bid

     (38,000         
  

 

 

          

Cash received from FDIC

   $ 40,532               40,532   
  

 

 

          

 

 

 

Pre-tax gain

            $ 2,952   
           

 

 

 

 

(1) Represents the Day 1 Fair Values of assets acquired and liabilities assumed in the Oglethorpe acquisition.

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A summary of the assets acquired and liabilities assumed in the First Choice acquisition, including recast adjustments, is as follows:

 

     April 29, 2011  
     As Recorded
by  First
Choice
    Fair  Value
Adjustments
           Recast
Adjustments
    As Recorded
by the
Company (1)
 
     (Dollars in thousands)  

Assets acquired:

           

Cash and cash equivalents

   $ 38,018      $ 0         $ 0      $ 38,018   

Investment securities available for sale (“AFS”)

     4,588        (20     a         0        4,568   

Loans not covered by FDIC loss share agreements

     1,973        (419     b         0        1,554   

Loans covered by FDIC loss share agreements

     246,451        (96,557     b         (1,382     148,512   

FDIC loss share receivable

     0        59,544        c         460        60,004   

Foreclosed assets covered by FDIC loss share agreements

     2,773        (1,102     d         0        1,671   

Core deposit intangible

     0        495        e         0        495   

Other assets

     931        (861     f         884        954   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total assets acquired

     294,734        (38,920        (38     255,776   
  

 

 

   

 

 

      

 

 

   

 

 

 

Liabilities assumed:

           

Deposits

     293,344        0        i         0        293,344   

Federal Home Loan Bank of Atlanta (“FHLB-Atlanta”) advances

     4,000        0        g         0        4,000   

FDIC clawback payable

     0        930        h         (38     892   

Other liabilities

     478        100        f         0        578   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total liabilities assumed

     297,822        1,030           (38     298,814   
  

 

 

   

 

 

      

 

 

   

 

 

 

Net assets acquired

     (3,088   $ (39,950      $ 0        (43,038
    

 

 

      

 

 

   

Asset discount bid

     (42,900         
  

 

 

          

Cash received from FDIC

   $ 45,988               45,988   
  

 

 

          

 

 

 

Pre-tax gain

            $ 2,950   
           

 

 

 

 

(1) Represents the Day 1 Fair Values of assets acquired and liabilities assumed in the First Choice acquisition.

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A summary of the assets acquired and liabilities assumed in the Park Avenue acquisition, including recast adjustments, is as follows:

 

     April 29, 2011  
     As Recorded
by
Park Avenue
    Fair Value
Adjustments
           Recast
Adjustments
    As Recorded
by the
Company (1)
 
     (Dollars in thousands)  

Assets acquired:

           

Cash and cash equivalents

   $ 66,825      $ 0         $ 0      $ 66,825   

Investment securities AFS

     132,737        (947     a         0        131,790   

Loans not covered by FDIC loss share agreements

     23,664        (5,968     b         0        17,696   

Loans covered by FDIC loss share agreements

     408,069        (145,152     b         1,380        264,297   

FDIC loss share receivable

     0        113,683        c         2,571        116,254   

Foreclosed assets covered by FDIC loss share agreements

     91,442        (59,812     d         (450     31,180   

Core deposit intangible

     0        5,063        e         0        5,063   

Other assets

     5,012        (2,035     f         (1,799     1,178   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total assets acquired

     727,749        (95,168        1,702        634,283   
  

 

 

   

 

 

      

 

 

   

 

 

 

Liabilities assumed:

           

Deposits

     626,321        0        i         0        626,321   

FHLB-Atlanta advances

     84,260        4,559        g         0        88,819   

FDIC clawback payable

     0        14,868        h         77        14,945   

Other liabilities

     1,588        500        f         1,625        3,713   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total liabilities assumed

     712,169        19,927           1,702        733,798   
  

 

 

   

 

 

      

 

 

   

 

 

 

Net assets acquired

     15,580      $ (115,095      $ 0        (99,515
    

 

 

      

 

 

   

Asset discount bid

     (174,900         
  

 

 

          

Cash received from FDIC

   $ 159,320               159,320   
  

 

 

          

 

 

 

Pre-tax gain

            $ 59,805   
           

 

 

 

 

(1) Represents the Day 1 Fair Values of the assets acquired and liabilities assumed in the Park Avenue acquisition.

Explanation of fair value adjustments in the above tables:

 

  a- Adjustment reflects the fair value adjustment based on the Company’s pricing of investment securities AFS.
  b- Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio.
  c- Adjustment reflects the estimated fair value of payments the Company expects to receive from the FDIC under the loss share agreements.
  d- Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired foreclosed assets covered by FDIC loss share agreements.
  e- Adjustment reflects the estimated fair value of the core deposit intangible.
  f- Adjustment reflects the amount needed to adjust the carrying value of other assets and other liabilities to estimated fair value.
  g- Adjustment reflects the amount of the prepayment penalty, if any, assessed on early payoff of FHLB-Atlanta advances.
  h- Adjustment reflects the estimated fair value of payments the Company expects to make to the FDIC under the clawback provisions of the loss share agreements at the conclusion of the term of the loss share agreements.
  i- Because the Company reset deposit rates for these assumed deposits, as provided for under the purchase and assumption agreement, to reflect an appropriate market rate of interest, there was no fair value adjustment for such assumed deposits.

The Company’s results of operations include the operating results of the acquired assets and assumed liabilities from the respective dates of acquisition through the end of the reporting period. Due to the significant fair value adjustments and the nature of the loss sharing agreements with the FDIC, the Company believes pro forma information that would include pre-acquisition historical results of the acquired assets and assumed liabilities is not relevant. Accordingly, no pro forma information is included in these consolidated financial statements.

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2010 Acquisitions

On March 26, 2010, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Unity National Bank (“Unity”) with offices in Cartersville (2), Rome, Adairsville and Calhoun, Georgia.

On July 16, 2010, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Woodlands Bank (“Woodlands”) with offices in South Carolina (2), North Carolina (2), Georgia and Alabama (3). On October 26, 2010, the Company closed four of the Woodlands offices.

On September 10, 2010, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Horizon Bank (“Horizon”) with offices in Bradenton (2), Palmetto and Brandon, Florida. On December 23, 2010, the Company closed the office in Brandon, Florida.

On December 17, 2010, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Chestatee State Bank (“Chestatee”) with offices in Dawsonville (2), Cumming and Marble Hill, Georgia.

Purchase Accounting Adjustments

All recast adjustments to the acquired assets and assumed liabilities for each of the Company’s seven FDIC-assisted acquisitions were made subsequent to the acquisition, but prior to their one-year anniversaries and, as provided for under GAAP, were considered to be purchase accounting adjustments in deriving the Day 1 Fair Values for the acquired assets and assumed liabilities. These adjustments impacted the net assets acquired and the resulting pre-tax gains on these acquisitions. However, because the net effect on net assets acquired and resulting pre-tax gains was not material, management recorded the impact of such adjustments as an increase or decrease to non-interest income during the quarter or quarters in which the adjustments were determined. No such adjustments were made in the quarter ended September 30, 2012.

As a result of the recast adjustments, certain amounts previously reported in the Company’s consolidated financial statements have been recast. The following is a summary of those financial statement captions that have been impacted by these recast adjustments.

 

     As Previously      Recast     As  
     Reported      Adjustments     Recast  
     (Dollars in thousands)  

September 30, 2011:

       

Loans covered by FDIC loss share agreements

   $ 865,096       $ (4,671   $ 860,425   

FDIC loss share receivable

     318,730         5,726        324,456   

Foreclosed assets covered by FDIC loss share agreements

     73,249         (509     72,740   

Other assets

     36,663         952        37,615   

FDIC clawback payable

     24,475         (127     24,348   

Accrued interest payable and other liabilities

     48,715         1,625        50,340   

December 31, 2011:

       

Loans covered by FDIC loss share agreements

   $ 806,924       $ (2   $ 806,922   

FDIC loss share receivable

     278,263         782        279,045   

Other assets

     32,495         884        33,379   

FDIC clawback payable

     24,606         39        24,645   

Accrued interest payable and other liabilities

     43,882         1,625        45,507   

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Table of Contents
4. 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 using the treasury stock method. No options to purchase shares of the Company’s common stock for the three-month and nine-month periods ended September 30, 2012 and 2011 were excluded from the diluted EPS calculations as all options were dilutive for the respective periods.

Basic and diluted EPS are computed as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  
     (In thousands, except per share amounts)  

Numerator:

           

Distributed earnings allocated to common stock

   $ 4,498       $ 3,255       $ 12,440       $ 9,233   

Undistributed earnings allocated to common stock

     14,777         15,649         43,937         74,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common stock

   $ 19,275       $ 18,904       $ 56,377       $ 83,751   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Denominator for basic EPS – weighted-average common shares

     34,647         34,264         34,591         34,211   

Effect of dilutive securities – stock options

     316         246         281         223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted EPS – weighted-average common shares and assumed conversions

     34,963         34,510         34,872         34,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 0.56       $ 0.55       $ 1.63       $ 2.45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 0.55       $ 0.55       $ 1.62       $ 2.43   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

5. Investment Securities

At September 30, 2012 and 2011 and at December 31, 2011, the Company classified all of its investment securities portfolio 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 tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss).

The following table presents the amortized cost and estimated fair value of investment securities as of the dates indicated. The Company’s holdings of “other equity securities” include Federal Home Loan Bank of Dallas (“FHLB – Dallas”), FHLB – Atlanta and First National Banker’s Bankshares, Inc. (“FNBB”) shares, which do not have readily determinable fair values and are carried at cost.

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (Dollars in thousands)  

September 30, 2012:

          

Obligations of state and political subdivisions

   $ 330,965       $ 18,784       $ (211   $ 349,538   

U.S. Government agency residential mortgage-backed securities

     63,192         2,752         0        65,944   

Corporate bonds

     777         0         0        777   

Other equity securities

     13,676         0         0        13,676   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 408,610       $ 21,536       $ (211   $ 429,935   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011:

          

Obligations of state and political subdivisions

   $ 359,667       $ 14,359       $ (979   $ 373,047   

U.S. Government agency residential mortgage-backed securities

     46,068         1,967         0        48,035   

Other equity securities

     17,828         0         0        17,828   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 423,563       $ 16,326       $ (979   $ 438,910   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2011:

          

Obligations of state and political subdivisions

   $ 357,489       $ 12,660       $ (1,382   $ 368,767   

U.S. Government agency residential mortgage-backed securities

     48,749         1,769         0        50,518   

Other equity securities

     20,311         0         0        20,311   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 426,549       $ 14,429       $ (1,382   $ 439,596   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The following table shows estimated fair value of investment securities AFS having gross unrealized losses and the amount of such unrealized losses, aggregated by investment category and length of time that individual investment securities have been in a continuous unrealized loss position, as of the dates indicated.

 

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

September 30, 2012:

                 

Obligations of state and political subdivisions

   $ 1,796       $ 75       $ 7,540       $ 136       $ 9,336       $ 211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,796       $ 75       $ 7,540       $ 136       $ 9,336       $ 211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                 

Obligations of states and political subdivisions

   $ 6,035       $ 248       $ 16,582       $ 731       $ 22,617       $ 979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 6,035       $ 248       $ 16,582       $ 731       $ 22,617       $ 979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011:

                 

Obligations of state and political subdivisions

   $ 12,917       $ 488       $ 20,531       $ 894       $ 33,448       $ 1,382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 12,917       $ 488       $ 20,531       $ 894       $ 33,448       $ 1,382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment for the investment securities portfolio, management considers the credit quality of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors. At September 30, 2012 and 2011 and December 31, 2011, management determined the unrealized losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality of the investments. Accordingly, management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

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

 

     September 30, 2012      December 31, 2011  

Maturity or

Estimated Repayment

   Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
     (Dollars in thousands)  

One year or less

   $ 15,192       $ 15,805       $ 12,216       $ 12,624   

After one year to five years

     38,476         40,121         37,392         38,539   

After five years to ten years

     35,562         37,036         35,935         37,241   

After ten years

     319,380         336,973         338,020         350,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 408,610       $ 429,935       $ 423,563       $ 438,910   
  

 

 

    

 

 

    

 

 

    

 

 

 

For purposes of this maturity distribution, all investment securities AFS are shown based on their contractual maturity date, except (i) FHLB – Dallas, FHLB – Atlanta and FNBB stock with no contractual maturity date are shown in the longest maturity category and (ii) U.S. Government agency residential mortgage-backed securities are allocated among various maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds and interest rate levels at the measurement dates. 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 in the Company’s investment securities AFS for the periods indicated were as follows:

 

                                                   
     Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
     2012      2011     2012      2011  
     (Dollars in thousands)  

Sales proceeds

   $ 0       $ 58,930      $ 8,525       $ 96,743   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross realized gains

   $ 0       $ 643      $ 403       $ 1,044   

Gross realized losses

     0         (5     0         (55
  

 

 

    

 

 

   

 

 

    

 

 

 

Net gains on investment securities

   $ 0       $ 638      $ 403       $ 989   
  

 

 

    

 

 

   

 

 

    

 

 

 

At September 30, 2012, the Company owned three different maturities of bonds totaling an aggregate of $2.6 million issued by the Northwest Arkansas Regional Solid Waste Management District (“District”). The District owns and operates a landfill for the benefit of the residents of certain counties located in north Arkansas, with the landfill, the revenues therefrom and certain personal property serving as collateral under the bond indenture. On October 9, 2012, a special election was held where an additional  3/8-cent sales tax proposal to be used to support the purchase of the landfill by a third party from the District was defeated. Subsequently, on October 23, 2012, the management board governing the District voted to place the District into receivership. Management of the Company is monitoring these bonds and is currently unable to estimate how much, if any, impairment may exist on the bonds.

 

6. Allowance for Loan and Lease Losses (“ALLL”)

The following table is a summary of activity within the ALLL for the periods indicated.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands)  

Beginning balance

   $ 38,862      $ 39,124      $ 39,169      $ 40,230   

Non-covered loans and leases charged off

     (1,763     (1,627     (5,096     (8,913

Recoveries of non-covered loans and leases previously charged off

     174        139        549        319   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net non-covered loans and leases charged off

     (1,589     (1,488     (4,547     (8,594

Covered loans charged off

     (1,681     0        (5,162     0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs – total loans and leases

     (3,270     (1,488     (9,709     (8,594

Provision for loan and lease losses

     3,080        1,500        9,212        7,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 38,672      $ 39,136      $ 38,672      $ 39,136   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2012, the Company identified purchased loans covered by FDIC loss share agreements acquired in its FDIC-assisted acquisitions where the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $1.7 million for such loans during the third quarter of 2012 and $5.2 million for such loans during the first nine months of 2012 (none during the third quarter or first nine months of 2011). The Company also recorded provision for loan and lease losses of $1.7 million during the third quarter of 2012 and $5.2 million during the first nine months of 2012 to cover such charge-offs (none during the third quarter or first nine months of 2011). In addition to those net charge-offs, the Company also transferred certain of these covered loans to covered foreclosed assets. As a result, the Company had $31.0 million of impaired covered loans at September 30, 2012 (none at September 30, 2011).

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Table of Contents

The following table is a summary of the Company’s allowance for loan and lease losses as of and for the three months and nine months ended September 30, 2012.

 

     Beginning
Balance
     Charge-offs     Recoveries      Provision     Ending
Balance
 
     (Dollars in thousands)  

Three months ended September 30, 2012:

            

Real estate:

            

Residential 1-4 family

   $ 4,957       $ (385   $ 42       $ 313      $ 4,927   

Non-farm/non-residential

     9,916         (94     1         (138     9,685   

Construction/land development

     11,805         (26     70         391        12,240   

Agricultural

     2,959         (767     3         807        3,002   

Multifamily residential

     1,870         0        0         (207     1,663   

Commercial and industrial

     4,136         (127     8         (89     3,928   

Consumer

     1,089         (114     22         41        1,038   

Direct financing leases

     1,886         (101     2         201        1,988   

Other

     244         (149     26         80        201   

Covered loans

     0         (1,681     0         1,681        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 38,862       $ (3,444   $ 174       $ 3,080      $ 38,672   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Nine months ended September 30, 2012:

            

Real estate:

            

Residential 1-4 family

   $ 3,848       $ (1,016   $ 99       $ 1,996      $ 4,927   

Non-farm/non-residential

     12,203         (800     13         (1,731     9,685   

Construction/land development

     9,478         (369     101         3,030        12,240   

Agricultural

     3,383         (985     129         475        3,002   

Multifamily residential

     2,564         0        0         (901     1,663   

Commercial and industrial

     4,591         (917     29         225        3,928   

Consumer

     1,209         (324     88         65        1,038   

Direct financing leases

     1,632         (295     1         650        1,988   

Other

     261         (390     89         241        201   

Covered loans

     0         (5,162     0         5,162        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 39,169       $ (10,258   $ 549       $ 9,212      $ 38,672   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following table is a summary of the Company’s allowance for loan and lease losses as of and for the year ended December 31, 2011.

 

     Beginning
Balance
     Charge-offs     Recoveries      Provision     Ending
Balance
 
     (Dollars in thousands)  

Year ended December 31, 2011:

            

Real estate:

            

Residential 1-4 family

   $ 2,999       $ (2,743   $ 64       $ 3,528      $ 3,848   

Non-farm/non-residential

     8,313         (1,033     16         4,907        12,203   

Construction/land development

     10,565         (5,651     30         4,534        9,478   

Agricultural

     2,569         (771     0         1,585        3,383   

Multifamily residential

     1,320         0        0         1,244        2,564   

Commercial and industrial

     4,142         (1,465     142         1,772        4,591   

Consumer

     2,051         (825     166         (183     1,209   

Direct financing leases

     1,726         (413     5         314        1,632   

Other

     201         (87     4         143        261   

Covered loans

     0         (275     0         275        0   

Unallocated

     6,344         0        0         (6,344     0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 40,230       $ (13,263   $ 427       $ 11,775      $ 39,169   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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Table of Contents

The following table is a summary of the Company’s allowance for loan and lease losses as of and for the three months and nine months ended September 30, 2011.

 

     Beginning
Balance
     Charge-offs     Recoveries      Provision     Ending
Balance
 
     (Dollars in thousands)  

Three months ended September 30, 2011:

            

Real estate:

            

Residential 1-4 family

   $ 2,249       $ (197   $ 26       $ 1,729      $ 3,807   

Non-farm/non-residential

     8,694         (117     7         (618     7,966   

Construction/land development

     9,482         (902     19         (1,602     6,997   

Agricultural

     2,169         (4     0         684        2,849   

Multifamily residential

     1,563         0        0         388        1,951   

Commercial and industrial

     3,645         (77     15         249        3,832   

Consumer

     1,381         (231     66         108        1,324   

Direct financing leases

     1,538         (98     5         153        1,598   

Other

     185         (1     1         (25     160   

Unallocated

     8,218         0        0         434        8,652   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 39,124       $ (1,627   $ 139       $ 1,500      $ 39,136   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Nine months ended September 30, 2011:

            

Real estate:

            

Residential 1-4 family

   $ 2,999       $ (909   $ 40       $ 1,677      $ 3,807   

Non-farm/non-residential

     8,313         (1,020     14         659        7,966   

Construction/land development

     10,565         (4,220     29         623        6,997   

Agricultural

     2,569         (617     0         897        2,849   

Multifamily residential

     1,320         0        0         631        1,951   

Commercial and industrial

     4,142         (1,092     78         704        3,832   

Consumer

     2,051         (657     150         (220     1,324   

Direct financing leases

     1,726         (324     5         191        1,598   

Other

     201         (74     3         30        160   

Unallocated

     6,344         0        0         2,308        8,652   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 40,230       $ (8,913   $ 319       $ 7,500      $ 39,136   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Prior to December 31, 2011, the Company included a reasonable unallocated allowance in its determination of the appropriate level of allowance for loan and lease losses. The primary qualitative factors and conditions used by the Company in its determination of a reasonable unallocated allowance included, among other factors, (1) general economic and business conditions affecting key lending areas, (2) credit quality trends (including trends in nonperforming loans and leases expected to result from existing conditions), (3) trends that could affect collateral values, (4) seasoning of the loan and lease portfolio, (5) specific industry conditions affecting portfolio segments, (6) concentrations of credit to single borrowers or related borrowers or to specific industries, or in specific collateral types in the loan and lease portfolio, including concentrations of credit in commercial real estate, (7) expansion into new markets, (8) the offering of new loan and lease products and (9) expectations regarding the current business cycle. During the fourth quarter of 2011, the Company completed a refinement of its allowance calculation whereby it “allocated” the portion of the allowance that was previously deemed to be unallocated allowance. This refined allowance calculation included specific allowance allocations for certain qualitative factors including (i) concentrations of credit, (ii) general economic and business conditions affecting key lending areas, (iii) expectations regarding the current business cycle and (iv) trends that could affect collateral values. The Company may also consider other qualitative factors in future periods for additional allowance allocations.

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15


Table of Contents

The following table is a summary of the Company’s ALLL and recorded investment in loans and leases, excluding loans covered by FDIC loss share agreements, as of the dates indicated.

