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 June 30, 2014

 

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

For the transition period from                      to                      .

Commission File Number 0-22759

 

 

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

ARKANSAS   71-0556208
(State or other jurisdiction of   (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

 

 

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 non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company in Rule 12b-2 of the Exchange Act.

 

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 June 30, 2014

Common Stock, $0.01 par value per share   79,662,150

 

 

 


Table of Contents

BANK OF THE OZARKS, INC.

FORM 10-Q

June 30, 2014

INDEX

 

PART I.

  

Financial Information

  

Item 1.

  

Financial Statements

  
  

Consolidated Balance Sheets as of June 30, 2014 and 2013 and December 31, 2013

     1   
  

Consolidated Statements of Income for the Three Months Ended June 30, 2014 and 2013 and the Six Months Ended June 30, 2014 and 2013

     2   
  

Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2014 and 2013 and the Six Months Ended June 30, 2014 and 2013

     3   
  

Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2014 and 2013

     4   
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

     5   
  

Notes to Consolidated Financial Statements

     6   

Item 2.

  

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

     37   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     83   

Item 4.

  

Controls and Procedures

     84   

PART II.

  

Other Information

  

Item 1.

  

Legal Proceedings

     85   

Item 1A.

  

Risk Factors

     85   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     86   

Item 3.

  

Defaults Upon Senior Securities

     86   

Item 4.

  

Mine Safety Disclosures

     86   

Item 5.

  

Other Information

     86   

Item 6.

  

Exhibits

     86   

Signature

     87   

Exhibit Index

     88   


Table of Contents
PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

 

     Unaudited        
     June 30,     December 31,
2013
 
     2014     2013    
     (Dollars in thousands, except per share amounts)  

ASSETS

      

Cash and due from banks

   $ 107,240      $ 59,245      $ 195,094   

Interest earning deposits

     3,448        1,647        881   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     110,688        60,892        195,975   

Investment securities - available for sale (“AFS”)

     892,129        490,748        669,384   

Non-purchased loans and leases

     3,171,585        2,443,342        2,632,565   

Purchased loans not covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements (“purchased non-covered loans”)

     1,127,689        31,027        372,723   

Loans covered by FDIC loss share agreements (“covered loans”)

     276,380        480,752        351,791   

Allowance for loan and lease losses

     (46,958     (39,372     (42,945
  

 

 

   

 

 

   

 

 

 

Net loans and leases

     4,528,696        2,915,749        3,314,134   

FDIC loss share receivable

     50,679        112,716        71,854   

Premises and equipment, net

     265,061        225,838        245,472   

Foreclosed assets not covered by FDIC loss share agreements

     20,581        10,451        11,851   

Foreclosed assets covered by FDIC loss share agreements

     35,775        46,157        37,960   

Accrued interest receivable

     21,143        13,837        14,359   

Bank owned life insurance (“BOLI”)

     179,277        126,031        143,473   

Intangible assets, net

     108,640        10,690        19,158   

Other, net

     85,306        30,523        67,550   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,297,975      $ 4,043,632      $ 4,791,170   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Deposits:

      

Demand non-interest bearing

   $ 1,058,210      $ 591,879      $ 746,320   

Savings and interest bearing transaction

     2,748,929        1,665,789        2,073,497   

Time

     1,176,758        726,961        897,210   
  

 

 

   

 

 

   

 

 

 

Total deposits

     4,983,897        2,984,629        3,717,027   

Repurchase agreements with customers

     55,999        24,704        53,103   

Other borrowings

     280,875        391,690        280,895   

Subordinated debentures

     64,950        64,950        64,950   

FDIC clawback payable

     26,533        25,596        25,897   

Accrued interest payable and other liabilities

     32,063        17,493        16,768   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     5,444,317        3,509,062        4,158,640   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ equity:

      

Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding at June 30, 2014 and 2013 or at December 31, 2013

     0        0        0   

Common stock; $0.01 par value; 125,000,000 shares authorized; 79,662,150, 70,875,848 and 73,711,704 shares issued and outstanding at June 30, 2014, June 30, 2013 and December 31, 2013, respectively

     797        709        737   

Additional paid-in capital

     315,267        78,746        143,017   

Retained earnings

     524,134        452,568        488,978   

Accumulated other comprehensive income (loss)

     10,006        (898     (3,672
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity before noncontrolling interest

     850,204        531,125        629,060   

Noncontrolling interest

     3,454        3,445        3,470   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     853,658        534,570        632,530   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 6,297,975      $ 4,043,632      $ 4,791,170   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2014     2013     2014     2013  
     (Dollars in thousands, except per share amounts)  

Interest income:

        

Non-purchased loans and leases

   $ 36,833      $ 30,719      $ 70,247      $ 60,598   

Purchased non-covered loans

     13,998        724        21,478        1,713   

Covered loans

     11,130        11,480        20,535        24,344   

Investment securities:

        

Taxable

     2,790        1,183        5,149        2,468   

Tax-exempt

     4,974        3,849        9,371        7,593   

Deposits with banks and federal funds sold

     35        2        38        10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     69,760        47,957        126,818        96,726   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,827        1,374        3,408        2,920   

Repurchase agreements with customers

     13        6        25        13   

Other borrowings

     2,692        2,684        5,347        5,332   

Subordinated debentures

     427        428        840        857   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     4,959        4,492        9,620        9,122   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     64,801        43,465        117,198        87,604   

Provision for loan and lease losses

     (5,582     (2,666     (6,887     (5,394
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     59,219        40,799        110,311        82,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges on deposit accounts

     6,605        5,074        12,244        9,796   

Mortgage lending income

     1,126        1,643        2,080        3,384   

Trust income

     1,364        865        2,681        1,748   

BOLI income

     1,278        1,104        2,408        2,186   

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

     (741     2,481        (49     4,873   

Other income from loss share and purchased non-covered loans, net

     3,629        3,689        6,940        5,844   

Net gains on investment securities

     18        0        23        156   

Gains on sales of other assets

     1,448        3,110        2,422        5,084   

Gain on merger and acquisition transaction

     0        0        4,667        0   

Other

     2,661        1,021        4,333        2,273   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     17,388        18,987        37,749        35,344   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     18,831        15,294        36,520        30,989   

Net occupancy and equipment

     5,707        4,370        10,751        8,884   

Other operating expenses

     13,340        10,237        28,062        19,259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     37,878        29,901        75,333        59,132   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     38,729        29,885        72,727        58,422   

Provision for income taxes

     12,251        9,506        20,981        18,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     26,478        20,379        51,746        40,390   

Earnings attributable to noncontrolling interest

     8        8        16        (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 26,486      $ 20,387      $ 51,762      $ 40,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.35      $ 0.29      $ 0.69      $ 0.57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.34      $ 0.29      $ 0.68      $ 0.57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.115      $ 0.085      $ 0.225      $ 0.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

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     Six Months Ended  
     June 30,     June 30,  
     2014     2013     2014     2013  
     (Dollars in thousands)  

Net income

   $ 26,478      $ 20,379      $ 51,746      $ 40,390   

Other comprehensive income (loss):

        

Unrealized gains and losses on investment securities AFS

     10,786        (16,335     22,529        (19,063

Tax effect of unrealized gains and losses on investment securities AFS

     (4,231     6,408        (8,837     7,476   

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

     (18     0        (23     (156

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

     7        0        9        62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     6,544        (9,927     13,678        (11,681
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 33,022      $ 10,452      $ 65,424      $ 28,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

 

     Common
Stock
     Additional
Paid-In

Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive

Income (Loss)
    Non-Controlling
Interest
    Total  
     (Dollars in thousands)  

Balances – January 1, 2013

   $ 706       $ 72,690       $ 423,485      $ 10,783      $ 3,442      $ 511,106   

Net income

     0         0         40,390        0        0        40,390   

Earnings attributable to noncontrolling interest

     0         0         (3     0        3        0   

Total other comprehensive income (loss)

     0         0         0        (11,681     0        (11,681

Common stock dividends

     0         0         (11,304     0        0        (11,304

Issuance of 332,400 split-adjusted shares of common stock for exercise of stock options

     3         2,436         0        0        0        2,439   

Excess tax benefit on exercise and forfeiture of stock options

     0         1,374         0        0        0        1,374   

Stock-based compensation expense

     0         2,246         0        0        0        2,246   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – June 30, 2013

   $ 709       $ 78,746       $ 452,568      $ (898   $ 3,445      $ 534,570   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – January 1, 2014, as recast

     737         143,017         488,978        (3,672     3,470        632,530   

Net income

     0         0         51,746        0        0        51,746   

Earnings attributable to noncontrolling interest

     0         0         16        0        (16     0   

Total other comprehensive income (loss)

     0         0         0        13,678        0        13,678   

Common stock dividends

     0         0         (16,606     0        0        (16,606

Issuance of 185,000 split-adjusted shares of common stock for exercise of stock options

     2         1,570         0        0        0        1,572   

Forfeiture of 400 split-adjusted shares of unvested common stock under restricted stock plan

     0         0         0        0        0        0   

Excess tax benefit on exercise and forfeiture of stock options

     0         1,373         0        0        0        1,373   

Stock-based compensation expense

     0         3,050         0        0        0        3,050   

Issuance of 5,765,846 split-adjusted shares of common stock for acquisition of Summit Bancorp, Inc., net of issuance costs of $88,000

     58         166,257         0        0        0        166,315   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – June 30, 2014

   $ 797       $ 315,267       $ 524,134      $ 10,006      $ 3,454      $ 853,658   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

4


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

     Six Months Ended  
     June 30,  
     2014     2013  
     (Dollars in thousands)  

Cash flows from operating activities:

    

Net income

   $ 51,746      $ 40,390   

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

    

Depreciation

     3,816        3,530   

Amortization

     1,932        1,429   

Earnings attributable to noncontrolling interest

     16        (3

Provision for loan and lease losses

     6,887        5,394   

Provision for losses on foreclosed assets

     863        191   

Net amortization of investment securities AFS

     301        379   

Net gains on investment securities AFS

     (23     (156

Originations of mortgage loans held for sale

     (90,110     (121,484

Proceeds from sales of mortgage loans held for sale

     83,337        138,764   

Accretion of covered loans

     (20,535     (24,344

Accretion of purchased non-covered loans

     (21,478     (1,713

(Accretion)/amortization of FDIC loss share receivable, net of amortization of FDIC clawback payable

     49        (4,873

Gains on sales of other assets

     (2,422     (5,084

Gain on merger and acquisition transaction

     (4,667     0   

Deferred income tax benefit

     (3,407     (245

Increase in cash surrender value of BOLI

     (2,408     (2,186

Excess tax benefit on exercise and forfeiture of stock options

     (1,373     (1,374

Stock-based compensation expense

     3,050        2,246   

Changes in assets and liabilities:

    

Accrued interest receivable

     (2,049     (635

Other assets, net

     3,449        (364

Accrued interest payable and other liabilities

     13,094        3,677   
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,068        33,539   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales of investment securities AFS

     48,394        999   

Proceeds from maturities/calls/paydowns of investment securities AFS

     29,706        52,322   

Purchases of investment securities AFS

     (35,109     (74,659

Net advances on non-purchased loans and leases

     (539,695     (345,499

Payments received on purchased non-covered loans

     138,949        12,220   

Payments received on covered loans

     68,454        110,257   

Payments received from FDIC under loss share agreements

     16,076        45,745   

Other net decreases in covered assets and FDIC loss share receivable

     9,246        14,665   

Purchases of premises and equipment

     (4,586     (5,939

Proceeds from sales of other assets

     30,166        27,216   

Cash invested in unconsolidated investments

     (2,320     (104

Net cash received in merger and acquisition transactions

     121,918        0   
  

 

 

   

 

 

 

Net cash used by investing activities

     (118,801     (162,777
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     41,190        (116,426

Net (repayments of) proceeds from other borrowings

     (464     110,926   

Net decrease in repurchase agreements with customers

     (13,619     (4,846

Proceeds from exercise of stock options

     1,572        2,439   

Excess tax benefit on exercise and forfeiture of stock options

     1,373        1,374   

Cash dividends paid on common stock

     (16,606     (11,304
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     13,446        (17,837
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (85,287     (147,075

Cash and cash equivalents – beginning of period

     195,975        207,967   
  

 

 

   

 

 

 

Cash and cash equivalents – end of period

   $ 110,688      $ 60,892   
  

 

 

   

 

 

 

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.

At June 30, 2014, the Company had 164 offices, including 88 in Arkansas, 28 in Georgia, 21 in Texas, 16 in North Carolina, five in Florida, three in Alabama, and one office each in South Carolina, New York and California.

 

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, 2013.

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 six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year or future periods.

On June 23, 2014, the Company completed a two-for-one 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 June 13, 2014. 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 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 the second quarter of 2014, the Company revised its initial estimates regarding the expected recovery of acquired assets with built-in losses in its July 31, 2013 acquisition of The First National Bank of Shelby (“First National Bank”). As a result, certain amounts previously reported in the Company’s financial statements have been recast.

 

3. Acquisitions

Summit Bancorp, Inc.

On May 16, 2014, the Company completed its acquisition of Summit Bancorp, Inc. (“Summit”) and Summit Bank, its wholly-owned bank subsidiary, for an aggregate of $42.5 million in cash and 5,765,846 split-adjusted shares of its common stock. The acquisition of Summit expanded the Company’s service area in Central, South and Western Arkansas by adding 23 banking locations and one loan production office in nine Arkansas counties. During the second quarter of 2014, the Company closed one of the banking offices and the one loan production office acquired in the Summit acquisition.

 

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The following table provides a summary of the assets acquired and liabilities assumed as recorded by Summit, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, and the resultant fair values of those assets and liabilities as recorded by the Company. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The fair value adjustments and the resultant fair values shown in the following table continue to be evaluated by management and may be subject to further adjustment.

 

     May 16, 2014  
     As Recorded by
Summit
    Fair Value
Adjustments
    As Recorded
by the
Company
 
     (Dollars in thousands)  

Assets acquired:

    

Cash, due from banks and interest earning deposits

   $ 84,106      $ (304 ) a    $ 83,802   

Investment securities

     242,149        765   b      242,914   

Loans and leases

     742,546        (24,718 ) c      717,828   

Allowance for loan losses

     (13,183     13,183   c      0   

Premises and equipment

     13,773        (1,108 ) d      12,665   

Foreclosed assets

     3,094        (1,088 ) e      2,006   

Accrued interest receivable and other assets

     11,016        1,461   f      12,477   

Bank owned life insurance

     33,398        0        33,398   

Core deposit intangible asset

     0        15,340   g      15,340   

Deferred income taxes

     3,878        953   h      4,831   
  

 

 

   

 

 

   

 

 

 

Total assets acquired

     1,120,777        4,484        1,125,261   
  

 

 

   

 

 

   

 

 

 

Liabilities assumed:

      

Deposits

     965,687        4,074   i      969,761   

Repurchase agreements with customers

     16,515        0        16,515   

Accrued interest payable and other liabilities

     2,352        1,206   j      3,558   
  

 

 

   

 

 

   

 

 

 

Total liabilities assumed

     984,554        5,280        989,834   
  

 

 

   

 

 

   

 

 

 

Net assets acquired

   $ 136,223      $ (796     135,427   
  

 

 

   

 

 

   

Consideration paid:

      

Cash

         42,451   

Stock

         166,402   
      

 

 

 

Total consideration paid

         208,853   
      

 

 

 

Goodwill

       $ 73,426   
      

 

 

 

Explanation of fair value adjustments

 

a- Adjustment reflects the fair value adjustment based on the Company’s evaluation of acquired interest earning deposits.
b- Adjustment reflects the fair value adjustment based on the Company’s pricing of the acquired investment securities portfolio.
c- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the recorded allowance for loan losses.
d- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired.
e- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired foreclosed assets.
f- Adjustment reflects the fair value adjustment based on the Company’s evaluation of accrued interest receivable and other assets.
g- Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.
h- This adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting purposes and their basis for federal income tax purposes.
i- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired deposits.
j- Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly attributable to the acquisition of Summit.

Goodwill of $73.4 million, which is the excess of the merger consideration over the fair value of net assets acquired, was recorded in the Summit acquisition and is the result of expected operational synergies and other factors. This goodwill is not expected to be deductible for tax purposes.

The Company’s consolidated results of operations include the operating results for Summit beginning May 16, 2014 through the end of the reporting period. Summit’s operating results contributed $5.8 million of net interest income and $2.8 million of net income to the Company’s results of operations for both the three months and six months ended June 30, 2014.

 

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The following unaudited supplemental pro forma information is presented to show the estimated results assuming Summit was acquired as of the beginning of each period presented, adjusted for estimated potential costs savings. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisition as of January 1, 2013 or 2014 and should not be considered as representative of future operating results.

 

     Six Months Ended
June 30,
 
     2014      2013  
    

(Dollars in thousands,

except per share amounts)

 

Net interest income – pro forma (unaudited)

   $ 133,828       $ 109,995   

Net income – pro forma (unaudited)

   $ 58,954       $ 49,352   

Diluted earnings per common share – pro forma (unaudited)

   $ 0.73       $ 0.64   

Bancshares, Inc.

On March 5, 2014, the Company completed its acquisition of Bancshares, Inc. (“Bancshares”) of Houston, Texas and OMNIBANK, N.A., its wholly-owned bank subsidiary for an aggregate of $21.5 million in cash. The acquisition of Bancshares expanded the Company’s service area in South Texas by adding three offices in Houston and one office each in Austin, Cedar Park, Lockhart, and San Antonio.

The following table provides a summary of the assets acquired and liabilities assumed as recorded by Bancshares, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, and the resultant fair values of those assets and liabilities as recorded by the Company. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The fair value adjustments and the resultant fair values shown in the following table continue to be evaluated by management and may be subject to further adjustment.

 

     March 5, 2014  
     As Recorded by
Bancshares
    Fair Value
Adjustments
    As Recorded
by the
Company
 
     (Dollars in thousands)  

Assets acquired:

    

Cash and due from banks

   $ 102,156      $ 0      $ 102,156   

Investment securities

     1,860        (1 ) a      1,859   

Loans and leases

     165,939        (10,764 ) b      155,175   

Allowance for loan losses

     (5,280     5,280   b      0   

Premises and equipment

     6,259        1,619   c      7,878   

Foreclosed assets

     7,634        (2,916 ) d      4,718   

Accrued interest receivable and other assets

     608        (294 ) e      314   

Core deposit intangible asset

     0        2,648   f      2,648   

Deferred income taxes

     7,110        1,881   g      8,991   
  

 

 

   

 

 

   

 

 

 

Total assets acquired

     286,286        (2,547     283,739   
  

 

 

   

 

 

   

 

 

 

Liabilities assumed:

      

Deposits

     255,798        121   h     255,919   

Accrued interest payable and other liabilities

     1,358        295   i      1,653   
  

 

 

   

 

 

   

 

 

 

Total liabilities assumed

     257,156        416        257,572   
  

 

 

   

 

 

   

 

 

 

Net assets acquired

   $ 29,130      $ (2,963     26,167   
  

 

 

   

 

 

   

Total cash consideration paid

         (21,500
      

 

 

 

Gain on acquisition

       $ 4,667   
      

 

 

 

Explanation of fair value adjustments

 

a- Adjustment reflects the fair value adjustment based on the Company’s pricing of the acquired investment securities portfolio.
b- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the recorded allowance for loan losses.
c- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired.
d- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired foreclosed assets.
e- Adjustment reflects the fair value adjustment based on the Company’s evaluation of accrued interest receivable and other assets.
f- Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.
g-

This adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting purposes and their basis for federal income tax purposes. Management has determined that acquired net operating loss carryforwards are expected to be settled in future periods where the realization of such benefits would be subject to limitations under section 382 of the Internal Revenue Code (“section 382

 

8


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  limitations”). Accordingly, as of the date of acquisition, the Company had established a deferred tax asset valuation allowance of approximately $0.5 million to reflect its assessment that the realization of the benefits from the settlement of these acquired net operating losses is expected to be subject to section 382 limitations. To the extent that additional information becomes available, management may be required to adjust its estimates and assumptions regarding the realization of the benefits associated with these acquired net operating losses by adjusting this deferred tax asset valuation allowance.
h- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired deposits.
i- Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly attributable to the acquisition of Bancshares.

The Company’s consolidated results of operations include the operating results for Bancshares beginning March 6, 2014 through the end of the reporting period. For the three months ended June 30, 2014, Bancshares’ operating results contributed $2.4 million of net interest income and $1.3 million of net income to the Company’s results of operations. For the six months ended June 30, 2014, Bancshares’ operating results contributed $3.4 million of net interest income and $6.4 million of net income, including the $4.7 million of tax-exempt bargain purchase gain, to the Company’s results of operations.

The First National Bank of Shelby

On July 31, 2013, the Company completed the First National Bank acquisition whereby First National Bank merged with and into the Company’s wholly-owned bank subsidiary for an aggregate of $8.4 million in cash and 2,514,770 split-adjusted shares of its common stock. The Company also acquired certain real property from parties related to First National Bank and on which certain First National Bank offices are located for $3.8 million in cash.

The acquisition of First National Bank expanded the Company’s service area in North Carolina by adding 14 offices in Shelby, North Carolina and the surrounding communities. On September 24, 2013 the Company closed one of the acquired offices in Shelby, North Carolina.

During the second quarter of 2014, management revised its initial estimates and assumptions regarding the expected recovery of acquired assets with built-in losses, specifically the timing of expected charge-offs of purchased non-covered loans, in the First National Bank acquisition. As a result of such revision, management concluded that the deferred tax asset valuation allowance of $4.1 million was not necessary. Because such revision occurred during the first 12 months following the date of acquisition and was not the result of changes in circumstances, management has recast the third quarter 2013 financial statements, along with all subsequent financial statements, to increase the bargain purchase gain on the First National Bank acquisition by $4.1 million to reflect this change in estimate.

 

9


Table of Contents

The following table provides a summary of the assets acquired and liabilities assumed as recorded by First National Bank, the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, the recast adjustment described above and the resultant fair values of those assets and liabilities as recorded by the Company.

 

     July 31, 2013  
     As Recorded
by First
National Bank
    Fair Value
Adjustments
    Recast
Adjustment
     As Recorded
by the
Company
 
     (Dollars in thousands)  

Assets acquired:

  

Cash and due from banks

   $ 69,285      $ 0      $ 0       $ 69,285   

Investment securities

     149,943        (599 ) a      0         149,344   

Loans and leases

     432,250        (44,183 ) b      0         388,067   

Allowance for loan losses

     (13,931     13,931   b      0         0   

Premises and equipment

     14,318        5,064   c      0         19,382   

Foreclosed assets

     3,073        (915 ) d      0         2,158   

Accrued interest receivable

     1,234        (110 ) e      0         1,124   

BOLI

     14,812        0        0         14,812   

Core deposit intangible asset

     0        10,136   f      0         10,136   

Deferred income taxes

     12,179        12,325   g      4,102         28,606   

Other assets

     4,277        (251 ) e      0         4,026   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total assets acquired

     687,440        (4,602     4,102         686,940   
  

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities assumed:

         

Deposits

     595,668        4,950   h      0         600,618   

Repurchase agreements with customers

     6,405        0        0         6,405   

Accrued interest payable and other liabilities

     1,296        1,164   i      0         2,460   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities assumed

     603,369        6,114        0         609,483   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net assets acquired

   $ 84,071      $ (10,716   $ 4,102         77,457   
  

 

 

   

 

 

   

 

 

    

 

 

 

Consideration paid:

         

Cash

            (12,215

Common stock

            (60,079
         

 

 

 

Total consideration paid

            (72,294
         

 

 

 

Gain on acquisition

          $ 5,163   
         

 

 

 

Explanation of fair value adjustments

 

a- Adjustment reflects the fair value adjustment based on the Company’s pricing of the acquired investment securities portfolio.
b- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the recorded allowance for loan losses.
c- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired.
d- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired foreclosed assets.
e- Adjustment reflects the fair value adjustment based on the Company’s evaluation of accrued interest receivable and other assets.
f- Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.
g- This adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting purposes and their basis for federal income tax purposes. Management initially determined that acquired net operating loss carryforwards and other acquired assets with built-in losses are expected to be settled or otherwise recovered in future periods where the realization of such benefits would be subject to section 382 limitations. Accordingly, at the date of acquisition, the Company established a deferred tax asset valuation allowance of approximately $4.1 million to reflect its initial assessment that the realization of the benefits from the settlement or recovery of certain of these acquired assets and net operating losses is expected to be subject to section 382 limitations. During the second quarter of 2014, management determined such valuation allowance was not necessary. Accordingly, the Company’s acquisition of First National Bank has been recast to reflect such determination.
h- Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired deposits.
i- Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly attributable to the acquisition of First National Bank.

Beginning August 1, 2013, First National Bank operations are included in the Company’s consolidated results of operations. Accordingly, no revenue or earnings of First National Bank are included in the Company’s results of operations for the three months or six months ended June 30, 2013.

 

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Table of Contents

As a result of the recast adjustment described above, 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 this recast adjustment.

 

     As Previously
Reported
    Recast
Adjustment
     As Recast  
     (Dollars in thousands, except per share amounts)  

December 31, 2013:

    

Deferred income tax asset valuation allowance

   $ (4,102   $ 4,102       $ 0   

Total stockholders’ equity before noncontrolling interest

     846,102        4,102         850,204   

Gain on merger and acquisition transaction

     1,061        4,102         5,163   

Net income available to common stockholders

     87,135        4,102         91,237   

Diluted earnings per common share

   $ 1.20      $ 0.06       $ 1.26   

 

4. Earnings Per Common Share (“EPS”)

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding after consideration of the dilutive effect, if any, of the Company’s outstanding common stock options using the treasury stock method. No options to purchase shares of the Company’s common stock for the three months or six months ended June 30, 2014 and 2013 were excluded from the diluted EPS calculations as all options were dilutive for all periods presented.

The following table presents the computation of basic and diluted EPS for the periods indicated.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2014      2013      2014      2013  
     (In thousands, except per share amounts)  

Numerator:

     

Distributed earnings allocated to common stock

   $ 8,497       $ 6,013       $ 16,606       $ 11,304   

Undistributed earnings allocated to common stock

     17,989         14,374         35,156         29,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common stock

   $ 26,486       $ 20,387       $ 51,762       $ 40,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

     

Denominator for basic EPS – weighted-average common shares

     76,743         70,806         75,281         70,726   

Effect of dilutive securities – stock options

     723         676         700         616   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     77,466         71,482         75,981         71,342   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 0.35       $ 0.29       $ 0.69       $ 0.57   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 0.34       $ 0.29       $ 0.68       $ 0.57   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

5. Investment Securities

At June 30, 2014 and 2013 and at December 31, 2013, 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).

 

11


Table of Contents

The following table presents the amortized cost and estimated fair value of investment securities AFS as of the dates indicated. The Company’s holdings of “other equity securities” include Federal Home Loan Bank of Dallas (“FHLB – Dallas”) 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)  

June 30, 2014:

     

Obligations of state and political subdivisions

   $ 603,533       $ 15,536       $ (2,504   $ 616,565   

U.S. Government agency securities

     254,878         5,613         (2,180     258,311   

Corporate obligations

     685         0         0        685   

Other equity securities

     16,568         0         0        16,568   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 875,664       $ 21,149       $ (4,684   $ 892,129   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013:

     

Obligations of state and political subdivisions

   $ 438,390       $ 6,230       $ (8,631   $ 435,989   

U.S. Government agency securities

     222,510         2,352         (5,993     218,869   

Corporate obligations

     716         0         0        716   

Other equity securities

     13,810         0         0        13,810   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 675,426       $ 8,582       $ (14,624   $ 669,384   
  

 

 

    

 

 

    

 

 

   

 

 

 

June 30, 2013:

          

Obligations of state and political subdivisions

   $ 390,509       $ 8,372       $ (7,435   $ 391,446   

U.S. Government agency securities

     85,449         860         (3,274     83,035   

Corporate obligations

     747         0         0        747   

Other equity securities

     15,520         0         0        15,520   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 492,225       $ 9,232       $ (10,709   $ 490,748   
  

 

 

    

 

 

    

 

 

   

 

 

 

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)  

June 30, 2014:

                 

Obligations of state and political subdivisions

   $ 60,769       $ 386       $ 79,000       $ 2,118       $ 139,769       $ 2,504   

U.S. Government agency securities

     15,227         67         58,608         2,113         73,835         2,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 75,996       $ 453       $ 137,608       $ 4,231       $ 213,604       $ 4,684   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

                 

Obligations of states and political subdivisions

   $ 132,568       $ 7,237       $ 10,823       $ 1,394       $ 143,391       $ 8,631   

U.S. Government agency securities

     127,274         5,993         0         0         127,274         5,993   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 259,842       $ 13,230       $ 10,823       $ 1,394       $ 270,665       $ 14,624   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013:

                 

Obligations of state and political subdivisions

   $ 105,258       $ 7,004       $ 6,942       $ 431       $ 112,200       $ 7,435   

U.S. Government agency securities

     60,685         3,274         0         0         60,685         3,274   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 165,943       $ 10,278       $ 6,942       $ 431       $ 172,885       $ 10,709   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment of its investment securities portfolio, management considers the credit quality of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors. At June 30, 2014 management determined the unrealized losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality of the investments. Accordingly, management 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 date indicated.

 

     June 30, 2014  

Maturity or Estimated Repayment

   Amortized
Cost
     Estimated
Fair Value
 
     (Dollars in thousands)  

One year or less

   $ 43,874       $ 44,751   

After one year to five years

     136,928         139,251   

After five years to ten years

     197,779         200,213   

After ten years

     497,083         507,914   
  

 

 

    

 

 

 

Total

   $ 875,664       $ 892,129   
  

 

 

    

 

 

 

For purposes of this maturity distribution, all investment securities AFS are shown based on their contractual maturity date or estimated date of repayment, except (i) FHLB – Dallas and FNBB stock with no contractual maturity date are shown in the longest maturity category and (ii) U.S. Government agency securities and municipal housing authority securities backed by residential mortgages are allocated among various maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds or other estimates of prepayment speeds and interest rate levels at the measurement date. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following table is a summary of sales activities in the Company’s investment securities AFS for the periods indicated.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  
     (Dollars in thousands)  

Sales proceeds

   $ 47,170       $ 0       $ 48,394       $ 999   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross realized gains

   $ 18       $ 0       $ 23       $ 156   

Gross realized losses

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on investment securities

   $ 18       $ 0       $ 23       $ 156   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Allowance for Loan and Lease Losses

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (Dollars in thousands)  

Beginning balance

   $ 43,861      $ 38,422      $ 42,945      $ 38,738   

Non-purchased loans and leases charged off

     (1,650     (1,101     (2,569     (2,449

Recoveries of non-purchased loans and leases previously charged off

     247        451        982        783   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net non-purchased loans and leases charged off

     (1,403     (650     (1,587     (1,666

Covered loans charged off

     (515     (1,066     (720     (3,094

Purchased non-covered loans charged off

     (567     0        (567     0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs – total loans and leases

     (2,485     (1,716     (2,874     (4,760

Provision for loan and lease losses:

        

Non-purchased loans and leases

     4,500        1,600        5,600        2,300   

Covered loans

     515        1,066        720        3,094   

Purchased non-covered loans

     567        0        567        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision

     5,582        2,666        6,887        5,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 46,958      $ 39,372      $ 46,958      $ 39,372   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Table of Contents

At June 30, 2014 and 2013, the Company identified covered loans 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 $0.5 million for such loans during the second quarter of 2014 and $0.7 million for such loans during the first six months of 2014. The Company also recorded provision for loan and lease losses of $0.5 million during the second quarter of 2014 and $0.7 million during the first six months of 2014 to cover such charge-offs. In addition to those net charge-offs, the Company transferred certain of these covered loans to covered foreclosed assets. As a result, the Company had $20.3 million and $52.6 million, respectively, of impaired covered loans at June 30, 2014 and 2013.

As of June 30, 2014, the Company had identified purchased non-covered loans where the expected performance had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values or where current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereon. As a result, the Company recorded partial charge-offs totaling $0.6 million for both the second quarter and first six months of 2014 compared to none for the comparable periods in 2013. The Company also recorded provision for loan and lease losses of $0.6 million for both the second quarter and first six months of 2014 compared to none during the second quarter and first six months of 2013 to cover such charge-offs. At June 30, 2014, the Company had $0.9 million of impaired purchased non-covered loans compared to none at both June 30, 2013 and December 31, 2013.

The following table is a summary of the Company’s ALLL for the periods indicated.

 

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

Three months ended June 30, 2014:

            

Real estate:

            

Residential 1-4 family

   $ 4,622       $ (142   $ 49       $ 231      $ 4,760   

Non-farm/non-residential

     14,013         (1,181     1         2,003        14,836   

Construction/land development

     12,828         (14     0         2,650        15,464   

Agricultural

     3,018         0        6         (116     2,908   

Multifamily residential

     2,429         0        0         (657     1,772   

Commercial and industrial

     2,738         (48     135         23        2,848   

Consumer

     831         (56     18         133        926   

Direct financing leases

     2,438         (121     8         247        2,572   

Other

     944         (88     30         (14     872   

Covered loans

     0         (515     0         515        0   

Purchased non-covered loans

     0         (567     0         567        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 43,861       $ (2,732   $ 247       $ 5,582      $ 46,958   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Six months ended June 30, 2014:

            

Real estate:

            

Residential 1-4 family

   $ 4,701       $ (341   $ 71       $ 329      $ 4,760   

Non-farm/non-residential

     13,633         (1,254     4         2,453        14,836   

Construction/land development

     12,306         (14     8         3,164        15,464   

Agricultural

     3,000         (15     11         (88     2,908   

Multifamily residential

     2,504         0        0         (732     1,772   

Commercial and industrial

     2,855         (422     763         (348     2,848   

Consumer

     917         (97     36         70        926   

Direct financing leases

     2,266         (267     14         559        2,572   

Other

     763         (159     75         193        872   

Covered loans

     0         (720     0         720        0   

Purchased non-covered loans

     0         (567     0         567        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 42,945       $ (3,856   $ 982       $ 6,887      $ 46,958   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

14


Table of Contents

The following table is a summary of the Company’s ALLL for the periods indicated.

 

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

Year ended December 31, 2013:

            

Real estate:

            

Residential 1-4 family

   $ 4,820       $ (837   $ 106       $ 612      $ 4,701   

Non-farm/non-residential

     10,107         (1,111     122         4,515        13,633   

Construction/land development

     12,000         (137     174         269        12,306   

Agricultural

     2,878         (261     14         369        3,000   

Multifamily residential

     2,030         (4     4         474        2,504   

Commercial and industrial

     3,655         (922     433         (311     2,855   

Consumer

     1,015         (214     104         12        917   

Direct financing leases

     2,050         (482     33         665        2,266   

Other

     183         (359     144         795        763   

Covered loans

     0         (4,675     0         4,675        0   

Purchased non-covered loans

     0         0        0         0        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 38,738       $ (9,002   $ 1,134       $ 12,075      $ 42,945   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Three months ended June 30, 2013:

            

Real estate:

            

Residential 1-4 family

   $ 4,557       $ (136   $ 6       $ 226      $ 4,653   

Non-farm/non-residential

     11,061         (552     16         1,939        12,464   

Construction/land development

     11,316         (71     3         42        11,290   

Agricultural

     2,903         0        2         (310     2,595   

Multifamily residential

     1,990         0        0         (136     1,854   

Commercial and industrial

     3,061         (116     366         (382     2,929   

Consumer

     1,034         (58     13         4        993   

Direct financing leases

     2,140         (106     11         (4     2,041   

Other

     360         (62     34         221        553   

Covered loans

     0         (1,066     0         1,066        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 38,422       $ (2,167   $ 451       $ 2,666      $ 39,372   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Six months ended June 30, 2013:

            

Real estate:

            

Residential 1-4 family

   $ 4,820       $ (417   $ 102       $ 148      $ 4,653   

Non-farm/non-residential

     10,107         (593     118         2,832        12,464   

Construction/land development

     12,000         (129     8         (589     11,290   

Agricultural

     2,878         0        4         (287     2,595   

Multifamily residential

     2,030         0        0         (176     1,854   

Commercial and industrial

     3,655         (832     375         (269     2,929   

Consumer

     1,015         (119     71         26        993   

Direct financing leases

     2,050         (186     20         157        2,041   

Other

     183         (173     85         458        553   

Covered loans

     0         (3,094     0         3,094        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 38,738       $ (5,543   $ 783       $ 5,394      $ 39,372   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

15


Table of Contents

The following table is a summary of the Company’s ALLL and recorded investment in loans and leases, excluding purchased non-covered loans and covered loans (“non-purchased loans and leases”), as of the dates indicated.

 

     Allowance for Non-Purchased
Loan and Lease Losses
     Non-Purchased Loans and Leases  
     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)  

June 30, 2014:

                 

Real estate:

                 

Residential 1-4 family

   $ 411       $ 4,349       $ 4,760       $ 3,245       $ 263,252       $ 266,497   

Non-farm/non-residential

     13         14,823         14,836         2,363         1,287,811         1,290,174   

Construction/land development

     2         15,462         15,464         9,738         1,039,420         1,049,158   

Agricultural

     200         2,708         2,908         845         44,696         45,541   

Multifamily residential

     0         1,772         1,772         491         136,462         136,953   

Commercial and industrial

     553         2,295         2,848         689         166,195         166,884   

Consumer

     3         923         926         42         28,632         28,674   

Direct financing leases

     0         2,572         2,572         0         98,768         98,768   

Other

     0         872         872         9         88,927         88,936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,182       $ 45,776       $ 46,958       $ 17,422       $ 3,154,163       $ 3,171,585   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

                 

Real estate:

                 

Residential 1-4 family

   $ 438       $ 4,263       $ 4,701       $ 4,047       $ 245,509       $ 249,556   

Non-farm/non-residential

     15         13,618         13,633         2,159         1,101,955         1,104,114   

Construction/land development

     2         12,304         12,306         236         722,321         722,557   

Agricultural

     229         2,771         3,000         883         44,313         45,196   

Multifamily residential

     0         2,504         2,504         0         208,337         208,337   

Commercial and industrial

     652         2,203         2,855         686         123,382         124,068   

Consumer

     3         914         917         50         26,132         26,182   

Direct financing leases

     0         2,266         2,266         0         86,321         86,321   

Other

     2         761         763         26         66,208         66,234   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,341       $ 41,604       $ 42,945       $ 8,087       $ 2,624,478       $ 2,632,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013:

                 

Real estate:

                 

Residential 1-4 family

   $ 428       $ 4,225       $ 4,653       $ 2,728       $ 258,840       $ 261,568   

Non-farm/non-residential

     11         12,453         12,464         10,390         1,006,817         1,017,207   

Construction/land development

     0         11,290         11,290         272         680,557         680,829   

Agricultural

     194         2,401         2,595         663         48,216         48,879   

Multifamily residential

     0         1,854         1,854         312         145,371         145,683   

Commercial and industrial

     622         2,307         2,929         710         138,363         139,073   

Consumer

     0         993         993         7         28,282         28,289   

Direct financing leases

     0         2,041         2,041         0         76,953         76,953   

Other

     1         552         553         12         44,849         44,861   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,256       $ 38,116       $ 39,372       $ 15,094       $ 2,428,248       $ 2,443,342   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

The following table is a summary of impaired non-purchased loans and leases, as of and for the three months and six months ended June 30, 2014.

 

    Principal
Balance
    Net
Charge-offs
to Date
    Principal
Balance,

Net of
Charge-offs
    Specific
ALLL
    Weighted
Average
Carrying
Value – Three
Months Ended
June 30, 2014
    Weighted
Average
Carrying
Value – Six
Months Ended
June 30, 2014
 
    (Dollars in thousands)  

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

           

Real estate:

           

Residential 1-4 family

  $ 3,294      $ (1,721   $ 1,573      $ 411      $ 1,505      $ 1,642   

Non-farm/non-residential

    186        (142     44        13        52        50   

Construction/land development

    38        (22     16        2        16        16   

Agricultural

    336        (12     324        200        336        380   

Commercial and industrial

    838        (278     560        553        562        579   

Consumer

    102        (79     23        3        23        23   

Other

    0        0        0        0        0        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases with a related ALLL

    4,794        (2,254     2,540        1,182        2,494        2,695   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

Real estate:

           

Residential 1-4 family

    2,094        (421     1,673        0        2,023        2,059   

Non-farm/non-residential

    3,444        (1,125     2,319        0        1,942        1,999   

Construction/land development

    9,803        (81     9,722        0        5,015        3,417   

Agricultural

    554        (33     521        0        494        468   

Multifamily residential

    624        (133     491        0        246        164   

Commercial and industrial

    288        (159     129        0        95        88   

Consumer

    33        (14     19        0        22        24   

Other

    8        0        8        0        9        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases without a related ALLL

    16,848        (1,966     14,882        0        9,846        8,228   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases

  $ 21,642      $ (4,220   $ 17,422      $ 1,182      $ 12,340      $ 10,923   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

The following table is a summary of impaired non-purchased loans and leases as of and for the year ended December 31, 2013.

 

    Principal
Balance
    Net
Charge-offs
to Date
    Principal
Balance,

Net of
Charge-offs
    Specific
ALLL
    Weighted
Average
Carrying
Value – Year
Ended
December 31,
2013
 
    (Dollars in thousands)  

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

         

Real estate:

         

Residential 1-4 family

  $ 3,609      $ (1,692   $ 1,917      $ 438      $ 1,638   

Non-farm/non-residential

    121        (75     46        15        93   

Construction/land development

    38        (22     16        2        17   

Agricultural

    511        (42     469        229        514   

Commercial and industrial

    2,016        (1,405     611        652        578   

Consumer

    178        (156     22        3        10   

Other

    40        (25     15        2        10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases with a related ALLL

    6,513        (3,417     3,096        1,341        2,860   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

         

Real estate:

         

Residential 1-4 family

    2,939        (808     2,131        0        1,541   

Non-farm/non-residential

    3,234        (1,120     2,114        0        4,344   

Construction/land development

    300        (81     219        0        303   

Agricultural

    426        (12     414        0        404   

Multifamily residential

    133        (133     0        0        124   

Commercial and industrial

    85        (10     75        0        172   

Consumer

    39        (12     27        0        24   

Other

    31        (20     11        0        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases without a related ALLL

    7,187        (2,196     4,991        0        6,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases

  $ 13,700      $ (5,613   $ 8,087      $ 1,341      $ 9,781   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

The following table is a summary of impaired non-purchased loans and leases as of and for the three months and six months ended June 30, 2013.

 

    Principal
Balance
    Net
Charge-offs
to Date
    Principal
Balance,

Net of
Charge-offs
    Specific
ALLL
    Weighted
Average
Carrying
Value – Three
Months Ended
June 30, 2013
    Weighted
Average
Carrying
Value – Six
Months Ended
June 30, 2013
 
    (Dollars in thousands)  

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

           

Real estate:

           

Residential 1-4 family

  $ 2,960      $ (1,650   $ 1,310      $ 428      $ 1,334      $ 1,445   

Non-farm/non-residential

    19        (8     11        11        89        127   

Construction/land development

    90        (90     0        0        0        17   

Agricultural

    466        (42     424        194        561        561   

Commercial and industrial

    2,290        (1,731     559        622        580        574   

Consumer

    52        (52     0        0        0        1   

Other

    179        (171     8        1        9        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases with a related ALLL

    6,056        (3,744     2,312        1,256        2,573        2,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

Real estate:

           

Residential 1-4 family

    1,738        (320     1,418        0        1,371        1,327   

Non-farm/non-residential

    11,443        (1,064     10,379        0        6,690        5,358   

Construction/land development

    465        (193     272        0        303        366   

Agricultural

    250        (11     239        0        323        357   

Multifamily residential

    445        (133     312        0        156        104   

Commercial and industrial

    566        (415     151        0        202        201   

Consumer

    19        (12     7        0        28        29   

Other

    24        (20     4        0        5        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases without a related ALLL

    14,950        (2,168     12,782        0        9,078        7,749   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans and leases

  $ 21,006      $ (5,912   $ 15,094      $ 1,256      $ 11,651      $ 10,483   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management has determined that certain of the Company’s impaired non-purchased loans and leases do not require any specific allowance at June 30, 2014 and 2013 or at December 31, 2013 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 non-purchased loans and leases is recognized on a cash basis when and if actually collected. Total interest income recognized on impaired non-purchased loans and leases for the three months and six months ended June 30, 2014 and 2013 and for the year ended December 31, 2013 was not material.

 

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Table of Contents

Credit Quality Indicators

Non-Purchased Loans and Leases

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

 

     Satisfactory      Moderate      Watch      Substandard      Total  
     (Dollars in thousands)  

June 30, 2014:

              

Real estate:

              

Residential 1-4 family (1)

   $ 258,098       $ 0       $ 2,620       $ 5,779       $ 266,497   

Non-farm/non-residential

     1,090,525         139,080         53,478         7,091         1,290,174   

Construction/land development

     846,365         176,977         12,078         13,738         1,049,158   

Agricultural

     22,766         9,785         10,388         2,602         45,541   

Multifamily residential

     105,366         29,954         385         1,248         136,953   

Commercial and industrial

     127,935         35,769         1,768         1,412         166,884   

Consumer (1)

     28,244         0         132         298         28,674   

Direct financing leases

     97,967         727         34         40         98,768   

Other (1)

     85,684         3,036         189         27         88,936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,662,950       $ 395,328       $ 81,072       $ 32,235       $ 3,171,585   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

              

Real estate:

              

Residential 1-4 family (1)

   $ 239,940       $ 0       $ 3,140       $ 6,476       $ 249,556   

Non-farm/non-residential

     916,304         128,624         52,388         6,798         1,104,114   

Construction/land development

     550,436         144,435         23,574         4,112         722,557   

Agricultural

     21,647         11,098         9,788         2,663         45,196   

Multifamily residential

     177,144         30,029         391         773         208,337   

Commercial and industrial

     87,568         33,071         1,664         1,765         124,068   

Consumer (1)

     25,574         0         230         378         26,182   

Direct financing leases

     85,363         955         0         3         86,321   

Other (1)

     63,799         2,237         119         79         66,234   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,167,775       $ 350,449       $ 91,294       $ 23,047       $ 2,632,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013:

              

Real estate:

              

Residential 1-4 family(1)

   $ 253,479       $ 0       $ 2,242       $ 5,847       $ 261,568   

Non-farm/non-residential

     814,428         132,680         51,107         18,992         1,017,207   

Construction/land development

     498,398         135,166         32,634         14,631         680,829   

Agricultural

     25,400         10,940         9,836         2,703         48,879   

Multifamily residential

     115,313         28,886         396         1,088         145,683   

Commercial and industrial

     104,876         30,323         1,608         2,266         139,073   

Consumer(1)

     27,716         0         168         405         28,289   

Direct financing leases

     75,696         1,202         0         55         76,953   

Other(1)

     41,475         3,102         225         59         44,861   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,956,781       $ 342,299       $ 98,216       $ 46,046       $ 2,443,342   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The following categories of credit quality indicators are used by the Company.

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

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

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

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

 

20


Table of Contents

The following table is an aging analysis of past due non-purchased loans and leases as of the dates indicated.

 

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

June 30, 2014:

              

Real estate:

              

Residential 1-4 family

   $ 2,890       $ 1,521       $ 4,411       $ 262,086       $ 266,497   

Non-farm/non-residential

     1,714         1,693         3,407         1,286,767         1,290,174   

Construction/land development

     49         10,060         10,109         1,039,049         1,049,158   

Agricultural

     269         436         705         44,836         45,541   

Multifamily residential

     491         0         491         136,462         136,953   

Commercial and industrial

     674         0         674         166,210         166,884   

Consumer

     139         54         193         28,481         28,674   

Direct financing leases

     10         30         40         98,728         98,768   

Other

     0         0         0         88,936         88,936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,236       $ 13,794       $ 20,030       $ 3,151,555       $ 3,171,585   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 4,228       $ 2,004       $ 6,232       $ 243,324       $ 249,556   

Non-farm/non-residential

     2,093         1,867         3,960         1,100,154         1,104,114   

Construction/land development

     235         153         388         722,169         722,557   

Agricultural

     517         540         1,057         44,139         45,196   

Multifamily residential

     773         0         773         207,564         208,337   

Commercial and industrial

     418         31         449         123,619         124,068   

Consumer

     261         78         339         25,843         26,182   

Direct financing leases

     0         0         0         86,321         86,321   

Other

     18         24         42         66,192         66,234   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,543       $ 4,697       $ 13,240       $ 2,619,325       $ 2,632,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 2,483       $ 1,460       $ 3,943       $ 257,625       $ 261,568   

Non-farm/non-residential

     8,536         3,369         11,905         1,005,302         1,017,207   

Construction/land development

     385         84         469         680,360         680,829   

Agricultural

     315         331         646         48,233         48,879   

Multifamily residential

     0         0         0         145,683         145,683   

Commercial and industrial

     548         203         751         138,322         139,073   

Consumer

     230         23         253         28,036         28,289   

Direct financing leases

     89         15         104         76,849         76,953   

Other

     0         0         0         44,861         44,861   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,586       $ 5,485       $ 18,071       $ 2,425,271       $ 2,443,342   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $1.8 million, $0.8 million and $7.4 million of loans and leases on nonaccrual status at June 30, 2014, December 31, 2013 and June 30, 2013, respectively.
(2) All loans and leases greater than 90 days past due were on nonaccrual status at June 30, 2014 and 2013 and December 31, 2013.
(3) Includes $2.8 million, $3.2 million and $3.2 million of loans and leases on nonaccrual status at June 30, 2014, December 31, 2013 and June 30, 2013, respectively.

 

21


Table of Contents

Covered Loans

The following table is a summary of credit quality indicators for the Company’s covered loans as of the dates indicated.