 

     Allowance for Loan and Lease Losses      Loans and Leases not Covered
by FDIC Loss Share Agreements
 
     ALLL for
Individually
Evaluated
Impaired
Loans and
Leases
     ALLL for
All Other
Loans and
Leases
     Total
ALLL
     Individually
Evaluated
Impaired
Loans and
Leases
     All Other
Loans and
Leases
     Total Loans
and Leases
 
     (Dollars in thousands)  

September 30, 2012:

                 

Real estate:

                 

Residential 1-4 family

   $ 457       $ 4,470       $ 4,927       $ 3,221       $ 269,507       $ 272,728   

Non-farm/non-residential

     54         9,631         9,685         2,521         794,287         796,808   

Construction/land development

     57         12,183         12,240         321         567,906         568,227   

Agricultural

     256         2,746         3,002         1,096         52,511         53,607   

Multifamily residential

     0         1,663         1,663         0         105,854         105,854   

Commercial and industrial

     693         3,235         3,928         864         127,442         128,306   

Consumer

     1         1,037         1,038         33         32,745         32,778   

Direct financing leases

     0         1,988         1,988         0         65,395         65,395   

Other

     2         199         201         24         9,278         9,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,520       $ 37,152       $ 38,672       $ 8,080       $ 2,024,925       $ 2,033,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                 

Real estate:

                 

Residential 1-4 family (1)

   $ 415       $ 3,433       $ 3,848       $ 3,239       $ 257,234       $ 260,473   

Non-farm/non-residential

     410         11,793         12,203         3,837         704,929         708,766   

Construction/land development

     31         9,447         9,478         3,001         475,105         478,106   

Agricultural

     0         3,383         3,383         737         70,421         71,158   

Multifamily residential

     0         2,564         2,564         0         142,131         142,131   

Commercial and industrial

     868         3,723         4,591         1,390         119,289         120,679   

Consumer

     57         1,152         1,209         87         40,075         40,162   

Direct financing leases

     0         1,632         1,632         0         54,745         54,745   

Other

     2         259         261         11         9,051         9,062   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,783       $ 37,386       $ 39,169       $ 12,302       $ 1,872,980       $ 1,885,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011:

                 

Real estate:

                 

Residential 1-4 family

   $ 91       $ 3,716       $ 3,807       $ 1,511       $ 259,194       $ 260,705   

Non-farm/non-residential

     0         7,966         7,966         782         688,342         689,124   

Construction/land development

     113         6,884         6,997         16,456         420,328         436,784   

Agricultural

     0         2,849         2,849         878         73,257         74,135   

Multifamily residential

     0         1,951         1,951         0         162,807         162,807   

Commercial and industrial

     798         3,034         3,832         921         131,036         131,957   

Consumer

     3         1,321         1,324         33         44,371         44,404   

Direct financing leases

     0         1,598         1,598         0         52,957         52,957   

Other

     3         157         160         17         10,224         10,241   

Unallocated

     0         8,652         8,652         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,008       $ 38,128       $ 39,136       $ 20,598       $ 1,842,516       $ 1,863,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes one individually evaluated loan classified as a troubled debt restructuring at December 31, 2011 totaling $1.0 million with an ALLL of $0.3 million allocated for such loan. This loan was placed on nonaccrual status during the first quarter of 2012 and is included in nonaccrual loans and leases at September 30, 2012.

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16


Table of Contents

The following table is a summary of credit quality indicators for the Company’s total loans and leases, including non-covered loans and leases and covered loans, as of the dates indicated.

 

     Non-covered Loans and Leases      Covered Loans         
     Satisfactory      Moderate      Watch      Substandard      Total
Non-covered
Loans

and Leases
     FV 1      FV 2      Total
Covered
Loans
     Total
Loans
and
Leases
 
     (Dollars in thousands)  

September 30, 2012:

                          

Real estate:

                          

Residential 1-4 family

   $ 264,873       $ 0       $ 1,666       $ 6,189       $ 272,728       $ 162,762       $ 4,125       $ 166,887       $ 439,615   

Non-farm/non-residential

     643,663         102,293         40,412         10,440         796,808         299,494         14,833         314,327         1,111,135   

Construction/land development

     352,146         160,107         40,015         15,959         568,227         105,844         10,840         116,684         684,911   

Agricultural

     27,014         12,886         10,237         3,470         53,607         20,815         73         20,888         74,495   

Multifamily residential

     78,241         23,128         3,701         784         105,854         10,060         869         10,929         116,783   

Commercial and industrial

     90,775         30,654         3,223         3,654         128,306         21,848         47         21,895         150,201   

Consumer

     32,104         0         241         433         32,778         211         0         211         32,989   

Direct financing leases

     63,916         1,454         0         25         65,395         0         0         0         65,395   

Other

     7,476         1,499         253         74         9,302         977         0         977         10,279   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,560,208       $ 332,021       $ 99,748       $ 41,028       $ 2,033,005       $ 622,011       $ 30,787       $ 652,798       $ 2,685,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

  

Real estate:

  

Residential 1-4 family

   $ 256,267       $ 0       $ 2,449       $ 1,757       $ 260,473       $ 202,620       $ 0       $ 202,620       $ 463,093   

Non-farm/non-residential

     541,830         96,341         53,976         16,619         708,766         368,555         1,201         369,756         1,078,522   

Construction/land development

     263,149         164,500         41,741         8,716         478,106         160,737         135         160,872         638,978   

Agricultural

     45,276         11,549         7,328         7,005         71,158         24,104         0         24,104         95,262   

Multifamily residential

     94,049         43,622         3,673         787         142,131         15,376         518         15,894         158,025   

Commercial and industrial

     82,174         30,996         3,093         4,416         120,679         29,749         0         29,749         150,428   

Consumer

     38,851         0         1,032         279         40,162         958         0         958         41,120   

Direct financing leases

     52,329         2,070         26         320         54,745         0         0         0         54,745   

Other

     6,827         1,724         385         126         9,062         2,969         0         2,969         12,031   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,380,752       $ 350,802       $ 113,703       $ 40,025       $ 1,885,282       $ 805,068       $ 1,854       $ 806,922       $ 2,692,204   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011:

                          

Real estate:

                          

Residential 1-4 family

   $ 249,610       $ 0       $ 2,436       $ 8,659       $ 260,705       $ 212,254       $ 0       $ 212,254       $ 472,959   

Non-farm/non-residential

     521,758         97,288         52,404         17,674         689,124         392,415         0         392,415         1,081,539   

Construction/land development

     228,266         165,235         20,263         23,020         436,784         167,103         0         167,103         603,887   

Agricultural

     48,904         10,739         7,492         7,000         74,135         29,373         0         29,373         103,508   

Multifamily residential

     109,628         48,701         3,687         791         162,807         17,674         0         17,674         180,481   

Commercial and industrial

     93,040         32,812         1,594         4,511         131,957         35,031         0         35,031         166,988   

Consumer

     43,218         0         568         618         44,404         829         0         829         45,233   

Direct financing leases

     50,159         2,419         29         350         52,957         0         0         0         52,957   

Other

     7,870         1,816         406         149         10,241         5,746         0         5,746         15,987   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,352,453       $ 359,010       $ 88,879       $ 62,772       $ 1,863,114       $ 860,425       $ 0       $ 860,425       $ 2,723,539   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

The Company’s credit quality indicators consist of an internal grading system used to assign grades to all loans and leases except residential 1-4 family loans, consumer loans and purchased loans including covered loans. The grade for each individual loan or lease is determined by the account officer and other approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing assessment of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by senior management and as part of the Company’s internal loan review process. These risk elements include the following: (1) for non-farm/non-residential, multifamily residential, and agricultural real estate loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan repayment requirements), operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age, condition, value, nature and marketability of the collateral and the specific risks and volatility of income, property value and operating results typical of properties of that type; (2) for construction and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or ability to lease property constructed for lease, the quality and nature of contracts for presale or preleasing, if any, experience and ability of the developer and loan-to-value ratios; (3) for commercial and industrial loans and leases, the operating results of the commercial, industrial or professional enterprise, the borrower’s or lessee’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in the applicable industry and the age, condition, value, nature and marketability of collateral; and (4) for other loans and leases, the operating results, experience and ability of the borrower or lessee, historical and expected market conditions and the age, condition, value, nature and marketability of collateral. In addition, for each category the Company considers secondary sources of income and the financial strength of the borrower or lessee and any guarantors. The following categories of credit quality indicators are used by the Company.

Satisfactory – Loans and leases in this category are considered to be a satisfactory credit risk and are generally considered to be collectible in full.

Moderate – Loans and leases in this category are considered to be a marginally satisfactory credit risk and are generally considered to be collectible in full.

Watch – Loans and leases in this category are presently protected from apparent loss, however weaknesses exist which could cause future impairment of repayment of principal or interest.

Substandard – Loans and leases in this category are characterized by deterioration in quality exhibited by a number of weaknesses requiring corrective action and posing risk of some loss.

The Company does not risk rate its residential 1-4 family loans, its consumer loans, and certain “other” loans. However, for purposes of the above credit quality tables, the Company considers such loans to be (i) satisfactory – if they are performing and less than 30 days past due, (ii) watch – if they are performing and 30 to 89 days past due or (iii) substandard – if they are nonperforming or 90 days or more past due.

For purchased loans, including covered loans, management separately monitors this portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. To the extent that a loan is performing in accordance with or exceeding management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 1, is not included in any of the Company’s credit quality ratios, is not considered to be an impaired loan and is not considered in the determination of the required allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 2, is included in certain of the Company’s credit quality metrics, is generally considered an impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. At September 30, 2012 and 2011 and at December 31, 2011, the Company had no allowance for its covered loans because all identified losses had been charged off on covered loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

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Table of Contents

The following table is a summary of impaired loans and leases, excluding loans covered by FDIC loss share agreements, as of September 30, 2012 and for the three months and nine months ended September 30, 2012.

 

     Principal
Balance
     Net
Charge-offs
to Date
     Principal
Balance,

Net of
Charge-offs
     Specific
Allowance
     Weighted
Average
Carrying
Value - Three
Months Ended

September 30,
2012
     Weighted
Average Carrying
Value - Nine
Months Ended

September 30, 2012
 
     (Dollars in thousands)  

September 30, 2012:

                 

Impaired loans and leases for which there is a related ALLL:

                 

Real estate:

                 

Residential 1-4 family

   $ 3,307       $ 1,683       $ 1,624       $ 457       $ 1,684       $ 1,606   

Non-farm/non-residential

     211         7         204         54         231         245   

Construction/land development

     139         38         101         57         50         34   

Agricultural

     618         176         442         256         262         202   

Commercial and industrial(1)

     2,045         1,426         619         693         605         640   

Consumer

     953         950         3         1         3         10   

Other

     305         295         10         2         38         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with a related ALLL

     7,578         4,575         3,003         1,520         2,873         2,766   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans and leases for which there is not a related ALLL:

                 

Real estate:

                 

Residential 1-4 family

     1,802         205         1,597         0         1,725         1,882   

Non-farm/non-residential

     2,322         5         2,317         0         2,232         2,344   

Construction/land development

     342         122         220         0         400         636   

Agricultural

     972         318         654         0         390         357   

Multifamily residential

     161         161         0         0         0         0   

Commercial and industrial

     285         40         245         0         294         502   

Consumer

     549         519         30         0         30         31   

Other

     14         0         14         0         15         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without a related ALLL

     6,447         1,370         5,077         0         5,086         5,765   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 14,025       $ 5,945       $ 8,080       $ 1,520       $ 7,959       $ 8,531   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $104,000 of specific allowance related to the unfunded portion of an unexpired letter of credit for a previous customer of the Bank.

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Table of Contents

The following table is a summary of impaired loans and leases, excluding loans covered by FDIC loss share agreements, as of December 31, 2011 and for the year ended December 31, 2011.

 

     Principal
Balance
     Net
Charge-offs
to Date
    Principal
Balance,

Net of
Charge-offs
     Specific
Allowance
     Weighted
Average
Carrying  Value

– Year Ended
December 31,
2011
 
     (Dollars in thousands)  

December 31, 2011:

             

Impaired loans and leases for which there is a related ALLL:

             

Real estate:

             

Residential 1-4 family

   $ 3,200       $ (1,675   $ 1,525       $ 415       $ 504   

Non-farm/non-residential

     2,931         (146     2,785         410         1,173   

Construction/land development

     238         (90     148         31         882   

Agricultural

     9         (9     0         0         575   

Commercial and industrial(1)

     3,071         (1,775     1,296         868         844   

Consumer

     101         (28     73         57         81   

Other

     46         (35     11         2         30   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with a related ALLL

     9,596         (3,758     5,838         1,783         4,089   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Impaired loans and leases for which there is not a related ALLL:

             

Real estate:

             

Residential 1-4 family

     2,121         (407     1,714         0         1,239   

Non-farm/non-residential

     1,159         (107     1,052         0         1,633   

Construction/land development

     6,254         (3,401     2,853         0         5,833   

Agricultural

     842         (105     737         0         1,000   

Multifamily residential

     133         (133     0         0         15   

Commercial and industrial

     294         (200     94         0         194   

Consumer

     47         (33     14         0         15   

Other

     0         0        0         0         5   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without a related ALLL

     10,850         (4,386     6,464         0         9,934   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 20,446       $ (8,144   $ 12,302       $ 1,783       $ 14,023   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Includes $155,000 of specific allowance related to the unfunded portion of an unexpired letter of credit for a previous customer of the Bank.

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Table of Contents

The following table is a summary of impaired loans and leases, excluding loans covered by FDIC loss share agreements, as of September 30, 2011 and for the three months and nine months ended September 30, 2011.

 

     Principal
Balance
     Net
Charge-offs
to Date
    Principal
Balance,

Net of
Charge-offs
     Specific
Allowance
     Weighted
Average Carrying
Value - Three
Months Ended

September 30, 2011
     Weighted
Average Carrying
Value - Nine
Months Ended

September 30, 2011
 
     (Dollars in thousands)  

September 30, 2011:

                

Impaired loans and leases for which there is a related ALLL:

                

Real estate:

                

Residential 1-4 family

   $ 424       $ (101   $ 323       $ 91       $ 211       $ 256   

Non-farm/non-residential

     308         (132     176         1         176         879   

Construction/land development

     3,814         (1,876     1,938         113         1,011         840   

Agricultural

     9         (9     —           0         286         558   

Commercial and industrial(1)

     1,693         (931     762         798         754         740   

Consumer

     89         (70     19         3         44         63   

Other

     39         (22     17         2         17         17   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with a related ALLL

     6,376         (3,141     3,235         1,008         2,499         3,353   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans and leases for which there is not a related ALLL:

                

Real estate:

                

Residential 1-4 family

     1,463         (274     1,189         0         1,461         1,252   

Non-farm/non-residential

     728         (122     606         0         1,714         1,487   

Construction/land development

     19,680         (5,163     14,517         0         9,955         7,990   

Agricultural

     933         (55     878         0         972         1,004   

Multifamily residential

     133         (133     0         0         0         26   

Commercial and industrial

     372         (213     159         0         217         211   

Consumer

     47         (33     14         0         7         7   

Other

     0         0        0         0         0         0   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without a related ALLL

     23,356         (5,993     17,363         0         14,326         11,977   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 29,732       $ (9,134   $ 20,598       $ 1,008       $ 16,825       $ 15,330   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $166,775 of specific allowance related to the unfunded portion of an unexpired letter of credit for a previous customer of the Bank.

Management has determined that certain of the Company’s impaired loans and leases do not require any specific allowance at September 30, 2012 and 2011 or at December 31, 2011 because (i) management’s analysis of such individual loans and leases resulted in no impairment or (ii) all identified impairment on such loans and leases has previously been charged off.

Interest income on impaired loans and leases, excluding loans covered by FDIC loss share agreements, is recognized on a cash basis when and if actually collected. Total interest income recognized on impaired loans and leases not covered by FDIC loss share agreements for the three months and nine months ended September 30, 2012 and 2011 and for the year ended December 31, 2011 was not material.

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Table of Contents

The following table is an aging analysis of past due loans and leases, excluding loans covered by FDIC loss share agreements, as of the dates indicated.

 

     30-89 Days
Past Due  (1)
     90 Days
or More (2)
     Total
Past Due
     Current (3)      Total Loans
and Leases
 
     (Dollars in thousands)  

September 30, 2012:

              

Real estate:

              

Residential 1-4 family

   $ 2,533       $ 1,624       $ 4,157       $ 268,571       $ 272,728   

Non-farm/non-residential

     2,959         2,043         5,002         791,806         796,808   

Construction/land development

     698         108         806         567,421         568,227   

Agricultural

     944         335         1,279         52,328         53,607   

Multifamily residential

     0         0         0         105,854         105,854   

Commercial and industrial

     500         281         781         127,525         128,306   

Consumer

     311         164         475         32,303         32,778   

Direct financing leases

     0         25         25         65,370         65,395   

Other

     26         0         26         9,276         9,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,971       $ 4,580       $ 12,551       $ 2,020,454       $ 2,033,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

              

Real estate:

              

Residential 1-4 family

   $ 2,449       $ 1,757       $ 4,206       $ 256,267       $ 260,473   

Non-farm/non-residential

     3,448         3,448         6,896         701,870         708,766   

Construction/land development

     10,453         2,827         13,280         464,826         478,106   

Agricultural

     275         727         1,002         70,156         71,158   

Multifamily residential

     319         0         319         141,812         142,131   

Commercial and industrial

     1,477         469         1,946         118,733         120,679   

Consumer

     1,032         279         1,311         38,851         40,162   

Direct financing leases

     42         277         319         54,426         54,745   

Other

     79         0         79         8,983         9,062   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,574       $ 9,784       $ 29,358       $ 1,855,924       $ 1,885,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011:

              

Real estate:

              

Residential 1-4 family

   $ 2,900       $ 1,111       $ 4,011       $ 256,694       $ 260,705   

Non-farm/non-residential

     4,551         782         5,333         683,791         689,124   

Construction/land development

     5,285         16,187         21,472         415,312         436,784   

Agricultural

     61         878         939         73,196         74,135   

Multifamily residential

     0         0         0         162,807         162,807   

Commercial and industrial

     1,796         317         2,113         129,844         131,957   

Consumer

     667         249         916         43,488         44,404   

Direct financing leases

     21         335         356         52,601         52,957   

Other

     60         0         60         10,181         10,241   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,341       $ 19,859       $ 35,200       $ 1,827,914       $ 1,863,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $1.0 million at September 30, 2012, December 31, 2011 and September 30, 2011 of non-covered loans and leases on nonaccrual status.
(2) All non-covered loans and leases greater than 90 days past due were on nonaccrual status at September 30, 2012 and 2011 and December 31, 2011.
(3) Includes $3.2 million, $1.4 million and $2.0 million of non-covered loans and leases on nonaccrual status at September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

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22


Table of Contents

The following table is an aging analysis of past due loans covered by FDIC loss share agreements as of the dates indicated.

 

     30-89 Days
Past Due
     90 Days
or More
     Total
Past Due
     Current      Total
Covered
Loans
 
     (Dollars in thousands)  

September 30, 2012:

              

Real estate:

              

Residential 1-4 family

   $ 9,379       $ 22,470       $ 31,849       $ 135,038       $ 166,887   

Non-farm/non-residential

     13,776         51,407         65,183         249,144         314,327   

Construction/land development

     4,497         48,161         52,658         64,026         116,684   

Agricultural

     1,292         3,921         5,213         15,675         20,888   

Multifamily residential

     0         3,489         3,489         7,440         10,929   

Commercial and industrial

     1,321         3,105         4,426         17,469         21,895   

Consumer

     0         0         0         211         211   

Other

     0         0         0         977         977   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,265       $ 132,553       $ 162,818       $ 489,980       $ 652,798   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

              

Real estate:

              

Residential 1-4 family

   $ 12,013       $ 34,075       $ 46,088       $ 156,532       $ 202,620   

Non-farm/non-residential

     26,023         71,898         97,921         271,835         369,756   

Construction/land development

     15,335         54,165         69,500         91,372         160,872   

Agricultural

     3,111         4,390         7,501         16,603         24,104   

Multifamily residential

     288         4,208         4,496         11,398         15,894   

Commercial and industrial

     795         4,390         5,185         24,564         29,749   

Consumer

     246         14         260         698         958   

Other

     14         133         147         2,822         2,969   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,825       $ 173,273       $ 231,098       $ 575,824       $ 806,922   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011:

              

Real estate:

              

Residential 1-4 family

   $ 12,704       $ 30,897       $ 43,601       $ 168,653       $ 212,254   

Non-farm/non-residential

     28,783         59,122         87,905         304,510         392,415   

Construction/land development

     10,177         59,078         69,255         97,848         167,103   

Agricultural

     735         5,732         6,467         22,906         29,373   

Multifamily residential

     880         3,279         4,159         13,515         17,674   

Commercial and industrial

     1,230         4,710         5,940         29,091         35,031   

Consumer

     54         22         76         753         829   

Other

     0         40         40         5,706         5,746   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,563       $ 162,880       $ 217,443       $ 642,982       $ 860,425   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2012 and 2011 and December 31, 2011, a significant portion of the Company’s covered loans were contractually past due, including many that were 90 days or more past due. However, the elevated level of delinquencies of covered loans at the dates of acquisition was considered in the Company’s performance expectations used in its determination of the Day 1 Fair Values for all covered loans. Accordingly, all covered loans continue to accrete interest income and all covered loans rated FV 1 continue to perform in accordance with management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

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Table of Contents
7. Foreclosed Assets Not Covered by FDIC Loss Share Agreements

The following table is a summary of the amount and type of foreclosed assets not covered by FDIC loss share agreements as of the dates indicated.

 

     September 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Real estate:

     

Residential 1-4 family

   $ 1,505       $ 1,078   

Non-farm/non-residential

     3,468         2,857   

Construction/land development

     8,564         27,675   

Agricultural

     160         0   
  

 

 

    

 

 

 

Total real estate

     13,697         31,610   

Commercial and industrial

     91         145   

Consumer

     40         7   
  

 

 

    

 

 

 

Foreclosed assets not covered by FDIC loss share agreements

   $ 13,828       $ 31,762   
  

 

 

    

 

 

 

The following table is a summary of activity within foreclosed assets not covered by FDIC loss share agreements for the periods indicated.

 

     Nine Months Ended
September 30,
 
     2012     2011  
     (Dollars in thousands)  

Balance – beginning of period

   $ 31,762      $ 42,216   

Loans transferred into foreclosed assets

     7,021        8,613   

Sales of foreclosed assets

     (23,773     (7,729

Writedowns of foreclosed assets

     (1,182     (8,877

Foreclosed assets acquired in acquisitions

     0        115   
  

 

 

   

 

 

 

Balance – end of period

   $ 13,828      $ 34,338   
  

 

 

   

 

 

 

 

8. Supplemental Data for Cash Flows

The following table provides supplemental cash flow information for the periods indicated.

 

     Nine Months Ended
September 30,
 
     2012      2011  
     (Dollars in thousands)  

Cash paid during the period for:

     

Interest

   $ 17,400       $ 25,777   

Taxes

     39,478         12,656   

Supplemental schedule of non-cash investing and financing activities:

     

Net change in unrealized gains/losses on investment securities AFS

     5,978         13,323   

Loans transferred to foreclosed assets not covered by FDIC loss share agreements

     7,021         8,613   

Loans advanced for sales of foreclosed assets not covered by FDIC loss share agreements

     12,710         482   

Covered loans transferred to foreclosed assets covered by FDIC loss share agreements

     21,808         20,665   

Unsettled AFS investment security purchases

     12,771         0   

 

9. 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, 2012 was $19.2 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at September 30, 2012 totaled $19.0 million.