 

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

June 30, 2014:

        

Real estate:

        

Residential 1-4 family

   $ 92,486       $ 2,306       $ 94,792   

Non-farm/non-residential

     114,869         10,168         125,037   

Construction/land development

     25,935         6,032         31,967   

Agricultural

     10,528         323         10,851   

Multifamily residential

     5,901         311         6,212   

Commercial and industrial

     6,178         1,119         7,297   

Consumer

     79         0         79   

Other

     145         0         145   
  

 

 

    

 

 

    

 

 

 

Total

   $ 256,121       $ 20,259       $ 276,380   
  

 

 

    

 

 

    

 

 

 

December 31, 2013:

        

Real estate:

        

Residential 1-4 family

   $ 105,218       $ 5,835       $ 111,053   

Non-farm/non-residential

     138,573         25,135         163,708   

Construction/land development

     33,475         14,267         47,742   

Agricultural

     10,807         343         11,150   

Multifamily residential

     8,709         457         9,166   

Commercial and industrial

     8,582         137         8,719   

Consumer

     106         5         111   

Other

     142         0         142   
  

 

 

    

 

 

    

 

 

 

Total

   $ 305,612       $ 46,179       $ 351,791   
  

 

 

    

 

 

    

 

 

 

June 30, 2013:

        

Real estate:

        

Residential 1-4 family

   $ 126,659       $ 6,507       $ 133,166   

Non-farm/non-residential

     207,789         25,817         233,606   

Construction/land development

     58,370         18,045         76,415   

Agricultural

     14,016         1,889         15,905   

Multifamily residential

     9,408         285         9,693   

Commercial and industrial

     11,601         0         11,601   

Consumer

     164         43         207   

Other

     159         0         159   
  

 

 

    

 

 

    

 

 

 

Total

   $ 428,166       $ 52,586       $ 480,752   
  

 

 

    

 

 

    

 

 

 

For 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. For any loan that is exceeding management’s performance expectation established in conjunction with the determination of Day 1 Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV 2. At June 30, 2014 and 2013 and December 31, 2013, the Company had no allowance for its covered loans because all 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.

 

22


Table of Contents

The following table is an aging analysis of past due covered loans as of the dates indicated.

 

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

June 30, 2014:

              

Real estate:

              

Residential 1-4 family

   $ 4,518       $ 7,538       $ 12,056       $ 82,736       $ 94,792   

Non-farm/non-residential

     3,533         15,026         18,559         106,478         125,037   

Construction/land development

     531         7,327         7,858         24,109         31,967   

Agricultural

     36         2,112         2,148         8,703         10,851   

Multifamily residential

     0         1,365         1,365         4,847         6,212   

Commercial and industrial

     11         1,246         1,257         6,040         7,297   

Consumer

     12         0         12         67         79   

Other

     0         0         0         145         145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,641       $ 34,614       $ 43,255       $ 233,125       $ 276,380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 5,341       $ 12,409       $ 17,750       $ 93,303       $ 111,053   

Non-farm/non-residential

     6,954         32,462         39,416         124,292         163,708   

Construction/land development

     2,173         20,914         23,087         24,655         47,742   

Agricultural

     237         1,328         1,565         9,585         11,150   

Multifamily residential

     375         3,240         3,615         5,551         9,166   

Commercial and industrial

     605         2,001         2,606         6,113         8,719   

Consumer

     10         0         10         101         111   

Other

     0         0         0         142         142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,695       $ 72,354       $ 88,049       $ 263,742       $ 351,791   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 6,989       $ 19,230       $ 26,219       $ 106,947       $ 133,166   

Non-farm/non-residential

     15,059         44,768         59,827         173,779         233,606   

Construction/land development

     6,425         30,629         37,054         39,361         76,415   

Agricultural

     829         4,284         5,113         10,792         15,905   

Multifamily residential

     1,926         2,728         4,654         5,039         9,693   

Commercial and industrial

     260         3,505         3,765         7,836         11,601   

Consumer

     0         43         43         164         207   

Other

     0         0         0         159         159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,488       $ 105,187       $ 136,675       $ 344,077       $ 480,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2014 and 2013 and December 31, 2013, significant portions 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 or better than management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

 

23


Table of Contents

Purchased Non-Covered Loans

The following table is a summary of credit quality indicators for the Company’s purchased non-covered loans as of the dates indicated.

 

    Purchased Non-Covered Loans Without
Evidence of Credit Deterioration at Acquisition
    Purchased Non-Covered
Loans With Evidence of
Credit Deterioration  at
Acquisition
    Total
Purchased
Non-Covered
 
    FV 33     FV 44     FV 55     FV 36     FV 77     FV 66     FV 88     Loans  
    (Dollars in thousands)  

June 30, 2014:

               

Real estate:

               

Residential 1-4 family

  $ 81,102      $ 84,839      $ 32,286      $ 79,449      $ 10      $ 18,620      $ 0      $ 296,306   

Non-farm/non-residential

    211,896        198,937        40,193        3,704        0        33,622        81        488,433   

Construction/land development

    32,850        37,840        12,447        10,878        9        10,096        0        104,120   

Agricultural

    15,058        29,337        3,185        1,744        0        456        0        49,780   

Multifamily residential

    10,505        13,418        7,453        1,030        67        2,853        779        36,105   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

    351,411        364,371        95,564        96,805        86        65,647        860        974,744   

Commercial and industrial

    27,269        49,175        9,702        14,637        0        5,193        0        105,976   

Consumer

    3,215        1,165        670        20,204        0        536        0        25,790   

Other

    5,762        9,292        935        4,391        0        799        0        21,179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 387,657      $ 424,003      $ 106,871      $ 136,037      $ 86      $ 72,175      $ 860      $ 1,127,689   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013:

               

Real estate:

               

Residential 1-4 family

  $ 27,111      $ 32,259      $ 21,035      $ 35,733      $ 0      $ 14,947      $ 0      $ 131,085   

Non-farm/non-residential

    42,193        72,621        20,685        1,191        0        16,258        0        152,948   

Construction/land development

    5,930        8,106        2,137        4,553        0        4,907        0        25,633   

Agricultural

    1,547        6,619        823        164        0        365        0        9,518   

Multifamily residential

    3,531        5,565        5,268        959        0        1,887        0        17,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

    80,312        125,170        49,948        42,600        0        38,364        0        336,394   

Commercial and industrial

    9,592        9,730        2,250        1,879        0        1,483        0        24,934   

Consumer

    1,013        141        171        4,794        0        736        0        6,855   

Other

    1,202        2,897        157        237        0        47        0        4,540   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 92,119      $ 137,938      $ 52,526      $ 49,510      $ 0      $ 40,630      $ 0      $ 372,723   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2013:

               

Real estate:

               

Residential 1-4 family

  $ 0      $ 185      $ 0      $ 0      $ 0      $ 0      $ 0      $ 185   

Non-farm/non-residential

    294        792        794        1        0        332        0        2,213   

Construction/land development

    2,459        6,803        4,907        1,117        0        3,277        0        18,563   

Agricultural

    1,281        1,027        224        100        0        167        0        2,799   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

    4,034        8,807        5,925        1,218        0        3,776        0        23,760   

Commercial and industrial

    40        1,082        845        248        0        647        0        2,862   

Consumer

    512        141        135        2,085        0        1,017        0        3,890   

Other

    0        82        184        51        0        198        0        515   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,586      $ 10,112      $ 7,089      $ 3,602      $ 0      $ 5,638      $ 0      $ 31,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following grades are used for purchased non-covered loans without evidence of credit deterioration at the date of acquisition.

FV 33 – Loans in this category are considered to be satisfactory with minimal credit risk and are generally considered collectible.

FV 44 – Loans in this category are considered to be marginally satisfactory with minimal to moderate credit risk and are generally considered collectible.

FV 55 – Loans in this category exhibit weakness and are considered to have elevated credit risk and elevated risk of repayment.

FV 36 – Loans in this category were not individually reviewed at the date of purchase and are assumed to have characteristics similar to the characteristics of the aggregate acquired portfolio.

FV 77 – Loans in this category have deteriorated since the date of purchase and are considered impaired.

The following grades are used for purchased non-covered loans with evidence of credit deterioration at the date of acquisition.

FV 66 – Loans in this category are performing in accordance with or exceeding management’s performance expectations established in conjunction with the determination of Day 1 Fair Values.

FV 88 – Loans in this category have deteriorated from management’s performance expectations established in conjunction with the determination of Day 1 Fair Values.

The Company had no allowance for its purchased non-covered loans at June 30, 2014 and 2013 or December 31, 2013 as (i) all such loans were performing in accordance with management’s expectations established in conjunction with the determination of the Day 1 Fair Values or (ii) all losses on purchased non-covered loans whose performance had deteriorated from management’s expectations established in conjunction with the deterioration of the Day 1 Fair Values had been charged off.

 

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Table of Contents

The following table is an aging analysis of past due purchased non-covered loans as of the dates indicated.

 

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

June 30, 2014:

              

Real estate:

              

Residential 1-4 family

   $ 6,348       $ 6,536       $ 12,884       $ 283,422       $ 296,306   

Non-farm/non-residential

     1,396         10,544         11,940         476,493         488,433   

Construction/land development

     615         2,439         3,054         101,066         104,120   

Agriculture

     129         148         277         49,503         49,780   

Multifamily residential

     0         1,229         1,229         34,876         36,105   

Commercial and industrial

     381         487         868         105,108         105,976   

Consumer

     158         183         341         25,449         25,790   

Other

     16         19         35         21,144         21,179   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,043       $ 21,585       $ 30,628       $ 1,097,061       $ 1,127,689   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 6,615       $ 4,703       $ 11,318       $ 119,767       $ 131,085   

Non-farm/non-residential

     4,886         5,779         10,665         142,283         152,948   

Construction/land development

     265         4,045         4,310         21,323         25,633   

Agriculture

     134         25         159         9,359         9,518   

Multifamily residential

     421         1,225         1,646         15,564         17,210   

Commercial and industrial

     614         388         1,002         23,932         24,934   

Consumer

     411         237         648         6,207         6,855   

Other

     0         33         33         4,507         4,540   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,346       $ 16,435       $ 29,781       $ 342,942       $ 372,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 0       $ 0       $ 0       $ 185       $ 185   

Non-farm/non-residential

     184         68         252         1,961         2,213   

Construction/land development

     785         1,022         1,807         16,756         18,563   

Agriculture

     75         24         99         2,700         2,799   

Commercial and industrial

     89         211         300         2,562         2,862   

Consumer

     203         209         412         3,478         3,890   

Other

     151         50         201         314         515   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,487       $ 1,584       $ 3,071       $ 27,956       $ 31,027   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
7. Income Taxes

The following table is a summary of the types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities and their approximate tax effects as of the dates indicated.

 

     June 30,     December 31,
2013
 
     2014     2013    
     (Dollars in thousands)  

Deferred tax assets:

      

Allowance for loan and lease losses

   $ 18,116      $ 15,197      $ 16,576   

Differences in amounts reflected in financial statements and income tax basis of purchased non-covered loans

     26,024        1,288        17,167   

Stock-based compensation

     3,364        2,408        2,400   

Deferred compensation

     1,890        1,925        1,775   

Foreclosed assets

     5,624        2,812        3,165   

Investment securities AFS

     0        0        5,056   

Differences in amounts reflected in financial statements and income tax basis of assets acquired and liabilities assumed in FDIC-assisted acquisitions

     7,397        0        3,424   

Acquired net operating losses

     13,662        0        7,509   

Other, net

     5,950        0        3,858   
  

 

 

   

 

 

   

 

 

 

Total gross deferred tax assets

     82,027        23,630        60,930   

Less valuation allowance

     (474     0        0   
  

 

 

   

 

 

   

 

 

 

Net deferred tax asset

     81,553        23,630        60,930   
  

 

 

   

 

 

   

 

 

 

Deferred tax liabilities:

      

Accelerated depreciation on premises and equipment

     18,028        15,022        17,459   

Investment securities AFS

     5,022        545        0   

Differences in amounts reflected in financial statements and income tax basis of assets acquired and liabilities assumed in FDIC-assisted acquisitions

     0        6,103        0   

Acquired intangible assets

     10,847        594        4,227   

Other, net

     0        2,428        0   
  

 

 

   

 

 

   

 

 

 

Total gross deferred tax liabilities

     33,897        24,692        21,686   
  

 

 

   

 

 

   

 

 

 

Net deferred tax assets (liabilities)

   $ 47,656      $ (1,062   $ 39,244   
  

 

 

   

 

 

   

 

 

 

Net operating losses were acquired from the First National Bank, Bancshares and Summit transactions. The net operating losses acquired from the First National Bank transaction totaled $20.0 million, of which $12.5 million expires in 2032 and $7.5 million expires in 2033. The net operating losses acquired from the Bancshares transaction totaled $16.4 million, which will expire at various dates from 2030 through 2034. The net operating losses acquired from the Summit transaction totaled $6.5 million and will expire in 2019.

As a result of recording, at fair value, acquired assets and assumed liabilities pursuant to business combinations, differences in amounts reported for financial statement purposes and their related basis for federal and state income tax purposes are created. Such differences are recorded as deferred tax assets and liabilities using enacted tax rates in effect for the year or years in which the differences are expected to be recovered or settled. Business combination transactions may result in the acquisition of net operating loss carryforwards and other assets with built-in losses, the realization of which are subject to section 382 limitations. In determining the section 382 limitation associated with a business combination, management must make a number of estimates and assumptions regarding the ability to utilize acquired net operating loss carryforwards and the expected timing of future recoveries or settlements of acquired assets with built-in losses. To the extent that information available as of the date of acquisition results in a determination by management that some portion of net operating loss carryforwards cannot be utilized or assets with built-in losses is expected to be settled or recovered in future periods in which the ability to realize the benefits will be subject to section 382 limitations, a deferred tax asset valuation allowance is established for the estimated amount of the deferred tax assets subject to the section 382 limitation. To the extent that information becomes available, during the first 12 months following the consummation of a business combination transaction, that results in changes in management’s initial estimates and assumptions regarding the expected utilization of net operating loss carryforwards or the expected settlement or recovery of acquired assets with built-in losses subject to section 382 limitations, an increase or decrease of the deferred tax asset valuation allowance will be recorded as an adjustment to bargain purchase gain or goodwill. To the extent that such information becomes available 12 months or more after the consummation of a business combination transaction, or additional information becomes available during the first 12 months as a result of changes in circumstances since the date of the consummation of a business combination transaction, an increase or decrease of the deferred tax asset valuation allowance will be recorded as an adjustment to deferred income tax expense (benefit).

 

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Table of Contents

In connection with the acquisitions of First National Bank and Bancshares, management determined that net operating loss carryforwards and other assets with built-in losses are expected to be settled or otherwise recovered in future periods where the realization of such benefits would be subject to section 382 limitations. Accordingly, the Company had established a deferred tax asset valuation allowance of $4.1 million on the date of acquisition of First National Bank and $0.5 million on the date of acquisition of Bancshares, to reflect its initial assessment that the realization of the benefits from the settlement or recovery of certain of these acquired assets and net operating losses is expected to be subject to section 382 limitations.

As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, the fair value adjustments and the resultant fair values for the First National Bank acquisition continued to be evaluated by management and could be subject to further adjustment. During the second quarter of 2014, management revised its initial estimates and assumptions regarding the expected recovery of acquired assets with built-in losses, specifically the timing of expected charge-offs of purchased non-covered loans, in the First National Bank acquisition. As a result of such revision, management concluded that the deferred tax asset valuation allowance of $4.1 million was not necessary. Because such revision occurred during the first 12 months following the date of acquisition and was not the result of changes in circumstances, management has recast the third quarter 2013 financial statements, along with all subsequent financial statements, to reflect this change in estimate.

To the extent that additional information becomes available regarding the settlement or recovery of acquired net operating loss carryforwards or assets with built-in losses acquired in each of its acquisitions, management may be required to make adjustments to its deferred tax asset valuation allowance, which adjustments could affect bargain purchase gain, goodwill or deferred income tax expense (benefit).

 

8. Supplemental Data for Cash Flows

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

 

     Six Months Ended
June 30,
 
     2014      2013  
     (Dollars in thousands)  

Cash paid during the period for:

     

Interest

   $ 9,808       $ 9,159   

Taxes

     17,690         25,099   

Supplemental schedule of non-cash investing and financing activities:

     

Net change in unrealized gains/losses on investment securities AFS

     22,506         19,219   

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

     7,801         2,930   

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

     258         2,455   

Covered loans transferred to covered foreclosed assets

     23,212         16,081   

Unsettled AFS investment security purchases

     1,465         0   

Unsettled AFS investment security sales

     1,815         0   

Common stock issued in merger and acquisition transaction

     166,315         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 June 30, 2014 was $5.3 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at June 30, 2014 totaled $4.3 million.

At June 30, 2014 the Company had outstanding commitments to extend credit, excluding mortgage interest rate lock commitments, totaling $1.83 billion. While many of these commitments are expected to be disbursed within the next 12 months, the following table shows the contractual maturities of outstanding commitments to extend credit as of the date indicated.

 

Contractual Maturities at

June 30, 2014

 

Maturity

   Amount  
(Dollars in thousands)  

2014

   $ 89,442   

2015

     192,358   

2016

     475,201   

2017

     809,291   

2018

     226,279   

Thereafter

     40,903   
  

 

 

 

Total

   $ 1,833,474   
  

 

 

 

 

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Table of Contents
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 June 30, 2014 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 2,000 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 2,000 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 period indicated.

 

     Options     Weighted-
Average

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

Value
(in thousands)
 

Six Months Ended June 30, 2014:

          

Outstanding – January 1, 2014

     1,766,600      $ 15.84         

Granted

     52,000        29.05         

Exercised

     (185,000     8.50         

Forfeited

     (25,900     17.64         
  

 

 

         

Outstanding – June 30, 2014

     1,607,700        17.08         5.4       $ 26,321 (1) 
  

 

 

   

 

 

    

 

 

    

 

 

 

Fully vested and exercisable – June 30, 2014

     349,200        13.37         5.2       $ 7,011 (1) 
    

 

 

    

 

 

    

 

 

 

Expected to vest in future periods

     1,007,600           
  

 

 

         

Fully vested and expected to vest – June 30, 2014(2)

     1,356,800        16.89         5.4       $ 22,466 (1) 
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Based on closing price of $33.45 per share on June 30, 2014.
(2) At June 30, 2014 the Company estimated that outstanding options to purchase 250,900 shares of its common stock would not vest and would 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 six months ended June 30, 2014 and 2013 was $4.1 million and $4.3 million, respectively.

Options to purchase 52,000 split-adjusted shares and 44,000 split-adjusted shares of the Company’s stock were issued during the six months ended June 30, 2014 and 2013, respectively. Stock-based compensation expense for stock options included in non-interest expense was $0.8 million and $0.6 million for the quarters ended June 30, 2014 and 2013, respectively, and $1.2 million and $1.0 million for the six months ended June 30, 2014 and 2013, respectively. Total unrecognized compensation cost related to non-vested stock option grants was $2.7 million at June 30, 2014 and is expected to be recognized over a weighted-average period of 1.9 years.

The Company has a restricted stock plan that permits issuance of up to 1,600,000 shares of restricted stock or restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock 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 June 30, 2014 were issued with a vesting date of three years after issuance.

 

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Table of Contents

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

 

     Six Months Ended
June 30, 2014
 

Outstanding – January 1, 2014

     616,100   

Granted

     0   

Forfeited

     (400

Vested

     0   
  

 

 

 

Outstanding – June 30, 2014

     615,700   
  

 

 

 

Weighted-average grant date fair value

   $ 17.99   
  

 

 

 

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period and is based on the market price of the 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 $0.9 million and $0.6 million for the quarters ended June 30, 2014 and 2013, respectively, and $1.8 million and $1.3 million for the six months ended June 30, 2014 and 2013, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $6.0 million at June 30, 2014 and is expected to be recognized over a weighted-average period of 2.0 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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Table of Contents

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

 

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

June 30, 2014:

  

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ 0       $ 595,965       $ 20,600       $ 616,565   

U.S. Government agency securities

     0         258,311         0         258,311   

Corporate obligations

     0         685         0         685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     0         854,961         20,600         875,561   

Impaired non-purchased loans and leases

     0         0         16,240         16,240   

Impaired covered loans

     0         0         20,259         20,259   

Impaired purchased non-covered loans

     0         0         946         946   

Foreclosed assets not covered by FDIC loss share agreements

     0         0         20,581         20,581   

Foreclosed assets covered by FDIC loss share agreements

     0         0         35,775         35,775   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0       $ 854,961       $ 114,401       $ 969,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ 0       $ 417,307       $ 18,682       $ 435,989   

U.S. Government agency securities

     0         218,869         0         218,869   

Corporate obligations

     0         716         0         716   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     0         636,892         18,682         655,574   

Impaired non-purchased loans and leases

     0         0         6,746         6,746   

Impaired covered loans

     0         0         46,179         46,179   

Foreclosed assets not covered by FDIC loss share agreements

     0         0         11,851         11,851   

Foreclosed assets covered by FDIC loss share agreements

     0         0         37,960         37,960   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0       $ 636,892       $ 121,418       $ 758,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ 0       $ 372,117       $ 19,329       $ 391,446   

U.S. Government agency securities

     0         83,035         0         83,035   

Corporate obligations

     0         747         0         747   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     0         455,899         19,329         475,228   

Impaired non-purchased loans and leases

     0         0         13,838         13,838   

Impaired covered loans

     0         0         52,586         52,586   

Foreclosed assets not covered by FDIC loss share agreements

     0         0         10,451         10,451   

Foreclosed assets covered by FDIC loss share agreements

     0         0         46,157         46,157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0       $ 455,899       $ 142,361       $ 598,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not include $16.6 million at June 30, 2014; $13.8 million at December 31, 2013 and $15.5 million at June 30, 2013 of FHLB – Dallas and FNBB stock that do not have readily determinable fair values and are carried at cost.

 

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Table of Contents

The following table presents information related to Level 3 non-recurring fair value measurements as of the date indicated.

 

Description

   Fair Value at
June 30, 2014
    

Technique

   Unobservable Inputs
(Dollars in thousands)

Impaired non-purchased loans and leases

   $ 16,240       Third party appraisal(1) or discounted cash flows    1.   Management discount based on underlying collateral characteristics and market conditions
         2.   Life of loan

Impaired covered loans

   $ 20,259       Third party appraisal(1) and/or discounted cash flows    1.   Management discount based on underlying collateral characteristics and market conditions
         2.   Life of loan
         3.   Discount rate

Impaired purchased non-covered loans

   $ 946       Third party appraisal(1) and/or discounted cash flows    1.   Management discount based on underlying collateral characteristics and market conditions
         2.   Discount rate
         3.   Holding period

Foreclosed assets not covered by FDIC loss share agreements

   $ 20,581       Third party appraisal,(1) broker price opinions and/or discounted cash flows    1.   Management discount based on asset characteristics and market conditions
         2.   Discount rate
         3.   Holding period

Foreclosed assets covered by FDIC loss share agreements

   $ 35,775       Third party appraisal,(1) broker price opinions and/or discounted cash flows    1.   Management discount based on asset characteristics and market conditions
         2.   Discount rate
         3.   Holding period

 

(1) The Company utilizes valuation techniques consistent with the market, cost, and income approaches, or a combination thereof in determining fair value.

The following methods and assumptions are used to estimate the fair value of the Company’s assets 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, 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 of the Company’s investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

The Company has determined that certain of its investment securities had a limited to non-existent trading market at June 30, 2014. As a result, the Company considers these investments as Level 3 in the fair value hierarchy. Specifically, the fair values of certain obligations of state and political subdivisions consisting primarily of certain unrated private placement bonds (the “private placement bonds”) in the amount of $20.6 million at June 30, 2014 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 June 30, 2014, the third parties’ pricing matrices valued the Company’s portfolio of private placement bonds at $20.6 million which was equal to the aggregate par value of the private placement bonds. Accordingly, at June 30, 2014, the Company reported the private placement bonds at $20.6 million.

 

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Impaired non-purchased loans and leases – Fair values are measured on a nonrecurring basis and are based on the underlying collateral value of the impaired loan or lease, net of holding and selling costs, or the estimated discounted cash flows for such loan or lease. At June 30, 2014 the Company had reduced the carrying value of its impaired non-purchased loans and leases (all of which are included in nonaccrual loans and leases) by $5.4 million to the estimated fair value of $16.2 million. The $5.4 million adjustment to reduce the carrying value of impaired non-purchased loans and leases to estimated fair value consisted of $4.2 million of partial charge-offs and $1.2 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 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. 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 used discount rates ranging from 6.0% to 9.5% per annum. As of June 30, 2014, 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 $0.5 million during the second quarter and $0.7 million during the first six months of 2014 for such loans. The Company also recorded provision for loan and lease losses of $0.5 million during the second quarter and $0.7 million during the first six months of 2014 to cover such charge-offs. At June 30, 2014, the Company had $20.3 million of impaired covered loans.