At September 30, 2012 the Company had outstanding commitments to extend credit totaling $697 million. These commitments extend over varying periods of time with the majority expected to be disbursed within the next 24 months.

 

24


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10. Stock-Based Compensation

The Company has a nonqualified stock option plan for certain employees of the Company. This plan provides for the granting of nonqualified options to purchase shares of common stock in the Company. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under this plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. While the vesting period and the termination date for the employee plan options are determined when options are granted, all such employee options outstanding at September 30, 2012 were issued with a vesting date three years after issuance and an expiration date 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. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. These options are exercisable immediately and expire ten years after issuance.

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

The following table summarizes stock option activity for both the employee and non-employee director stock option plans for the nine months ended September 30, 2012.

 

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

Value
(in thousands)(1)
 

Outstanding – January 1, 2012

    991,100      $ 17.45       

Granted

    11,000        30.36       

Exercised

    (200,700     15.55       

Forfeited

    (23,800     19.18       
 

 

 

       

Outstanding – September 30, 2012

    777,600        18.07        4.5      $ 12,754 (1) 
 

 

 

   

 

 

   

 

 

   

 

 

 

Fully vested and exercisable –September 30, 2012

    281,400      $ 15.68        3.3      $ 5,286 (1) 
   

 

 

   

 

 

   

 

 

 

Expected to vest in future periods

    411,795         
 

 

 

       

Fully vested and expected to vest – September 30, 2012(2)

    693,195      $ 17.84        4.4      $ 11,527 (1) 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Based on closing price of $34.47 per share on September 28, 2012.
(2) At September 30, 2012 the Company estimates that outstanding options to purchase 84,405 shares of its common stock will not vest and will be forfeited prior to their vesting date.

Intrinsic value for stock options is defined as the amount by which the current market price of the underlying stock exceeds the exercise price. For those stock options where the exercise price exceeds the current market price of the underlying stock, the intrinsic value is zero. The total intrinsic value of options exercised during the nine months ended September 30, 2012 and 2011 was $3.1 million and $1.2 million, respectively.

Options to purchase 11,000 shares and 19,800 shares of the Company’s common stock were issued during the nine months ended September 30, 2012 and 2011, respectively. Stock-based compensation expense for stock options included in non-interest expense was $0.2 million and $0.1 million for the quarters ended September 30, 2012 and 2011, respectively and $0.8 million and $0.6 million for the nine-month periods ended September 30, 2012 and 2011, respectively. Total unrecognized compensation cost related to non-vested stock option grants was $1.2 million at September 30, 2012 and is expected to be recognized over a weighted-average period of 1.8 years.

The Company has a restricted stock plan that permits issuance of up to 400,000 shares of restricted stock or restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock 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. All restricted stock awards outstanding at September 30, 2012 were issued with a vesting date of three years after issuance.

 

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The following table summarizes non-vested restricted stock activity for the period indicated.

 

     Nine Months Ended
September 30, 2012
 

Outstanding – January 1, 2012

     201,900   

Granted

     0   

Forfeited

     0   

Vested

     0   
  

 

 

 

Outstanding – September 30, 2012

     201,900   
  

 

 

 

Weighted-average grant date fair value

   $ 20.02   
  

 

 

 

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (generally three years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in non-interest expense was $0.3 million and $0.1 million for the quarters ended September 30, 2012 and 2011, respectively, and $1.0 million and $0.4 million for the nine months ended September 30, 2012 and 2011, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $2.0 million at September 30, 2012 and is expected to be recognized over a weighted-average period of 1.8 years.

 

11. Fair Value Measurements

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

The Company applies the following fair value hierarchy.

 

Level 1 –   Quoted prices for identical instruments in active markets.
Level 2 –   Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.
Level 3 –   Instruments whose inputs are unobservable.

 

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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, 2012:

  

Assets:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ 0       $ 326,396       $ 23,142       $ 349,538   

U.S. Government agency residential mortgage-backed securities

     0         65,944         0         65,944   

Corporate bonds

     0         777         0         777   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     0         393,117         23,142         416,259   

Impaired non-covered loans and leases

     0         0         6,560         6,560   

Impaired covered loans

     0         0         31,002         31,002   

Foreclosed assets not covered by FDIC loss share agreements

     0         0         13,828         13,828   

Foreclosed assets covered by FDIC loss share agreements

     0         0         57,632         57,632   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0       $ 393,117       $ 132,164       $ 525,281   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Assets:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ 0       $ 348,855       $ 24,192       $ 373,047   

U.S. Government agency residential mortgage-backed securities

     0         48,035         0         48,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     0         396,890         24,192         421,082   

Impaired non-covered loans and leases

     0         0         10,519         10,519   

Impaired covered loans

     0         0         1,854         1,854   

Foreclosed assets not covered by FDIC loss share agreements

     0         0         31,762         31,762   

Foreclosed assets covered by FDIC loss share agreements

     0         0         72,907         72,907   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0       $ 396,890       $ 141,234       $ 538,124   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011:

           

Assets:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ 0       $ 349,853       $ 18,914       $ 368,767   

U.S. Government agency residential mortgage-backed securities

     0         50,518         0         50,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     0         400,371         18,914         419,285   

Impaired non-covered loans and leases

     0         0         19,590         19,590   

Foreclosed assets not covered by FDIC loss share agreements

     0         0         34,338         34,338   

Foreclosed assets covered by FDIC loss share agreements

     0         0         72,740         72,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0       $ 400,371       $ 145,582       $ 545,953   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not include $13.7 million at September 30, 2012; $17.8 million at December 31, 2011 and $20.3 million at September 30, 2011 of FHLB – Dallas, FHLB – Atlanta 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 are accounted for at fair value.

Investment securities – The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest rate tables and pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. All fair value estimates received by the Company for its investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

 

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The Company has determined that certain of its investment securities had a limited to non-existent trading market at September 30, 2012. As a result, the Company considers these investments as Level 3 in the fair value hierarchy. Specifically, the fair values of certain obligations of state and political subdivisions consisting primarily of certain unrated private placement bonds (the “private placement bonds”) in the amount of $23.1 million at September 30, 2012 were calculated using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active”. This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades for the private placement bonds. The private placement bonds are generally prepayable at par value at the option of the issuer. As a result, management believes the private placement bonds should be individually valued at the lower of (i) the matrix pricing provided by the Company’s third party pricing services for comparable unrated municipal securities or (ii) par value. At September 30, 2012, the third parties’ pricing matrices valued the Company’s portfolio of private placement bonds at $23.9 million which exceeded the aggregate of the lower of the matrix pricing or par value of the private placement bonds by $0.8 million. Accordingly, at September 30, 2012 the Company reported the private placement bonds at $23.1 million which was the lower of the matrix pricing or par value.

Impaired non-covered 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 selling costs, or the estimated discounted cash flows for such loan or lease. At September 30, 2012 the Company had reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $7.5 million to the estimated fair value of $6.5 million for such loans and leases. The $7.5 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $6.0 million of partial charge-offs and $1.5 million of specific loan and lease loss allocations.

Impaired covered loans – Impaired covered loans are measured at fair value on a non-recurring basis. In determining such fair value, management considers a number of factors including, among other things, the remaining life of the loan, estimated collateral value, estimated holding period and net present value of cash flows expected to be received. As a result, impaired covered loans include both a non-accretable difference (the credit component of the impaired loan) and an accretable difference (the yield component of the impaired loan). The accretable difference is the difference between the expected cash flows and the net present value of expected cash flows and is accreted into earnings using the effective yield method. In determining the net present value of expected cash flows, the Company uses discount rates ranging from 6.0% to 9.5% per annum. As of September 30, 2012, the Company identified purchased loans covered by FDIC loss share agreements acquired in its FDIC-assisted acquisitions where the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $1.7 million for such loans during the third quarter of 2012 and $5.2 million for such loans during the first nine months of 2012 (none during the third quarter or first nine months of 2011). The Company also recorded provision for loan and lease losses of $1.7 million during the third quarter of 2012 and $5.2 million during the first nine months of 2012 (none during the third quarter or first nine months of 2011) to cover such charge-offs. As a result, the Company had $31.0 million of impaired covered loans at September 30, 2012 (none at September 30, 2011).

Foreclosed assets not covered by FDIC loss share agreements – Repossessed personal properties and real estate acquired through or in lieu of foreclosure are measured on a non-recurring basis and are initially recorded at the lesser of current principal investment or fair value less estimated cost to sell (generally 8% to 10%) at the date of repossession or foreclosure. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of foreclosed assets are generally based on third party appraisals, broker price opinions or other valuations of the property, resulting in a Level 3 classification.

Foreclosed assets covered by FDIC loss share agreements – Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are recorded at estimated fair value on the date of acquisition. In estimating the fair value of covered foreclosed assets, management considers a number of factors including, among others, appraised value, estimating holding periods, net present value of cash flows expected to be received, and estimated selling costs. A discount rate ranging from 8.0% to 9.5% per annum was used to determine the net present value of covered foreclosed assets. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted to the then estimated fair value net of estimated selling costs, if lower, until disposition.

 

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

 

     Investment
Securities AFS
 
     (Dollars in thousands)  

Balance – January 1, 2012

   $ 24,192   

Total realized gains (losses) included in earnings

     0   

Total unrealized gains (losses) included in comprehensive income

     363   

Sales, maturities and calls

     (1,413

Transfers in and/or out of Level 3

     0   
  

 

 

 

Balance – September 30, 2012

   $ 23,142   
  

 

 

 

Balance – January 1, 2011

   $ 20,036   

Total realized gains (losses) included in earnings

     0   

Total unrealized gains (losses) included in comprehensive income

     (1,122

Sales, maturities and calls

     0   

Transfers in and/or out of Level 3

     0   
  

 

 

 

Balance – September 30, 2011

   $ 18,914   
  

 

 

 

The following table presents information related to Level 3 non-recurring fair value measurements at September 30, 2012.

 

Description

   Fair Values at
September 30, 2012
    

Technique

  

Unobservable Inputs

(Dollars in thousands)
Impaired loans    $ 6,560      

Third party appraisal

or discounted cash

flows

  

1. Management discount based on underlying collateral characteristics and market conditions

2. Life of loan

Impaired loans covered

by FDIC loss share

agreements

   $ 31,002      

Third party appraisal

and/or discounted

cash flows

  

1. Estimated holding period

2. Life of loan

Foreclosed assets    $ 13,828      

Third party

appraisals, broker

price opinions and/or

discounted cash flows

  

1. Management discount based on collateral characteristics and market conditions

2. Discount rate

3. Holding period

Foreclosed assets

covered by FDIC loss

share agreements

   $ 57,632      

Third party appraisals

and/or discounted

cash flows

  

1. Discount rate

2. Holding period

 

12. Fair Value of Financial Instruments

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

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

Investment securities – The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. All fair value estimates received by the Company for its investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer. The Company’s investments in the common stock of the FHLB – Dallas, FHLB – Atlanta and FNBB totaling $13.7 million at September 30, 2012, $17.8 million at December 31, 2011 and $20.3 million at September 30, 2011 do not have readily determinable fair values and are carried at cost.

 

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

FDIC loss share receivable – The fair value of the FDIC loss share receivable is based on the net present value of future cash proceeds expected to be received from the FDIC under the provisions of the loss share agreements using a discount rate that is based on current market rates.

Deposit liabilities – The fair value of demand deposits, savings accounts, money market deposits and other transaction accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity time deposits is estimated using the rate currently available for deposits of similar remaining maturities.

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

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

Subordinated debentures – The fair values of these instruments are based primarily upon discounted cash flows using rates for securities with similar terms and remaining maturities.

Off-balance sheet instruments The fair values of commercial loan commitments and letters of credit were not material at September 30, 2012 and 2011 or at December 31, 2011 and are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements.

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 represent values at which the respective financial instruments could be sold individually or in the aggregate.

The following table presents the estimated fair values for the dates indicated and the fair value hierarchy of the Company’s financial instruments.

 

          September 30,         
          2012      2011      December 31, 2011  
     Fair
Value
Hierarchy
   Carrying
Amount
     Estimated
Fair

Value
     Carrying
Amount
     Estimated
Fair

Value
     Carrying
Amount
     Estimated
Fair

Value
 
          (Dollars in thousands)  

Financial assets:

                    

Cash and cash equivalents

   Level 1    $ 126,642       $ 126,642       $ 69,497       $ 69,497       $ 58,927       $ 58,927   

Investment securities AFS

   Levels 2 and 3      429,935         429,935         439,596         439,596         438,910         438,910   

Loans and leases, net of ALLL

   Level 3      2,647,131         2,637,527         2,684,403         2,675,269         2,653,035         2,636,254   

FDIC loss share receivable

   Level 3      174,899         174,804         324,456         323,936         279,045         279,226   

Financial liabilities:

                    

Demand, savings and interest bearing transaction deposits

   Level 1    $ 2,114,375       $ 2,114,375       $ 2,076,570       $ 2,076,570       $ 2,025,663       $ 2,025,663   

Time deposits

   Level 2      777,360         785,026         969,899         978,442         918,256         925,754   

Repurchase agreements with customers

   Level 1      32,511         32,511         46,334         46,334         32,810         32,810   

Other borrowings

   Level 2      280,771         331,784         289,353         351,403         301,847         361,373   

Subordinated debentures

   Level 2      64,950         30,511         64,950         30,036         64,950         30,663   

 

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13. Recent Accounting Pronouncements

In September 2012, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached a final consensus for a proposed accounting standards update on accounting for business combinations. This update, Accounting Standards Update (“ASU”) No. 2012-06 “Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution,” was issued to address diversity in practice about how to subsequently measure an indemnification asset for a government-assisted acquisition that includes a loss-sharing agreement. Specifically, this proposed accounting standards update would require a reporting entity to account for a change in the subsequent measurement of the indemnification asset on the same basis as the changes in the asset subject to indemnification. As a result, for any change in expected cash flows of an indemnified asset that is immediately recognized in earnings, the associated change in the indemnification asset would also be immediately recognized in earnings. For any change in expected cash flows of an indemnified asset that is amortized or accreted into earnings over time, the associated change in the indemnification asset would also be accreted or amortized into earnings over the shorter of the contractual term of the indemnification agreement or the remaining life of the indemnified asset. The provisions of ASU 2012-06 will be applied prospectively. Management does not expect that the provisions of ASU 2012-06 will have a material change on the accounting for its loss share receivable from the FDIC under its various loss share agreements.

In July 2012, the FASB issued ASU No. 2012-02 “Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite—Lived Intangible Assets for Impairment” that amends the guidance related to testing indefinite-lived intangible assets, other than goodwill, for impairment. The provisions of ASU 2012-02 allow for a qualitative assessment in testing an indefinite-lived intangible asset for impairment before calculating the fair value of the asset. If the qualitative assessment determines that it is more likely than not that the asset is impaired, then a quantitative assessment of the fair value of the asset is required; otherwise, the quantitative calculation is not necessary. The provisions of ASU 2012-02 are effective January 1, 2013; however, early adoption is permitted. The Company does not expect that the provisions of ASU 2012-02 will have a material impact on its financial position, results of operation, or liquidity.

 

14. Subsequent Event

On October 4, 2012, the Board of Directors approved and the Company executed a definitive agreement and plan of merger (the “Agreement”) with Genala Banc, Inc. (“Genala”) whereby Genala will be merged into the Company in a transaction valued at approximately $27.3 million. Genala is the holding Company for The Citizens Bank, which operates one banking office in Geneva, Alabama. As of September 30, 2012, The Citizens Bank had approximately $167 million of total assets, $45 million of loans and $137 million of deposits.

Under the terms of the Agreement, the Company will issue shares of its common stock valued at approximately $13.9 million plus approximately $13.4 million in cash for all outstanding shares of Genala common stock, subject to certain conditions and potential adjustments. Simultaneous with the closing of the transaction, Genala will merge into the Company, and The Citizens Bank will merge into the Bank. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and the approval of the shareholders of Genala. The transaction is expected to close in late December 2012 or during the first quarter of 2013.

(The remainder of this page intentionally left blank)

 

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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 $19.3 million for the third quarter of 2012, a 2.0% increase from $18.9 million for the third quarter of 2011. Diluted earnings per common share were $0.55 for both the third quarter of 2012 and the third quarter of 2011. For the first nine months of 2012, net income available to common stockholders was $56.4 million, a 32.7% decrease from $83.8 million for the first nine months of 2011. Diluted earnings per common share for the first nine months of 2012 were $1.62, a 33.3% decrease from $2.43 for the first nine months of 2011.

The Company made no Federal Deposit Insurance Corporation (“FDIC”)-assisted acquisitions during the first nine months of 2012, and its results for the third quarter and first nine months of 2012 did not include any bargain purchase gains or any acquisition or conversion costs related to its seven previous FDIC-assisted acquisitions. The Company’s results for the first nine months of 2011 included three FDIC-assisted acquisitions which resulted in a gain, net of acquisition and conversion costs, of approximately $36.6 million after taxes, or approximately $1.06 of diluted earnings per common share.

On August 16, 2011 the Company completed a 2-for-1 stock split, in the form of a stock dividend, effected by issuing one share of common stock for each share of such stock outstanding on August 5, 2011. All share and per share information in this Management’s Discussion and Analysis has been adjusted to give effect to this stock split.

The Company’s annualized return on average assets was 2.05% for the third quarter of 2012 compared to 1.91% for the third quarter of 2011. Its annualized return on average common stockholders’ equity was 16.40% for the third quarter of 2012 compared to 18.97% for the third quarter of 2011. The Company’s annualized return on average assets was 2.00% for the first nine months of 2012 compared to 3.01% for the first nine months of 2011. Its annualized return on average common stockholders’ equity was 16.73% for the first nine months of 2012 compared to 31.01% for the first nine months of 2011.

Total assets were $3.82 billion at September 30, 2012 compared to $3.84 billion at December 31, 2011. Loans and leases, excluding those covered by FDIC loss share agreements, were $2.03 billion at September 30, 2012 compared to $1.89 billion at December 31, 2011. Total loans and leases, including loans covered by FDIC loss share agreements (“covered loans”), were $2.69 billion at both September 30, 2012 and December 31, 2011. Deposits were $2.89 billion at September 30, 2012 compared to $2.94 billion at December 31, 2011.

Common stockholders’ equity was $477.9 million at September 30, 2012 compared to $424.6 million at December 31, 2011. Book value per common share was $13.78 at September 30, 2012 compared to $12.32 at December 31, 2011. Tangible book value per common share, which is calculated by dividing total common stockholders’ equity less intangible assets, by total common shares outstanding, was $13.48 at September 30, 2012 compared to $12.06 at December 31, 2011. Changes in common stockholders’ equity, book value per common share and tangible book value per common share reflect earnings, dividends paid, stock option and stock grant transactions, changes in unrealized gains and losses on investment securities available for sale (“AFS”), and, for tangible book value per common share, changes in intangible assets.

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, covered loans and investments, and the interest expense incurred on interest bearing liabilities, such as deposits, borrowings and subordinated debentures. The Company also generates non-interest income, including service charges on deposit accounts, mortgage lending income, trust income, bank owned life insurance (“BOLI”) income, accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable, other loss share income, gains on investment securities and from sales of other assets, and gains on FDIC-assisted acquisitions.

The Company’s non-interest expense consists of salaries and employee 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 months and nine months ended September 30, 2012 and 2011 and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report.

 

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Net Interest Income

Net interest income is analyzed in this 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 $2.1 million and $2.3 million for the quarters ended September 30, 2012 and 2011, respectively, and $6.5 million and $6.8 million for the nine months ended September 30, 2012 and 2011, respectively. 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 2012 decreased 0.1% to $46.5 million compared to $46.6 million for the third quarter of 2011. Net interest income for the nine months ended September 30, 2012 increased 5.7% to $137.1 million compared to $129.7 million for the nine months ended September 30, 2011. Net interest margin was 5.97% for the third quarter and 5.93% for the first nine months of 2012 compared to 5.90% for the third quarter and 5.77% for the first nine months of 2011. The 0.1% decrease in net interest income for the third quarter of 2012 compared to the third quarter of 2011 was primarily due to a decrease in average earning assets from $3.13 billion for the third quarter of 2011 to $3.10 billion for the third quarter of 2012, almost fully offset by an increase in net interest margin, which increased seven basis points (“bps”). The increase in net interest income for the first nine months of 2012 compared to the first nine months of 2011 was a result of the increase in average earning assets from $3.01 billion for the first nine months of 2011 to $3.09 billion for the first nine months of 2012 and the improvement in net interest margin, which increased 20 bps in the first nine months of 2012 compared to the first nine months of 2011.

The Company’s seven bps improvement in net interest margin for the third quarter of 2012 compared to the same period in 2011 was primarily due to a reduction in the ratio of average interest bearing liabilities to average earning assets and a 25 bps reduction in rates paid on interest bearing liabilities, which combined to more than offset the 23 bps decrease in yields on average earning assets. The Company’s 16 bps improvement in net interest margin for the first nine months of 2012 compared to the same period in 2011 was primarily due to a reduction in the ratio of average interest bearing liabilities to average earning assets and a 29 bps reduction in rates paid on interest bearing liabilities, which were partially offset by an 18 bps decrease in yields on average earning assets.

Yields on earning assets decreased 23 bps to 6.62% for the third quarter of 2012 and decreased 18 bps to 6.65% for the first nine months of 2012 compared to 6.85% for the third quarter of 2011 and 6.83% for the first nine months of 2011. The yield on the Company’s portfolio of non-covered loans decreased 28 bps for both the third quarter and for the first nine months of 2012 compared to the same periods in 2011. The yield on covered loans and leases increased 39 bps for the third quarter and four bps for the first nine months of 2012 compared to the same periods in 2011. The yield on the Company’s aggregate investment securities portfolio increased 11 bps for the third quarter and six bps for the first nine months of 2012 compared to the same periods in 2011.

The decline in rates on average interest bearing liabilities was primarily due to the declines in rates on interest bearing deposits, the largest component of the Company’s interest bearing liabilities. Rates on interest bearing deposits decreased 32 bps for the third quarter and 36 bps for the first nine months of 2012 compared to the same periods in 2011. This decrease in the rate on interest bearing deposits was principally due to (i) a change in mix of the Company’s interest bearing deposits due to growth in the volume of savings and interest bearing transaction accounts resulting in an increase in the average balance of these deposits to 67.4% of total average interest bearing deposits for the third quarter and 65.7% for the first nine months of 2012 compared to 61.2% for the third quarter and 59.3% for the first nine months of 2011 and (ii) effectively managing the repricing of both time deposits and savings and interest bearing transaction deposits which resulted in lower rates paid on deposits as they were renewed or otherwise repriced.

The Company’s other borrowing sources include (i) repurchase agreements with customers (“repos”), (ii) other borrowings comprised primarily of federal funds purchased and Federal Home Loan Bank of Dallas (“FHLB – Dallas”) advances, and (iii) subordinated debentures. The rates on repos decreased 26 bps for the third quarter and 36 bps for the first nine months of 2012 compared to the same periods in 2011 primarily as a result of the Company’s efforts to effectively manage the rates on its interest bearing liabilities, including repos. The rates on the Company’s other borrowings, which consist primarily of fixed rate callable FHLB – Dallas advances, decreased 33 bps in the third quarter and eight bps in the first nine months of 2012 compared to the same periods in 2011. The rates paid on the Company’s subordinated debentures, which are tied to a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically, increased 22 bps in the third quarter and 23 bps in the first nine months of 2012 compared to the same periods in 2011.

The decrease in average earning assets for the third quarter of 2012 compared to the third quarter of 2011 was primarily due to decreases in the average balances of covered loans of $202 million and aggregate investment securities of $41 million, partially offset by an increase in the average balance of non-covered loans and leases of $207 million. The increase in average earning assets for the first nine months of 2012 compared to the first nine months of 2011 was primarily due to the $118 million increase in the average balance of non-covered loans and leases, partially offset by decreases in the average balances of investment securities of $24 million and covered loans of $12 million.

 

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Average Consolidated Balance Sheets and Net Interest Analysis – FTE

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
    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

  $ 1,226      $ 2        0.61   $ 1,405      $ 5        1.60   $ 1,138      $ 5        0.59   $ 1,865      $ 31        2.21

Investment securities:

                       

Taxable

    85,845        757        3.51        109,782        838        3.03        84,732        2,177        3.43        101,646        2,324        3.06   

Tax-exempt – FTE

    325,756        5,945        7.26        342,368        6,427        7.45        337,591        18,589        7.36        344,845        19,400        7.52   

Loans and leases – FTE

    2,003,013        29,492        5.86        1,796,113        27,799        6.14        1,932,708        85,217        5.89        1,815,004        83,734        6.17   

Covered loans

    682,506        15,347        8.95        884,864        19,089        8.56        731,658        47,710        8.69        744,069        48,119        8.65   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total earning assets – FTE

    3,098,346        51,543        6.62        3,134,532        54,158        6.85        3,087,827        153,698        6.65        3,007,429        153,608        6.83   

Non-interest earning assets

    640,824            800,269            680,379            706,952       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total assets

  $ 3,739,170          $ 3,934,801          $ 3,768,206          $ 3,714,381       
 

 

 

       

 

 

       

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

                       

Interest bearing liabilities:

                       

Deposits:

                       

Savings and interest bearing transaction

  $ 1,559,520      $ 1,002        0.26   $ 1,632,593      $ 2,071        0.50   $ 1,561,417      $ 3,517        0.30   $ 1,500,892      $ 6,854        0.61

Time deposits of $100,000 or more

    332,122        377        0.45        403,394        888        0.87        358,956        1,539        0.57        446,737        3,219        0.96   

Other time deposits

    422,632        533        0.50        631,347        1,430        0.90        457,445        2,082        0.61        582,906        4,294        0.99   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing deposits

    2,314,274        1,912        0.33        2,667,334        4,389        0.65        2,377,818        7,138        0.40        2,530,535        14,367        0.76   

Repurchase agreements with customers

    32,288        7        0.09        37,082        35        0.37        35,626        40        0.15        39,944        153        0.51   

Other borrowings

    301,673        2,628        3.47        283,176        2,712        3.80        295,342        8,020        3.63        291,484        8,096        3.71   

Subordinated debentures

    64,950        465        2.85        64,950        430        2.63        64,950        1,398        2.88        64,950        1,288        2.65   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing liabilities

    2,713,185        5,012        0.73        3,052,542        7,566        0.98        2,773,736        16,596        0.80        2,926,913        23,904        1.09   

Non-interest bearing liabilities:

                       

Non-interest bearing deposits

    498,529            419,349            480,593            377,278       

Other non-interest bearing liabilities

    56,588            64,069            60,411            45,642       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total liabilities

    3,268,302            3,535,960            3,314,740            3,349,833       

Common stockholders’ equity

    467,449            395,430            450,044            361,123       

Noncontrolling interest

    3,419            3,411            3,422            3,425       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 3,739,170          $ 3,934,801          $ 3,768,206          $ 3,714,381       
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income – FTE

    $ 46,531          $ 46,592          $ 137,102          $ 129,704     
   

 

 

       

 

 

       

 

 

       

 

 

   

Net interest margin – FTE

        5.97         5.90         5.93         5.77
     

 

 

       

 

 

       

 

 

       

 

 

 

 

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The following table reflects how changes in the volume of interest earning assets and interest bearing liabilities and changes in interest rates have affected the Company’s interest income, interest expense and net interest income for the periods indicated. Information is provided in each category with respect to changes attributable to (1) changes in volume (changes in volume multiplied by prior yield/rate); (2) changes in yield/rate (changes in yield/rate multiplied by prior volume); and (3) changes in both yield/rate and volume (changes in yield/rate multiplied by changes in volume). The changes attributable to the combined impact of volume and yield/rate have all been allocated to the changes due to volume.

Analysis of Changes in Net Interest Income – FTE

 

     Three Months Ended
September 30, 2012
Over
Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2012
Over
Nine Months Ended
September 30, 2011
 
     Volume     Yield/
Rate
    Net
Change
    Volume     Yield/
Rate
    Net
Change
 
     (Dollars in thousands)  

Increase (decrease) in:

            

Interest income – FTE:

            

Interest earning deposits and federal funds sold

   $ —        $ (3   $ (3   $ (3   $ (23   $ (26

Investment securities:

            

Taxable

     (211     130        (81     (435     288        (147

Tax-exempt – FTE

     (303     (179     (482     (400     (411     (811

Loans and leases – FTE

     3,046        (1,353     1,693        5,190        (3,707     1,483   

Covered loans

     (4,551     809        (3,742     (809     400        (409
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income – FTE

     (2,019     (596     (2,615     3,543        (3,453     90   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Savings and interest bearing transaction

     (47     (1,022     (1,069     136        (3,473     (3,337

Time deposits of $100,000 or more

     (81     (430     (511     (376     (1,304     (1,680

Other time deposits

     (263     (634     (897     (571     (1,641     (2,212

Repurchase agreements with customers

     (1     (27     (28     (5     (108     (113

Other borrowings

     161        (245     (84     105        (181     (76

Subordinated debentures

     —          35        35        —          110        110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (231     (2,323     (2,554     (711     (6,597     (7,308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest income – FTE

   $ (1,788   $ 1,727      $ (61   $ 4,254      $ 3,144      $ 7,398   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income

The Company’s non-interest income consists primarily of service charges on deposit accounts, mortgage lending income, trust income, BOLI income, accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable, other loss share income, gains on investment securities and on sales of other assets, and gains on FDIC-assisted acquisitions.

Non-interest income for the third quarter of 2012 decreased 9.8% to $14.5 million compared to $16.1 million for the third quarter of 2011. Non-interest income for the nine months ended September 30, 2012 decreased 57.7% to $44.0 million compared to $104.1 million for the nine months ended September 30, 2011. These results include no pre-tax bargain purchase gains on FDIC-assisted acquisitions for the third quarter or first nine months of 2012 compared to none for the third quarter and $65.7 million for the first nine months of 2011.

Service charges on deposit accounts increased 6.4% to $5.0 million for the third quarter of 2012 compared to $4.7 million for the third quarter of 2011. Service charges on deposit accounts increased 11.0% to $14.6 million for the nine months ended September 30, 2012 compared to $13.2 million for the same period in 2011. The increase in service charges on deposit accounts is primarily due to growth in the number of transaction accounts and the addition of deposit customers from the Company’s FDIC-assisted acquisitions.

Mortgage lending income increased 105.2% to $1.7 million for the third quarter of 2012 compared to $0.8 million for the third quarter of 2011. Mortgage lending income increased 92.5% to $4.1 million for the nine months ended September 30, 2012 compared to $2.1 million for the same period in 2011. The volume of originations of mortgage loans available for sale increased 80.3% and 83.5%, respectively for the third quarter and first nine months of 2012 compared to the same periods in 2011. During the third quarter of 2012, approximately 61% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 39% were related to new home purchases, compared to approximately 54% for refinancings and approximately 46% for new home purchases in the third quarter of 2011. During the first nine months of 2012, approximately 60% of the Company originations of mortgage loans available for sale were related to mortgage refinancings and approximately 40% were related to new home purchases compared to approximately 47% for refinancings and approximately 53% for new home purchases in the first nine months of 2011.

 

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Trust income was $0.9 million in the quarter ended September 30, 2012, an increase of 6.8% from $0.8 million for the same period in 2011. Trust income was $2.5 million for the nine months ended September 30, 2012, an increase of 5.5% from $2.4 million for the same period in 2011.

The Company recognized $1.7 million of income from the accretion of the FDIC loss share receivable, net of amortization of the FDIC clawback payable, during the third quarter of 2012 and $6.0 million of such income during the first nine months of 2012, compared to $2.9 million during the third quarter of 2011 and $7.8 million for the first nine months of 2011. The FDIC loss share receivable reflects the indemnification provided by the FDIC in FDIC-assisted acquisitions, and the FDIC clawback payable represents the obligation of the Company to reimburse the FDIC should actual losses be less than certain thresholds established in each loss share agreement. The FDIC loss share receivable and the FDIC clawback payable are both carried at net present value.

As the Company collects payments in future periods from the FDIC under the loss share agreements, the balance of the FDIC loss share receivable, absent any significant revisions of the amounts expected to be collected under the loss share agreements, will decline, resulting in a corresponding decrease in the accretion of the FDIC loss share receivable. Because any amounts due under the FDIC clawback payable are due at the conclusion of the loss share agreements, absent any significant revision of the amounts expected to be paid to the FDIC under the clawback provisions of the loss share agreements, the amortization of this liability is not expected to change significantly over the next several quarters.

Other loss share income, consisting primarily of income recognized on covered loan prepayments and payoffs that are not considered yield adjustments, was $2.3 million in the third quarter of 2012 and $7.5 million in the first nine months of 2012 compared to $3.0 million in the third quarter and $4.9 million in the first nine months of 2011.

Net gains on sales of other assets were $1.4 million in the third quarter of 2012 compared to $1.7 million in the third quarter of 2011. Net gains on sales of other assets were $4.4 million in the first nine months of 2012 compared to $2.8 million in the first nine months of 2011. These net gains on sales of other assets were primarily due to net gains on sales of foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets. Because the estimated fair value of acquired covered foreclosed assets includes a net present value component, which is not accreted into income over the expected holding period of the covered foreclosed assets, the sale of a majority of the Company’s covered foreclosed assets has resulted in gains.

During the first nine months of 2011, the Company made three FDIC-assisted acquisitions resulting in total pre-tax bargain purchase gains of $65.7 million. Specifically, on April 29, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former First Choice Community Bank. This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $2.95 million in the second quarter of 2011. On April 29, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former The Park Avenue Bank. This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $59.8 million in the second quarter of 2011. Additionally, on January 14, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Oglethorpe Bank. This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $2.95 million in the first quarter of 2011. The Company had no bargain purchase gains in the third quarter or first nine months of 2012.

An analysis of the assets acquired and liabilities assumed and a detailed discussion of the day 1 fair values adjustments, as well as the key factors and methodologies utilized to determine the estimated day 1 fair values of assets acquired and liabilities assumed and the resulting bargain purchase gain for the Company’s FDIC-assisted acquisitions is included in footnote 3 to the Notes to the Consolidated Financial Statements.

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Table of Contents

The following table presents non-interest income for the three and nine months ended September 30, 2012 and 2011.

Non-Interest Income

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  
     (Dollars in thousands)  

Service charges on deposit accounts

   $ 5,000       $ 4,734       $ 14,601       $ 13,158   

Mortgage lending income

     1,672         815         4,101         2,130   

Trust income

     865         810         2,527         2,395   

BOLI income

     598         585         1,740         1,728   

Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable

     1,699         2,861         6,039         7,783   

Other loss share income, net

     2,270         2,976         7,450         4,931   

Gains on investment securities

     —           638         403         989   

Gains on sales of other assets

     1,425         1,727         4,377         2,839   

Gains on FDIC-assisted acquisitions

     —           —           —           65,708   

Other

     962         925         2,774         2,458   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 14,491       $ 16,071       $ 44,012       $ 104,119   
  

 

 

    

 

 

    

 

 

    

 

 

 

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Table of Contents

Non-Interest Expense

Non-interest expense decreased 9.8% to $28.7 million for the third quarter of 2012 compared to $31.8 million for the third quarter of 2011. Non-interest expense decreased 9.2% to $84.6 million for the first nine months of 2012 compared to $93.2 million for the first nine months of 2011. The Company’s results for the third quarter and first nine months of 2012 results included no acquisition and conversion costs compared to $1.2 million of such costs in the third quarter and $5.5 million in the first nine months of 2011.

The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 47.0% for the third quarter of 2012 compared to 50.8% for the third quarter of 2011. The Company’s efficiency ratio was 46.7% for the nine months ended September 30, 2012 compared to 39.9% for the nine months ended September 30, 2011.

The following table presents non-interest expense for the three and nine months ended September 30, 2012 and 2011.

Non-Interest Expense

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 15,040       $ 14,597       $ 43,666       $ 41,060   

Net occupancy and equipment

     4,105         4,301         11,633         11,183   

Other operating expenses:

           

Postage and supplies

     740         939         2,423         2,430   

Advertising and public relations

     1,243         1,079         3,417         2,579   

Telephone and data lines

     904         913         2,534         2,247   

Professional and outside services

     1,067         1,082         2,854         3,784   

Software expense

     808         939         2,250         2,345   

Travel and meals

     679         1,009         1,928         2,590   

FDIC insurance

     450         350         1,135         1,805   

FDIC and state assessments

     175         285         529         540   

ATM expense

     227         283         653         731   

Loan collection and repossession expense

     1,216         2,450         4,564         5,776   

Writedowns of foreclosed assets

     108         1,435         1,182         8,877   

Writedown of other assets

     —           —           —           1,250   

Amortization of intangibles

     509         504         1,527         1,168   

Other

     1,411         1,634         4,276         4,826   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 28,682       $ 31,800       $ 84,571       $ 93,191   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Taxes

The provision for income taxes was $7.9 million for the third quarter and $24.4 million for the first nine months of 2012 compared to $8.2 million for the third quarter and $42.6 million for the first nine months of 2011. The effective income tax rate was 29.0% for the third quarter and 30.2% for the first nine months of 2012 compared to 30.3% for the third quarter and 33.7% for the first nine months of 2011. The effective tax rates for the periods were affected by various factors including non-taxable income and non-deductible expenses and FDIC-assisted acquisitions, which resulted in gains in certain periods affecting the Company’s mix of taxable and tax-exempt income.

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ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Portfolio

At September 30, 2012 the Company’s loan and lease portfolio, excluding loans covered by FDIC loss share agreements, was $2.03 billion, compared to $1.89 billion at December 31, 2011 and $1.86 billion at September 30, 2011. 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 $1.80 billion at September 30, 2012, compared to $1.66 billion at December 31, 2011 and $1.62 billion at September 30, 2011. The amount and type of loans and leases outstanding, excluding loans covered by FDIC loss share agreements, at September 30, 2012 and 2011 and at December 31, 2011 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,  
     2012     2011     2011  
     (Dollars in thousands)  

Real estate:

               

Residential 1-4 family

   $ 272,728         13.4   $ 260,705         14.0   $ 260,473         13.8

Non-farm/non-residential

     796,808         39.2        689,124         37.0        708,766         37.6   

Construction/land development

     568,227         28.0        436,784         23.4        478,106         25.4   

Agricultural

     53,607         2.6        74,135         4.0        71,158         3.8   

Multifamily residential

     105,854         5.2        162,807         8.7        142,131         7.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate

     1,797,224         88.4        1,623,555         87.1        1,660,634         88.1   

Commercial and industrial

     128,306         6.4        131,957         7.1        120,679         6.4   

Consumer

     32,778         1.6        44,404         2.4        40,162         2.1   

Direct financing leases

     65,395         3.2        52,957         2.8        54,745         2.9   

Other

     9,302         0.4        10,241         0.6        9,062         0.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 2,033,005         100.0   $ 1,863,114         100.0   $ 1,885,282         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Included in the Company’s loan and lease portfolio as shown in the table above are certain loans acquired in FDIC-assisted acquisitions, primarily consumer loans, that are not covered by loss share. The amount of unpaid principal balance, the valuation discount and the carrying value of these non-covered acquired loans at September 30, 2012 and 2011 and at December 31, 2011 are reflected in the following table.

Non-Covered Loans Acquired in FDIC-Assisted Acquisitions

 

     September 30,     December 31,  
     2012     2011     2011  
     (Dollars in thousands)  

Unpaid principal balance

   $ 5,364      $ 12,368      $ 9,515   

Valuation discount

     (3,191     (5,399     (4,716
  

 

 

   

 

 

   

 

 

 

Carrying value

   $ 2,173      $ 6,969      $ 4,799   
  

 

 

   

 

 

   

 

 

 

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The amount and type of the Company’s real estate loans, excluding loans covered by FDIC loss share agreements, at September 30, 2012 based on the metropolitan statistical area (“MSA”) and other geographic areas in which the principal collateral is located are reflected in the following table. Data for individual states and MSAs is separately presented when aggregate real estate loans, excluding loans covered by FDIC loss share agreements, in that state or MSA exceed $10.0 million.

Geographic Distribution of Real Estate Loans

 

     Residential
1-4

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

Arkansas:

  

Little Rock – North Little Rock – Conway, AR MSA

   $ 106,163       $ 208,741       $ 99,133       $ 9,437       $ 7,318       $ 430,792   

Fayetteville – Springdale – Rogers, AR – MO MSA

     10,370         16,287         16,003         5,562         3,127         51,349   

Fort Smith, AR – OK MSA

     29,825         38,160         5,749         3,631         2,441         79,806   

Hot Springs, AR MSA

     5,877         9,712         7,171         —           960         23,720   

Western Arkansas (1)

     25,436         33,421         4,343         7,449         1,313         71,962   

Northern Arkansas (2)

     53,343         18,455         8,551         22,029         565         102,943   

All other Arkansas (3)

     7,808         13,000         3,141         2,612         163         26,724   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Arkansas

     238,822         337,776         144,091         50,720         15,887         787,296   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Texas:

                 

Dallas – Fort Worth – Arlington, TX MSA

     14,824         166,758         189,770         186         36,308         407,846   

Houston – Sugar Land – Baytown, TX MSA

     —           53,157         39,322         —           —           92,479   

San Antonio – New Braunfels, TX MSA

     —           3,730         13,798         —           15,748         33,276   

Texarkana, TX – Texarkana, AR MSA

     9,450         7,853         4,311         549         1,263         22,877   

Beaumont – Port Arthur, TX MSA

     —           —           —           —           16,709         16,709   

All other Texas (3)

     2,030         16,046         34,494         —           —           53,119   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Texas

     26,304         247,544         281,695         735         70,028         626,306   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

North Carolina/South Carolina:

                 

Charlotte – Gastonia – Rock Hill, NC – SC MSA

     703         37,058         11,286         —           4,894         53,941   

All other North Carolina (3)

     869         27,659         36,510         —           —           65,038   

All other South Carolina (3)

     1,003         13,709         4,658         —           6,221         25,591   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total North Carolina/ South Carolina

     2,575         78,426         52,454         —           11,115         144,570   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Georgia:

                 

Atlanta – Sandy Springs – Marietta, GA MSA

     64         18,225         3,289         —           —           21,578   

All other Georgia

     2,167         3,147         947         1,746         151         8,158   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Georgia (3)

     2,231         21,372         4,236         1,746         151         29,736   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

California

     —           8,115         37,631         —           —           45,746   

Washington – Arlington – Alexandria, DC – VA – MD – WV MSA

     —           2,268         23,973         —           —           26,241   

Mississippi

     —           14,426         —           —           4,693         19,119   

Tennessee

     122         9,371         1,787         —           —           11,280   

All other states (3) (4)

     2,675         77,508         22,359         406         3,982         106,930   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

   $ 272,729       $ 796,806       $ 568,226       $ 53,607       $ 105,856       $ 1,797,224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This geographic area includes the following counties in Western Arkansas: Johnson, Logan, Pope and Yell counties.
(2) This geographic area includes the following counties in Northern Arkansas: Baxter, Boone, Marion, Newton, Searcy and Van Buren counties.
(3) These geographic areas include all MSA and non-MSA areas that are not separately reported.
(4) Includes all states not separately presented above.