Impaired purchased non-covered loans – Impaired purchased non-covered loans are measured at fair value on a non-recurring basis. In determining the Day 1 Fair Values of purchased non-covered loans without evidence of credit deterioration at the date of acquisition, management includes an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk profile and grade assigned to each loan. In determining the estimated fair value of purchased non-covered loans with evidence of credit deterioration, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received. In determining the Day 1 Fair Values of purchased non-covered loans with evidence of credit deterioration, 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. The accretable difference on purchased non-covered loans with evidence of credit deterioration is the difference between the expected cash flows and the net present value of expected cash flows. In determining the net present value of the expected cash flows for purposes of establishing the Day 1 Fair Values, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan.

As of June 30, 2014, the Company had identified purchased non-covered loans where the expected performance had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values or where current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereon. As a result, the Company recorded partial charge-offs totaling $0.6 million for both the second quarter and first six months of 2014. The Company also recorded provision for loan and lease losses of $0.6 million for both the second quarter and first six months of 2014 to cover such charge-offs. At June 30, 2014, the Company had $0.9 million of impaired purchased non-covered loans.

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 and repossessed assets are generally based on third party appraisals, broker price opinions or other valuations of the property.

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

 

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Values. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest income to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of foreclosed assets held for sale are generally based on third party appraisals, broker price opinions or other valuations of property, resulting in a Level 3 classification.

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, 2014

   $ 18,682   

Total realized gains (losses) included in earnings

     0   

Total unrealized gains (losses) included in comprehensive income

     403   

Acquired

     1,907   

Paydowns and maturities

     (392

Sales

     0   

Transfers in and/or out of Level 3

     0   
  

 

 

 

Balance – June 30, 2014

   $ 20,600   
  

 

 

 

Balance – January 1, 2013

   $ 104,172   

Total realized gains (losses) included in earnings

     0   

Total unrealized gains (losses) included in comprehensive income

     (1,867

Paydowns and maturities

     (32,189

Sales

     0   

Transfers in and/or out of Level 3

     (50,787
  

 

 

 

Balance – June 30, 2013

   $ 19,329   
  

 

 

 

 

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, comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. All fair value estimates of the Company’s investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer. The Company’s investments in the common stock of the FHLB – Dallas and FNBB totaling $16.6 million at June 30, 2014, $13.8 million at December 31, 2013 and $15.5 million at June 30, 2013, do not have readily determinable fair values and are carried at cost.

Loans and leases – The fair value of loans and leases, including covered loans and purchased non-covered loans, is estimated by discounting the contractual cash flows to be received in future periods 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.

 

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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.

Clawback payable – The fair value of the FDIC clawback payable is based on the net present value of future cash payments expected to be remitted to the FDIC in accordance with the provisions of the loss share agreements using a discount rate that is based on current market rates.

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

Off-balance sheet instruments The fair values of commercial loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, and were not material at June 30, 2014 and 2013 or at December 31, 2013.

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 carrying amounts and estimated fair values for the dates indicated and the fair value hierarchy of the Company’s financial instruments.

 

     Fair
Value
Hierarchy
   June 30,         
        2014      2013      December 31, 2013  
        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    $ 110,688       $ 110,688       $ 60,892       $ 60,892       $ 195,975       $ 195,975   

Investment securities AFS

   Levels 2 and 3      892,129         892,129         490,748         490,748         669,384         669,384   

Loans and leases, net of ALLL

   Level 3      4,528,696         4,480,221         2,915,749         2,884,141         3,314,134         3,286,600   

FDIC loss share receivable

   Level 3      50,679         50,600         112,716         112,662         71,854         71,770   

Financial liabilities:

                    

Demand, savings and interest bearing transaction deposits

   Level 1    $ 3,807,139       $ 3,807,139       $ 2,257,668       $ 2,257,668       $ 2,819,817       $ 2,819,817   

Time deposits

   Level 2      1,176,758         1,177,108         726,961         727,822         897,210         897,708   

Repurchase agreements with customers

   Level 1      55,999         55,999         24,704         24,704         53,103         53,103   

Other borrowings

   Level 2      280,875         304,381         391,690         435,719         280,895         319,650   

FDIC clawback payable

   Level 3      26,533         26,533         25,596         25,596         25,897         25,897   

Subordinated debentures

   Level 2      64,950         32,554         64,950         30,735         64,950         30,974   

 

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13. Changes In and Reclassifications From Accumulated Other Comprehensive Income (“AOCI”)

The following table presents changes in AOCI for the dates indicated.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (Dollars in thousands)  

Beginning balance of AOCI – unrealized gains and losses on investment securities AFS

   $ 3,211      $ 9,029      $ (3,672   $ 10,783   

Other comprehensive income (loss):

        

Other comprehensive income (loss) before reclassifications

     6,806        (9,927     13,692        (11,587

Amounts reclassified from AOCI

     (11     0        (14     (94
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     6,795        (9,927     13,678        (11,681
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of AOCI – unrealized gains and losses on investment securities AFS

   $ 10,006      $ (898   $ 10,006      $ (898
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from AOCI to net gains on investment securities in the consolidated statements of income related entirely to unrealized gains/losses on investment securities AFS. For the three months ended June 30, 2014, amounts reclassified for net gains on investment securities were $18,000, with related tax effects of $7,000. For the three months ended June 30, 2013, there were no amounts reclassified from AOCI. For the six months ended June 30, 2014 and 2013 amounts reclassified for net gains on investment securities were $23,000 and $156,000, respectively, with tax related tax effects of $9,000 and $62,000, respectively.

 

14. Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04 “Receivables – Troubled Debt Restructurings by Creditors (Sub topic 310-04) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.” The provisions of this ASU clarify when an in substance foreclosure occurs and require a creditor to reclassify a collateralized consumer mortgage loan to real estate owned upon obtaining legal title to the real estate collateral, or a deed in lieu of foreclosure, or similar legal agreement that is voluntarily provided by the borrower to satisfy the loan. ASU 2014-04 was effective for reporting periods beginning January 1, 2014. The proposed provisions of ASU 2014-04 did not have a material impact on the Company’s financial position, results of operations, or liquidity.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers.” ASU 2014-09 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact, if any, ASU 2014-09 will have on its financial position, results of operations, and its financial statement disclosures.

 

15. Subsequent Event

On July 31, 2014, the Company entered into a definitive agreement and plan of merger (the “Intervest Agreement”) with Intervest Bancshares Corporation (“Intervest”), and its wholly-owned bank subsidiary Intervest National Bank (“INB”), headquartered in New York, New York, whereby the Company will acquire all of the outstanding common stock of Intervest in a transaction valued at approximately $228.5 million. INB operates seven full service banking offices including one in New York City, five in Clearwater, Florida and one in Pasadena, Florida.

Under the terms of the Intervest Agreement, each outstanding share of common stock of Intervest will be converted into the right to receive shares of the Company’s common stock, plus cash in lieu of any fractional share, all subject to certain conditions and potential adjustments. The number of Company shares to be issued will be determined based on the Company’s 10-day average closing stock price as of the fifth business day prior to the closing date, subject to a minimum price of $23.95 per share and a maximum price of $39.91 per share. Upon the closing of the transaction, Intervest will merge into the Company and INB will merge into the Bank. Completion of the transaction is subject to certain closing conditions, including receipt of customary regulatory approvals and the approval of the shareholders of Intervest.

 

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

FORWARD-LOOKING INFORMATION

This quarterly report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, other filings made by the Company with the SEC and other oral and written statements or reports by the Company and its management include certain forward-looking statements that are intended to be covered by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at that time. Those statements are subject to certain risks, uncertainties and other factors that may cause actual results to differ materially from those projected in such forward-looking statements. Forward-looking statements include, without limitation, statements about economic, real estate market, competitive, employment, credit market and interest rate conditions; plans, goals, beliefs, expectations, thoughts, estimates and outlook for the future; revenue growth; net income and earnings per common share; net interest margin; net interest income; non-interest income, including service charges on deposit accounts, mortgage lending and trust income, gains (losses) on investment securities and sales of other assets; gains on merger and acquisition transactions; net FDIC loss share accretion income and amortization expenses; other income from loss share and purchased non-covered loans; non-interest expense; efficiency ratio; anticipated future operating results and financial performance; asset quality and asset quality ratios, including the effects of current economic and real estate market conditions; nonperforming loans and leases; nonperforming assets; net charge-offs; net charge-off ratio; provision and allowance for loan and lease losses; past due loans and leases; current or future litigation; interest rate sensitivity, including the effects of possible interest rate changes; future growth and expansion opportunities including plans for making additional acquisitions; problems with integrating or managing acquisitions; the effect of the announcements or completion of any pending or future mergers or acquisitions on customer relationships and operating results; opportunities to profitably deploy capital; plans for opening new offices or relocating or closing existing offices; opportunities and goals for future market share growth; expected capital expenditures; loan, lease and deposit growth, including growth from unfunded closed loans; changes in covered assets; changes in the volume, yield and value of the Company’s investment securities portfolio; conversion of the Company’s core banking software; availability of unused borrowings and other similar forecasts and statements of expectation. Words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “hope,” “intend,” “look,” “may,” “plan,” “project,” “seek,” “target,” “trend,” “will,” “would,” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. 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 future 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 or retaining qualified personnel, obtaining regulatory or other approvals, obtaining permits and designing, constructing and opening new offices; the ability to enter into and/or close additional acquisitions; problems with integrating or managing acquisitions; opportunities to profitably deploy capital; the ability to attract new or retain existing or acquired deposits, or to retain or grow loans and leases, including growth from unfunded closed loans; the ability to generate future revenue growth or to control future growth in non-interest expense; interest rate fluctuations, including changes in the yield curve between short-term and long-term interest rates; competitive factors and pricing pressures, including their effect on the Company’s net interest margin; general economic, unemployment, credit market and real estate market conditions, and the effect of any such conditions on the creditworthiness of borrowers and lessees, collateral values, the value of investment securities and asset recovery values, 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, strengthen the capital of financial institutions, increase regulation of the financial services industry and protect homeowners or consumers; changes in U.S. government monetary and fiscal policy; possible further downgrade of U.S. Treasury securities; the ability to keep pace with technological changes, including changes regarding cyber security; adoption of new accounting standards or changes in existing standards; and adverse results in current or future litigation or regulatory examinations as well as other factors described in this quarterly report on Form 10-Q 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 six months ended June 30, 2014 and 2013 and supplemental quarterly financial data of the Company for each of the most recent eight quarters beginning with the third quarter of 2012 through the second quarter of 2014. These tables are qualified in their entirety by the consolidated financial statements and related notes presented elsewhere in this quarterly report on Form 10-Q.

Selected Consolidated Financial Data

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (Dollars in thousands, except per share amounts)  

Income statement data:

        

Interest income

   $ 69,760      $ 47,957      $ 126,818      $ 96,726   

Interest expense

     4,959        4,492        9,620        9,122   

Net interest income

     64,801        43,465        117,198        87,604   

Provision for loan and lease losses

     5,582        2,666        6,887        5,394   

Non-interest income

     17,388        18,987        37,749        35,344   

Non-interest expense

     37,878        29,901        75,333        59,132   

Net income available to common stockholders

     26,486        20,387        51,762        40,387   

Common share and per common share data*:

        

Earnings – diluted

   $ 0.34      $ 0.29      $ 0.68      $ 0.57   

Book value

     10.67        7.49        10.67        7.49   

Dividends

     0.115        0.085        0.225        0.16   

Weighted-average diluted shares outstanding (thousands)

     77,466        71,482        75,981        71,342   

End of period shares outstanding (thousands)

     79,662        70,876        79,662        70,876   

Balance sheet data at period end:

        

Total assets

   $ 6,297,975      $ 4,043,632      $ 6,297,975      $ 4,043,632   

Non-purchased loans and leases

     3,171,585        2,443,342        3,171,585        2,443,342   

Purchased non-covered loans

     1,127,689        31,027        1,127,689        31,027   

Covered loans

     276,380        480,752        276,380        480,752   

Allowance for loan and lease losses

     46,958        39,372        46,958        39,372   

FDIC loss share receivable

     50,679        112,716        50,679        112,716   

Investment securities AFS

     892,129        490,748        892,129        490,748   

Covered foreclosed assets

     35,775        46,157        35,775        46,157   

Total deposits

     4,983,897        2,984,629        4,983,897        2,984,629   

Repurchase agreements with customers

     55,999        24,704        55,999        24,704   

Other borrowings

     280,875        391,690        280,875        391,690   

Subordinated debentures

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

Total common stockholders’ equity

     850,204        531,125        850,204        531,125   

Loan and lease (including covered loans and purchased non-covered loans) to deposit ratio

     91.81     99.01     91.81     99.01

Average balance sheet data:

        

Total average assets

   $ 5,660,136      $ 3,928,528      $ 5,247,221      $ 3,931,692   

Total average common stockholders’ equity

     749,692        527,713        696,360        521,082   

Average common equity to average assets

     13.25     13.43     13.27     13.25

Performance ratios:

        

Return on average assets**

     1.88     2.08     1.99     2.07

Return on average common stockholders’ equity**

     14.17        15.50        14.99        15.63   

Return on average tangible common stockholders’ equity**

     15.41        15.82        15.90        15.97   

Net interest margin – FTE**

     5.62        5.56        5.55        5.68   

Efficiency ratio

     44.60        46.34        47.05        46.54   

Common stock dividend payout ratio

     33.82        29.49        33.09        27.99   

Asset quality ratios:

        

Net charge-offs to average total loans and leases**(1)

     0.19     0.12     0.11     0.15

Nonperforming loans and leases to total loans and leases(2)

     0.58        0.65        0.58        0.66   

Nonperforming assets to total assets(2)

     0.62        0.66        0.62        0.66   

Allowance for loan and lease losses as a percentage of:

        

Total loans and leases(2)

     1.48     1.61     1.48     1.61

Nonperforming loans and leases(2)

     255     244     255     244

Capital ratios at period end:

        

Tier 1 leverage

     14.31     14.91     14.31     14.91

Tier 1 risk-based capital

     13.40        17.12        13.40        17.12   

Total risk-based capital

     14.19        18.27        14.19        18.27   

 

* Adjusted to give effect to 2-for-1 stock split on June 23, 2014.
** Ratios annualized based on actual days.
(1) Excludes covered loans, purchased non-covered loans and net charge-offs related to such loans.
(2) Excludes purchased non-covered loans, covered loans and covered foreclosed assets, except for their inclusion in total assets.

 

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Supplemental Quarterly Financial Data

 

    9/30/12     12/31/12     3/31/13     6/30/13     9/30/13     12/31/13     3/31/14     6/30/14  
    (Dollars in thousands, except per share amounts)  

Earnings Summary:

               

Net interest income

  $ 44,444      $ 43,771      $ 44,139      $ 43,465      $ 50,633      $ 55,282      $ 52,396      $ 64,801   

Federal tax (FTE) adjustment

    2,087        2,009        2,020        2,076        2,161        2,372        2,424        2,737   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (FTE)

    46,531        45,780        46,159        45,541        52,794        57,654        54,820        67,538   

Provision for loan and lease losses

    (3,080     (2,533     (2,728     (2,666     (3,818     (2,863     (1,304     (5,582

Non-interest income

    14,491        18,848        16,357        18,987        22,102        18,592        20,360        17,388   

Non-interest expense

    (28,682     (29,891     (29,231     (29,901     (32,208     (34,728     (37,454     (37,878
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pretax income (FTE)

    29,260        32,204        30,557        31,961        38,870        38,655        36,422        41,466   

FTE adjustment

    (2,087     (2,009     (2,020     (2,076     (2,161     (2,372     (2,424     (2,737

Provision for income taxes

    (7,883     (9,519     (8,526     (9,506     (10,224     (11,893     (8,730     (12,251

Noncontrolling interest

    (15     (9     (11     8        (33     8        8        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

  $ 19,275      $ 20,667      $ 20,000      $ 20,387      $ 26,452      $ 24,398      $ 25,276      $ 26,486   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share – diluted*

  $ 0.28      $ 0.29      $ 0.28      $ 0.29      $ 0.36      $ 0.33      $ 0.34      $ 0.34   

Non-interest Income:

               

Service charges on deposit accounts

  $ 5,000      $ 4,799      $ 4,722      $ 5,074      $ 5,817      $ 6,031      $ 5,639      $ 6,605   

Mortgage lending income

    1,672        1,483        1,741        1,643        1,276        967        954        1,126   

Trust income

    865        928        883        865        1,060        1,289        1,316        1,364   

BOLI income

    598        1,027        1,083        1,104        1,179        1,164        1,130        1,278   

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

    1,699        1,336        2,392        2,481        1,396        901        692        (741

Other income from loss share and purchased non-covered loans, net

    2,270        3,194        2,155        3,689        2,484        4,825        3,311        3,629   

Gains on investment securities

    —          55        156        —          —          4        5        18   

Gains on sales of other assets

    1,425        2,431        1,974        3,110        2,501        1,801        974        1,448   

Gains on merger and acquisition transactions

    —          2,403        —          —          5,163        —          4,667        —     

Other

    962        1,192        1,251        1,021        1,226        1,610        1,672        2,661   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

  $ 14,491      $ 18,848      $ 16,357      $ 18,987      $ 22,102      $ 18,592      $ 20,360      $ 17,388   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense:

               

Salaries and employee benefits

  $ 15,040      $ 15,362      $ 15,694      $ 15,294      $ 16,456      $ 17,381      $ 17,689      $ 18,831   

Net occupancy expense

    4,105        4,160        4,514        4,370        4,786        5,039        5,044        5,707   

Other operating expenses

    9,028        9,860        8,455        9,669        10,178        11,427        13,908        12,221   

Amortization of intangibles

    509        509        568        568        788        881        813        1,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

  $ 28,682      $ 29,891      $ 29,231      $ 29,901      $ 32,208      $ 34,728      $ 37,454      $ 37,878   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan and Lease Losses:

               

Balance at beginning of period

  $ 38,862      $ 38,672      $ 38,738      $ 38,422      $ 39,372      $ 41,660      $ 42,945      $ 43,861   

Net charge-offs

    (3,270     (2,467     (3,044     (1,716     (1,530     (1,578     (388     (2,485

Provision for loan and lease losses

    3,080        2,533        2,728        2,666        3,818        2,863        1,304        5,582   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 38,672      $ 38,738      $ 38,422      $ 39,372      $ 41,660      $ 42,945      $ 43,861      $ 46,958   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Ratios:

               

Net interest margin - FTE**

    5.97     5.84     5.83     5.56     5.55     5.63     5.46     5.62

Efficiency ratio

    47.00        46.25        46.76        46.34        43.00        45.55        49.82        44.60   

Net charge-offs to average loans and leases**(1)

    0.31        0.28        0.19        0.12        0.10        0.14        0.03        0.19   

Nonperforming loans and leases to total loans and leases(2)

    0.43        0.43        0.40        0.66        0.41        0.33        0.42        0.58   

Nonperforming assets to total assets(2)

    0.59        0.57        0.50        0.66        0.47        0.43        0.57        0.62   

Allowance for loan and lease losses to total loans and leases(2)

    1.90        1.83        1.78        1.61        1.65        1.63        1.58        1.48   

Loans and leases past due 30 days or more, including past due non-accrual loans and leases, to total loans and leases(2)

    0.61        0.73        0.56        0.74        0.54        0.45        0.75        0.63   

 

* Adjusted to give effect to 2-for-1 stock split on June 23, 2014.
** Annualized based on actual days.
(1) Excludes covered loans, purchased non-covered loans and net charge-offs related to such loans.
(2) Excludes purchased non-covered loans, covered loans and covered foreclosed assets, except for their inclusion in total assets.

 

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OVERVIEW

The following discussion explains the financial condition and results of operations of Bank of the Ozarks, Inc. (“the Company”) as of and for the three months and six months ended June 30, 2014. The purpose of this discussion is to focus on information about the Company’s financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 previously filed with the Securities and Exchange Commission (“SEC”). Annualized results for these interim periods may not be indicative of results for the full year or future periods.

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 non-purchased loans and leases, purchased loans not covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements (“purchased non-covered loans”), loans covered by FDIC loss share agreements (“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/amortization of FDIC loss share receivable, net of amortization of FDIC clawback payable, other income from loss share and purchased non-covered loans, gains on investment securities and from sales of other assets, and gains on merger and acquisition transactions.

The Company’s non-interest expense consists primarily of employee compensation and benefits, net occupancy and equipment expense and other operating expenses. The Company’s results of operations are significantly affected by its provision for loan and lease losses and its provision for income taxes.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. The Company’s determination of (i) the provisions to and the adequacy of the allowance for loan and lease losses (“ALLL”), (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 the assets acquired and liabilities assumed pursuant to business combination transactions all involve a higher degree of judgment and complexity than its other significant accounting policies. Accordingly, the Company considers the determination of (i) provisions to and the adequacy of the ALLL, (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 the assets acquired and liabilities assumed pursuant to business combination transactions to be critical accounting policies.

Provisions to and adequacy of the ALLL. The ALLL is established through a provision for such losses charged against income. All or portions of loans or leases, excluding purchased non-covered loans and covered loans (“non-purchased loans and leases”), deemed to be uncollectible are charged against the ALLL when management believes that collectability of all or some portion of outstanding principal is unlikely. Subsequent recoveries, if any, of loans or leases previously charged off are credited to the ALLL.

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

The Company’s internal grading system assigns grades to all non-purchased loans and leases, except residential 1-4 family loans, consumer loans, and certain other loans, with each grade being assigned an allowance allocation percentage. The grade for each graded individual loan or lease is determined by the account officer and other approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing assessment of loan or lease risk. Grades are reviewed on specific loans and leases from time to time by senior management and as part of the Company’s internal loan review process. 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 of operating expenses compared to loan repayment requirements),

 

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operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age, condition, value, nature and marketability of the collateral and the specific risks and volatility of income, property value and operating results typical of properties of that type; (2) for construction and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or ability to lease property constructed for lease, the quality and nature of contracts for presale or preleasing, if any, experience and ability of the developer and loan-to-cost and loan-to-value ratios; (3) for commercial and industrial loans and leases, the operating results of the commercial, industrial or professional enterprise, the borrower’s or lessee’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in the applicable industry 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, consumer loans and certain other loans are assigned an allowance allocation percentage based on past due status.

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

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

For 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 ALLL. 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.

For purchased non-covered loans, management segregates this portfolio into loans that contain evidence of credit deterioration on the date of purchase and loans that do not contain evidence of credit deterioration on the date of purchase. Purchased non-covered loans with evidence of credit deterioration are regularly monitored and are periodically reviewed by management. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is considered in the determination of the required level of ALLL. To the extent that a revised loss estimate exceeds the loss estimate established in the determination of Day 1 Fair Values, such determination will result in an allowance allocation or a charge-off.

All other purchased non-covered loans are graded by management at the time of purchase. The grade on these purchased non-covered loans are reviewed regularly as part of the ongoing assessment of such loans. To the extent that current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereof, such loan is considered in the determination of the required level of ALLL and may result in an allowance allocation or a charge-off.

At June 30, 2014 and 2013 and at December 31, 2013, the Company had no allowance for its purchased non-covered loans and its covered loans because all losses had been charged off on such loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values.

The Company generally places a loan or lease, excluding purchased non-covered loans with evidence of credit deterioration on the date of purchase and covered loans, 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 ALLL. Loans for which the terms have been modified and for which (i) the borrower is experiencing financial difficulties and (ii) a concession has been granted to the borrower by the Company are considered troubled debt restructurings (“TDRs”) and are included in impaired loans and leases. Income on nonaccrual loans or leases, including impaired loans and leases but excluding certain TDRs which continue to accrue interest, is recognized on a cash basis when and if actually collected. For the three months and six months ended June 30, 2014, there were no defaults during the preceding 12 months on any loans that were considered TDRs.

 

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All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan or lease, excluding purchased non-covered loans with evidence of credit deterioration at the date of purchase and covered loans, 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 non-covered loan with evidence of credit deterioration at the date of purchase and a covered loan to be impaired once a decrease in expected cash flows or other deterioration in the loan’s expected performance, subsequent to the determination of the Day 1 Fair Values, results in an allowance allocation, a partial or full charge-off or in a provision for loan and lease losses. Most of the Company’s nonaccrual loans and leases, excluding purchased non-covered loans and covered loans, and all TDRs are considered impaired. The majority of the Company’s impaired loans and leases are dependent upon collateral for repayment. For such loans and leases, impairment is measured by comparing collateral value, net of holding and selling costs, to the current investment in the loan or lease. For all other impaired loans and leases, the Company compares estimated discounted cash flows to the current investment in the loan or lease. To the extent that the Company’s current investment in a particular loan or lease exceeds its estimated net collateral value or its estimated discounted cash flows, the impaired amount is specifically considered in the determination of the ALLL or is charged off as a reduction of the ALLL. The Company’s practice is to charge off any estimated loss as soon as management is able to identify and reasonably quantify such potential loss. Accordingly, only a small portion of the Company’s ALLL is needed for potential losses on nonperforming loans and leases.