 

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The amount and type of non-farm/non-residential loans, excluding loans covered by FDIC loss share agreements, at September 30, 2012 and 2011 and at December 31, 2011, 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,  
     2012     2011     2011  
     (Dollars in thousands)  

Retail, including shopping centers and strip centers

   $ 309,053         38.8   $ 252,970         36.7   $ 274,777         38.8

Churches and schools

     38,531         4.8        40,085         5.8        40,929         5.8   

Office, including medical offices

     119,051         14.9        104,775         15.2        101,724         14.3   

Office warehouse, warehouse and mini-storage

     38,577         4.9        59,030         8.6        60,173         8.5   

Gasoline stations and convenience stores

     10,465         1.3        10,448         1.5        9,627         1.4   

Hotels and motels

     101,085         12.7        54,514         7.9        67,598         9.5   

Restaurants and bars

     33,656         4.2        34,363         5.0        33,452         4.7   

Manufacturing and industrial facilities

     32,506         4.1        9,580         1.4        9,362         1.3   

Nursing homes and assisted living centers

     29,782         3.7        28,931         4.2        28,733         4.0   

Hospitals, surgery centers and other medical

     50,403         6.3        58,009         8.4        48,129         6.8   

Golf courses, entertainment and recreational facilities

     11,668         1.5        12,885         1.9        12,542         1.8   

Other non-farm/non residential

     22,031         2.8        23,534         3.4        21,720         3.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 796,808         100.0   $ 689,124         100.0   $ 708,766         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The amount and type of construction/land development loans, excluding loans covered by FDIC loss share agreements, at September 30, 2012 and 2011 and at December 31, 2011, 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,  
     2012     2011     2011  
     (Dollars in thousands)  

Unimproved land

   $ 94,614         16.6   $ 92,367         21.1   $ 92,288         19.3

Land development and lots:

               

1-4 family residential and multifamily

     178,719         31.5        150,948         34.6        144,550         30.2   

Non-residential

     104,498         18.4        67,365         15.4        90,797         19.0   

Construction:

               

1-4 family residential:

               

Owner occupied

     12,900         2.3        11,727         2.7        10,751         2.2   

Non-owner occupied:

               

Pre-sold

     6,415         1.1        5,830         1.3        3,777         0.8   

Speculative

     34,015         6.0        36,602         8.4        34,523         7.2   

Multifamily

     54,087         9.5        8,356         1.9        15,605         3.3   

Industrial, commercial and other

     82,979         14.6        63,589         14.6        85,815         18.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 568,227         100.0   $ 436,784         100.0   $ 478,106         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The establishment of interest reserves for construction and development loans is an established banking practice, and many of the Company’s construction and development loans provide for the use of interest reserves. When the Company underwrites construction and development loans, it considers the expected total project costs, including hard costs such as land, site work and construction costs and soft costs such as architectural and engineering fees, closing costs, leasing commissions and construction period interest. Based on the total project costs and other factors, the Company determines the required borrower cash equity contribution and the maximum amount the Company is willing to loan. In the vast majority of cases, the Company requires that all of the borrower’s cash equity contribution be contributed prior to any 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

 

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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. The Company advanced construction period interest on construction and development loans totaling $2.2 million in the third quarter of 2012 and $5.3 million in the first nine months of 2012. 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, 2012 was approximately $851 million, of which $404 million was outstanding at September 30, 2012 and $447 million remained to be advanced. The weighted average loan to cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 56%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 44%. 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 52%.

The amount and percentage of the Company’s loan and lease portfolio, excluding loans covered by FDIC loss share agreements, by office of origination 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

   2012     2011     2011  
     (Dollars in thousands)  

Arkansas

   $ 1,037,040         51.0   $ 1,040,926         55.9   $ 1,018,885         54.0

Texas

     877,001         43.1        719,164         38.6        788,570         41.8   

North Carolina

     81,050         4.0        89,467         4.8        65,908         3.5   

Georgia

     36,265         1.8        12,041         0.6        10,492         0.6   

Florida

     646         0.1        885         0.1        808         0.1   

Alabama

     951         —          598         —          590         —     

South Carolina

     52         —          33         —          29         —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,033,005         100.0   $ 1,863,114         100.0   $ 1,885,282         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table reflects loans and leases, excluding loans covered by FDIC loss share agreements, as of September 30, 2012 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

   $ 264,611      $ 187,778      $ 111,242      $ 284,138      $ 847,769   

Floating rate (not at a floor or ceiling rate)

     61,728        801        350        561        63,440   

Floating rate (at floor rate)

     1,120,685        685        —          426        1,121,796   

Floating rate (at ceiling rate)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,447,024      $ 189,264      $ 111,592      $ 285,125      $ 2,033,005   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     71.2     9.3     5.5     14.0     100.0

Cumulative percentage of total

     71.2        80.5        86.0        100.0     

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Table of Contents

Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable

On March 26, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Unity National Bank (“Unity”) in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets.

On July 16, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Woodlands Bank (“Woodlands”) in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but a small amount of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets.

On September 10, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Horizon Bank (“Horizon”) in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but a small amount of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets.

On December 17, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Chestatee State Bank (“Chestatee”) in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but a small amount of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets.

On January 14, 2011, the Company through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Oglethorpe Bank (“Oglethorpe”) in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but a small amount of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets.

On April 29, 2011, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former First Choice Community Bank (“First Choice”) in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but a small amount of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets.

On April 29, 2011, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former The Park Avenue Bank (“Park Avenue”) in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but a small amount of consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets.

In conjunction with each of these acquisitions, the Bank entered into loss share agreements with the FDIC such that the Bank and the FDIC will share in the losses on assets covered under the loss share agreements. Pursuant to the terms of the loss share agreements for the Unity acquisition, on losses up to $65 million, the FDIC will reimburse the Bank for 80% of losses. On losses exceeding $65 million, the FDIC will reimburse the Bank for 95% of losses. Pursuant to the terms of the loss share agreements for the Woodlands, Chestatee, Oglethorpe and First Choice acquisitions, the FDIC will reimburse the Bank for 80% of losses. Pursuant to the terms of the loss share agreements for the Horizon acquisition, the FDIC will reimburse the Bank on single family residential loans and related foreclosed assets for (i) 80% of losses up to $11.8 million, (ii) 30% of losses between $11.8 million and $17.9 million and (iii) 80% of losses in excess of $17.9 million. For non-single family residential loans and related foreclosed assets, the FDIC will reimburse the Bank for (i) 80% of losses up to $32.3 million, (ii) 0% of losses between $32.3 million and $42.8 million and (iii) 80% of losses in excess of $42.8 million. Pursuant to the terms of the loss share agreements for the Park Avenue acquisition, the FDIC will reimburse the Bank for (i) 80% of losses up to $218.2 million, (ii) 0% of losses between $218.2 million and $267.5 million and (iii) 80% of losses in excess of $267.5 million.

The loss share agreements applicable to single family residential mortgage loans and related foreclosed assets provide for FDIC loss sharing and the Bank’s reimbursement to the FDIC for recoveries of covered losses for ten years from the date on which each applicable loss share agreement was entered. The loss share agreements applicable to commercial loans and related foreclosed assets provide for FDIC loss sharing for five years from the date on which each applicable loss share agreement was entered and the Bank’s reimbursement to the FDIC for recoveries of covered losses for an additional three years thereafter.

 

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To the extent that actual losses incurred by the Bank are less than (i) $65 million on the Unity assets covered under the loss share agreements, (ii) $107 million on the Woodlands assets covered under the loss share agreements, (iii) $60 million on the Horizon assets covered under the loss share agreements, (iv) $66 million on the Chestatee assets covered under the loss share agreements, (v) $66 million on the Oglethorpe assets covered under the loss share agreements, (vi) $87 million on the First Choice assets covered under the loss share agreements and (vii) $269 million on the Park Avenue assets covered under loss share agreements, the Bank may be required to reimburse the FDIC under the clawback provisions of the loss share agreements.

The terms of the purchase and assumption agreements for the Unity, Woodlands, Horizon, Chestatee, Oglethorpe, First Choice and Park Avenue acquisitions provide for the FDIC to indemnify the Bank against certain claims, including claims with respect to assets, liabilities or any affiliate not acquired or otherwise assumed by the Bank and with respect to claims based on any action by directors, officers or employees of Unity, Woodlands, Horizon, Chestatee, Oglethorpe, First Choice or Park Avenue.

A summary of the covered assets, the FDIC loss share receivable and the FDIC clawback payable is as follows:

Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable

 

     September 30,      December 31,  
     2012      2011      2011  
     (Dollars in thousands)  

Covered loans

   $ 652,798       $ 860,425       $ 806,922   

FDIC loss share receivable

     174,899         324,456         279,045   

Covered foreclosed assets

     57,632         72,740         72,907   
  

 

 

    

 

 

    

 

 

 

Total

   $ 885,329       $ 1,257,621       $ 1,158,874   
  

 

 

    

 

 

    

 

 

 

FDIC clawback payable

   $ 24,934       $ 24,348       $ 24,645   
  

 

 

    

 

 

    

 

 

 

Covered Loans

Purchased loans acquired in a business combination, including covered loans, are accounted for in accordance with the provisions of generally accepted accounting principles (“GAAP”) applicable to loans acquired with deteriorated credit quality and pursuant to the American Institute of Certified Public Accountants’ (“AICPA”) December 18, 2009 letter in which the AICPA summarized the U.S. Securities and Exchange Commission’s (“SEC”) view regarding the accounting in subsequent periods for discount accretion associated with non-credit impaired loans acquired in a business combination or asset purchase. Considering, among other factors, the general lack of adequate underwriting, proper documentation, appropriate loan structure and insufficient equity contributions for a large number of these acquired loans, and the uncertainty of the borrowers’ and/or guarantors’ ability or willingness to make contractually required (or any) principal and interest payments, management has determined that a significant portion of the purchased loans acquired in FDIC-assisted acquisitions have evidence of credit deterioration since origination. Accordingly, management has elected to apply the provisions of GAAP applicable to loans acquired with deteriorated credit quality as provided by the AICPA’s December 18, 2009 letter, to all purchased loans acquired in its FDIC-assisted acquisitions.

At the time such purchased loans are acquired, management individually evaluates substantially all loans acquired in the transaction. This evaluation allows management to determine the estimated fair value of the purchased loans (not considering any FDIC loss sharing agreements) and includes no carryover of any previously recorded allowance for loan and lease losses. In determining the estimated fair value of purchased loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received. To the extent that any purchased loan acquired in a FDIC-assisted acquisition is not specifically reviewed, management applies a loss estimate to that loan based on the average expected loss rates for the purchased loans that were individually reviewed in that purchased loan portfolio.

As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities. Once management has finalized the fair value of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the day 1 fair values (“Day 1 Fair Values”).

In determining the Day 1 Fair Values of purchased loans, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans). The non-accretable difference is the difference between the contractually required payments and the cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in cash flows will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

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Table of Contents

The accretable difference on purchased loans is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. In determining the net present value of the expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan. The weighted average period during which management expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment under the FDIC loss share agreements) is 2.25 years.

Management separately monitors the purchased loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed or extended, (ii) at any other time additional information becomes available to the Company that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio. Management separately reviews, on an annual basis, the performance of a substantial portion of each acquired loan portfolio, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’ performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values. To the extent that a loan is performing in accordance with or exceeding management’s performance expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is not included in any of the credit quality ratios, is not considered to be a nonaccrual or impaired loan, is not risk rated in a similar manner as are the Company’s non-purchased loans and is not considered in the determination of the required allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan will be included in certain of the Company’s credit quality metrics, is generally considered an impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. To the extent that deterioration in the credit quality of the loan would result in some portion or all of such loan being included in the calculation of the allowance for loan and lease losses, there would be an increase of the FDIC loss share receivable balance for the portion of such additional loss expected to be collected from the FDIC. Any improvement in the expected performance of a purchased loan would result in (i) a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income and (ii) a decrease in the FDIC loss share receivable balance for the applicable percentage of the portion of such loss no longer expected to be incurred by the Company.

Currently, the expected losses on covered assets for each of the Company’s loss share agreements would result in expected recovery of approximately 80% of incurred losses.

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Table of Contents

The following table presents a summary, by acquisition, of covered loans acquired as of the dates of acquisition and activity within covered loans during the periods indicated.

Covered Loans

 

     Unity     Woodlands     Horizon     Chestatee     Oglethorpe     First
Choice
    Park
Avenue
    Total  
     (Dollars in thousands)  

At acquisition date:

        

Contractually required principal and interest

   $ 208,410      $ 315,103      $ 179,441      $ 181,523      $ 174,110      $ 260,178      $ 452,658      $ 1,771,423   

Nonaccretable difference

     (52,526     (83,933     (52,388     (47,538     (67,300     (86,876     (124,899     (515,460
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected

     155,884        231,170        127,053        133,985        106,810        173,302        327,759        1,255,963   

Accretable difference

     (21,432     (44,692     (35,245     (22,604     (25,376     (24,790     (63,462     (237,601
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at acquisition date

   $ 134,452      $ 186,478      $ 91,808      $ 111,381      $ 81,434      $ 148,512      $ 264,297      $ 1,018,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at
January 1, 2011

   $ 114,983      $ 175,720      $ 87,714      $ 111,051      $ —        $ —        $ —        $ 489,468   

Covered loans acquired

     —          —          —          —          81,434        148,512        264,297        494,243   

Accretion

     5,858        10,583        5,096        6,810        4,786        5,223        9,763        48,119   

Transfers to foreclosed assets covered by FDIC loss share agreements

     (3,663     (11,098     (1,833     (1,860     (1,851     —          (360     (20,665

Payments received

     (16,710     (30,855     (9,201     (27,171     (19,093     (15,842     (29,169     (148,041

Other activity, net

     (92     (800     (552     (817     (150     (54     (234     (2,699
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at
September 30, 2011

   $ 100,376      $ 143,550      $ 81,224      $ 88,013      $ 65,126      $ 137,839      $ 244,297      $ 860,425   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at
January 1, 2012

   $ 96,360      $ 131,775      $ 79,798      $ 74,701      $ 64,391      $ 131,923      $ 227,974      $ 806,922   

Accretion

     4,794        7,821        4,403        4,418        4,399        7,612        14,263        47,710   

Transfers to foreclosed assets covered by FDIC loss share agreements

     (1,066     (3,663     (3,267     (1,978     (2,466     (4,289     (5,079     (21,808

Payments received

     (14,451     (21,123     (11,882     (13,813     (11,851     (34,371     (50,271     (157,762

Charge-offs of covered loans

     (3,969     (8,170     (3,227     (1,128     (683     (2,307     (1,299     (20,783

Other activity, net

     (189     (437     (128     (213     (208     (284     (22     (1,481
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at
September 30, 2012

   $ 81,479      $ 106,203      $ 65,697      $ 61,987      $ 53,582      $ 98,284      $ 185,566      $ 652,798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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Table of Contents

The following table presents a summary of the carrying value and type of covered loans at September 30, 2012 and 2011 and at December 31, 2011.

Covered Loan Portfolio

 

     September 30,      December  31,
2011
 
     2012      2011     
     (Dollars in thousands)  

Real estate:

        

Residential 1-4 family

   $ 166,887       $ 212,254       $ 202,620   

Non-farm/non-residential

     314,327         392,415         369,756   

Construction/land development

     116,684         167,103         160,872   

Agricultural

     20,888         29,373         24,104   

Multifamily residential

     10,929         17,674         15,894   
  

 

 

    

 

 

    

 

 

 

Total real estate

     629,715         818,819         773,246   

Commercial and industrial

     21,895         35,031         29,749   

Consumer

     211         829         958   

Other

     977         5,746         2,969   
  

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 652,798       $ 860,425       $ 806,922   
  

 

 

    

 

 

    

 

 

 

The following table presents covered loans grouped by remaining maturities and by type at September 30, 2012. This table is based on contractual maturities and does not reflect accretion of the accretable difference or management’s estimate of projected cash flows. Most covered loans have scheduled accretion and/or cash flows projected by management to occur in periods prior to maturity. In addition, because income on covered loans is recognized by accretion of the accretable difference, none of the covered loans are considered to be floating or adjustable rate loans.

Covered Loan Maturities

 

     1 Year
or Less
     Over 1
Through 5
Years
     Over 5
Years
     Total  
     (Dollars in thousands)  

Real estate:

           

Residential 1-4 family

   $ 76,555       $ 48,257       $ 42,075       $ 166,887   

Non-farm/non-residential

     176,721         97,270         40,336         314,327   

Construction/land development

     101,686         13,192         1,806         116,684   

Agricultural

     14,493         4,872         1,523         20,888   

Multifamily residential

     4,718         4,527         1,684         10,929   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     374,173         168,118         87,424         629,715   

Commercial and industrial

     11,928         5,014         4,953         21,895   

Consumer

     95         116         —           211   

Other

     148         59         770         977   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 386,344       $ 173,307       $ 93,147       $ 652,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

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Table of Contents

The following table presents a summary, by acquisition, of changes in the accretable difference on covered loans during the periods indicated.

Accretable Difference on Covered Loans

 

     Unity     Woodlands     Horizon     Chestatee     Oglethorpe     First
Choice
    Park
Avenue
    Total  
     (Dollars in thousands)  

Accretable difference at January 1, 2011

   $ 15,279      $ 37,182      $ 32,165      $ 22,265      $ —        $ —        $ —        $ 106,891   

Accretable difference acquired

     —          —          —          —          25,376        24,790        63,462        113,628   

Accretion

     (5,858     (10,583     (5,096     (6,810     (4,786     (5,223     (9,763     (48,119

Changes in accretable difference related to:

                

Transfers to foreclosed assets covered by FDIC loss share agreements

     (312     (1,256     (188     (391     (195     —          (23     (2,365

Covered loans paid off

     (235     (1,095     (586     (3,920     (2,456     (1,002     (2,177     (11,471

Cash flow revisions as a result of renewals and/or modifications

     3,050        4,201        174        2,151        1,046        (112     1,170        11,680   

Other, net

     42        35        27        143        25        186        172        630   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at September 30, 2011

   $ 11,966      $ 28,484      $ 26,496      $ 13,438      $ 19,010      $ 18,639      $ 52,841      $ 170,874   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at January 1, 2012

   $ 10,614      $ 24,555      $ 24,432      $ 10,663      $ 17,338      $ 16,900      $ 47,147      $ 151,649   

Accretion

     (4,794     (7,821     (4,403     (4,418     (4,399     (7,612     (14,263     (47,710

Changes in accretable difference related to:

                

Transfers to foreclosed assets covered by FDIC loss share agreements

     (22     (364     (162     (349     (456     (439     (1,239     (3,031

Covered loans paid off

     (288     (984     (968     (667     (979     (1,359     (2,789     (8,034

Cash flow revisions

     3,776        3,909        (737     1,040        1,181        2,865        2,610        14,644   

Other, net

     2        124        46        180        142        18        92        604   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at September 30, 2012

   $ 9,288      $ 19,419      $ 18,208      $ 6,449      $ 12,827      $ 10,373      $ 31,558      $ 108,122   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FDIC Loss Share Receivable

In connection with the Company’s FDIC-assisted acquisitions, the Company has recorded an FDIC loss share receivable to reflect the indemnification provided by the FDIC. Since the indemnified items are covered loans and covered foreclosed assets, which are measured at Day 1 Fair Values, the FDIC loss share receivable is also measured and recorded at Day 1 Fair Values, and is calculated by discounting the cash flows expected to be received from the FDIC. A discount rate of 5.0% per annum was used to determine the net present value of the FDIC loss share receivable. These cash flows are estimated by multiplying estimated losses by the reimbursement rates as set forth in the loss share agreements. The balance of the FDIC loss share receivable is adjusted periodically to reflect changes in expectations of discounted cash flows, expense reimbursements under the loss share agreements and other factors.

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Table of Contents

The following table presents a summary, by acquisition, of the FDIC loss share receivable as of the dates of acquisition and the activity within the FDIC loss share receivable during the periods indicated.

FDIC Loss Share Receivable

 

    Unity     Woodlands     Horizon     Chestatee     Oglethorpe     First
Choice
    Park
Avenue
    Total  
    (Dollars in thousands)  

At acquisition date:

               

Expected principal loss on covered assets:

               

Covered loans

  $ 50,354      $ 73,220      $ 40,537      $ 46,869      $ 62,890      $ 82,212      $ 113,872      $ 469,954   

Covered foreclosed assets

    9,979        5,897        3,678        15,960        7,907        628        49,850        93,899   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expected principal losses

    60,333        79,117        44,215        62,829        70,797        82,840        163,722        563,853   

Estimated loss sharing percentage (1)

    80     80     80     80     80     80     80     80
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated recovery from FDIC loss share agreements

    48,266        63,294        35,372        50,263        56,638        66,272        130,978        451,083   

Discount for net present value on FDIC loss share receivable

    (4,119     (7,428     (6,283     (4,204     (5,535     (6,268     (14,724     (48,561
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net present value of FDIC loss share receivable at acquisition date

  $ 44,147      $ 55,866      $ 29,089      $ 46,059      $ 51,103      $ 60,004      $ 116,254      $ 402,522   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2011

  $ 31,120      $ 51,776      $ 29,182      $ 46,059      $ —        $ —        $ —        $ 158,137   

FDIC loss share receivable recorded in acquisition

    —          —          —          —          51,103        60,004        116,254        227,361   

Accretion income

    741        1,461        849        1,086        1,517        1,198        1,569        8,421   

Cash received from FDIC

    (4,408     (15,384     (4,085     (10,385     (4,324     (8,004     (12,138     (58,728

Reductions of FDIC loss share receivable for payments on covered loans in excess of Day 1 Fair Values

    (693     (3,987     (621     (2,674     (3,912     (1,585     (5,304     (18,776

Expenses on covered assets reimbursable by FDIC

    917        1,017        768        868        421        175        1,036        5,202   

Other activity, net

    103        112        629        1,782        208        —          5        2,839   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2011

  $ 27,780      $ 34,995      $ 26,722      $ 36,736      $ 45,013      $ 51,788      $ 101,422      $ 324,456   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2012

  $ 27,575      $ 29,177      $ 21,757      $ 29,382      $ 37,720      $ 48,442      $ 84,992      $ 279,045   

Accretion income

    573        850        588        592        1,051        1,273        2,006        6,933   

Cash received from FDIC

    (10,573     (11,440     (5,191     (20,170     (9,985     (27,761     (37,602     (122,722

Reductions of FDIC loss share receivable for payments on covered loans in excess of Day 1 Fair Values

    (968     (2,506     (677     (1,171     (3,641     (4,466     (8,166     (21,595

Increases in FDIC loss share receivable for:

               

Charge-offs of covered loans

    2,807        6,287        1,907        841        546        1,846        940        15,174   

Writedowns of covered foreclosed assets

    1,314        1,011        419        1,800        63        111        2,969        7,687   

Expenses on covered assets reimbursable by FDIC

    1,080        1,145        1,014        877        901        747        2,282        8,046   

Other activity, net

    369        566        401        735        (255     47        468        2,331   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2012

  $ 22,177      $ 25,090      $ 20,218      $ 12,886      $ 26,400      $ 20,239      $ 47,889      $ 174,899   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Certain of the Company’s loss share agreements contain tranches whereby the FDIC’s loss sharing percentage is more than or less than 80%. However, management’s current expectation of most of the principal losses on covered assets under each of the loss share agreements falls in the tranches whereby the FDIC would reimburse the Company for approximately 80% of such losses.

 

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Table of Contents

Foreclosed Assets Covered by FDIC Loss Share Agreements

Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are recorded at Day 1 Fair Values. In estimating the fair value of covered foreclosed assets, management considers a number of factors including, among others, appraised value, estimated holding periods, net present value of cash flows expected to be received, and estimated selling costs. Discount rates ranging from 8.0% to 9.5% per annum were used to determine the net present value of covered foreclosed assets.