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

The Company also maintains specific ALLL allocations for concentrations of credit to capture the risk associated with having a loan portfolio comprised of both large individual credits and large borrower relationships. This ALLL allocation is applied to every risk-rated loan in a borrower relationship that exceeds $3 million, and is based on the greater of the loan-to-value or loan-to-cost ratio for each individual risk-rated loan comprising such borrower relationship.

The Company also includes specific ALLL allocations for qualitative factors including, (i) general economic and business conditions, (ii) trends that could affect collateral values and (iii) expectations regarding the current business cycle. The Company may also consider other qualitative factors in future periods for additional allowance allocations.

Changes in the criteria used in this evaluation or the availability of new information could cause the ALLL to be increased or decreased in future periods. In addition bank regulatory agencies, as part of their examination process, may require adjustments to the ALLL based on their judgments and estimates.

Fair value of the investment securities portfolio. Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At June 30, 2014 and 2013 and December 31, 2013, the Company has classified all of its investment securities as available for sale (“AFS”).

AFS investment securities are stated at estimated fair value, with the unrealized gains and losses determined on a specific identification basis. Such unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity and included in other comprehensive income (loss). The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. As a result, the Company receives estimates of fair values from at least two independent pricing sources for the majority of its individual securities within its investment portfolio. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. Additionally, the valuation of investment securities acquired may include certain unobservable inputs. All fair value estimates received by the Company for its investment securities are reviewed and approved on a quarterly basis by the Company’s Investment Portfolio Manager and its Chief Financial Officer.

Declines in the fair value of investment securities below their amortized cost are reviewed at least quarterly by the Company for other-than-temporary impairment. Factors considered during such review include, among other things, the length of time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer. The Company also assesses whether it has the intent to sell the investment security or more likely than not would be required to sell the investment security before any anticipated recovery in fair value. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through the income statement. For securities that do not meet the aforementioned criteria, the amount of impairment is split into (i) other-than-temporary impairment related to credit loss, which must

 

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be recognized in the income statement, and (ii) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

The fair values of 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 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 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. Loans covered by FDIC loss share agreements, or covered loans, are accounted for in accordance with the provisions of 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 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. 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 loans acquired in FDIC-assisted acquisitions had 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 loans acquired in its FDIC-assisted acquisitions.

At the time such covered 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 covered loans (not considering any FDIC loss sharing agreements) and includes no carryover of any previously recorded ALLL. In determining the estimated fair value of covered 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 covered loan 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 covered loan portfolio.

In determining the Day 1 Fair Values of covered loans, management calculates a non-accretable difference (the credit component of the covered loans) and an accretable difference (the yield component of the covered 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 expected cash flows following any previous decrease will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield. Any such increase or decrease in expected cash flows will result in a corresponding adjustment of the FDIC loss share receivable and accretion or amortization thereof and the FDIC clawback payable or the amortization thereof for the portion of such reduced or additional loss expected to be collected from the FDIC.

The accretable difference on covered 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 for purposes of establishing the Day 1 Fair Values, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan. At June 30, 2014, 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 approximately 2.6 years.

Management separately monitors the covered 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 typically reviewed (i) when it is modified or extended, (ii) when material information becomes available to the Company that provides 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 which include a substantial portion of each acquired covered loan portfolio. Management separately reviews the performance of the portfolio of covered loans on an annual basis, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’

 

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performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values or since management’s most recent review of such portfolio’s performance. To the extent that a loan is performing in accordance with or exceeding management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV1, 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 ALLL. For any loan that is exceeding management’s performance expectation established in conjunction with the determination of Day 1 Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV2, is included in certain of the Company’s credit quality metrics, is considered an impaired loan, and is considered in the determination of the required level of ALLL. Any improvement in the expected performance of a covered loan would result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield.

Purchased non-covered loans include a small volume of non-covered loans acquired in FDIC-assisted acquisitions and loans acquired in the Genala Banc, Inc. (“Genala”), The First National Bank of Shelby (“First National Bank”), Bancshares Inc. (“Bancshares”) and Summit Bancshares, Inc. (“Summit”) acquisitions and are initially recorded at estimated fair value on the date of purchase. Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are carried at the net present value of expected future proceeds. All other purchased non-covered loans are recorded at their initial estimated fair value, adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on purchase, charge-offs and any other adjustment to carrying value.

At the time of acquisition of purchased non-covered loans, management individually evaluates substantially all loans acquired in the transaction. For those purchased loans without evidence of credit deterioration, management evaluates each reviewed loan using an internal grading system with a grade assigned to each loan at the date of acquisition. To the extent that any purchased non-covered loan without evidence of credit deterioration is not specifically reviewed, such loan is assumed to have characteristics similar to the characteristics of the aggregate acquired portfolio of purchased non-covered loans without evidence of credit deterioration. The grade for each purchased non-covered loan is reviewed subsequent to the date of acquisition any time a loan is renewed or extended or at any time information becomes available to the Company that provides material insight regarding the loan’s performance, the borrower or the underlying collateral. To the extent that current information indicates it is probable that the Company will collect all amounts according to the contractual terms thereof, such loan is not considered impaired and is not considered in the determination of the required ALLL. To the extent that current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereof, such loan is considered impaired and is considered in the determination of the required level of ALLL.

In determining the Day 1 Fair Values of purchased non-covered loans without evidence of credit deterioration at the date of acquisition, management includes (i) no carry-over of any previously recorded ALLL and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk profile and grade assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.

Purchased non-covered loans that contain evidence of credit deterioration on the date of purchase are accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated credit quality. At the time such purchased non-covered loans with evidence of credit deterioration are acquired, management individually evaluates each loan to determine the estimated fair value of each loan. This evaluation includes no carryover of any previously recorded ALLL. In determining the estimated fair value of purchased non-covered loans with evidence of credit deterioration, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received.

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

The accretable difference on purchased non-covered loans with evidence of credit deterioration is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. In determining the net present value of the expected cash flows for purposes of establishing the Day 1 Fair Values, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan.

 

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Management separately monitors purchased non-covered loans with evidence of credit deterioration on the date of purchase and periodically reviews such loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed or extended, (ii) at any other time additional information becomes available to the Company that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio. Management separately reviews the performance of the portfolio of purchased non-covered loans with evidence of credit deterioration, on an annual basis, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’ performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values or since management’s most recent review of such portfolio’s performance. To the extent that a loan is performing in accordance with or exceeding management’s performance expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV66, is not included in any of the credit quality ratios, is not considered to be a nonaccrual or impaired loan, and is not considered in the determination of the required ALLL. For any loan that is exceeding management’s performance expectation established in conjunction with the determination of Day 1 Fair Values, the accretable yield on such loan is adjusted to reflect such increased performance. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV88, is included in certain of the Company’s credit quality metrics, is considered an impaired loan, and is considered in the determination of the required level of ALLL. Any improvement in the expected performance of such loan would result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield.

Foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, are initially recorded at Day 1 Fair Values. In estimating the Day 1 Fair Values of covered foreclosed assets, management considers a number of factors including, among others, appraised value, estimated selling prices, estimated selling costs, estimated holding periods and net present value of cash flows expected to be received. Discount rates ranging from 8.0% to 9.5% per annum were used to determine the net present value of covered foreclosed assets for purposes of establishing the Day 1 Fair Values. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest income to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of these assets are based on third party appraisals, broker price opinions or other valuations of the property.

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. 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. Since the indemnified items are covered loans and covered foreclosed assets, which are initially measured at Day 1 Fair Values, the FDIC loss share receivable is also initially 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 Day 1 Fair Values 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 and the accretion or amortization thereof is adjusted periodically to reflect changes in expectations of discounted cash flows, expense reimbursements under the loss share agreements and other factors. The Company is accreting or amortizing its FDIC loss share receivable over the shorter of (i) the contractual term of the indemnification agreement (ten years for the single family loss share agreements, and five years for the non-single family loss share agreements) or (ii) the remaining life of the indemnified asset.

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. The balance of the FDIC clawback payable and the amortization thereof are adjusted periodically to reflect changes in expected losses on covered assets and the impact of such changes on the clawback payable and other factors.

The Day 1 Fair Values of investment securities acquired in business combinations are generally based on quoted market prices, broker quotes, comprehensive interest rate tables or pricing matrices, or a combination thereof. Additionally, these valuations may include certain unobservable inputs. The Day 1 Fair Values of assumed liabilities in business combinations are generally the amounts payable by the Company necessary to completely satisfy the assumed obligations.

As a result of recording, at fair value, acquired assets and assumed liabilities pursuant to business combinations, differences in amounts reported for financial statement purposes and their related basis for federal and state income tax purposes are created. Such

 

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differences are recorded as deferred tax assets and liabilities using enacted tax rates in effect for the year or years in which the differences are expected to be recovered or settled. Business combination transactions may result in the acquisition of net operating loss carryforwards and other assets with built-in losses, the realization of which is subject to limitations pursuant to section 382 (“section 382 limitations”) of the Internal Revenue Code (“IRC”). In determining the section 382 limitation associated with a business combination, management must make a number of estimates and assumptions regarding the ability to utilize acquired net operating loss carryforwards and the expected timing of future recoveries or settlements of acquired assets with built-in losses. To the extent that information available as of the date of acquisition results in a determination by management that some portion of net operating loss carryforwards cannot be utilized or assets with built-in losses are expected to be settled or recovered in future periods in which the ability to realize the benefits will be subject to section 382 limitations, a deferred tax asset valuation allowance is established for the estimated amount of the deferred tax assets subject to the section 382 limitation. To the extent that information becomes available, during the first 12 months following the consummation of a business combination transaction, that results in changes in management’s initial estimates and assumptions regarding the expected utilization of net operating loss carryforwards or the expected settlement or recovery of acquired assets with built-in losses subject to section 382 limitations, an increase or decrease of the deferred tax asset valuation allowance will be recorded as an adjustment to bargain purchase gain or goodwill. To the extent that such information becomes available 12 months or more after the consummation of a business combination transaction, or additional information becomes available during the first 12 months as a result of changes in circumstances since the date of the consummation of a business combination transaction, an increase or decrease of the deferred tax asset valuation allowance will be recorded as an adjustment to deferred income tax expense (benefit).

ANALYSIS OF RESULTS OF OPERATIONS

General

Net income available to common stockholders for the Company was $26.5 million for the second quarter of 2014, a 29.9% increase from $20.4 million for the second quarter of 2013. Diluted earnings per common share were $0.34 for the second quarter of 2014, a 17.2% increase from $0.29, on a split-adjusted basis, for the second quarter of 2013. For the first six months of 2014, net income available to common stockholders totaled $51.8 million, a 28.2% increase from $40.4 million the first six months of 2013. Diluted earnings per common share for the first six months of 2014 were $0.68, a 19.3% increase from $0.57, on a split-adjusted basis, for the first six months of 2013.

On June 23, 2014, the Company completed a two-for-one stock split in the form of a stock dividend, effected by using one share of common stock for each share of such stock outstanding on June 13, 2014. All share and per share information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations has been adjusted to give effect to this stock split.

The Company’s annualized return on average assets was 1.88% for the second quarter of 2014 compared to 2.08% for the second quarter of 2013. Its annualized return on average common stockholders’ equity was 14.17% for the second quarter of 2014 compared to 15.50% for the second quarter of 2013. The Company’s annualized return on average tangible common stockholders’ equity was 15.41% for the second quarter of 2014 compared to 15.82% for the second quarter of 2013. The Company’s annualized return on average assets was 1.99% for the first six months of 2014 compared to 2.07% for the first six months of 2013. Its annualized return on average common stockholders’ equity was 14.99% for the first six months of 2014 compared to 15.63% for the first six months of 2013. The Company’s annualized return on average tangible common stockholders’ equity was 15.90% for the first six months of 2014 compared to 15.97% for the first six months of 2013.

Total assets were $6.30 billion at June 30, 2014 compared to $4.79 billion at December 31, 2013. Non-purchased loans and leases were $3.17 billion at June 30, 2014 compared to $2.63 billion at December 31, 2013. Total loans and leases were $4.58 billion at June 30, 2014 compared to $3.36 billion at December 31, 2013. Deposits were $4.98 billion at June 30, 2014 compared to $3.72 billion at December 31, 2013.

Common stockholders’ equity was $850 million at June 30, 2014 compared to $629 million at December 31, 2013. Tangible common stockholders’ equity was $742 million at June 30, 2014 compared to $610 million at December 31, 2013. Book value per common share was $10.67 at June 30, 2014 compared to $8.53, on a split-adjusted basis, at December 31, 2013. Tangible book value per common share was $9.31 at June 30, 2014 compared to $8.27, on a split-adjusted basis, at December 31, 2013. Changes in common stockholders’ equity, tangible 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 AFS, and, for tangible common stockholders’ equity and tangible book value per common share, changes in intangible assets.

On July 31, 2013, the Company completed its acquisition of First National Bank. Because the acquisition was effective on July 31, 2013, the Company’s consolidated results of operations for the three months and six months ended June 30, 2013 do not include the acquired operations of First National Bank.

 

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During the second quarter of 2014, management revised its initial estimates and assumptions regarding the expected recovery of acquired assets with built-in losses, specifically the timing of expected charge-offs of purchased non-covered loans, in the First National Bank acquisition. As a result of such revision, management concluded that the deferred tax asset valuation allowance of $4.1 million was not necessary. Because such revision occurred during the first 12 months following the date of acquisition and was not the result of changes in circumstances, management has recast the third quarter 2013 financial statements, along with all subsequent financial statements, to increase the bargain purchase gain on the First National Bank acquisition by $4.1 million to reflect this change in estimate.

On March 5, 2014, the Company completed its acquisition of Bancshares. Because the acquisition was effective March 5, 2014, the Company’s consolidated results of operations for the three months and six months ended June 30, 2013 do not include the acquired operations of Bancshares. The Company’s consolidated results of operations for the three months and six months ended June 30, 2014 include the acquired operations of Bancshares beginning March 6, 2014.

On May 16, 2014, the Company completed its acquisition of Summit. Because the acquisition was effective May 16, 2014, the Company’s consolidated results of operations for the three months and six months ended June 30, 2013 do not include the acquired operations of Summit. The Company’s consolidated results of operations for the three months and six months ended June 30, 2014 include the acquired operations of Summit beginning May 17, 2014.

A summary of the assets acquired and liabilities assumed in the First National Bank, Bancshares, and Summit acquisitions is included in Note 3 to the Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q.

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 $2.7 million and $2.1 million for the quarters ended June 30, 2014 and 2013, respectively, and $5.2 million and $4.1 million for the six months ended June 30, 2014 and 2013, 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 IRC as a result of investment in certain tax-exempt securities.

Net interest income for the second quarter of 2014 increased 48.3% to $67.5 million compared to $45.5 million for the second quarter of 2013. Net interest income for the first six months of 2014 increased 33.4% to $122.4 million compared to $91.7 million for the first six months of 2013. The increase in net interest income for the second quarter and first six months of 2014 compared to the same periods in 2013 was primarily due to the increase in average earning assets, which increased to $4.82 billion, or 46.8%, for the second quarter and $4.45 billion, or 36.6%, for the first six months of 2014, compared to $3.29 billion for the second quarter and $3.26 billion for the first six months of 2013.

The Company’s net interest margin for the second quarter of 2014 increased six basis points (“bps”) to 5.62% compared to 5.56% for the second quarter in 2013. This increase was primarily due to a 14 bps reduction in rates paid on interest bearing liabilities, partially offset by an eight bps decrease in yields on average earning assets. The Company’s net interest margin for the first six months of 2014 decreased 13 bps to 5.55% compared to 5.68% for the first six months of 2013. This decrease was primarily due to a 27 bps decrease in the yield on average earning assets, partially offset by a 12 bps reduction in the rates paid on interest bearing liabilities.

Yields on earning assets decreased to 6.03% for the second quarter and 5.98% for the first six months of 2014 compared to 6.11% for the second quarter and 6.25% for the first six months of 2013. The yield on the Company’s portfolio of non-purchased loans and leases decreased 42 bps for the second quarter and 51 bps for the first six months of 2014 compared to the same periods in 2013. The decrease in yield on the Company’s non-purchased loan and lease portfolio was primarily attributable to the extremely low interest rate environment experienced in recent years and increased pricing competition from many of the Company’s competitors. The yield on the Company’s aggregate investment securities portfolio decreased 50 bps for the second quarter and 46 bps for the first six months of 2014 compared to the same periods in 2013 primarily due to changes in the composition of the Company’s investment securities portfolio between taxable and tax-exempt investment securities. During the second quarter and first six months of 2014, taxable investment securities comprised 40.5% and 40.6%, respectively, and tax-exempt investment securities comprised 59.5% and 59.4%, respectively, of average investment securities. During the second quarter and first six months of 2013, taxable investment securities comprised 28.8% and 30.0%, respectively, and tax-exempt investment securities comprised 71.2% and 70.0%, respectively, of average investment securities. Additionally, the yield on the Company’s purchased non-covered loan portfolio decreased 147 bps for the second quarter and 215 bps for the first six months of 2014 compared to the same periods in 2013. This decrease was primarily attributable to the loans acquired in the Summit transaction, many of which did not contain evidence of credit deterioration on the date of purchase and were priced at a lower yield compared to the Company’s then existing yield on its purchased non-covered loan portfolio. These decreases were partially offset by the 660 bps increase in the yield on covered loans for the second quarter and 439 bps increase for the first six months of 2014 compared to the same periods in 2013. The increase in yields on covered loans was primarily due to upward revisions of estimated cash flows of certain covered loans as a result of recent evaluations of the expected performance of such loans. To the extent the Company makes additional upward revisions of estimated cash flow of certain covered loans in future periods to reflect improvement in the expected performance of such loans, these upward revisions of estimated cash flows are expected to result in increased yields on the covered loan portfolio in future periods.

 

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The decrease 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 two bps for the second quarter and three bps for the first six months of 2014 compared to the same periods in 2013. This decrease in the rate on interest bearing deposits was principally due to (i) 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 and (ii) a change in the mix of savings and interest bearing deposit accounts to 71.4% and 71.4%, respectively, of total average interest bearing deposits for the second quarter and first six months of 2014 compared to 69.2% and 68.9%, respectively, for the second quarter and first six months of 2013. During recent quarters, the Company has increased deposit pricing in several target markets to fund growth in loans and leases. To the extent the Company continues to increase deposit pricing in additional markets to fund future growth in earning assets, if any, such increased deposit pricing is expected to result in increased deposit costs in future periods.

The Company’s other borrowing sources include (i) repurchase agreements with customers (“repos”), (ii) other borrowings comprised primarily of Federal Home Loan Bank of Dallas (“FHLB – Dallas”) advances, and, to a lesser extent, Federal Reserve borrowings and federal funds purchased and (iii) subordinated debentures. The rates on repos increased one bps for the second quarter of 2014 but decreased one bps for the first six months of 2014 compared to the same periods of 2013. The rate on the Company’s other borrowings, which consist primarily of fixed rate callable FHLB – Dallas advances, increased nine bps in the second quarter and five bps for the first six months of 2014 compared to the same periods of 2013. 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, decreased one bps in the second quarter and five bps for the first six months of 2014 compared to the same periods of 2013.

The increase in average earning assets for the second quarter and first six months of 2014 compared to the same periods in 2013 was due to increases in the average balances of non-purchased loans and leases of $671 million for the second quarter and $602 million for the first six months of 2014 compared to the same periods in 2013. Additionally, the average balance of purchased non-covered loans increased $783 million for the second quarter and $574 million for the first six months of 2014 compared to the same periods for 2013, primarily as a result of the First National Bank, Bancshares and Summit acquisitions. The average balances of investment securities increased $300 million for the second quarter and $246 million for the first six months of 2014 compared to the same periods in 2013, primarily as a result of investment securities acquired in the First National Bank and Summit acquisitions. These increases were partially offset by a decrease in the average balance of covered loans of $228 million for the second quarter and $234 million for the first six months of 2014 compared to the same periods in 2013.

The following table sets forth certain information relating to the Company’s net interest income for the periods indicated. The yields and rates are derived by dividing interest income or interest expense by the average balance of the related assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances for such assets and liabilities. The average balance of loans and leases includes loans and leases on which the Company has discontinued accruing interest. The average balances of investment securities are computed based on amortized cost adjusted for unrealized gains and losses on investment securities AFS and other-than-temporary impairment writedowns. The yields on loans and leases include late fees and amortization of certain deferred fees and origination costs, which are considered adjustments to yields. The yields on investment securities include amortization of premiums and accretion of discounts. The yields on covered loans and purchased non-covered loans include accretion of the net present value of expected future cash flows using the effective yield method over the term of the loans and include late fees. Interest expense and rates on other borrowings are presented net of interest capitalized on construction projects.

 

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Average Consolidated Balance Sheets and Net Interest Analysis – FTE

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2014     2013     2014     2013  
    Average     Income/     Yield/     Average     Income/     Yield/     Average     Income/     Yield/     Average     Income/     Yield/  
    Balance     Expense     Rate     Balance     Expense     Rate     Balance     Expense     Rate     Balance     Expense     Rate  
    (Dollars in thousands)  

ASSETS

                       

Earning assets:

                       

Interest earning deposits and federal funds sold

  $ 12,398      $ 35        1.14   $ 1,312      $ 2        0.84   $ 6,770      $ 38        1.14   $ 1,090      $ 10        1.81

Investment securities:

                       

Taxable

    320,298        2,790        3.49        141,836        1,183        3.34        298,551        5,149        3.48        147,097        2,468        3.38   

Tax-exempt – FTE

    471,001        7,652        6.52        349,878        5,921        6.79        437,364        14,416        6.65        343,284        11,681        6.86   

Non-purchased loans and leases – FTE

    2,913,816        36,892        5.08        2,242,441        30,723        5.50        2,785,645        70,358        5.09        2,183,975        60,606        5.60   

Purchased non-covered loans

    817,864        13,998        6.86        34,864        724        8.33        611,179        21,478        7.09        37,373        1,713        9.24   

Covered loans

    287,380        11,130        15.53        515,547        11,480        8.93        308,225        20,535        13.44        542,675        24,344        9.05   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total earning assets – FTE

    4,822,757        72,497        6.03        3,285,878        50,033        6.11        4,447,734        131,974        5.98        3,255,494        100,822        6.25   

Non-interest earning assets

    837,379            642,650            799,487            676,198       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total assets

  $ 5,660,136          $ 3,928,528          $ 5,247,221          $ 3,931,692       
 

 

 

       

 

 

       

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

                       

Interest bearing liabilities:

                       

Deposits:

                       

Savings and interest bearing transaction

  $ 2,484,649      $ 1,271        0.21   $ 1,654,637      $ 806        0.20   $ 2,291,407      $ 2,337        0.21   $ 1,660,156      $ 1,670        0.20

Time deposits of $100,00 or more

    488,265        281        0.23        331,094        243        0.29        435,850        516        0.24        332,939        532        0.32   

Other time deposits

    505,260        275        0.22        404,408        325        0.32        481,887        555        0.23        415,499        718        0.35   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing deposits

    3,478,174        1,827        0.21        2,390,139        1,374        0.23        3,209,144        3,408        0.21        2,408,594        2,920        0.24   

Repurchase agreements with customers

    58,607        13        0.09        29,815        6        0.08        61,808        25        0.08        31,872        13        0.09   

Other borrowings

    281,009        2,692        3.84        286,719        2,684        3.75        280,968        5,347        3.84        283,755        5,332        3.79   

Subordinated debentures

    64,950        427        2.64        64,950        428        2.65        64,950        840        2.61        64,950        857        2.66   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing liabilities

    3,882,740        4,959        0.51        2,771,623        4,492        0.65        3,616,870        9,620        0.54        2,789,171        9,122        0.66   

Non-interest bearing liabilities:

                       

Non-interest bearing deposits

    964,935            577,930            878,349            567,153       

Other non-interest bearing liabilities

    59,311            47,814            52,180            50,840       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total liabilities

    4,906,986            3,397,367            4,547,399            3,407,164       

Common stockholders’ equity

    749,692            527,713            696,360            521,082       

Noncontrolling interest

    3,458            3,448            3,462            3,446       
 

 

 

       

 

 

       

 

 

           

Total liabilities and stockholders’ equity

  $ 5,660,136          $ 3,928,528          $ 5,247,221          $ 3,931,692       
 

 

 

       

 

 

       

 

 

       

 

 

     
                       
   

 

 

       

 

 

       

 

 

       

 

 

   

Net interest income – FTE

    $ 67,538          $ 45,541          $ 122,354          $ 91,700     
   

 

 

       

 

 

       

 

 

       

 

 

   

Net interest margin – FTE

        5.62         5.56         5.55         5.68
     

 

 

       

 

 

       

 

 

       

 

 

 

 

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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 - FTE, interest expense and net interest income - FTE 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
June 30, 2014
Over
Three Months Ended
June 30, 2013
    Six Months Ended
June 30, 2014
Over
Six Months Ended
June 30, 2013
 
     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

   $ 32      $ 1      $ 33      $ 32      $ (4   $ 28   

Investment securities:

            

Taxable

     1,554        53        1,607        2,612        69        2,681   

Tax-exempt – FTE

     1,968        (237     1,731        3,101        (366     2,735   

Non-purchased loans and leases – FTE

     8,500        (2,331     6,169        15,197        (5,445     9,752   

Purchased non-covered loans

     13,401        (127     13,274        20,164        (399     19,765   

Covered loans

     (8,836     8,486        (350     (15,620     11,811        (3,809
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income – FTE

     16,619        5,845        22,464        25,486        5,666        31,152   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Savings and interest bearing transaction

     425        40        465        644        23        667   

Time deposits of $100,000 or more

     91        (53     38        122        (138     (16

Other time deposits

     55        (105     (50     76        (239     (163

Repurchase agreements with customers

     6        1        7        12        —          12   

Other borrowings

     (55     63        8        (53     68        15   

Subordinated debentures

     —          (1     (1     —          (17     (17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     522        (55     467        801        (303     498   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in net interest income – FTE

   $ 16,097      $ 5,900      $ 21,997      $ 24,685      $ 5,969      $ 30,654   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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/amortization of FDIC loss share receivable, net of amortization of FDIC clawback payable, other income from loss share and purchased non-covered loans, gains on investment securities and on sales of other assets and gains on merger and acquisition transactions.