The following table presents a summary, by acquisition, of foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, as of the dates of acquisition and activity within covered foreclosed assets during the periods indicated.

Foreclosed Assets Covered by FDIC Loss Share Agreements

 

     Unity     Woodlands     Horizon     Chestatee     Oglethorpe     First
Choice
    Park
Avenue
    Total  
     (Dollars in thousands)  

At acquisition date:

                

Balance on acquired bank’s books

   $ 20,304      $ 12,258      $ 8,391      $ 31,647      $ 16,554      $ 2,773      $ 91,442      $ 183,369   

Total expected losses

     (9,979     (5,897     (3,678     (15,960     (7,907     (628     (49,850     (93,899

Discount for net present value of expected cash flows

     (1,466     (1,332     (1,030     (2,281     (1,562     (474     (10,412     (18,557
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at acquisition date

   $ 8,859      $ 5,029      $ 3,683      $ 13,406      $ 7,085      $ 1,671      $ 31,180      $ 70,913   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2011

   $ 8,060      $ 5,996      $ 3,683      $ 13,406      $ —        $ —        $ —        $ 31,145   

Covered foreclosed assets acquired

     —          —          —          —          7,085        1,671        31,180        39,936   

Transfers from covered loans

     3,663        11,098        1,833        1,860        1,851        —          360        20,665   

Sales of covered foreclosed assets

     (2,120     (4,848     (1,442     (4,173     (1,131     —          (5,292     (19,006
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2011

   $ 9,603      $ 12,246      $ 4,074      $ 11,093      $ 7,805      $ 1,671      $ 26,248      $ 72,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2012

   $ 10,272      $ 14,435      $ 3,677      $ 9,677      $ 7,132      $ 2,224      $ 25,490      $ 72,907   

Transfers from covered loans

     1,066        3,663        3,267        1,978        2,466        4,289        5,079        21,808   

Sales of covered foreclosed assets

     (3,728     (6,989     (3,055     (4,924     (3,075     (1,267     (6,293     (29,331

Writedowns of covered foreclosed assets included in other loss share income

     (1,325     (1,442     (540     (1,619     (48     (194     (2,584     (7,752
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2012

   $ 6,285      $ 9,667      $ 3,349      $ 5,112      $ 6,475      $ 5,052      $ 21,692      $ 57,632   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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The following table presents a summary of the carrying value and type of foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, at September 30, 2012 and 2011 and December 31, 2011.

Foreclosed Assets Covered by FDIC Loss Share Agreements

 

     September 30,      December 31,  
     2012      2011      2011  
     (Dollars in thousands)  

Real estate:

        

Residential 1-4 family

   $ 10,490       $ 15,201       $ 15,945   

Non-farm/non-residential

     11,718         12,311         11,624   

Construction/land development

     35,252         42,550         43,323   

Agricultural

     99         —           —     

Multifamily residential

     73         2,649         2,014   
  

 

 

    

 

 

    

 

 

 

Total real estate

     57,632         72,711         72,906   

Repossessions

     —           29         1   
  

 

 

    

 

 

    

 

 

 

Total covered foreclosed assets

   $ 57,632       $ 72,740       $ 72,907   
  

 

 

    

 

 

    

 

 

 

FDIC Clawback Payable

Pursuant to the clawback provisions of the loss share agreements for the Company’s FDIC-assisted acquisitions, the Company may be required to reimburse the FDIC should actual losses be less than certain thresholds established in each loss share agreement. The amount of the clawback provision for each acquisition is measured and recorded at Day 1 Fair Values. It is calculated as the difference between management’s estimated losses on covered loans and covered foreclosed assets and the loss threshold contained in each loss share agreement, multiplied by the applicable clawback provisions contained in each loss share agreement. This clawback amount, which is payable to the FDIC upon termination of the applicable loss share agreement, is then discounted back to net present value using a discount rate of 5.0% per annum. To the extent that actual losses on covered loans and covered foreclosed assets are less than estimated losses, the applicable clawback payable to the FDIC upon termination of the loss share agreements will increase. To the extent that actual losses on covered loans and covered foreclosed assets are more than estimated losses, the applicable clawback payable to the FDIC upon termination of the loss share agreements will decrease.

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The following table presents a summary, by acquisition, of the FDIC clawback payable as of the dates of acquisition and activity within the FDIC clawback payable during the periods indicated.

FDIC Clawback Payable

 

     Unity     Woodlands     Horizon     Chestatee     Oglethorpe     First
Choice
    Park
Avenue
    Total  
     (Dollars in thousands)  

At acquisition date:

                

Estimated FDIC clawback payable

   $ 2,612      $ 4,846      $ 2,380      $ 1,291      $ 1,721      $ 1,452      $ 24,344      $ 38,646   

Discount for net present value on FDIC clawback payable

     (1,046     (1,905     (919     (499     (664     (560     (9,399     (14,992
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net present value of FDIC clawback payable at acquisition date

   $ 1,566      $ 2,941      $ 1,461      $ 792      $ 1,057      $ 892      $ 14,945      $ 23,654   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2011

   $ 1,629      $ 3,004      $ 1,479      $ 792      $ —        $ —        $ —        $ 6,904   

FDIC clawback payable recorded in acquisition

     —          —          —          —          1,057        892        14,945        16,894   

Amortization expense

     60        113        55        41        31        19        319        638   

Changes in FDIC clawback payable related to changes in expected losses on covered assets

     —          —          —          (88     —          —          —          (88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2011

   $ 1,689      $ 3,117      $ 1,534      $ 745      $ 1,088      $ 911      $ 15,264      $ 24,348   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2012

   $ 1,709      $ 3,153      $ 1,552      $ 759      $ 1,099      $ 923      $ 15,450      $ 24,645   

Amortization expense

     60        105        55        26        40        34        574        894   

Changes in FDIC clawback payable related to changes in expected losses on covered assets

     (144     (305     (156     —          —          —          —          (605
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2012

   $ 1,625      $ 2,953      $ 1,451      $ 785      $ 1,139      $ 957      $ 16,024      $ 24,934   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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Nonperforming Assets

Nonperforming assets, excluding assets covered by FDIC loss share agreements, consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days or more past due, (3) certain troubled and restructured loans for which a concession has been granted by the Company to the borrower because of a deterioration in the financial position of the borrower (“TDRs”) and (4) real estate or other assets that have been acquired in partial or full satisfaction of loan or lease obligations or upon foreclosure.

The Company generally places a loan or lease on nonaccrual status when such loan or lease is (i) deemed impaired or (ii) 90 days or more past due, or earlier when doubt exists as to the ultimate collection of payments. The Company may continue to accrue interest on certain loans or leases contractually past due 90 days or more if such loans or leases are both well secured and in the process of collection. At the time a loan or lease is placed on nonaccrual status, interest previously accrued but uncollected is generally reversed and charged against interest income. Nonaccrual loans and leases are generally returned to accrual status when payments are less than 90 days past due and the Company reasonably expects to collect all payments. If a loan or lease is determined to be uncollectible, the portion of the principal determined to be uncollectible will be charged against the allowance for loan and lease losses. Income on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs which continue to accrue interest, is recognized on a cash basis when and if actually collected.

The following table presents information, excluding loans and foreclosed assets covered by FDIC loss share agreements, concerning nonperforming assets, including nonaccrual loans and leases, TDRs, and foreclosed assets as of the dates indicated.

Nonperforming Assets

 

     September 30,     December 31,  
     2012     2011     2011  
     (Dollars in thousands)  

Nonaccrual loans and leases(1)

   $ 8,882      $ 22,805      $ 12,494   

Accruing loans and leases 90 days or more past due

     —          —          —     

TDRs

     —          —          1,000   
  

 

 

   

 

 

   

 

 

 

Total nonperforming loans and leases

     8,882        22,805        13,494   

Foreclosed assets not covered by FDIC loss share agreements(2)

     13,828        34,338        31,762   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 22,710      $ 57,143      $ 45,256   
  

 

 

   

 

 

   

 

 

 

Nonperforming loans and leases to total loans and leases(3)

     0.44     1.22     0.72

Nonperforming assets to total assets(3)

     0.59        1.45        1.18   

 

(1) Included one loan at September 30, 2012 totaling $1.0 million that was reported as a TDR at December 31, 2012 but is currently on nonaccrual status.
(2) Repossessed personal properties and real estate acquired through or in lieu of foreclosure are initially recorded at the lesser of current principal investment or estimated market value less estimated cost to sell at the date of repossession or foreclosure. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest expense to the then estimated market value net of estimated selling costs, if lower, until disposition.
(3) Excludes assets covered by FDIC loss share agreements, except for their inclusion in total assets.

Because covered loans and covered foreclosed assets are not included in the above calculations of the Company’s nonperforming loans and leases ratio and nonperforming assets ratio, the Company’s nonperforming loans and leases ratio and nonperforming assets ratio may not be comparable from period to period or with such ratios of other financial institutions, including institutions that have made FDIC-assisted acquisitions.

As of September 30, 2012, the Company had identified purchased loans covered by FDIC loss share agreements acquired in its FDIC-assisted acquisitions where the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. As a result the Company recorded partial charge-offs, net of adjustments to the FDIC loss share receivable and the FDIC clawback payable, totaling $1.7 million for such loans during the third quarter of 2012 and $5.2 million for such loans during the first nine months of 2012 (none during the third quarter or first nine months of 2011). The Company also recorded provision for loan and lease losses of $1.7 million during the third quarter and $5.2 million during the first nine months of 2012 to cover such charge-offs (none during the third quarter or first nine months of 2011). The Company had $31.0 million of impaired covered loans at September 30, 2012 (none at September 30, 2011).

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If an adequate current determination of collateral value has not been performed, once a loan or lease is considered impaired, management seeks to establish an appropriate value for the collateral. This assessment may include (i) obtaining an updated appraisal, (ii) obtaining one or more broker price opinions or comprehensive market analyses, (iii) internal evaluations or (iv) other methods deemed appropriate considering the size and complexity of the loan and the underlying collateral. On an ongoing basis, typically at least quarterly, the Company evaluates the underlying collateral on all impaired loans and leases and, if needed, due to changes in market or property conditions, the underlying collateral is reassessed and the estimated fair value is revised. The determination of collateral value includes any adjustments considered necessary related to estimated holding period and estimated selling costs.

At September 30, 2012, the Company had reduced the carrying value of its non-covered loans and leases deemed impaired (all of which were included in nonaccrual loans and leases) by $7.5 million to the estimated fair value of such loans and leases of $6.5 million. The adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $6.0 million of partial charge-offs and $1.5 million of specific loan and lease loss allocations. These amounts do not include the Company’s $31.0 million of impaired covered loans at September 30, 2012.

The following table presents information concerning the geographic location of nonperforming assets, excluding assets covered by FDIC loss share agreements, at September 30, 2012. Nonaccrual loans and leases are reported in the physical location of the principal collateral. Foreclosed assets are reported in the physical location of the asset. Repossessions are reported at the physical location where the borrower resided or had its principal place of business at the time of repossession.

Geographic Distribution of Nonperforming Assets

 

     Nonperforming
Loans and

Leases
     Foreclosed
Assets
     Total
Nonperforming
Assets
 
     (Dollars in thousands)  

Arkansas

   $ 7,634       $ 9,599       $ 17,233   

Texas

     5         1,070         1,075   

North Carolina

     130         1,055         1,185   

South Carolina

     990         1,521         2,511   

Georgia

     93         —           93   

Alabama

     —           —           —     

Florida

     6         —           6   

All other

     26         583         609   
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,884       $ 13,828       $ 22,712   
  

 

 

    

 

 

    

 

 

 

Allowance and Provision for Loan and Lease Losses

Excluding covered loans, the Company’s allowance for loan and lease losses (“ALLL”) was $38.7 million, or 1.90% of total loans and leases at September 30, 2012, compared with $39.2 million, or 2.08% of total loans and leases, at December 31, 2011. The Company had no allowance for covered loans at September 30, 2012 or at December 31, 2011. Excluding covered loans, the Company’s allowance for loan and lease losses was equal to 435% of its total nonperforming loans and leases at September 30, 2012 compared to 290% at December 31, 2011. While the Company believes the current allowance is appropriate, changing economic and other conditions may require future adjustments to the allowance for loan and lease losses.

The amount of provision to the allowance for loan and lease losses is based on the Company’s analysis of the adequacy of the allowance for loan and lease losses utilizing the criteria discussed below. The provision for loan and lease losses for the third quarter of 2012 was $3.1 million, including $1.4 million for non-covered loans and leases and $1.7 million for covered loans, compared to $1.5 million for non-covered loans and leases and no provision for covered loans in the third quarter of 2011. The provision for loan and lease losses for the first nine months of 2012 was $9.2 million, including $4.0 million for non-covered loan and leases and $5.2 million for covered loans, compared to $7.5 million for non-covered loans and leases and no provision for covered loans in the first nine months of 2011.

The decrease in the Company’s ALLL, the ALLL as a percent of total loans and leases and the Company’s provision for non-covered loans and leases for both the third quarter and first nine months of 2012 compared to the same periods in 2011 reflects the general improvement in the Company’s credit quality metrics during recent quarters. The Company’s ALLL, its ALLL as a percent of total non-covered loans and leases and the amount of provision for non-covered loans and leases as of and for the periods ended September 30, 2012, and any changes in the ALLL, the ALLL as a percent of total non-covered loans and leases and the amount of provision for non-covered loans and leases in future periods are affected by a number of factors, the most significant of which are discussed in the following pages.

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An analysis of the allowance for loan and lease losses for the periods indicated is shown in the following table.

Analysis of the Allowance for Loan and Lease Losses

 

     Nine Months Ended
September 30,
   

Year Ended

December 31,

 
     2012     2011     2011  
     (Dollars in thousands)  

Balance, beginning of period

   $ 39,169      $ 40,230      $ 40,230   

Non-covered loans and leases charged off:

      

Real estate

     3,170        6,766        10,198   

Commercial and industrial

     917        1,092        1,465   

Consumer

     324        657        825   

Direct financing leases

     295        324        413   

Other

     390        74        87   
  

 

 

   

 

 

   

 

 

 

Total non-covered loans and leases charged off

     5,096        8,913        12,988   
  

 

 

   

 

 

   

 

 

 

Recoveries of non-covered loans and leases previously charged off:

      

Real estate

     342        83        110   

Commercial and industrial

     29        78        142   

Consumer

     88        150        166   

Direct financing leases

     —          5        5   

Other

     90        3        4   
  

 

 

   

 

 

   

 

 

 

Total recoveries of non-covered loans and leases previously charged off

     549        319        427   
  

 

 

   

 

 

   

 

 

 

Net non-covered loans and leases charged off

     4,547        8,594        12,561   

Covered loans charged off

     5,162        —          275   
  

 

 

   

 

 

   

 

 

 

Net charge-offs – total loans and leases

     9,709        8,594        12,836   

Provision for loan and lease losses

     9,212        7,500        11,775   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 38,672      $ 39,136      $ 39,169   
  

 

 

   

 

 

   

 

 

 

Net charge-offs of non-covered loans and leases to average non-covered loans and leases (1)

     0.32 (2)      0.63 (2)      0.69

Net charge-offs of total loans and leases, including covered and non-covered loans and leases, to total loans and leases

     0.49 %(2)      0.42 (2)      0.49

Allowance for loan and lease losses to total non-covered loans and leases (1)

     1.90     2.10     2.08

Allowance for loan and lease losses to nonperforming loans and leases (1)

     435     172     290

 

(1) Excludes assets covered by FDIC loss share agreements.
(2) Annualized.

Provisions to and the adequacy of the allowance for loan and lease losses are based on evaluations of the loan and lease portfolio utilizing objective and subjective criteria. The objective criteria primarily include an internal grading system and specific allowances. In addition to these objective criteria, the Company subjectively assesses the adequacy of the allowance for loan and lease losses and the need for additions thereto, with consideration given to the nature and mix of the portfolio, including concentrations of credit; general economic and business conditions, including national, regional and local business and economic conditions that may affect borrowers’ or lessees’ ability to pay; expectations regarding the current business cycle; trends that could affect collateral values and other relevant factors. The Company also utilizes a peer group analysis and a historical analysis to validate the overall adequacy of its allowance for loan and lease losses. Changes in any of these criteria or the availability of new information could require adjustment to the ALLL in future periods. While a specific allowance has been calculated for impaired loans and leases and for loans and leases where the Company has otherwise determined a specific reserve is appropriate, no portion of the Company’s ALLL is restricted to any individual loan or lease or group of loans or leases, and the entire ALLL is available to absorb losses from any and all loans and leases.

The Company’s internal grading system assigns one of nine grades to all loans and leases, with each grade being assigned a specific allowance allocation percentage, except residential 1-4 family loans, consumer loans and purchased loans, including covered loans.

The grade for each graded individual loan or lease is determined by the account officer and other approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing assessment of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by senior management and as part of the Company’s internal loan review process. These risk elements include, among others, the following: (1) for non-farm/non-residential, multifamily residential, and agricultural real estate loans, the debt service coverage ratio (income from the property in excess

 

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of operating expenses compared to loan repayment requirements), operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age, condition, value, nature and marketability of the collateral and the specific risks and volatility of income, property value and operating results typical of properties of that type; (2) for construction and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or ability to lease property constructed for lease, the quality and nature of contracts for presale or preleasing, if any, experience and ability of the developer and loan-to-value ratios; (3) for commercial and industrial loans and leases, the operating results of the commercial, industrial or professional enterprise, the borrower’s or lessee’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in the applicable industry and the age, condition, value, nature and marketability of collateral; and (4) for non-real estate agricultural loans and leases, the operating results, experience and ability of the borrower or lessee, historical and expected market conditions and the age, condition, value, nature and marketability of collateral. In addition, for each category the Company considers secondary sources of income and the financial strength of the borrower or lessee and any guarantors.

Residential 1-4 family and consumer loans are assigned an allowance allocation percentage based on past due status.

Allowance allocation percentages for the various risk grades and past due categories for residential 1-4 family and consumer loans are determined by management and are adjusted periodically. In determining these allowance allocation percentages, management considers, among other factors, historical loss percentages and a variety of subjective criteria in determining the allowance allocation percentages.

For purchased loans, including covered loans, management separately monitors this portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is considered in the determination of the required level of allowance for loan and lease losses. To the extent that a revised loss estimate exceeds the loss estimate established in the determination of the Day 1 Fair Values, such deterioration will result in an allowance allocation or a charge-off. At September 30, 2012 and 2011 and at December 31, 2011, the Company had no allowance for its covered loans because any identified loss on covered loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values had been charged-off.

All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan or lease, excluding purchased loans and loans covered by FDIC loss share agreements, to be impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms thereof. The Company considers a purchased loan, including a covered loan, to be impaired once a decrease in expected cash flows, subsequent to the determination of the Day 1 Fair Values, results in an allowance allocation, a partial or full charge-off or in a provision for loan and lease losses. Most of the Company’s nonaccrual loans and leases, excluding loans covered by FDIC loss share agreements, and all TDRs are considered impaired. The majority of the Company’s impaired loans and leases are dependent upon collateral for repayment. For such loans and leases, impairment is measured by comparing collateral value, net of estimated holding and selling costs, to the current investment in the loan or lease. For all other impaired loans and leases, the Company compares estimated discounted cash flows to the current investment in the loan or lease. To the extent that the Company’s current investment in a particular loan or lease exceeds its estimated net collateral value or its estimated discounted cash flows, the impaired amount is specifically considered in the determination of the allowance for loan and lease losses or is charged off as a reduction of the allowance for loan and lease losses.

The Company also maintains an allowance for certain loans and leases, excluding purchased loans and loans covered by FDIC loss share agreements, not considered impaired where (i) the customer is continuing to make regular payments, although payments may be past due, (ii) there is a reasonable basis to believe the customer may continue to make regular payments, although there is also an elevated risk that the customer may default, and (iii) the collateral or other repayment sources are likely to be insufficient to recover the current investment in the loan or lease if a default occurs. The Company evaluates such loans and leases to determine if an allowance is needed for these loans and leases. For the purpose of calculating the amount of such allowance, management assumes that (i) no further regular payments occur and (ii) all sums recovered will come from liquidation of collateral and collection efforts from other payment sources. To the extent that the Company’s current investment in a particular loan or lease evaluated for the need for such an allowance exceeds its net collateral value or its estimated discounted cash flows, such excess is considered allocated allowance for purposes of the determination of the allowance for loan and lease losses.

Prior to December 31, 2011, the Company utilized the sum of all allowance amounts derived as described above, combined with a reasonable unallocated allowance, as the primary indicator of the appropriate level of allowance for loan and lease losses. The primary qualitative factors and conditions used by the Company in its determination of a reasonable unallocated allowance included, among other factors, (1) general economic and business conditions affecting key lending areas, (2) credit quality trends (including trends in nonperforming loans and leases expected to result from existing conditions), (3) trends that could affect collateral values, (4) seasoning of the loan and lease portfolio, (5) specific industry conditions affecting portfolio segments, (6) concentrations of credit to single borrowers or related borrowers or to specific industries, or in specific collateral types in the loan and lease portfolio, including concentrations of credit in commercial real estate, (7) expansion into new markets, (8) the offering of new loan and lease products and (9) expectations regarding the current business cycle.

 

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Prior to the fourth quarter of 2011, the Company assessed the need for an allowance for these qualitative factors in the aggregate. This assessment was based on a number of factors including, but not limited to, overall portfolio composition, portfolio quality and recent trends of certain asset quality metrics, recent national, regional and local economic data, and various other factors. The allowance derived from this assessment supported the unallocated allowance. During recent years, the Company began working on methodologies of refining its allowance calculation with a goal of moving from this assessment of qualitative factors in the aggregate to a methodology whereby it would assign quantitative values to certain of the individual qualitative factors considered in determining the unallocated allowance and then allocate such quantitative values to the portfolio segments.

The Company has completed the refinement of its allowance calculation whereby it “allocated” the portion of the allowance that was previously deemed to be unallocated allowance. This refined allowance calculation included specific allowance allocations at September 30, 2012 for certain of the previously discussed qualitative factors including (i) concentrations of credit, (ii) general economic and business conditions affecting key lending areas, (iii) expectations regarding the current business cycle and (iv) trends that could affect collateral values. As a result of this refined allowance calculation, at September 30, 2012 the Company allocated (i) $3.0 million for the concentrations of credit factor to its risk-rated loans not covered by FDIC loss share agreements on a pro rata basis based on the outstanding balance of each relevant portfolio segment, (ii) $1.9 million to all portfolio segments of non-covered loans and leases on a pro rata basis based on the outstanding balance of each portfolio segment for general economic and business conditions affecting key lending areas, (iii) $1.9 million to all portfolio segments of non-covered loans and leases on a pro rata basis based on the outstanding balance of each portfolio segment for expectations regarding the current business cycle, and (iv) $1.0 million to all portfolio segments of non-covered loans and leases on a pro rata basis based on the outstanding balance of each portfolio segment for trends that could affect collateral values.

The Company may also consider other qualitative factors in future periods for additional allowance allocations, including, among other factors, (1) credit quality trends (including trends in nonperforming loans and leases expected to result from existing conditions), (2) seasoning of the loan and lease portfolio, (3) specific industry conditions affecting portfolio segments, (4) expansion into new markets and (5) the offering of new loan and lease products. Because the Company has refined its allowance calculation such that it no longer maintains unallocated allowance and has included allocations for certain qualitative factors and conditions within each loan and lease category by portfolio segment, the Company’s allocation of its allowance at September 30, 2012 may not be comparable with prior periods.

Investment Securities

At September 30, 2012 and 2011 and at December 31, 2011, 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).

The following table presents the amortized cost and estimated fair value of investment securities AFS at September 30, 2012 and 2011 and at December 31, 2011. The Company’s holdings of “other equity securities” include Federal Home Loan Bank of Dallas (“FHLB – Dallas”), Federal Home Loan Bank of Atlanta (“FHLB – Atlanta”) and First National Banker’s Bankshares, Inc. (“FNBB”) shares which do not have readily determinable fair values and are carried at cost.

Investment Securities

 

     September 30,      December 31,  
     2012      2011      2011  
     Amortized      Fair      Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value      Cost      Value  
     (Dollars in thousands)  

Obligations of state and political subdivisions

   $ 330,965       $ 349,538       $ 357,489       $ 368,767       $ 359,667       $ 373,047   

U.S. Government agency residential mortgage-backed securities

     63,192         65,944         48,749         50,518         46,068         48,035   

Corporate bonds

     777         777         —           —           —           —     

Other equity securities

     13,676         13,676         20,311         20,311         17,828         17,828   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 408,610       $ 429,935       $ 426,549       $ 439,596       $ 423,563       $ 438,910   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, 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, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. All fair value estimates received by the Company for its investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

The Company’s investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $21.5 million and gross unrealized losses of $0.2 million at September 30, 2012; gross unrealized gains of $16.3 million and gross unrealized losses of $1.0 million at December 31, 2011; and gross unrealized gains of $14.4 million and gross unrealized losses of $1.4 million at September 30, 2011. Management believes that all of its unrealized losses on individual investment securities at September 30, 2012 and 2011 and at December 31, 2011 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of these investments. Accordingly, management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

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, 2012:

          

Obligations of states and political subdivisions

   $ 330,965       $ 4,415       $ (166   $ 335,214   

U.S. Government agency residential mortgage-backed securities

     63,192         —           (2,170     61,022   

Corporate bonds

     777         —           (24     753   

Other equity securities

     13,676         —           —          13,676   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 408,610       $ 4,415       $ (2,360   $ 410,665   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011:

          

Obligations of states and political subdivisions

   $ 359,667       $ 4,969       $ (134   $ 364,502   

U.S. Government agency residential mortgage-backed securities

     46,068         —           (1,556     44,512   

Other equity securities

     17,828         —           —          17,828   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 423,563       $ 4,969       $ (1,690   $ 426,842   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2011:

          

Obligations of states and political subdivisions

   $ 357,489       $ 4,936       $ (147   $ 362,278   

U.S. Government agency residential mortgage-backed securities

     48,749         —           (1,767     46,982   

Other equity securities

     20,311         —           —          20,311   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 426,549       $ 4,936       $ (1,914   $ 429,571   
  

 

 

    

 

 

    

 

 

   

 

 

 

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The Company had no sales of investment securities in the third quarter of 2012 compared with net gains of $0.6 million from the sale of $58 million of investment securities in the third quarter of 2011. The Company had net gains of $0.4 million from the sale of $8 million of investment securities in the first nine months of 2012 compared to net gains of $1.0 million from the sale of $96 million of investment securities in the first nine months of 2011. During the quarters ended September 30, 2012 and 2011, respectively, investment securities totaling $16 million and $9 million matured, were called or were paid down by the issuer. During the nine months ended September 30, 2012 and 2011, respectively, investment securities totaling $46 million and $20 million matured, were called or paid down by the issuer. The Company purchased $17 million and $10,000 of investment securities during the quarters ended September 30, 2012 and 2011, respectively, and purchased $27 million and $8 million of investment securities during the first nine months of 2012 and 2011, respectively.

In recent years the Company has been a net seller of investment securities. Reductions of its investment securities portfolio in recent years have been undertaken primarily as a result of the Company’s ongoing evaluations of interest rate risk and to free up capital for FDIC-assisted acquisitions.

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

The following table presents the types and estimated fair values of the Company’s investment securities AFS at September 30, 2012 based on credit ratings by one or more nationally-recognized credit rating agencies.

Credit Ratings of Investment Securities

 

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

Obligations of states and political subdivisions:

            

Arkansas

   $ —        $ 124,124      $ 8,660      $ 1,770      $ 126,773      $ 261,327   

Texas

     1,267        31,129        11,566        13,360        12,567        69,889   

Louisiana

     —          4,494        —          —          —          4,494   

Georgia

     —          1,476        189        307        1,902        3,874   

Connecticut

     —          —          2,797        —          —          2,797   

Florida

     —          —          —          1,329        —          1,329   

Iowa

     —          —          2,657        —          —          2,657   

Massachusetts

     —          —          —          —          2,033        2,033   

Missouri

     —          —          —          —          1,138        1,138   

U.S. Government agency residential mortgage-backed securities

     —          65,944        —          —          —          65,944   

Corporate bonds

     —          —          777        —          —          777   

Other equity securities

     —          —          —          —          13,676        13,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,267      $ 227,166      $ 26,646      $ 16,766      $ 158,090      $ 429,935   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     0.3     52.8     6.2     3.9     36.8     100.0

Cumulative percentage of total

     0.3     53.1     59.3     63.2     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 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 has credit characteristics equivalent to those which would warrant a credit rating of investment grade (i.e., Baa3 or better by Moody’s or BBB- or better by S&P or a comparable rating by another nationally-recognized credit rating agency).

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Deposits

The Company’s lending and investment activities are funded primarily by deposits. The amount and type of deposits outstanding at September 30, 2012 and 2011 and at December 31, 2011 and their respective percentage of the total deposits are reflected in the following table.

Deposits

 

     September 30,     December 31,  
     2012     2011     2011  
     (Dollars in thousands)  

Non-interest bearing

   $ 528,278         18.3   $ 466,938         15.3   $ 447,214         15.2

Interest bearing:

               

Transaction (NOW)

     698,094         24.1        716,102         23.5        738,926         25.1   

Savings and money market

     888,003         30.7        893,530         29.3        839,523         28.5   

Time deposits less than $100,000

     428,776         14.8        420,195         13.8        508,675         17.3   

Time deposits of $100,000 or more

     348,584         12.1        549,704         18.1        409,581         13.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 2,891,735         100.0   $ 3,046,469         100.0   $ 2,943,919         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s total deposits were $2.89 billion at September 30, 2012, a decrease of 1.8% compared to $2.94 billion at December 31, 2011 and a decrease of 5.1% compared to $3.05 billion at September 30, 2011. In recent years, the Company has benefited from favorable changes in its deposit mix. The Company’s non-CD deposits comprised 73.1% of total deposits at September 30, 2012, compared to 68.8% at December 31, 2011 and 68.2% at September 30, 2011. Non-CD deposits totaled $2.11 billion at September 30, 2012, compared to $2.03 billion at December 31, 2011 and $2.08 billion at September 30, 2011.

The amount and percentage of the Company’s deposits at September 30, 2012 and 2011 and December 31, 2011, by state of originating office, are reflected in the following table.

Deposits by State of Originating Office

 

      September 30,     December 31,  

Deposits Attributable to Offices In

   2012     2011     2011  
     (Dollars in thousands)  

Arkansas

   $ 1,670,455         57.8   $ 1,584,472         52.0   $ 1,582,294         53.6

Texas

     365,664         12.6        448,464         14.8        419,422         14.3   

Georgia

     678,462         23.4        801,446         26.3        751,087         25.5   

Florida

     140,445         4.9        172,009         5.6        157,230         5.4   

North Carolina

     16,787         0.6        14,208         0.4        12,952         0.5   

Alabama

     8,477         0.3        13,169         0.5        11,966         0.4   

South Carolina

     11,445         0.4        12,701         0.4        8,968         0.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,891,735         100.0   $ 3,046,469         100.0   $ 2,943,919         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other Interest Bearing Liabilities

The Company relies on other interest bearing liabilities to supplement the funding of its lending and investing activities. Such liabilities consist of repurchase agreements with customers, other borrowings (primarily federal funds purchased and FHLB – Dallas advances) and subordinated debentures.

The following table reflects the average balance and rate paid for each category of other interest bearing liabilities for the three months and nine months ended September 30, 2012 and 2011.

Average Balances and Rates of Other Interest Bearing Liabilities

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  
      Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
 
     (Dollars in thousands)  

Repurchase agreements with customers

   $ 32,288         0.09   $ 37,082         0.37   $ 35,626         0.15   $ 39,944         0.51

Other borrowings (1)

     301,673         3.47        283,176         3.80        295,342         3.63        291,484         3.71   

Subordinated debentures

     64,950         2.85        64,950         2.63        64,950         2.88        64,950         2.65   
  

 

 

      

 

 

      

 

 

      

 

 

    

Total other interest bearing liabilities

   $ 398,911         3.09   $ 385,208         3.27   $ 395,918         3.19   $ 396,378         3.22
  

 

 

      

 

 

      

 

 

      

 

 

    

 

(1) Included in other borrowings at September 30, 2012 and 2011 are FHLB – Dallas advances that contain quarterly call features and mature as follows: 2017, $260 million at 3.90% weighted-average interest rate and 2018, $20 million at 2.53% weighted-average interest rate.

 

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CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Subordinated Debentures. At September 30, 2012 and 2011 and at December 31, 2011, the Company had an aggregate of $64.9 million of subordinated debentures and related trust preferred securities outstanding consisting of (i) $20.6 million of subordinated debentures and securities issued in 2006 that bear interest, adjustable quarterly, at LIBOR plus 1.60%; (ii) $15.4 million of subordinated debentures and securities issued in 2004 that bear interest, adjustable quarterly, at LIBOR plus 2.22%; and (iii) $28.9 million of subordinated debentures and securities issued in 2003 that bear interest, adjustable quarterly, at a weighted-average rate of LIBOR plus 2.925%. These subordinated debentures and securities generally mature 30 years after issuance and may be prepaid at par, subject to regulatory approval, on or after approximately five years from the date of issuance, or at an earlier date upon certain changes in tax laws, investment company laws or regulatory capital requirements. These subordinated debentures and the related trust preferred securities provide the Company additional regulatory capital to support its expected future growth and expansion.

Tangible Common Stockholders’ Equity. The Company uses its tangible common stockholders’ equity ratio as the principal measure of the strength of its capital. The tangible common stockholders’ equity ratio is calculated by dividing total common stockholders’ equity less intangible assets by total assets less intangible assets. The Company’s tangible common stockholders’ equity ratio was 12.25% at September 30, 2012 compared to 10.77% at December 31, 2011 and 10.06% at September 30, 2011.

Common Stock Dividend Policy. During the quarter ended September 30, 2012, the Company paid a dividend of $0.13 per common share compared to $0.095 per common share in the quarter ended September 30, 2011. On October 1, 2012, the Company’s board of directors approved a dividend of $0.14 per common share that was paid on October 19, 2012. The determination of future dividends on the Company’s common stock will depend on conditions existing at that time.

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Capital Compliance

Regulatory Capital Requirements. 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, 2012 and December 31, 2011, and are presented in the following tables.

Consolidated Capital Ratios

 

     September 30,     December 31,  
     2012     2011  
     (Dollars in thousands)  

Tier 1 capital:

    

Common stockholders’ equity

   $ 477,851      $ 424,551   

Allowed amount of trust preferred securities

     63,000        63,000   

Net unrealized gains on investment securities AFS

     (12,960     (9,327

Goodwill and certain intangible assets

     (10,679     (12,207
  

 

 

   

 

 

 

Total tier 1 capital

     517,212        466,017   

Tier 2 capital:

    

Qualifying allowance for loan and lease losses

     36,309        33,038   
  

 

 

   

 

 

 

Total risk-based capital

   $ 553,521      $ 499,055   
  

 

 

   

 

 

 

Risk-weighted assets

   $ 2,902,335      $ 2,636,875   
  

 

 

   

 

 

 

Adjusted quarterly average assets

   $ 3,728,491      $ 3,864,468   
  

 

 

   

 

 

 

Ratios at end of period:

    

Tier 1 leverage

     13.87     12.06

Tier 1 risk-based capital

     17.82        17.67   

Total risk-based capital

     19.07        18.93   

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,
2012
    December 31,
2011
 
     (Dollars in thousands)  

Stockholders’ equity – Tier 1

   $ 494,450      $ 445,789   

Tier 1 leverage ratio

     13.31     11.58

Tier 1 risk-based capital ratio

     17.09        16.98   

Total risk-based capital ratio

     18.35        18.23   

 

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Notices of Proposed Rulemaking (“NPR”). On June 7, 2012 the FRB, the Office of Comptroller of Currency and the FDIC jointly issued two NPRs for public comment. The first NPR, “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions,” would revise the general risk-based capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework. The provisions of this NPR would:

 

   

revise the definition of regulatory capital components and related calculations;

 

   

add a new common equity tier 1 capital ratio;

 

   

increase the minimum tier 1 capital ratio requirement from four percent to six percent;

 

   

impose different limitations to qualifying minority interest in regulatory capital;

 

   

incorporate revised regulatory capital requirements into the Prompt Corrective Action (“PCA”) Framework;

 

   

implement a new capital conservation buffer that would limit payment of capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold certain amounts of common tier 1 capital in addition to the minimum risk-based capital requirements; and

 

   

provide for a transition period for several aspects of the proposed rule, including a phase-out period for certain non-qualifying capital instruments, the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions.

The specific provisions of the NPR regarding capital requirements would alter the existing definition of capital by imposing, among other requirements, additional constraints on the inclusion of certain items in regulatory capital (including trust preferred securities), require that most accumulated other comprehensive income be included in regulatory capital, and establish a new common equity tier 1 capital requirement. This NPR also would establish a capital conservation buffer that, if not met, could reduce a bank’s payout amount for capital distributions and discretionary bonus payments. Additionally, this NPR proposes revisions to the PCA capital category thresholds to reflect new capital ratio requirements. The provisions of this NPR are scheduled to phase in over a number of years with certain changes to the capital requirements beginning in 2013 and phasing in over three years and with the capital conservation buffer requirements beginning in 2016 and phasing in over four years.

The second NPR, “Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets: Market Discipline and Disclosure Requirements,” revised the measurement of risk-weighted assets. The provisions of this NPR would:

 

   

revise risk weights for exposures to foreign sovereign entities, foreign banking organizations and foreign public sector entities;

 

   

revise risk weights for residential mortgages based on loan to value ratios and certain products and underwriting features;

 

   

increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;

 

   

expand the recognition of collateral and guarantors in determining risk-weighted assets; and

 

   

establish due diligence requirements for securitization exposures.

The provisions of this NPR would take effect on January 1, 2015. Management is currently evaluating these proposed rules and is continuing to monitor developments with these NPRs to determine what affect these NPRs might have on both the Bank’s and Company’s regulatory capital requirements.

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, repayments of loans and leases and covered loans, and repayments of its investment securities as its primary sources of funds. The principal deposit sources utilized by the Company include consumer, commercial and public funds customers in the Company’s markets. The Company has used these funds, together with brokered deposits, FHLB – Dallas advances, federal funds purchased and other sources of short-term borrowings, to make loans and leases, acquire investment securities and other assets and to fund continuing operations.

        Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other factors. Loan and lease repayments are a relatively stable source of funds but are subject to the borrowers’ and lessees’ ability to repay the loans and leases, which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values 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 growth in loans and leases and deposit withdrawal demands or otherwise fund operations. Such secondary sources include FHLB – Dallas advances, secured and unsecured federal funds lines of credit from correspondent banks and Federal Reserve Bank (“FRB”) borrowings.

 

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At September 30, 2012 the Company had unused borrowing availability that was primarily comprised of the following four sources: (1) $443 million of available blanket borrowing capacity with the FHLB – Dallas, (2) $89 million of investment securities available to pledge for federal funds or other borrowings, (3) $154 million of available unsecured federal funds lines of credit and (4) $90 million from the FRB.

The Company anticipates it will continue to rely on deposits, repayments of loans and leases and covered loans 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.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). On July 21, 2010, the Dodd-Frank Act was signed into law. Among other things, the Dodd-Frank Act provides full deposit insurance with no maximum coverage amount for non-interest bearing transaction accounts for two years beginning December 31, 2010. Participation in this deposit insurance coverage of the Dodd-Frank Act is mandatory for all financial institutions and requires no separate fee assessment to the Bank. Additionally, the Dodd-Frank Act permanently increases the maximum deposit insurance coverage for all other deposit categories to $250,000 retroactive to January 1, 2008.

Sources and Uses of Funds. Operating activities used $11.4 million for the first nine months of 2012 and provided $14.2 million for the first nine months of 2011. Net cash used or 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 $160.7 million in the nine months ended September 30, 2012 and $704.7 million in the nine months ended September 30, 2011. Net activity in the Company’s investment securities portfolio provided $28.1 million and $109.5 million in the nine months ended September 30, 2012 and 2011, respectively. Net non-covered loans and leases used $136.3 million and $2.9 million in the nine months ended September 30, 2012 and 2011, respectively. Payments received on covered loans provided $157.9 million and $148.0 million for the nine months ended September 30, 2012 and 2011, respectively, and payments received from the FDIC under loss share agreements provided $122.7 million and $58.7 million for the nine months ended September 30, 2012 and 2011, respectively. The Company received net cash of $365.4 million in the nine months ended September 30, 2011 (none in the quarter ended September 30, 2012) in connection with its FDIC-assisted acquisitions. Other loss share activity provided $12.7 million and $18.3 million in the nine months ended September 30, 2012 and 2011, respectively. The Company had proceeds from sales of other assets of $46.3 million and $26.2 million in the nine months ended September 30, 2012 and 2011, respectively. Purchases of premises and equipment used $40.9 million and $16.8 million in the nine months ended September 30, 2012 and 2011, respectively. During the third quarter of 2012, the Company purchased $30.0 million of additional BOLI.

Financing activities used $81.7 million and $698.4 million in the nine months ended September 30, 2012 and 2011, respectively. Net changes in deposit accounts used $52.1 million and $609.0 million in the nine months ended September 30, 2012 and 2011, respectively. Net repayments of other borrowings and repurchase agreements with customers used $21.4 million and $83.3 million in the nine months ended September 30, 2012 and 2011, respectively. The Company paid common stock cash dividends of $12.4 million and $9.2 million in the quarters ended September 30, 2012 and 2011, respectively. Proceeds from and current tax benefits on exercise of stock options provided $4.3 million and $3.2 million during the nine months ended September 30, 2012 and 2011, respectively.

Growth and Expansion

On March 26, 2010, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Unity with offices in Cartersville (2), Rome, Adairsville and Calhoun, Georgia.

On July 16, 2010, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Woodlands with offices in South Carolina (2), North Carolina (2), Georgia (1) and Alabama (3). On October 26, 2010, the Company closed four of the Woodlands offices.

On September 10, 2010, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Horizon with offices in Bradenton (2), Palmetto and Brandon, Florida. On December 23, 2010, the Company closed the office in Brandon, Florida.

On December 17, 2010, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Chestatee with offices in Dawsonville (2), Cumming and Marble Hill, Georgia.

 

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On January 14, 2011, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Oglethorpe with offices in Brunswick and St. Simons Island, Georgia.

On April 29, 2011, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of First Choice with offices in Dallas, Newnan (2), Senoia, Sharpsburg, Douglasville and Carrollton, Georgia. On July 1, 2011, the Company closed one of the offices in Newnan, Georgia, and on October 26, 2011, the Company closed the office in Carrollton, Georgia.

On April 29, 2011, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Park Avenue with offices in Valdosta (3), Bainbridge (2), Cairo, Lake Park, Stockbridge, McDonough, Oakwood, and Athens, Georgia and in Ocala, Florida. On October 21, 2011, the Company closed the office in Stockbridge, Georgia.

The Company plans to continue evaluating and bidding on failed bank opportunities and hopes to make additional FDIC-assisted acquisitions in the coming quarters.

In addition, 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. During 2010 and 2011, most new offices added by the Company were the result of branches acquired in FDIC-assisted acquisitions. In the first quarter of 2012, the Company opened its ninth metro-Dallas area office in The Colony, Texas and a loan production office in Austin, Texas. In July of 2012, the Company opened its tenth metro-Dallas area office in Southlake, Texas and a loan production office in Atlanta, Georgia. In August of 2012, the Company relocated from a leased facility to a bank-owned facility in Bluffton, South Carolina, and in September of 2012, the Company opened its second office in Mobile, Alabama. The Company also plans to complete fourth quarter relocations of its Wilmington, North Carolina office and its original Mobile, Alabama office from the current leased facilities to bank-owned facilities. In early 2013, the Company expects to replace its existing Charlotte, North Carolina loan production office with a full-service banking office.

On October 4, 2012, the Board of Directors approved and the Company executed a definitive agreement and plan of merger (the “Agreement”) with Genala Banc, Inc. (“Genala”) whereby Genala will be merged into the Company in a transaction valued at approximately $27.3 million. Genala is the holding Company for The Citizens Bank, which operates one banking office in Geneva, Alabama. As of September 30, 2012, The Citizens Bank had approximately $167 million of total assets, $45 million of loans and $137 million of deposits.