Non-interest income for the second quarter of 2014 decreased 8.4% to $17.4 million compared to $19.0 million for the second quarter of 2013. Non-interest income for the first six months of 2014 increased 6.8% to $37.7 million compared to $35.3 million for the first six months of 2013. The Company’s results for the first six months of 2014 included $4.7 million of tax-exempt bargain purchase gain from the acquisition of Bancshares. The Company’s results for the second quarter of 2014 and for the second quarter and first six months of 2013 included no bargain purchase gain.

Service charges on deposit accounts increased 30.2% to $6.6 million for the second quarter of 2014 compared to $5.1 million for the second quarter of 2013. Service charges on deposit accounts increased 25.0% to $12.2 million for the first six months of 2014 compared to $9.8 million for the same period in 2013. The increase in service charges on deposit accounts was primarily a result of growth in the number of transaction accounts and the addition of deposit customers from the Company’s First National Bank, Bancshares and Summit acquisitions.

Mortgage lending income decreased 31.5% to $1.1 million for the second quarter of 2014 compared to $1.6 million for the second quarter of 2013. Mortgage lending income decreased 38.5% to $2.1 million for the first six months of 2014 compared to $3.4 million for the same period in 2013. The volume of originations of mortgage loans available for sale decreased 16.6% to $51.4 million for the second quarter of 2014 compared to $61.6 million for the second quarter of 2013. The volume of originations of mortgage loans available for sale decreased 25.8% to $90.1 million for the first six months of 2014 compared to $121.5 million for the first six months of 2013.

 

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Table of Contents

Trust income was $1.4 million in the second quarter of 2014, an increase of 57.7% from $0.9 million for the second quarter of 2013. Trust income was $2.7 million for the first six months of 2014, an increase of 53.4% from $1.7 million for the same period in 2013. The increase in trust income was primarily due to new trust customers added as a result of the First National Bank acquisition.

The Company recognized $0.7 million of amortization expense of the FDIC loss share receivable, including amortization of the FDIC clawback payable, during the second quarter of 2014 compared to accretion income of $2.5 million during the second quarter of 2013. The Company recognized $0.05 million of amortization expense of the FDIC loss share receivables, including amortization of the FDIC clawback payable, during the first six months of 2014 compared to accretion income of $4.9 million during the first six months of 2013. The decrease in income from the accretion of the FDIC loss share receivable for the second quarter and first six months of 2014 compared to the same periods in 2013 was due to both a decrease in the balance of the FDIC loss share receivable and upward revisions of projected cash flows of certain loans whose performance is exceeding management’s expectations established in conjunction with the determination of the Day 1 Fair Values, resulting in reduced accretion and/or increased amortization of the related FDIC loss share receivable over the remaining term of the loan or the loss share agreement, whichever is shorter.

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 or otherwise has further upward revisions of projected cash flows of certain loans, the balance of the FDIC loss share receivable, absent any significant revisions to the timing or the amounts expected to be collected under the loss share agreements, will decline, resulting in a corresponding decrease in the accretion of, or increase in the amortization 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 income from loss share and purchased non-covered loans was $3.6 million in the second quarter of 2014 compared to $3.7 million in the second quarter of 2013 and $6.9 million in the first six months of 2014 compared to $5.8 million in the first six months of 2013.

Net gains on sales of other assets were $1.4 million in the second quarter of 2014 compared to $3.1 million in the second quarter of 2013. Net gains on sales of other assets were $2.4 million in the first six months of 2014 compared to $5.1 million in the first six months of 2013.

On March 5, 2014, the Company completed its acquisition of Bancshares for an aggregate of $21.5 million in cash. This acquisition resulted in the Company recognizing a tax-exempt bargain purchase gain of $4.7 million during the first quarter of 2014.

 

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Table of Contents

The following table presents non-interest income for the periods indicated.

Non-Interest Income

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014     2013      2014     2013  
     (Dollars in thousands)  

Service charges on deposit accounts

   $ 6,605      $ 5,074       $ 12,244      $ 9,796   

Mortgage lending income

     1,126        1,643         2,080        3,384   

Trust income

     1,364        865         2,681        1,748   

BOLI income

     1,278        1,104         2,408        2,186   

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

     (741     2,481         (49     4,873   

Other income from loss share and purchased non-covered loans, net

     3,629        3,689         6,940        5,844   

Gains on investment securities

     18        —           23        156   

Gains on sales of other assets

     1,448        3,110         2,422        5,084   

Gain on merger and acquisition transaction

     —          —           4,667        —     

Other

     2,661        1,021         4,333        2,273   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 17,388      $ 18,987       $ 37,749      $ 35,344   
  

 

 

   

 

 

    

 

 

   

 

 

 

Non-Interest Expense

The Company’s non-interest expense consists of salaries and employee benefits, net occupancy and equipment and other operating expenses. Non-interest expense increased 26.7% to $37.9 million for the second quarter of 2014 compared to $29.9 million for the second quarter of 2013. Non-interest expense increased 27.4% to $75.3 million for the first six months of 2014 compared to $59.1 million for the first six months of 2013. During the second quarter of 2014, the Company incurred pre-tax acquisition-related non-interest expense of approximately $0.8 million. During the first six months of 2014, the Company incurred pre-tax non-interest expense of $5.0 million due to the termination of existing core banking software contracts and approximately $1.5 million of acquisition-related expense. There were no software termination charges or acquisition-related costs in the second quarter or first six months of 2013.

Salaries and employee benefits, the Company’s largest components of non-interest expense, increased 23.1% to $18.8 million in the second quarter of 2014 compared to $15.3 million in the second quarter of 2013. Salaries and employee benefits increased 17.8% to $36.5 million for the first six months of 2014 compared to $31.0 million for the first six months of 2013. The Company had 1,586 full-time equivalent employees at June 30, 2014, a 43.7% increase compared to 1,104 full-time equivalent employees at June 30, 2013.

Net occupancy and equipment expense for the second quarter of 2014 increased 30.6% to $5.7 million compared to $4.4 million for the second quarter of 2013. Net occupancy and equipment expenses increased 21.0% to $10.8 million for the first six months of 2014 compared to $8.9 million for the first six months of 2013. At June 30, 2014 the Company had 164 offices, a 40.2% increase compared to 117 offices at June 30, 2013.

The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 44.6% for the second quarter and 47.1% for the first six months of 2014 compared to 46.5% for the second quarter and 46.5% for the first six months of 2013.

 

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The following table presents non-interest expense for the periods indicated.

Non-Interest Expense

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 18,831       $ 15,294       $ 36,520       $ 30,989   

Net occupancy and equipment

     5,707         4,370         10,751         8,884   

Other operating expenses:

           

Postage and supplies

     852         811         1,623         1,620   

Advertising and public relations

     636         511         1,036         865   

Telecommunication services

     1,191         867         2,207         1,704   

Professional and outside services

     2,353         1,566         4,526         2,752   

Software and data processing

     1,662         1,372         2,799         2,856   

Travel and meals

     629         740         1,169         1,371   

FDIC insurance

     555         435         1,105         855   

FDIC and state assessments

     218         175         431         346   

ATM expense

     307         223         516         440   

Loan collection and repossession expense

     1,528         907         1,987         1,673   

Writedowns of foreclosed and other assets

     798         69         877         191   

Amortization of intangibles

     1,119         568         1,932         1,137   

Other

     1,492         1,993         7,854         3,449   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 37,878       $ 29,901       $ 75,333       $ 59,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Taxes

The provision for income taxes was $12.3 million for the second quarter and $21.0 million for the first six months of 2014 compared to $9.5 million for the second quarter and $18.0 million for the first six months of 2013. The effective income tax rate was 31.6% for the second quarter and 28.8% for the first six months of 2014 compared to 31.8% for the second quarter and 30.9% for the first six months of 2013. The decrease in the effective tax rate for the first six months of 2014 compared to the same period in 2013 was due primarily to the tax-exempt bargain purchase gain of $4.7 million as a result of the Bancshares acquisition. The effective tax rates were also affected by various other factors including non-taxable income and non-deductible expenses.

 

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ANALYSIS OF FINANCIAL CONDITION

Non-Purchased Loan and Lease Portfolio

At June 30, 2014 the Company’s non-purchased loan and lease portfolio was $3.17 billion, compared to $2.63 billion at December 31, 2013 and $2.44 billion at June 30, 2013. 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 $2.79 billion at June 30, 2014, compared to $2.33 billion at December 31, 2013 and $2.15 billion at June 30, 2013. The amount and type of non-purchased loans and leases outstanding as of the dates indicated, and their respective percentage of the total non-purchased loan and lease portfolio are reflected in the following table.

Non-Purchased Loan and Lease Portfolio

 

     June 30,     December 31,
2013
 
     2014     2013    
     (Dollars in thousands)  

Real estate:

               

Residential 1-4 family

   $ 266,497         8.4   $ 261,568         10.7   $ 249,556         9.5

Non-farm/non-residential

     1,290,174         40.7        1,017,207         41.6        1,104,114         41.9   

Construction/land development

     1,049,158         33.1        680,829         27.9        722,557         27.4   

Agricultural

     45,541         1.4        48,879         2.0        45,196         1.7   

Multifamily residential

     136,953         4.3        145,683         6.0        208,337         8.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate

     2,788,323         87.9        2,154,166         88.2        2,329,760         88.5   

Commercial and industrial

     166,884         5.3        139,073         5.7        124,068         4.7   

Consumer

     28,674         0.9        28,289         1.2        26,182         1.0   

Direct financing leases

     98,768         3.1        76,953         3.1        86,321         3.3   

Other

     88,936         2.8        44,861         1.8        66,234         2.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 3,171,585         100.0   $ 2,443,342         100.0   $ 2,632,565         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The amount and percentage of the Company’s non-purchased loan and lease portfolio, by office of origination, as of the dates indicated, are reflected in the following table. This table shows the relative productivity of the Company’s offices in each state, but does not necessarily reflect the location of the borrower or collateral.

Non-Purchased Loan and Lease Portfolio by State of Originating Office

 

Non-Purchased Loans and Leases Attributable to Offices In

   June 30,     December 31,
2013
 
   2014     2013    
     (Dollars in thousands)  

Texas

   $ 1,545,366         48.7   $ 1,177,330         48.2   $ 1,302,061         49.5

Arkansas

     1,072,904         33.8        1,068,206         43.7        1,069,200         40.6   

New York

     209,388         6.6        —           —          30,837         1.2   

North Carolina

     200,413         6.3        130,304         5.3        157,938         6.0   

Georgia

     112,940         3.6        55,438         2.3        57,570         2.1   

Alabama

     14,795         0.5        11,260         0.5        13,073         0.5   

California

     8,813         0.3        —           —          —           —     

South Carolina

     5,158         0.1        582         0.0        1,703         0.1   

Florida

     1,808         0.1        222         0.0        183         0.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,171,585         100   $ 2,443,342         100.0   $ 2,632,565         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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The amount and type of the Company’s non-purchased real estate loans at June 30, 2014, 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 non-purchased real estate loans in that state or MSA exceed $10.0 million.

Geographic Distribution of Non-Purchased 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

   $ 100,190       $ 204,882       $ 125,834       $ 8,412       $ 14,171       $ 453,489   

Northern Arkansas (1)

     40,602         15,373         4,993         14,468         1,284         76,720   

Fort Smith, AR–OK MSA

     27,984         24,629         6,321         3,482         8,404         70,820   

Western Arkansas (2)

     21,461         29,221         4,820         6,572         1,109         63,183   

Fayetteville–Springdale–Rogers, AR–MO MSA

     9,290         20,961         15,715         4,728         3,324         54,018   

Hot Springs, AR MSA

     8,557         26,573         6,980         80         756         42,946   

All other Arkansas (3)

     6,943         9,955         2,396         4,234         1,691         25,219   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Arkansas

     215,027         331,594         167,059         41,976         30,739         786,395   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Texas:

                 

Dallas–Fort Worth–Arlington, TX MSA

     16,657         107,020         221,162         —           6,558         351,397   

Houston–The Woodlands–Sugar Land, TX MSA

     994         26,521         93,385         —           —           120,900   

Austin–Round Rock, TX MSA

     157         —           49,989         —           —           50,146   

Midland, TX MSA

     —           7,878         11,196         —           —           19,074   

Texarkana, TX–AR MSA

     8,273         7,902         890         526         978         18,569   

College Station–Bryan, TX MSA

     —           —           —           —           17,775         17,775   

Beaumont–Port Arthur, TX MSA

     —           —           —           —           15,616         15,616   

San Antonio–New Braunfels, TX MSA

     1,049         100         13,436         —           —           14,585   

All other Texas (3)

     808         12,513         188         3         232         13,744   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Texas

     27,938         161,934         390,246         529         41,159         621,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

California:

                 

Los Angeles–Long Beach–Anaheim, CA MSA

     —           162,449         9,086         —           —           171,535   

San Francisco–Oakland–Hayward, CA MSA

     —           58,999         —           —           —           58,999   

Sacramento–Roseville–Arden–Arcade, CA MSA

     —           —           46,586         —           —           46,586   

All other California(3)

     —           9,123         7,759         —           —           16,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total California

     —           230,571         63,431         —           —           294,002   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

North Carolina/South Carolina:

                 

Charlotte–Concord–Gastonia, NC–SC MSA

     5,345         58,486         32,791         —           1,507         98,129   

Wilmington, NC MSA

     1,559         17,088         4,214         463         —           23,324   

Raleigh, NC MSA

     —           —           17,472         —           —           17,472   

Carolina Foothills(4)

     5,313         4,131         2,981         28         —           12,453   

Charleston–North Charleston, SC MSA

     —           3,719         714         —           5,813         10,246   

All other N. Carolina (3)

     487         9,404         36,110         —           —           46,001   

All other S. Carolina (3)

     1,565         7,380         28,355         —           —           37,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total N. Carolina/S. Carolina

     14,269         100,208         122,637         491         7,320         244,925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

New York–Newark–Jersey City, NY–NJ–PA MSA

     —           102,142         109,125         —           —           211,267   

 

55


Table of Contents

Geographic Distribution of Non-Purchased Real Estate Loans (continued)

 

     Residential
1-4 Family
     Non-
Farm/Non-
Residential
     Construction
/Land
Development
     Agricultural      Multifamily
Residential
     Total  
     (Dollars in thousands)  

Georgia:

                 

Atlanta–Sandy Springs–Roswell, GA MSA

     2,566         99,091         34,046         294         —           135,997   

All other Georgia (3)

     1,689         16,697         2,421         1,250         212         22,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Georgia

     4,255         115,788         36,467         1,544         212         158,266   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Florida:

                 

Miami–Fort Lauderdale–West Palm Beach, FL MSA

     —           23,609         53,479         —           —           77,088   

All other Florida(3)

     1,344         19,458         6,941         693         473         28,909   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Florida

     1,344         43,067         60,420         693         473         105,997   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Phoenix–Mesa–Scottsdale, AZ MSA

     —           61,319         19         —           —           61,338   

Missouri/Kansas:

                 

St. Louis, MO–IL MSA

     —           —           115         —           22,941         23,056   

Kansas City, MO–KS MSA

     116         91         19,922         —           —           20,129   

All other Missouri (3)

     495         1,085         173         256         —           2,009   

All other Kansas (3)

     —           —           1,847         —           —           1,847   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Missouri/Kansas

     611         1,176         22,057         256         22,941         47,041   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Tennessee:

                 

Nashville–Davidson–Murfreesboro–Franklin, TN MSA

     316         14,283         7,544         —           —           22,143   

Memphis, TN–MS–AR MSA

     186         19,270         —           —           —           19,456   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Tennessee

     502         33,553         7,544         —           —           41,599   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Virginia:

                 

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

     —           —           30,207         —           —           30,207   

All other Virginia(3)

     —           —           1,169         —           —           1,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Virginia

     —           —           31,376         —           —           31,376   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Seattle–Tacoma–Bellevue, WA MSA

     —           —           1         —           30,074         30,075   

Oklahoma:

                 

Lawton, OK MSA

     —           —           22,891         —           —           22,891   

All other Oklahoma (3)

     125         4,150         2,870         —           —           7,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Oklahoma

     125         4,150         25,761         —           —           30,036   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Boston–Cambridge–Newton, MA–NH MSA

     —           21,330         —           —           —           21,330   

Colorado:

                 

Denver–Aurora–Lakewood, CO MSA

     16         11,215         1         —           —           11,232   

All other Colorado(3)

     —           6,365         —           —           —           6,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Colorado

     16         17,580         1         —           —           17,597   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Baltimore–Columbia–Towson, MD MSA

     —           17,341         —           —           —           17,341   

 

56


Table of Contents

Geographic Distribution of Non-Purchased Real Estate Loans (continued)

 

     Residential
1-4 Family
     Non-
Farm/Non-
Residential
     Construction
/Land
Development
     Agricultural      Multifamily
Residential
     Total  
     (Dollars in thousands)  

Alabama:

                 

Mobile, AL MSA

     501         9,654         80         —           300         10,535   

All other Alabama(3)

     1,365         570         976         52         3,735         6,698   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Alabama

     1,866         10,224         1,056         52         4,035         17,233   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

LasVegas–Henderson–Paradise, NV MSA

     —           —           10,499         —           —           10,499   

All other states (5)

     544         38,197         1,459         —           —           40,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

   $ 266,497       $ 1,290,174       $ 1,049,158       $ 45,541       $ 136,953       $ 2,788,323   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The amount and type of non-purchased non-farm/non-residential loans, as of the dates indicated, and their respective percentage of the total non-purchased non-farm/non-residential loan portfolio are reflected in the following table.

Non-Purchased Non-Farm/Non-Residential Loans

 

     June 30,     December 31,
2013
 
     2014     2013    
     (Dollars in thousands)  

Retail, including shopping centers and strip centers

   $ 271,308         21.0   $ 326,169         32.1   $ 290,092         26.3

Churches and schools

     68,672         5.3        45,339         4.5        44,740         4.1   

Office, including medical offices

     361,471         28.0        190,563         18.7        263,986         23.9   

Office warehouse, warehouse and mini-storage

     115,927         9.0        40,894         4.0        113,317         10.3   

Gasoline stations and convenience stores

     11,948         0.9        7,657         0.8        8,150         0.7   

Hotels and motels

     232,771         18.0        214,372         21.1        192,527         17.4   

Restaurants and bars

     32,926         2.6        36,853         3.6        33,178         3.0   

Manufacturing and industrial facilities

     40,999         3.2        38,436         3.8        37,288         3.4   

Nursing homes and assisted living centers

     42,607         3.3        29,491         2.9        41,317         3.7   

Hospitals, surgery centers and other medical

     47,491         3.7        51,969         5.1        49,112         4.4   

Golf courses, entertainment and recreational facilities

     6,320         0.5        10,134         1.0        5,261         0.5   

Other non-farm/non residential

     57,734         4.5        25,330         2.4        25,146         2.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,290,174         100.0   $ 1,017,207         100.0   $ 1,104,114         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

57


Table of Contents

The amount and type of non-purchased construction/land development loans, as of the dates indicated, and their respective percentage of the total non-purchased construction/land development loan portfolio are reflected in the following table.

Non-Purchased Construction/Land Development Loans

 

     June 30,     December 31,
2013
 
     2014     2013    
     (Dollars in thousands)  

Unimproved land

   $ 165,392         15.8   $ 98,246         14.4   $ 105,739         14.6

Land development and lots:

               

1-4 family residential and multifamily

     240,431         22.9        190,691         28.0        176,893         24.5   

Non-residential

     81,767         7.8        71,842         10.6        68,376         9.5   

Construction:

               

1-4 family residential:

               

Owner occupied

     17,118         1.6        17,680         2.6        12,870         1.8   

Non-owner occupied:

               

Pre-sold

     11,682         1.1        7,281         1.1        8,206         1.1   

Speculative

     59,592         5.7        36,824         5.4        50,030         6.9   

Multifamily

     287,082         27.4        145,947         21.4        187,409         26.0   

Industrial, commercial and other

     186,094         17.7        112,318         16.5        113,034         15.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,049,158         100.0   $ 680,829         100.0   $ 722,557         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Many of the Company’s non-purchased 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 be available for such purposes. As a result of this practice, the borrower’s cash equity typically goes toward the purchase of the land and early stage hard costs and soft costs. This results in the Company funding the loan later as the project progresses, and accordingly the Company typically funds the majority of the construction period interest through loan advances. However, when the Company initially determines the borrower’s cash equity requirement, the Company typically requires borrower’s cash equity in an amount to cover a majority, or all, of the soft costs, including an amount equal to construction period interest, and an appropriate portion of the hard costs. The Company advanced construction period interest on construction and development loans totaling $4.1 million in the second quarter of 2014. 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 non-purchased construction and development loans which provide for the use of interest reserves at June 30, 2014 was approximately $2.1 billion, of which $0.8 billion was outstanding at June 30, 2014 and $1.3 billion remained to be advanced. The weighted average loan-to-cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 53%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 47%. 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 45%.

 

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Table of Contents

The following table reflects non-purchased loans and leases as of June 30, 2014 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 non-purchased loans and leases either by adjusting rates on existing loans and leases or reinvesting principal cash flow in new loans and leases.

Non-Purchased 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

   $ 274,813      $ 168,702      $ 185,197      $ 368,977      $ 997,689   

Floating rate (not at a floor or ceiling rate)

     146,682        136        60        245        147,123   

Floating rate (at floor rate)(1)

     2,022,214        471        2,289        1,799        2,026,773   

Floating rate (at ceiling rate)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,443,709      $ 169,309      $ 187,546      $ 371,021      $ 3,171,585   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     77.1     5.3     5.9     11.7     100.0

Cumulative percentage of total

     77.1        82.4        88.3        100.0     

 

(1) The Company has included a floor rate in many of its loans and leases. As a result of such floor rates, many loans and leases will not immediately reprice in a rising rate environment if the interest rate index and margin on such loans and leases continue to result in a computed interest rate less than the applicable floor rate. The earnings simulation model results included in the Quantitative and Qualitative Disclosures about Market Risk section of this quarterly report on Form 10-Q include consideration of the impact of all interest rate floors and ceilings in loans and leases.

Purchased Non-Covered Loans

The amount and type of purchased non-covered loans outstanding, as of the dates indicated, are reflected in the following table.

Purchased Non-Covered Loan Portfolio

 

     June 30,      December 31,  
     2014      2013      2013  
     (Dollars in thousands)  

Real estate:

        

Residential 1-4 family

   $ 296,306       $ 16,916       $ 131,085   

Non-farm/non-residential

     488,433         2,213         152,948   

Construction/land development

     104,120         1,832         25,633   

Agricultural

     49,780         2,799         9,518   

Multifamily residential

     36,105         —           17,210   
  

 

 

    

 

 

    

 

 

 

Total real estate

     974,744         23,760         336,394   

Commercial and industrial

     105,976         2,862         24,934   

Consumer

     25,790         3,890         6,855   

Other

     21,179         515         4,540   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,127,689       $ 31,027       $ 372,723   
  

 

 

    

 

 

    

 

 

 

The amount and percentage of the Company’s purchased non-covered loans, by state, as of the dates indicated, are reflected in the following table, but does not necessarily reflect the location of the borrower or collateral.

Purchased Non-Covered Loans by State

 

     June 30,     December 31,  

Purchased Non-Covered Loans

Attributable to Offices In

   2014     2013     2013  
   Amount      %     Amount      %     Amount      %  
     (Dollars in thousands)  

Arkansas

   $ 689,831         61.2   $ —           0.0   $ —           0.0

North Carolina

     290,833         25.8        93         0.3        348,651         93.5   

Texas

     128,399         11.4        —           0.0        —           0.0   

Alabama

     18,143         1.6        30,050         96.9        23,431         6.3   

Georgia

     388         0.0        758         2.4        537         0.1   

Florida

     95         0.0        126         0.4        104         0.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,127,689         100.0   $ 31,027         100.0   $ 372,723         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

59


Table of Contents

The following table presents the amount of unpaid principal balance, the valuation discount and the carrying value of purchased non-covered loans as of the dates indicated.