Under the terms of the Agreement, the Company will issue shares of its common stock valued at approximately $13.9 million plus approximately $13.4 million in cash for all outstanding shares of Genala common stock, subject to certain conditions and potential adjustments. Simultaneous with the closing of the transaction, Genala will merge into the Company, and The Citizens Bank will merge into the Bank. Completion of the transaction is subject to certain closing conditions, including customary regulatory approvals and the approval of the shareholders of Genala. The transaction is expected to close in late December 2012 or during the first quarter of 2013.

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 2012, the Company had $40.9 million of capital expenditures for premises and equipment. The Company’s capital expenditures for the full year of 2012 are expected to be in the range of $43 million to $46 million and include progress payments on construction projects expected to be completed in 2012 or 2013, 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 (i) the provisions to and the adequacy of the allowance for loan and lease losses, (ii) the fair value of its investment securities portfolio, (iii) the fair value of foreclosed assets not covered by FDIC loss share agreements and (iv) the fair value of assets acquired and liabilities assumed pursuant to business combination transactions, including the Company’s FDIC-assisted acquisitions, all involve a higher degree of judgment and complexity than its other significant accounting policies. Accordingly, the Company considers the determination of (i) the adequacy of the allowance for loan and lease losses, (ii) the fair value of its investment securities portfolio, (iii) the fair value of foreclosed assets not covered by FDIC loss share agreements and (iv) the fair value of assets acquired and liabilities assumed pursuant to business combination transactions to be critical accounting policies.

 

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Provisions to and adequacy of the allowance for loan and lease losses. Provisions to and the adequacy of the allowance for loan and lease losses 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 this 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.

Fair value of the investment securities portfolio. 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).

The Company utilizes independent third parties as its principal sources for determining fair value of its investment securities that are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, the fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. All fair value estimates received by the Company for its investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

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

Fair value of foreclosed assets not covered by FDIC loss share agreements. Repossessed personal properties and real estate acquired through or in lieu of foreclosure are measured on a non-recurring basis and are initially recorded at the lesser of current principal investment or fair value less estimated cost to sell at the date of repossession or foreclosure. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest expense to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of these assets are generally based on third party appraisals, broker price opinions or other valuations of the property.

Fair value of assets acquired and liabilities assumed pursuant to business combination transactions. Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. Purchased loans acquired in a business combination, including covered loans, are accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated credit quality and pursuant to the AICPA’s December 18, 2009 letter in which the AICPA summarized the SEC’s view regarding the accounting in subsequent periods for discount accretion associated with non-credit impaired loans acquired in a business combination or asset purchase. See the “Analysis of Financial Condition” section of this Management’s Discussion and Analysis for a detailed discussion of the Company’s accounting for purchased loans, including loans covered by FDIC loss share agreements.

Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are recorded at Day 1 Fair Values. See the “Analysis of Financial Condition” of this Management’s Discussion and Analysis for a detailed discussion of the Company’s accounting for covered foreclosed assets.

In connection with the Company’s FDIC-assisted acquisitions, the Company has recorded an FDIC loss share receivable to reflect the indemnification provided by the FDIC. Since the indemnified items are covered loans and covered foreclosed assets, which are measured at Day 1 Fair Values, the FDIC loss share receivable is also measured and recorded at Day 1 Fair Values. See the “Analysis of Financial Condition” section of this Management’s Discussion and Analysis for a detailed discussion of the Company’s accounting for purchased loans, including loans covered by FDIC loss share agreements.

Pursuant to the clawback provisions of the loss share agreements for the Company’s FDIC-assisted acquisitions, the Company may be required to reimburse the FDIC should actual losses be less than certain thresholds established in each loss share agreement. The amount of the clawback provision for each acquisition is measured and recorded at Day 1 Fair Values.

The Day 1 Fair Values of investment securities acquired in business combinations are generally based on quoted market prices, broker quotes, comprehensive interest rate tables or pricing matrices, or a combination thereof. The Day 1 Fair Values of assumed liabilities in business combinations is generally the amount payable by the Company necessary to completely satisfy the assumed obligations.

 

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RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 13 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, credit market and interest rate conditions; plans, goals, beliefs, expectations, thoughts, estimates and outlook for the future; revenue growth; net income and earnings per common share; net interest margin; net interest income; non-interest income, including service charges on deposit accounts, mortgage lending and trust income, gains (losses) on investment securities and sales of other assets; gains on FDIC-assisted acquisitions; income from accretion of the FDIC loss share receivable, net of amortization of the FDIC clawback payable; other loss share income; non-interest expense; efficiency ratio; anticipated future operating results and financial performance; asset quality and asset quality ratios, including the effects of current economic and real estate market conditions; nonperforming loans and leases; nonperforming assets; net charge-offs; net charge-off ratio; provision and allowance for loan and lease losses; past due loans and leases; current or future litigation; interest rate sensitivity, including the effects of possible interest rate changes; future growth and expansion opportunities including plans for making additional FDIC-assisted acquisitions and additional negotiated acquisitions and plans for opening new offices or relocating existing offices; opportunities and goals for future market share growth; expected capital expenditures; loan, lease and deposit growth, including growth in non-covered loans and leases from unfunded closed loans; changes in covered assets; changes in the volume, yield and value of the Company’s investment securities portfolio; availability of unused borrowings and other similar forecasts and statements of expectation. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “look,” “seek,” “may,” “will,” “could,” “trend,” “target,” “goal,” “hope,” 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 enter into additional FDIC-assisted or traditional negotiated acquisitions or problems with integrating or managing acquisitions; opportunities to profitably deploy capital; the ability to attract new or retain existing deposits, loans and leases; the ability to generate future revenue growth or to control future growth in non-interest expense; interest rate fluctuations, including changes in the yield curve between short-term and long-term interest rates; competitive factors and pricing pressures, including their effect on the Company’s net interest margin; general economic, unemployment, credit market and real estate market conditions, including their effect on the creditworthiness of borrowers and lessees, collateral values, the value of investment securities and asset recovery values, including the value of the FDIC loss share receivable and related assets covered by FDIC loss share agreements; changes in legal and regulatory requirements; recently enacted and potential legislation and regulatory actions, including legislation and regulatory actions intended to stabilize economic conditions and credit markets, increase regulation of the financial services industry, protect homeowners or consumers and increase capital requirements of insured depository institutions; changes in U.S. government monetary and fiscal policy; possible further downgrade of U.S. Treasury securities; adoption of new accounting standards or changes in existing standards; and adverse results in current or future litigation as well as other factors described in this 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 months and nine months ended September 30, 2012 and 2011 and supplemental quarterly financial data of the Company for each of the most recent eight quarters beginning with the fourth quarter of 2010 through the third quarter of 2012. These tables are qualified in their entirety by the consolidated financial statements and related notes presented elsewhere in this report.

Selected Consolidated Financial Data

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands, except per share amounts)  

Income statement data:

           

Interest income

   $ 49,456      $ 51,902         $ 147,172      $ 146,799   

Interest expense

     5,012        7,566           16,596        23,904   

Net interest income

     44,444        44,336           130,576        122,895   

Provision for loan and lease losses

     3,080        1,500           9,212        7,500   

Non-interest income

     14,491        16,071           44,012        104,119   

Non-interest expense

     28,682        31,800           84,571        93,191   

Net income available to common stockholders

     19,275        18,904           56,377        83,751   

Common share and per common share data:

           

Earnings – diluted

   $ 0.55      $ 0.55         $ 1.63      $ 2.43   

Book value

     13.78        11.87           13.78        11.87   

Dividends

     0.13        0.095           0.36        0.27   

Weighted-average diluted shares outstanding (thousands)

     34,963        34,510           34,872        34,434   

End of period shares outstanding (thousands)

     34,665        34,277           34,665        34,277   

Balance sheet data at period end:

           

Total assets

   $ 3,823,017      $ 3,932,145         $ 3,823,017      $ 3,932,145   

Loans and leases not covered by FDIC loss share agreements

     2,033,005        1,863,114           2,033,005        1,863,114   

Loans covered by FDIC loss share agreements

     652,798        860,425           652,798        860,425   

Allowance for loan and lease losses

     38,672        39,136           38,672        39,136   

FDIC loss share receivable

     174,899        324,456           174,899        324,456   

Investment securities AFS

     429,935        439,596           429,935        439,596   

Foreclosed assets covered by FDIC loss share agreements

     57,632        72,740           57,632        72,740   

Total deposits

     2,891,735        3,046,469           2,891,735        3,046,469   

Repurchase agreements with customers

     32,511        46,334           32,511        46,334   

Other borrowings

     280,771        289,353           280,771        289,353   

Subordinated debentures

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

Total common stockholders’ equity

     477,851        406,945           477,851        406,945   

Loan and lease (including covered loans) to deposit ratio

     92.88     89.40        92.88     89.40

Average balance sheet data:

           

Total average assets

   $ 3,739,170      $ 3,934,801         $ 3,768,206      $ 3,714,381   

Total average common stockholders’ equity

     467,449        395,430           450,044        361,123   

Average common equity to average assets

     12.50     10.05        11.94     9.72

Performance ratios:

           

Return on average assets*

     2.05     1.91        2.00     3.01

Return on average common stockholders’ equity*

     16.40        18.97           16.73        31.01   

Net interest margin – FTE*

     5.97        5.90           5.93        5.77   

Efficiency ratio

     47.00        50.75           46.69        39.86   

Common stock dividend payout ratio

     23.64        17.27           22.69        11.11   

Asset quality ratios:

           

Net charge-offs to average total loans and leases*(1)(2)

     0.32     0.33        0.31     0.63

Nonperforming loans and leases to total loans and leases(1)

     0.44        1.22           0.44        1.22   

Nonperforming assets to total assets(1)

     0.59        1.45           0.59        1.45   

Allowance for loan and lease losses as a percentage of:

           

Total loans and leases(1)

     1.90     2.10        1.90     2.10

Nonperforming loans and leases(1)

     435     172        435     172

Capital ratios at period end:

           

Tier 1 leverage

     13.87     11.46        13.87     11.46

Tier 1 risk-based capital

     17.82        18.26           17.82        18.26   

Total risk-based capital

     19.07        19.52           19.07        19.52   

 

* Ratios annualized based on actual days.
(1) Excludes loans and/or foreclosed assets covered by FDIC loss share agreements, except for their inclusion in total assets.
(2) Excludes net charge-offs related to loans covered by FDIC loss share agreements.

 

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Supplemental Quarterly Financial Data

(Dollars in thousands, except per share amounts)

 

    12/31/10     3/31/11     6/30/11     9/30/11     12/31/11     3/31/12     6/30/12     9/30/12  

Earnings Summary:

               

Net interest income

  $ 33,945      $ 36,083      $ 42,476      $ 44,336      $ 45,839      $ 43,833      $ 42,298      $ 44,444   

Federal tax (FTE) adjustment

    2,341        2,318        2,235        2,256        2,210        2,288        2,151        2,087   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (FTE)

    36,286        38,401        44,711        46,592        48,049        46,121        44,449        46,531   

Provision for loan and lease losses

    (4,100     (2,250     (3,750     (1,500     (4,275     (3,076     (3,055     (3,080

Non-interest income

    18,646        12,990        75,058        16,071        12,964        13,810        15,710        14,491   

Non-interest expense

    (25,274     (26,192     (35,200     (31,800     (29,339     (28,607     (27,282     (28,682
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pretax income (FTE)

    25,558        22,949        80,819        29,363        27,399        28,248        29,822        29,260   

FTE adjustment

    (2,341     (2,318     (2,235     (2,256     (2,210     (2,288     (2,151     (2,087

Provision for income taxes

    (6,303     (6,004     (28,380     (8,220     (7,604     (7,950     (8,584     (7,883

Noncontrolling interest

    17        3        13        17        (15     (1     5        (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

  $ 16,931      $ 14,630      $ 50,217      $ 18,904      $ 17,570      $ 18,009      $ 19,092      $ 19,275   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share – diluted *

  $ 0.49      $ 0.43      $ 1.46      $ 0.55      $ 0.51      $ 0.52      $ 0.55      $ 0.55   

Non-interest Income:

               

Service charges on deposit accounts

  $ 4,019      $ 3,838      $ 4,586      $ 4,734      $ 4,936      $ 4,693      $ 4,908      $ 5,000   

Mortgage lending income

    1,495        681        634        815        1,147        1,101        1,328        1,672   

Trust income

    888        782        803        810        811        774        888        865   

Bank owned life insurance income

    574        568        575        585        580        576        567        598   

Accretion of FDIC loss share receivable, net of amortization of FDIC clawback payable

    1,252        1,998        2,923        2,861        2,359        2,305        2,035        1,699   

Other loss share income, net

    304        971        984        2,976        1,501        1,983        3,197        2,270   

Gains (losses) on investment securities

    226        152        199        638        (56     1        402        —     

Gains on sales of other assets

    571        407        705        1,727        899        1,555        1,397        1,425   

Gains on FDIC-assisted transactions

    8,859        2,952        62,756        —          —          —          —          —     

Other

    458        641        893        925        787        822        988        962   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

  $ 18,646      $ 12,990      $ 75,058      $ 16,071      $ 12,964      $ 13,810      $ 15,710      $ 14,491   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense:

               

Salaries and employee benefits

  $ 12,351      $ 11,647      $ 14,817      $ 14,597      $ 15,202      $ 14,052      $ 14,574      $ 15,040   

Net occupancy expense

    2,999        3,106        3,775        4,301        3,522        3,878        3,650        4,105   

Other operating expenses

    9,764        11,211        16,172        12,398        10,106        10,168        8,549        9,028   

Amortization of intangibles

    160        228        436        504        509        509        509        509   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

  $ 25,274      $ 26,192      $ 35,200      $ 31,800      $ 29,339      $ 28,607      $ 27,282      $ 28,682   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan and Lease Losses:

               

Balance at beginning of period

  $ 40,250      $ 40,230      $ 39,225      $ 39,124      $ 39,136      $ 39,169      $ 38,632      $ 38,862   

Net charge-offs

    (4,120     (3,255     (3,851     (1,488     (4,242     (3,613     (2,825     (3,270

Provision for loan and lease losses

    4,100        2,250        3,750        1,500        4,275        3,076        3,055        3,080   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 40,230      $ 39,225      $ 39,124      $ 39,136      $ 39,169      $ 38,632      $ 38,862      $ 38,672   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Ratios:

               

Net interest margin—FTE**

    5.35     5.61     5.80     5.90     6.05     5.98     5.84     5.97

Efficiency ratio

    46.01        50.97        29.39        50.75        48.09        47.73        45.35        47.00   

Net charge-offs to average loans and leases**(1)(2)

    0.87        0.72        0.85        0.33        0.84        0.44        0.18        0.32   

Nonperforming loans and leases to total loans and leases(1)

    0.75        0.77        1.09        1.22        0.72        0.61        0.50        0.44   

Nonperforming assets to total assets(1)

    1.72        1.62        1.39        1.45        1.18        0.77        0.63        0.59   

Allowance for loan and lease losses to total loans and leases(1)

    2.17        2.17        2.17        2.10        2.08        2.04        1.96        1.90   

Loans and leases past due 30 days or more, including past due non-accrual loans and leases, to total loans and leases(1)

    2.02        2.19        2.47        1.89        1.56        0.86        0.75        0.62   

 

* Adjusted to give effect to 2-for-1 stock split effective August 16, 2011.
** Ratios for interim periods annualized based on actual days.
(1) Excludes loans and/or foreclosed assets covered by FDIC loss share agreements, except for their inclusion in total assets.
(2) Excludes net charge-offs related to loans covered by FDIC loss share agreements.

 

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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 typically models its change in net interest income assuming interest rates go up 100 bps, up 200 bps, down 100 bps and down 200 bps. Based on current conditions, the Company is now modeling its change in net interest income assuming interest rates go up 100 bps, up 200 bps, up 300 bps and up 400 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, 2012. 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
+400      0.2%
+300   (0.4)
+200   (0.6)
+100   (0.3)
-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 the Company’s 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 the Company’s 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 January 5, 2012, the Company and the Bank were served with a summons and complaint filed on December 19, 2011 in the Circuit Court of Lonoke County, Arkansas, Division III, styled Robert Walker, Ann B. Hines and Judith Belk vs. Bank of the Ozarks, Inc. and Bank of the Ozarks, No. CV-2011-777. The complaint alleges that the defendants have harmed the plaintiffs, former customers of the Bank, by improper, unfair and unconscionable assessment and collection of excessive overdraft fees from the plaintiffs. According to the complaint, plaintiffs claim that the Bank employs sophisticated software to automate its overdraft system, and that this system unfairly and inequitably manipulates and alters customers’ transaction records in order to maximize overdraft penalties, particularly utilizing a practice of posting of items in “high-to-low” order, despite the actual sequence in which such items are presented for payment. Plaintiffs claim that the Bank’s deposit agreements with customers do not adequately disclose the Bank’s overdraft assessment policies and are ambiguous, deceptive, unfair and misleading. Plaintiffs’ complaint also alleges that these actions and omissions constitute breach of contract, breach of the implied covenant of good faith and fair dealing, unconscionable conduct, conversion, unjust enrichment and violation of the Arkansas Deceptive Trade Practices Act. The plaintiffs seek to have the case certified by the court as a class action for all Bank account holders similarly situated, and seek a declaratory judgment as to the wrongful nature of the Bank’s overdraft fee policies, restitution of overdraft fees paid by the plaintiffs and the putative class as a result of the actions cited in the complaint, disgorgement of profits as a result of the alleged wrongful actions and unspecified compensatory and punitive damages, together with pre-judgment interest, costs and plaintiffs’ attorneys’ fees. The Company believes the plaintiffs’ claims are unfounded and intends to defend against these claims.

On April 8, 2011, the Company was served with a petition filed on March 31, 2011 by the Seib Family, GP, LLC, a Texas limited liability company, as General Partner of Seib Family, LP in the District Court of Dallas County, Texas, (“district court”) Cause Number 11-04057, against the Company and two entities which the plaintiff apparently believed had some type of ownership interest in a former borrower of the Bank, alleging, among other things, that the defendants fraudulently induced the plaintiff to purchase a tract of real estate consisting of approximately 60 acres located at 318 Cadiz Street in Dallas, Texas, owned by the former borrower and financed by the Bank. The petition alleges that the defendants knew that a levee protecting the property from the Trinity River flood plain did not meet federal standards, that the defendants omitted to disclose that information to plaintiff prior to the sale of the property, and that due to the problems or potential problems with the levee, the value of the property was significantly impaired, as supported by a report by the U.S. Corps of Engineers concerning the condition of the levee, released at approximately the same time as the plaintiff purchased the property from the former borrower and affiliates with the aid and assistance of the Company. The petition alleges that the plaintiff did not become aware of the U.S. Corps of Engineers’ report until a month or two after it purchased the property.

The original petition alleged that the defendants’ conduct violated the Texas Securities Act and the Texas Deceptive Trade Practices Act, and sought compensatory damages, trebled under the Texas Deceptive Trade Practices Act, plus exemplary damages, attorneys’ fees, costs, interest, and other relief the court deems just. Since the original petition was filed, the plaintiff has (i) dropped all claims against the Company, but added the Bank to its petition and (ii) dropped all claims with respect to the Texas Deceptive Trade Practices Act. Under its amended petition, the Plaintiff is seeking $15,962,677 in actual damages and $31,925,354 in exemplary damages.

On June 15, 2012, the district court granted the Bank’s motion for Summary Judgment. Subsequent to the district court’s granting of the Bank’s Motion for Summary Judgment, the plaintiff filed a notice of nonsuit with prejudice with respect to its claims against the other two defendants, which was granted. In response, the Bank filed a notice of nonsuit without prejudice with respect to the Bank’s claim for attorneys’ fees and costs against the plaintiff as to its claims under the Texas Deceptive Trade Practices Act, which resulted in dismissal of that claim without prejudice. On or about August 23, 2012, the plaintiff filed a Notice of Appeal with the district court, which appealed the summary judgment ruling to the Fifth Court of Appeals. The Company believes the allegations as contained in the petition are wholly without merit, and this belief is supported by the district court’s grant of Summary Judgment. The Company intends to vigorously defend against the appeal of the district court’s recent ruling.

The Company is party to various other legal proceedings, as both plaintiff and defendant, arising in the ordinary course of business, including claims of lender liability, predatory lending, broken promises and other similar lending-related claims, as well as legal proceedings arising from acquired operations in its FDIC-assisted acquisitions. In addition, the Company and the Bank are parties to three legal proceedings involving third party claims alleging that the Company and the Bank, along with certain other financial institutions, have infringed certain “business method” patents claimed to be violated by the institutions’ use of web site authentication software and check imaging and processing software not authorized by the patent holder claimants. While the ultimate resolution of these various claims and proceedings cannot be determined at this time, management of the Company believes that such claims and proceedings, individually or in the aggregate, will not have a material adverse effect on the future results of operations, financial condition or liquidity of the Company.

 

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Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A Risk Factors in the Company’s 2011 annual report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012.

 

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. Mine Safety Disclosures

Not Applicable.

 

Item 5. Other Information

None.

 

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, 2012       /s/ Greg McKinney
      Greg McKinney
      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).
  10.1    Form of Indemnification Agreement between the Registrant and its directors newly elected for the first time at the Registrant’s annual shareholders’ meeting on April 17, 2012 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 18, 2012 and incorporated herein by this reference).
  10.2    Fourth Amendment to the Bank of the Ozarks, Inc. 401(k) Retirement Savings Plan, adopted on August 21, 2012 (previously filed as Exhibit 10.1(a) to the Company’s current report on Form 8-K filed with the Commission on August 23, 2012, and incorporated herein by this reference).
  10.3(a)    Bank of the Ozarks, Inc. 2009 Restricted Stock Plan, as amended on August 21, 2012 (previously filed as Exhibit 10.1(b)(i) to the Company’s current report on Form 8-K filed with the Commission on August 23, 2012, and incorporated herein by this reference).
  10.3(b)    Form of Notice of Grant of Restricted Stock and Award Agreement, as amended on August 21, 2012 (previously filed as Exhibit 10-1(b)(ii) to the Company’s current report on Form 8-K filed with the Commission on August 23, 2012, and incorporated herein by this reference).
  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.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase
101.DEF *    XBRL Taxonomy Definition Linkbase
101.LAB*    XBRL Extension Label Linkbase
101.PRE *    XBRL Taxonomy Extension Presentation Linkbase

 

*Pursuant to Rule 406T of Regulations S-T, these interactive data files are not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

 

75