Purchased Non-Covered Loans

 

     June 30,     December 31,  
     2014     2013     2013  
     (Dollars in thousands)  

Loans without evidence of credit deterioration at date of purchase:

      

Unpaid principal balance

   $ 1,079,330      $ 25,955      $ 344,065   

Valuation discount

     (24,676     (566     (11,972
  

 

 

   

 

 

   

 

 

 

Carrying value

     1,054,654        25,389        332,093   
  

 

 

   

 

 

   

 

 

 

Loans with evidence of credit deterioration at date of purchase:

      

Unpaid principal balance

     114,600        10,119        70,857   

Valuation discount

     (41,565     (4,481     (30,227
  

 

 

   

 

 

   

 

 

 

Carrying value

     73,035        5,638        40,630   
  

 

 

   

 

 

   

 

 

 

Total carrying value

   $ 1,127,689      $ 31,027      $ 372,723   
  

 

 

   

 

 

   

 

 

 

The Company completed its acquisition of Bancshares on March 5, 2014 and its acquisition of Summit on May 16, 2014. On the date of each acquisition, all outstanding purchased loans were categorized into loans without evidence of credit deterioration and loans with evidence of credit deterioration. The following table presents, by risk rating, the unpaid principal balance, fair value adjustment, Day 1 Fair Value and the weighted-average fair value adjustment applied to the purchased non-covered loans without evidence of credit deterioration in the Company’s 2014 acquisitions.

Fair Value Adjustments for Purchased Non-Covered

Loans Without Evidence of Credit Deterioration

At Date of Acquisition of Bancshares

 

     Unpaid
Principal
Balance
     Fair
Value
Adjustment
    Day 1
Fair
Value
     Weighted
Average
Fair Value
Adjustment
(in bps)
 
     (Dollars in thousands)  

Bancshares:

  

FV 33

   $ 35,541       $ (375   $ 35,166         106   

FV 44

     72,376         (852     71,524         118   

FV 55

     29,210         (584     28,626         200   

FV 36

     908         (222     686         2,445   
  

 

 

    

 

 

   

 

 

    

Total

   $ 138,035       $ (2,033   $ 136,002         147   
  

 

 

    

 

 

   

 

 

    

Summit:

  

FV 33

   $ 304,997       $ (7,312   $ 297,685         240   

FV 44

     269,630         (5,202     264,428         193   

FV 55

     40,608         (1,091     39,517         269   

FV 36

     96,802         (2,595     94,207         268   
  

 

 

    

 

 

   

 

 

    

Total

   $ 712,037       $ (16,200   $ 695,837         228   
  

 

 

    

 

 

   

 

 

    

The following grades are used for purchased non-covered loans without evidence of credit deterioration at date of acquisition.

FV 33 – Loans in this category are considered to be satisfactory with minimal credit risk and are generally considered collectible.

FV 44 – Loans in this category are considered to be marginally satisfactory with minimal to moderate credit risk and are generally considered collectible.

FV 55 – Loans in this category exhibit weakness and are considered to have elevated credit risk and elevated risk of repayment.

FV 36 – Loans in this category were not individually reviewed at the date of purchase and are assumed to have characteristics similar to the characteristics of the aggregate acquired portfolio.

 

60


Table of Contents

The following table is a summary of the loans acquired in the Bancshares and Summit acquisitions with evidence of credit deterioration at the date of acquisition.

Fair Value Adjustments for

Purchased Non-Covered Loans With Evidence of

Credit Deterioration at Date of Acquisition

 

     Bancshares as of
March 5, 2014
    Summit as of
May 16, 2014
 
     (Dollars in thousands)  

Contractually required principal and interest

   $ 30,453      $ 31,525   

Nonaccretable difference

     (8,054     (7,157
  

 

 

   

 

 

 

Cash flows expected to be collected

     22,399        24,368   

Accretable difference

     (3,226     (3,506
  

 

 

   

 

 

 

Day 1 Fair Value

   $ 19,173      $ 20,862   
  

 

 

   

 

 

 

A summary of changes in the accretable difference on purchased non-covered loans with evidence of credit deterioration at the date of acquisition is shown below for the periods indicated.

Accretable Difference on Non-Covered Loans With Evidence

of Credit Deterioration at Date of Acquisition

 

     Six Months Ended
June 30,
 
     2014     2013  
     (Dollars in thousands)  

Accretable difference at January 1

   $ 5,983      $ 969   

Accretable difference acquired

     6,732        —     

Accretion

     (2,115     (257

Other, net

     (496     40   
  

 

 

   

 

 

 

Accretable difference at June 30

   $ 10,104      $ 752   
  

 

 

   

 

 

 

The following table presents purchased non-covered loans grouped by remaining maturities at June 30, 2014 by type and by fixed or floating interest rates. This table is based on contractual maturities and does not reflect amortizations, projected paydowns, the earliest repricing for floating rate loans, accretion or management’s estimate of projected cash flows. Many loans have principal paydowns scheduled in periods prior to the period in which they mature, and many variable rate loans are subject to repricing in periods prior to the period in which they mature. Additionally, because income on purchased non-covered loans with evidence of credit deterioration on the date of acquisition is recognized by accretion of the discount of estimated cash flows, such loans are not considered to be floating or adjustable rate loans and are reported below as fixed rate loans.

Purchased Non-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

   $ 45,096       $ 161,787       $ 89,423       $ 296,306   

Non-farm/non-residential

     86,367         319,763         82,303         488,433   

Construction/land development

     54,425         43,204         6,491         104,120   

Agricultural

     7,553         34,974         7,253         49,780   

Multifamily residential

     7,552         26,651         1,902         36,105   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     200,993         586,379         187,372         974,744   

Commercial and industrial

     29,920         70,486         5,570         105,976   

Consumer

     7,018         17,948         824         25,790   

Other

     6,756         9,563         4,860         21,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 244,687       $ 684,376       $ 198,626       $ 1,127,689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed rate

   $ 160,394       $ 503,202       $ 128,138       $ 791,734   

Floating rate

     84,293         181,174         70,488         335,955   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 244,687       $ 684,376       $ 198,626       $ 1,127,689   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable

FDIC-Assisted Acquisitions

During 2010 and 2011, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of seven failed financial institutions in FDIC-assisted acquisitions. A summary of each acquisition is as follows:

Failed Bank Acquisitions

 

Date of FDIC-Assisted

Acquisition

    

Failed Financial Institution

 

Headquarters Location

March 26, 2010      Unity National Bank (“Unity”)   Cartersville, Georgia
July 16, 2010      Woodlands Bank (“Woodlands”)   Bluffton, South Carolina
September 10, 2010      Horizon Bank (“Horizon”)   Bradenton, Florida
December 17, 2010      Chestatee State Bank (“Chestatee”)   Dawsonville, Georgia
January 14, 2011      Oglethorpe Bank (“Oglethorpe”)   Brunswick, Georgia
April 29, 2011      First Choice Community Bank (“First Choice”)   Dallas, Georgia
April 29, 2011      The Park Avenue Bank (“Park Avenue”)   Valdosta, Georgia

Loans comprise the majority of the assets acquired in each of these FDIC–assisted acquisitions and, with the exception of Unity, 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 the Unity acquisition, all loans, including consumer loans, are subject to loss share agreement with the FDIC.

Loss Share Agreements and Other FDIC-Assisted Acquisition Matters

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.

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 or (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.

 

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The covered loans and covered foreclosed assets (collectively “covered assets”) and the related FDIC loss share receivable and the FDIC clawback payable are reported at the net present value of expected future amounts to be paid or received.

The following is a summary of the covered assets, the FDIC loss share receivable and the FDIC clawback payable as of the dates indicated.

Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable

 

     June 30,      December 31,  
     2014      2013      2013  
     (Dollars in thousands)  

Covered loans

   $ 276,380       $ 480,752       $ 351,791   

FDIC loss share receivable

     50,679         112,716         71,854   

Covered foreclosed assets

     35,775         46,157         37,960   
  

 

 

    

 

 

    

 

 

 

Total

   $ 362,834       $ 639,625       $ 461,605   
  

 

 

    

 

 

    

 

 

 

FDIC clawback payable

   $ 26,533       $ 25,596       $ 25,897   
  

 

 

    

 

 

    

 

 

 

Covered Loans

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

Covered Loans

 

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

Carrying value at January 1, 2013

   $ 72,849      $ 99,734      $ 63,193      $ 56,668      $ 48,093      $ 91,081      $ 164,621      $ 596,239   

Accretion

     3,009        3,798        2,397        2,260        2,223        3,809        6,848        24,344   

Transfers to covered foreclosed assets

     (1,458     (3,019     (1,322     (961     (3,709     (638     (4,974     (16,081

Payments received

     (9,575     (16,112     (11,199     (13,028     (7,887     (17,098     (35,358     (110,257

Charge-offs

     (2,161     (1,625     (808     (1,339     (480     (2,153     (4,891     (13,457

Other activity, net

     66        43        47        (39     78        (140     (91     (36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at June 30, 2013

   $ 62,730      $ 82,819      $ 52,308      $ 43,561      $ 38,318      $ 74,861      $ 126,155      $ 480,752   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2014

   $ 48,968      $ 62,039      $ 41,466      $ 26,076      $ 27,592      $ 61,966      $ 83,684      $ 351,791   

Accretion

     3,580        2,916        1,716        1,416        1,675        4,175        5,057        20,535   

Transfers to covered foreclosed assets

     (3,300     (2,259     (1,229     (1,168     (853     (4,766     (9,637     (23,212

Payments received

     (8,756     (12,598     (10,658     (8,415     (4,963     (6,833     (16,231     (68,454

Charge-offs

     (662     (500     (53     —          —          (1,581     (1,820     (4,616

Other activity, net

     110        134        31        (60     54        26        41        336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at June 30, 2014

   $ 39,940      $ 49,732      $ 31,273      $ 17,849      $ 23,505      $ 52,987      $ 61,094      $ 276,380   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents a summary of the carrying value and type of covered loans as of the dates indicated.

Covered Loan Portfolio

 

     June 30,      December 31,  
     2014      2013      2013  
     (Dollars in thousands)  

Real estate:

        

Residential 1-4 family

   $ 94,792       $ 133,166       $ 111,053   

Non-farm/non-residential

     125,037         233,606         163,707   

Construction/land development

     31,967         76,415         47,743   

Agricultural

     10,851         15,905         11,150   

Multifamily residential

     6,212         9,693         9,166   
  

 

 

    

 

 

    

 

 

 

Total real estate

     268,859         468,785         342,819   

Commercial and industrial

     7,297         11,601         8,719   

Consumer

     79         207         111   

Other

     145         159         142   
  

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 276,380       $ 480,752       $ 351,791   
  

 

 

    

 

 

    

 

 

 

The following table presents covered loans grouped by remaining maturities and by type at June 30, 2014. 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

   $ 28,953       $ 42,091       $ 23,748       $ 94,792   

Non-farm/non-residential

     72,010         39,204         13,823         125,037   

Construction/land development

     24,377         6,628         962         31,967   

Agricultural

     7,429         1,742         1,680         10,851   

Multifamily residential

     4,521         1,471         220         6,212   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     137,290         91,136         40,433         268,859   

Commercial and industrial

     3,511         769         3,017         7,297   

Consumer

     66         13         —           79   

Other

     143         2         —           145   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 141,010       $ 91,920       $ 43,450       $ 276,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2013

   $ 8,574      $ 17,452      $ 16,524      $ 5,712      $ 11,372      $ 9,919      $ 27,942      $ 97,495   

Accretion

     (3,009     (3,798     (2,397     (2,260     (2,223     (3,809     (6,848     (24,344

Transfers to covered foreclosed assets

     (98     (175     (26     (76     (199     (34     (717     (1,325

Covered loans paid off

     (421     (210     (1,589     (572     (374     (823     (1,667     (5,656

Cash flow revisions

     3,527        4,022        (149     2,004        1,163        6,294        4,077        20,938   

Other, net

     42        12        99        271        63        84        382        953   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at June 30, 2013

   $ 8,615      $ 17,303      $ 12,462      $ 5,079      $ 9,802      $ 11,631      $ 23,169      $ 88,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at January 1, 2014

   $ 8,037      $ 16,216      $ 14,428      $ 4,195      $ 11,311      $ 9,621      $ 13,664      $ 77,472   

Accretion

     (3,580     (2,916     (1,716     (1,416     (1,675     (4,175     (5,057     (20,535

Transfers to covered foreclosed assets

     (43     (96     (28     (13     (45     (163     (383     (771

Covered loans paid off

     (393     (1,678     (3,064     (590     (1,327     (870     (557     (8,479

Cash flow revisions

     2,828        927        436        1,148        1,506        10,681        13,599        31,125   

Other, net

     86        (20     (11     30        56        9        (162     (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at June 30, 2014

   $ 6,935      $ 12,433      $ 10,045      $ 3,354      $ 9,826      $ 15,103      $ 21,104      $ 78,800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

FDIC Loss Share Receivable

The following table presents a summary, by acquisition, of 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)  

Carrying value at January 1, 2013

   $ 19,818      $ 22,373      $ 16,859      $ 11,162      $ 23,996      $ 17,918      $ 40,072      $ 152,198   

Accretion income

     119        453        142        267        561        1,384        2,565        5,491   

Cash received from FDIC

     (3,310     (5,318     (4,250     (3,123     (6,097     (5,653     (17,994     (45,745

Reductions of FDIC loss share receivable for payments on covered loans in excess of carrying value

     (1,207     (1,966     (1,220     (2,807     (1,922     (2,406     (4,312     (15,840

Increases in FDIC loss share receivable for:

                

Charge-offs of covered loans

     1,049        1,288        646        1,072        384        1,837        3,673        9,949   

Writedowns of covered foreclosed assets

     489        195        83        246        15        340        1,910        3,278   

Expenses on covered assets reimbursable by FDIC

     494        718        576        174        718        586        1,198        4,464   

Other activity, net

     (104     (164     (16     (156     (1,242     (144     747        (1,079
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at June 30, 2013

   $ 17,348      $ 17,579      $ 12,820      $ 6,835      $ 16,413      $ 13,862      $ 27,859      $ 112,716   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2014

   $ 13,892      $ 14,331      $ 5,731      $ 3,688      $ 10,119      $ 9,336      $ 14,757      $ 71,854   

Accretion income (amortization expense)

     (676     3        159        31        113        63        893        586   

Cash received from FDIC

     (3,560     (4,400     (1,002     (1,009     (805     (2,052     (3,248     (16,076

Reductions of FDIC loss share receivable for payments on covered loans in excess of carrying value

     (1,466     (1,934     (1,331     (1,144     (2,096     (1,538     (3,392     (12,901

Increases in FDIC loss share receivable for:

                

Charge-offs of covered loans

     513        399        43        —          —          1,207        1,417        3,579   

Writedowns of covered foreclosed assets

     97        524        51        3        39        36        1,757        2,507   

Expenses on covered assets reimbursable by FDIC

     456        429        428        81        285        649        333        2,661   

Other activity, net

     (38     372        (107     39        (315     (1,211     (271     (1,531
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at June 30, 2014

   $ 9,218      $ 9,724      $ 3,972      $ 1,689      $ 7,340      $ 6,490      $ 12,246      $ 50,679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Covered Foreclosed Assets

The following table presents a summary, by acquisition, of activity within covered foreclosed assets during the periods indicated.

Covered Foreclosed Assets

 

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

Carrying value at January 1, 2013

   $ 8,187      $ 8,050      $ 2,538      $ 4,211      $ 6,797      $ 3,584      $ 19,584      $ 52,951   

Transfers from covered loans

     1,458        3,019        1,322        961        3,709        638        4,974        16,081   

Sales of covered foreclosed assets

     (2,859     (3,202     (1,789     (726     (5,523     (1,360     (5,132     (20,591

Writedowns of covered foreclosed assets

     (572     (235     (92     (274     (34     (355     (722     (2,284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at June 30, 2013

   $ 6,214      $ 7,632      $ 1,979      $ 4,172      $ 4,949      $ 2,507      $ 18,704      $ 46,157   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2014

   $ 3,980      $ 6,891      $ 3,802      $ 2,004      $ 4,130      $ 2,629      $ 14,524      $ 37,960   

Transfers from covered loans

     3,300        2,259        1,229        1,168        853        4,766        9,637        23,212   

Sales of covered foreclosed assets

     (1,422     (3,957     (1,406     (1,433     (1,383     (4,700     (8,733     (23,034

Writedowns of covered foreclosed assets

     (104     (555     (43     —          (44     (73     (1,544     (2,363
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at June 30, 2014

   $ 5,754      $ 4,638      $ 3,582      $ 1,739      $ 3,556      $ 2,622      $ 13,884      $ 35,775   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents a summary of the carrying value and type of covered foreclosed assets as of the dates indicated.

Covered Foreclosed Assets

 

     June 30,      December 31,  
     2014      2013      2013  
     (Dollars in thousands)  

Real estate:

        

Residential 1-4 family

   $ 6,280       $ 6,748       $ 5,004   

Non-farm/non-residential

     16,006         9,491         14,301   

Construction/land development

     13,252         28,756         17,202   

Agricultural

     237         71         1,054   

Multifamily residential

     —           1,091         399   
  

 

 

    

 

 

    

 

 

 

Total real estate

     35,775         46,157         37,960   

Repossessions

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total covered foreclosed assets

   $ 35,775       $ 46,157       $ 37,960   
  

 

 

    

 

 

    

 

 

 

 

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FDIC Clawback Payable

The following table presents a summary, by acquisition, of 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)  

Carrying value at January 1, 2013

   $ 1,644      $ 2,986       $ 1,468       $ 794       $ 1,083       $ 968       $ 16,226      $ 25,169   

Amortization expense

     40        66         36         18         26         22         409        617   

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

     (93     —           —           —           —           —           (97     (190
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value at June 30, 2013

   $ 1,591      $ 3,052       $ 1,504       $ 812       $ 1,109       $ 990       $ 16,538      $ 25,596   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value at January 1, 2014

   $ 1,630      $ 3,036       $ 1,420       $ 751       $ 1,091       $ 1,013       $ 16,956      $ 25,897   

Amortization (accretion) expense

     (73     73         48         33         71         38         446        636   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value at June 30, 2014

   $ 1,557      $ 3,109       $ 1,468       $ 784       $ 1,162       $ 1,051       $ 17,402      $ 26,533   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Nonperforming Assets

Non-Purchased Loans and Leases and Foreclosed Assets Not Covered by FDIC Loss Share Agreements

Nonperforming assets 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. Covered loans and covered foreclosed assets are not considered to be nonperforming by the Company for purposes of calculation of the nonperforming loans and leases to total loans and leases ratio and the nonperforming assets to total assets ratio, except for their inclusion in total assets. Because covered loans and covered assets are not included in the 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 or traditional acquisitions.

 

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The following table presents information, excluding purchased non-covered loans and covered assets, concerning nonperforming assets, including nonaccrual loans and leases, TDRs, and foreclosed assets as of the dates indicated.

Nonperforming Assets

 

     June 30,     December 31,  
     2014     2013     2013  
     (Dollars in thousands)  

Nonaccrual non-purchased loans and leases

   $ 18,393      $ 16,136      $ 8,737   

Accruing non-purchased loans and leases 90 days or more past due

     —          —          —     

TDRs

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total nonperforming non-purchased loans and leases

     18,393        16,136        8,737   

Foreclosed assets not covered by FDIC loss share agreements(1)

     20,581        10,451        11,851   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 38,974      $ 26,587      $ 20,588   
  

 

 

   

 

 

   

 

 

 

Nonperforming loans and leases to total loans and leases(2)

     0.58     0.65     0.33

Nonperforming assets to total assets(2)

     0.62        0.66        0.43   

 

(1) 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.
(2) Excludes purchased non-covered loans and covered assets except for their inclusion in total assets.

If an adequate current determination of collateral value has not been performed, once a loan or lease is considered impaired, 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 periods and estimated selling costs.

At June 30, 2014, the Company had reduced the carrying value of its non-purchased loans and leases deemed impaired (all of which were included in nonaccrual loans and leases) by $5.4 million to the estimated fair value of such loans and leases of $16.2 million. The adjustment to reduce the carrying value of such impaired loans and leases to estimated fair value consisted of $1.2 million of partial charge-offs and $4.2 million of specific loan and lease loss allocations. These amounts do not include the Company’s $0.9 million of impaired purchased non-covered loans or $20.3 million of impaired covered loans at June 30, 2014.

The following table presents information concerning the geographic location of nonperforming assets, excluding purchased non-covered loans and covered assets, at June 30, 2014. Nonperforming non-purchased 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
Non-Purchased
Loans and
Leases
     Foreclosed
Assets
     Total
Nonperforming
Assets
 
     (Dollars in thousands)  

Arkansas

   $ 13,106       $ 7,808       $ 20,914   

Texas

     41         5,334         5,375   

North Carolina

     3,914         4,298         8,212   

South Carolina

     967         1,219         2,186   

Georgia

     6         1,370         1,376   

Alabama

     9         459         468   

Florida

     5         35         40   

All other

     345         58         403   
  

 

 

    

 

 

    

 

 

 

Total

   $ 18,393       $ 20,581       $ 38,974   
  

 

 

    

 

 

    

 

 

 

 

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

 

     June 30,      December 31,  
     2014      2013      2013  
     (Dollars in thousands)  

Real estate:

        

Residential 1-4 family

   $ 2,829       $ 1,118       $ 1,604   

Non-farm/non-residential

     9,395         2,449         4,380   

Construction/land development

     8,028         6,673         5,359   

Agricultural

     215         143         222   

Multifamily residential

     —           —           211   
  

 

 

    

 

 

    

 

 

 

Total real estate

     20,467         10,383         11,776   

Commercial and industrial

     103         63         75   

Consumer

     11         5         —     
  

 

 

    

 

 

    

 

 

 

Total foreclosed assets not covered by FDIC loss share agreements

   $ 20,581       $ 10,451       $ 11,851   
  

 

 

    

 

 

    

 

 

 

Purchased Non-Covered Loans

The following table presents information concerning nonperforming purchased non-covered loans as of the dates indicated.

Nonperforming Purchased

Non-Covered Loans

 

     June 30,     December 31,  
     2014     2013     2013  
     (Dollars in thousands)  

Nonaccrual purchased non-covered loans

   $ 3,160      $ 382      $ 1,696   

Accruing purchased non-covered loans 90 days or more past due

     199        —          —     
  

 

 

   

 

 

   

 

 

 

Total nonperforming purchased non-covered loans

   $ 3,359      $ 382      $ 1,696   
  

 

 

   

 

 

   

 

 

 

Nonperforming purchased non-covered loans to total purchased non-covered loans

     0.30     1.23     0.46

The Company’s ratio of nonperforming loans and leases, including nonperforming purchased non-covered loans but excluding covered loans, to total loans and leases, including purchased non-covered loans but excluding covered loans, was 0.51% and 0.67% at June 30, 2014 and 2013, respectively, and 0.35% at December 31, 2013.

As of June 30, 2014, the Company had identified purchased non-covered loans where the expected performance had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values or where current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereon. As a result, the Company recorded partial charge-offs totaling $0.6 million for both the second quarter and first six months of 2014 compared to none for the comparable periods in 2013. The Company also recorded provision for loan and lease losses of $0.6 million for both the second quarter and first six months of 2014 compared to none during the second quarter and first six months of 2013 to cover such charge-offs. At June 30, 2014, the Company had $0.9 million of impaired purchased non-covered loans compared to none at both June 30, 2013 and December 31, 2013.

Covered Loans

As of June 30, 2014, the Company had identified covered loans 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 $0.5 million for such loans during the second quarter and $0.7 million during the first six months of 2014 compared to $1.1 million during the second quarter and $3.1 million during the first six months of 2013. The Company also recorded provision for loan and lease losses of $0.5 million during the second quarter and $0.7 million during the first six months of 2014 compared to $1.1 million during the second quarter and $3.1 million during the first six months of 2013 to cover such charge-offs. The Company had $20.3 million of impaired covered loans at June 30, 2014 compared to $52.6 million of impaired covered loans at June 30, 2013 and $46.2 million at December 31, 2013.

 

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Allowance and Provision for Loan and Lease Losses

The Company’s ALLL was $47.0 million, or 1.48% of total non-purchased loans and leases at June 30, 2014, compared to $42.9 million, or 1.63% of total non-purchased loans and leases at December 31, 2013 and $39.4 million, or 1.61% of total non-purchased loans and leases at June 30, 2013. The Company had no ALLL for purchased non-covered loans or for covered loans at June 30, 2014, December 31, 2013 or June 30, 2013, because all losses had been charged off on purchased non-covered loans and covered loans whose performance had deteriorated from management’s expectations established in conjunction with the determination of the Day 1 Fair Values. The Company’s ALLL was equal to 255% of its total nonperforming non-purchased loans and leases at June 30, 2014 compared to 492% at December 31, 2013 and 244% at June 30, 2013. While the Company believes the current ALLL is appropriate, changing economic and other conditions may require future adjustments to the ALLL.

The amount of provision to the ALLL is based on the Company’s analysis of the adequacy of the ALLL utilizing the criteria discussed in the Critical Accounting Policies caption of this Management’s Discussion and Analysis. The provision for loan and lease losses for the second quarter of 2014 was $5.6 million, including $4.5 million for non-purchased loans and leases, $0.6 million for purchased non-covered loans and $0.5 million for covered loans, compared to $2.7 million for the second quarter of 2013, including $1.6 million for non-purchased loans and leases, none for purchased non-covered loans and $1.1 million for covered loans. The provision for loan and lease losses for the first six months of 2014 was $6.9 million, including $5.6 million for non-purchased loans and leases, $0.6 million for purchased non-covered loans and $0.7 million for covered loans, compared to $5.4 million for the first six months of 2013, including $2.3 million for non-purchased loans and leases, none for purchased non-covered loans and $3.1 million for covered loans.

The increase in the Company’s provision to the ALLL for non-purchased loans and leases for both the quarter and six months ended June 30, 2014 compared to the same periods in 2013 is primarily the result of provision necessary to cover the growth of the Company’s non-purchased loan and lease portfolio, which increased $393 million during the second quarter and $539 million during the first six months of 2014 and for specific ALLL allocations for concentrations of credit as a result of growth in both the number and volume of large borrower relationships, partially offset by generally decreasing net charge-offs for this portfolio during recent quarters. The Company’s ALLL to non-purchased loans and leases has decreased to 1.48% at June 30, 2014, compared to 1.63% at December 31, 2013 and 1.61% at June 30, 2013 primarily as a result of the generally decreasing net charge-offs in recent quarters and due to generally improving economic conditions in many of the Company’s markets.

 

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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

 

     Six Months Ended
June 30,
   

Year Ended

December 31,

 
     2014     2013     2013  
     (Dollars in thousands)  

Balance, beginning of period

   $ 42,945      $ 38,738      $ 38,738   

Non-purchased loans and leases charged off:

      

Real estate:

      

Residential 1-4 family

     (341     (417     (837

Non-farm/non-residential

     (1,254     (593     (1,111

Construction/land development

     (14     (129     (137

Agricultural

     (15     —          (261

Multifamily residential

     —          —          (4
  

 

 

   

 

 

   

 

 

 

Total real estate

     (1,624     (1,139     (2,350

Commercial and industrial

     (422     (832     (922

Consumer

     (97     (119     (214

Direct financing leases

     (267     (186     (482

Other

     (159     (173     (359
  

 

 

   

 

 

   

 

 

 

Total non-purchased loans and leases charged off

     (2,569     (2,449     (4,327
  

 

 

   

 

 

   

 

 

 

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

      

Real estate:

      

Residential 1-4 family

     71        102        106   

Non-farm/non-residential

     4        118        122   

Construction/land development

     8        8        174   

Agricultural

     11        4        14   

Multifamily residential

     —          —          4   
  

 

 

   

 

 

   

 

 

 

Total real estate

     94        232        420   

Commercial and industrial

     763        375        433   

Consumer

     36        71        104   

Direct financing leases

     14        20        33   

Other

     75        85        144   
  

 

 

   

 

 

   

 

 

 

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

     982        783        1,134   
  

 

 

   

 

 

   

 

 

 

Net non-purchased loans and leases charged off

     (1,587     (1,666     (3,193

Purchased non-covered loans charged off

     (567     —          —     

Covered loans charged off

     (720     (3,094     (4,675
  

 

 

   

 

 

   

 

 

 

Net charge-offs – total loans and leases

     (2,874     (4,760     (7,868

Provision for loan and lease losses:

      

Non-purchased loans and leases

     5,600        2,300        7,400   

Purchased non-covered loans

     567        —          —     

Covered loans

     720        3,094        4,675   
  

 

 

   

 

 

   

 

 

 

Total provision

     6,887        5,394        12,075   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 46,958      $ 39,372      $ 42,945   
  

 

 

   

 

 

   

 

 

 

ALLL to total loans and leases (1)

     1.48     1.61     1.63

ALLL to nonperforming loans and leases (1) (2)

     255     244     492

 

(1) Excludes purchased non-covered loans and covered loans.
(2) The Company’s practice is to charge off any estimated loss as soon as management is able to identify and reasonably quantify such potential loss. Accordingly, only a small portion of the Company’s ALLL is needed for potential losses on nonperforming loans and leases.

 

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Net Charge-Off Ratios

The following table provides a summary of the Company’s annualized net charge-off ratios for its loan and lease portfolio for the periods indicated.

Annualized Net Charge-Off Ratios

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2014     2013     2014     2013  

Non-purchased loans and leases

     0.19     0.12     0.11     0.15

Purchased non-covered loans

     0.28        0.00        0.19        0.00   

Covered loans

     0.72        0.83        0.47        1.15   

Total loans and leases, excluding covered loans

     0.21        0.11        0.13        0.15   

Total loans and leases

     0.25        0.25        0.16        0.35   

Investment Securities

At June 30, 2014 and 2013 and at December 31, 2013, 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 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.

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

Investment Securities

 

     June 30,      December 31,  
     2014      2013      2013  
     Amortized      Fair      Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value      Cost      Value  
     (Dollars in thousands)  

Obligations of state and political subdivisions

   $ 603,533       $ 616,565       $ 390,509       $ 391,446       $ 438,390       $ 435,989   

U.S. Government agency securities

     254,878         258,311         85,449         83,035         222,510         218,869   

Corporate obligations

     685         685         747         747         716         716   

Other equity securities

     16,568         16,568         15,520         15,520         13,810         13,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 875,664       $ 892,129       $ 492,225       $ 490,748       $ 675,426       $ 669,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $21.1 million and gross unrealized losses of $4.7 million at June 30, 2014; gross unrealized gains of $8.6 million and gross unrealized losses of $14.6 million at December 31, 2013; and gross unrealized gains of $9.2 million and gross unrealized losses of $10.7 million at June 30, 2013. Management believes that all of its unrealized losses on individual investment securities at June 30, 2014 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.

 

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

Unaccreted Discounts and Unamortized Premiums

 

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

June 30, 2014:

          

Obligations of states and political subdivisions

   $ 603,533       $ 8,625       $ (8,762   $ 603,396   

U.S. Government agency securities

     254,878         4,561         (4,191     255,248   

Corporate obligations

     685         —           (15     670   

Other equity securities

     16,568         —           —          16,568   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 875,664       $ 13,186       $ (12,968   $ 875,882   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013:

          

Obligations of states and political subdivisions

   $ 438,390       $ 8,298       $ (3,447   $ 443,241   

U.S. Government agency securities

     222,510         4,694         (4,436     222,768   

Corporate obligations

     716         —           (18     698   

Other equity securities

     13,810         —           —          13,810   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 675,426       $ 12,992       $ (7,901   $ 680,517   
  

 

 

    

 

 

    

 

 

   

 

 

 

June 30, 2013:

          

Obligations of states and political subdivisions

   $ 390,509       $ 8,049       $ (2,599   $ 395,959   

U.S. Government agency securities

     85,449         187         (4,604     81,032   

Corporate obligations

     747         —           (20     727   

Other equity securities

     15,520         —           —          15,520   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 492,225       $ 8,236       $ (7,223   $ 493,238   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company had net gains of $18,000 from the sale of $47 million of investment securities in the second quarter of 2014 compared to no sales of investment securities in the second quarter of 2013. The Company had net gains of $23,000 from the sale of $48 million of investment securities in the first six months of 2014 compared with net gains of $0.2 million from the sale of $0.8 million of investment securities in the first six months of 2013. During the second quarter of 2014 and 2013, respectively, investment securities totaling $16 million and $13 million matured, were called or were paid down by the issuer. During the first six months of 2014 and 2013, respectively, investment securities totaling $30 million and $53 million matured, were called or paid down by the issuer. The Company purchased $17 million and $38 million of investment securities during the second quarter of 2014 and 2013, respectively, and purchased $35 million and $75 million of investment securities during the first six months of 2014 and 2013, respectively. On March 5, 2014, the Company acquired $1.9 million of investment securities as a result of its acquisition of Bancshares, and on May 16, 2014, the Company acquired $242.9 million of investment securities as a result of its acquisition of Summit.

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 at June 30, 2014 based on credit ratings by one or more nationally-recognized credit rating agency.

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

   $ 10,389      $ 224,475      $ 91,153      $ 45,750      $ 244,798      $ 616,565   

U.S. Government agency securities

     —          258,311        —          —          —          258,311   

Corporate obligations

     —          —          685        —          —          685   

Other equity securities

     —          —          —          —          16,568        16,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 10,389      $ 482,786      $ 91,838      $ 45,750      $ 261,366      $ 892,129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     1.2     54.1     10.3     5.1     29.3     100.0

Cumulative percentage of total

     1.2     55.3     65.6     70.7     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.

 

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(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).

Deposits

The Company’s lending and investment activities are funded primarily by deposits. The amount and type of deposits outstanding as of the dates indicated and their respective percentage of the total deposits are reflected in the following table. On May 16, 2014, the Company assumed $970 million of deposits as a result of its acquisition of Summit. On March 5, 2014, the Company assumed $256 million of deposits as a result of its acquisition of Bancshares. On July 31, 2013, the Company assumed $601 million of deposits as a result of its acquisition of First National Bank.

Deposits

 

     June 30,      December 31,  
     2014     2013      2013  
     (Dollars in thousands)  

Non-interest bearing

   $ 1,058,210         21.2   $ 591,879         19.8   $ 746,320         20.0

Interest bearing:

            

Transaction (NOW)

     1,173,404         23.6        717,317         24.0        839,632         22.6   

Savings and money market

     1,575,525         31.6        948,472         31.8        1,233,865         33.2   

Time deposits less than $100,000

     557,632         11.2        388,045         13.0        471,052         12.7   

Time deposits of $100,000 or more

     619,126         12.4        338,916         11.4        426,158         11.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 4,983,897         100.0   $ 2,984,629         100.0   $ 3,717,027         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The amount and percentage of the Company’s deposits attributable to offices, by state, as of the dates indicated, are reflected in the following table.

Deposits by State

 

Deposits Attributable to Offices In

   June 30,     December 31,  
   2014     2013     2013  
     (Dollars in thousands)  

Arkansas

   $ 2,736,653         54.9   $ 1,644,271         55.1   $ 1,671,498         45.0

Texas

     728,073         14.6        390,928         13.1        492,069         16.9   

Georgia

     636,950         12.8        656,579         22.0        634,060         17.1   

North Carolina

     596,180         12.0        16,794         0.6        629,241         3.4   

Alabama

     132,271         2.6        139,428         4.7        137,345         13.2   

Florida

     120,677         2.4        125,870         4.2        124,894         3.7   

South Carolina

     33,093         0.7        10,759         0.3        27,920         0.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,983,897         100.0   $ 2,984,629         100.0   $ 3,717,027         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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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 (FHLB – Dallas advances and, to a lesser extent, FRB borrowings and federal funds purchased) and subordinated debentures.

The following table reflects the average balance and rate paid for each category of other interest bearing liabilities for the periods indicated.

Average Balances and Rates of Other Interest Bearing Liabilities

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014     2013     2014     2013  
     Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
 
     (Dollars in thousands)  

Repurchase agreements with customers

   $ 58,607         0.09   $ 29,815         0.08   $ 61,808         0.08   $ 31,872         0.09

Other borrowings (1)

     281,009         3.84        286,719         3.75        280,968         3.84        283,755         3.79   

Subordinated debentures

     64,950         2.64        64,950         2.65        64,950         2.61        64,950         2.66   
  

 

 

      

 

 

      

 

 

      

 

 

    

Total other interest bearing liabilities

   $ 404,566         3.11   $ 381,484         3.28   $ 407,726         3.10   $ 380,577         3.29
  

 

 

      

 

 

      

 

 

      

 

 

    

 

(1) Included in other borrowings at June 30, 2014 and 2013 are FHLB – Dallas advances that contain quarterly call features and mature as follows: 2017, $260.0 million at 3.90% weighted-average interest rate and 2018, $20.0 million at 2.53% weighted-average interest rate.

 

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CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Subordinated Debentures. At June 30, 2014, 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 2.93%. 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.

Common Stockholders’ Equity and Tangible Common Stockholder’s Equity. The Company uses its common stockholders’ equity ratio, its tangible common stockholders’ equity ratio, its book value per common share, its tangible book value per common share and its return on tangible common stockholders’ equity as the principal measures of the strength of its capital and its ability to generate earnings on its tangible common equity invested by its shareholders. The following table reconciles the calculation of tangible common stockholders’ equity to total tangible assets ratio to GAAP financial measures as reflected in the Company’s consolidated financial statements as of the dates indicated.

Calculation of the Ratio of Total Tangible Common

Stockholders’ Equity to Total Tangible Assets

 

     June 30,     December 31,
2013
 
     2014     2013    
     (Dollars in thousands)  

Total common stockholders’ equity before noncontrolling interest

   $ 850,204      $ 531,125      $ 629,060   

Less intangible assets:

      

Goodwill

     (78,669     (5,243     (5,243

Core deposit and bank charter intangibles, net of accumulated amortization

     (29,971     (5,447     (13,915
  

 

 

   

 

 

   

 

 

 

Total intangibles

     (108,640     (10,690     (19,158
  

 

 

   

 

 

   

 

 

 

Total tangible common stockholders’ equity

   $ 741,564      $ 520,435      $ 609,902   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,297,975      $ 4,043,632      $ 4,791,170   

Less intangible assets:

      

Goodwill

     (78,669     (5,243     (5,243

Core deposit and bank charter intangibles, net of accumulated amortization

     (29,971     (5,447     (13,915
  

 

 

   

 

 

   

 

 

 

Total intangibles

     (108,640     (10,690     (19,158
  

 

 

   

 

 

   

 

 

 

Total tangible assets

   $ 6,189,335      $ 4,032,942      $ 4,772,012   
  

 

 

   

 

 

   

 

 

 

Ratio of total tangible common stockholders’ equity to total tangible assets

     11.98     12.90     12.78
  

 

 

   

 

 

   

 

 

 

 

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The following table reconciles the tangible book value per common share to GAAP financial measures as reflected in the Company’s consolidated financial statements as of the dates indicated.

Calculation of Tangible Book Value Per Common Share

 

     June 30,     December 31,  
     2014     2013     2013  
     (In thousands, except per share amounts)  

Total common stockholders’ equity before noncontrolling interest

   $ 850,204      $ 531,125      $ 629,060   

Less intangible assets:

      

Goodwill

     (78,669     (5,243     (5,243

Core deposit and bank charter intangibles, net of accumulated amortization

     (29,971     (5,447     (13,915
  

 

 

   

 

 

   

 

 

 

Total intangibles

     (108,640     (10,690     (19,158
  

 

 

   

 

 

   

 

 

 

Total tangible common stockholders’ equity

   $ 741,564      $ 520,435      $ 609,902   
  

 

 

   

 

 

   

 

 

 

Shares of common stock outstanding(1)

     79,662        70,876        73,712   
  

 

 

   

 

 

   

 

 

 

Tangible book value per common share

   $ 9.31      $ 7.34      $ 8.27   
  

 

 

   

 

 

   

 

 

 

 

(1)  Adjusted to give effect for 2-for-1 stock split on June 23, 2014.

The following table reconciles the calculation of the return on average tangible common stockholders’ equity to GAAP financial measures as reflected in the Company’ consolidated financial statements for the periods indicated.

Calculation of Return on Average Tangible Common Stockholders’ Equity

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (Dollars in thousands)  

Net income available to common stockholders

   $ 26,486      $ 20,387      $ 51,762      $ 40,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common stockholders’ equity before noncontrolling interest

   $ 749,692      $ 527,713      $ 696,360      $ 521,082   

Less average intangible assets:

        

Goodwill

     (44,083     (5,243     (24,770     (5,243

Core deposit and bank charter intangibles, net of accumulated amortization

     (16,033     (5,780     (14,973     (6,059
  

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible common stockholders’ equity before noncontrolling interest

   $ 689,576      $ 516,690      $ 656,617      $ 509,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible common stockholders’ equity

     15.41     15.83     15.90     15.98
  

 

 

   

 

 

   

 

 

   

 

 

 

Common Stock Dividend Policy. During the quarter ended June 30, 2014, the Company paid a dividend of $0.115 per split-adjusted common share compared to $0.085 per split-adjusted common share in the quarter ended June 30, 2013. On July 1, 2014, the Company’s board of directors approved a dividend of $0.12 per common share that was paid on July 18, 2014. The determination of future dividends on the Company’s common stock will depend on conditions existing at that time and approval of the Company’s board of directors.

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.

 

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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 June 30, 2014 and December 31, 2013, and are presented in the following tables.

Consolidated Capital Ratios

 

     June 30,
2014
    December 31,
2013(1)
 
     (Dollars in thousands)  

Tier 1 capital:

    

Common stockholders’ equity before noncontrolling interest

   $ 850,204      $ 629,060   

Allowed amount of trust preferred securities

     63,000        63,000   

Net unrealized (gains) losses on investment securities AFS included in common stockholders’ equity

     (10,006     3,672   

Less goodwill and certain intangible assets

     (108,640     (19,158
  

 

 

   

 

 

 

Total tier 1 capital

     794,558        676,574   

Tier 2 capital:

    

Qualifying allowance for loan and lease losses

     46,958        42,945   
  

 

 

   

 

 

 

Total risk-based capital

   $ 841,516      $ 719,519   
  

 

 

   

 

 

 

Risk-weighted assets

   $ 5,928,679      $ 4,189,244   
  

 

 

   

 

 

 

Adjusted quarterly average assets

   $ 5,551,496      $ 4,767,848   
  

 

 

   

 

 

 

Ratios at end of period:

    

Tier 1 leverage

     14.31     14.19

Tier 1 risk-based capital

     13.40        16.15   

Total risk-based capital

     14.19        17.18   

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) Amounts and ratios as of December 31, 2013 have been adjusted to give effect for the $4.1 million recast discussed in Notes 2, 3 and 7 to the Consolidated Financial Statements presented elsewhere in this quarterly report on Form 10-Q.
(2) 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

 

     June 30, 2014     December 31, 2013(1)  
     (Dollars in thousands)  

Stockholders’ equity – Tier 1

   $ 759,897      $ 659,895   

Tier 1 leverage ratio

     13.76     13.85

Tier 1 risk-based capital ratio

     12.84        15.77   

Total risk-based capital ratio

     13.63        16.80   

 

(1) Amounts and ratios as of December 31, 2013 have been adjusted to give effect for the $4.1 million recast discussed in Notes 2, 3 and 7 to the Consolidated Financial Statements presented elsewhere in this quarterly report on Form 10-Q.

Basel III. On July 9, 2013, the FDIC and other federal banking regulators issued a final rule that will substantially revise the risk-based capital requirements applicable to bank holding companies and insured depository institutions, including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies.

 

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The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.

The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, the new rules allow for insured depository institutions to make a one-time election not to include most elements of accumulated other comprehensive income in regulatory capital and instead effectively use the existing treatment under the general risk-based capital rules. Insured depository institutions, including the Company and Bank, must make their accumulated other comprehensive income opt-out election in the first Consolidated Reports of Condition and Income, Consolidated Financial Statements for Bank Holding Companies and Parent Company Only Financial Statements for Large Bank Holding Companies reports that are filed for the first quarter of 2015.

The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and the unsecured portion of non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk weights (from 0% to up to 600%) for equity exposures.

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The final rule becomes effective on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019.

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. Liquidity risk arises from the possibility the Company may be unable to satisfy current or future funding requirements and needs. The ALCO and Investments Committee (“ALCO”), which reports to the board of directors, has primary responsibility for oversight of the Company’s liquidity, funds management, asset/liability (interest rate risk) position and investment portfolio functions.

The objective of managing liquidity risk is to ensure the cash flow requirements resulting from depositor, borrower and other creditor demands are met, as well as operating cash needs of the Company, and the cost of funding such requirements and needs is reasonable. The Company maintains an interest rate risk, liquidity and funds management policy and a contingency funding plan that, among other things, include policies and procedures for managing liquidity risk. Generally the Company relies on deposits, repayments of loans, leases, covered loans and purchased non-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 wholesale deposit sources such as brokered deposits, along with 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 generally a relatively stable source of funds but are subject to the borrowers’ and lessees’ ability to repay the loans and leases, which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and other factors. Furthermore, loans and leases generally are not readily convertible to cash. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet growth in loans and leases and deposit withdrawal demands or otherwise fund operations. Such secondary sources include FHLB-Dallas advances, secured and unsecured federal funds lines of credit from correspondent banks, wholesale deposit sources and FRB borrowings.

 

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At June 30, 2014 the Company had substantial unused borrowing availability. This availability was primarily comprised of the following four options: (1) $747 million of available blanket borrowing capacity with the FHLB-Dallas, (2) $212 million of investment securities available to pledge for federal funds or other borrowings, (3) $144 million of available unsecured federal funds borrowing lines and (4) up to $117 million of available borrowing capacity from borrowing programs of the FRB.

The Company anticipates it will continue to rely primarily on deposits, repayments of loans and leases, covered loans and purchased non-covered loans, and repayments of its investment securities to provide liquidity, as well as other funding sources as appropriate. Additionally, where necessary, the sources of borrowed funds described above will be used to augment the Company’s primary funding sources.

Sources and Uses of Funds. Operating activities provided $20.1 million for the first six months of 2014 and $33.5 million for the first six months of 2013. Net cash used or provided by operating activities is comprised primarily of net income, adjusted for non-cash items and for changes in operating assets and liabilities.

Investing activities used $118.8 million and $162.8 million in the first six months of 2014 and 2013, respectively. Net activity in the Company’s investment securities portfolio provided $43.0 million and used $21.3 million in the first six months of 2014 and 2013, respectively. Net non-purchased loans and leases used $539.7 million and $345.5 million in the first six months of 2014 and 2013, respectively. Payments received on purchased non-covered loans provided $138.9 million and $12.2 million for the first six months of 2014 and 2013, respectively. Payments received on covered loans provided $68.3 million and $110.3 million for the first six months of 2014 and 2013, respectively, and payments received from the FDIC under loss share agreements provided $16.1 million and $45.7 million for the first six months of 2014 and 2013, respectively. Other loss share activity provided $9.2 million and $14.7 million for the first six months of 2014 and 2013, respectively. The Company had proceeds from sales of other assets of $30.2 million and $27.2 million in the first six months of 2014 and 2013, respectively. Purchases of premises and equipment used $4.6 million and $5.9 million in the first six months of 2014 and 2013, respectively. Net cash invested in unconsolidated investments used $2.3 million and $0.1 million in the first six months of 2014 and 2013, respectively. Net cash received in merger and acquisition transactions totaled $121.9 million for the first six months of 2014 (none in the first six months of 2013).

Financing activities provided $13.4 million and used $17.8 million in the first six months of 2014 and 2013, respectively. Net changes in deposit accounts provided $41.2 million and used $116.4 million in the in the first six months of 2014 and 2013, respectively. Net repayments of other borrowings and repurchase agreements with customers used $14.1 million and provided $106.1 million in the in the first six months of 2014 and 2013, respectively. The Company paid common stock cash dividends of $16.6 million and $11.3 million in the in the first six months of 2014 and 2013, respectively. Proceeds from and excess tax benefits on exercise and forfeiture of stock options provided $2.9 million and $3.8 million in the first six months of 2014 and 2013, respectively.

Off-Balance Sheet Commitments. The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit and standby letters of credit. See Note 9 to the Consolidated Financial Statements for more information about the Company’s outstanding guarantees and commitments as of June 30, 2014.

Growth and Expansion

The Company is continuing its growth and de novo branching strategy. On January 2, 2014, the Company opened a loan production office for its Real Estate Specialties Group (“RESG”) in Houston, Texas, and on February 24, 2014, it opened an RESG loan production office in Los Angeles, California. On February 26, 2014, the Company relocated its Savannah, Georgia office from a leased facility to a bank-owned facility and on March 11, 2014, opened a third retail banking office in Bradenton, Florida. On May 19, 2014, the Company opened a retail banking office in Cornelius, North Carolina. In the third quarter of 2014, the Company expects to open a loan production office in Asheville, North Carolina, and in the fourth quarter of 2014, it expects to open a retail banking office in Hilton Head Island, South Carolina.

Opening new offices is subject to local banking market conditions, availability of suitable sites, hiring qualified personnel, obtaining regulatory and other approvals and many other conditions and contingencies that the Company cannot predict with certainty. The Company may increase or decrease its expected number of new office openings 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 six months of 2014, the Company spent $4.6 million on capital expenditures for premises and equipment. The Company’s capital expenditures for 2014 are expected to be in the range of $12 million to $20 million, including progress payments on construction projects expected to be completed in 2014 and 2015, furniture and equipment costs and acquisition of sites for future development. Actual expenditures may vary significantly from those expected, depending on the number and cost of additional branch offices acquired or constructed and sites acquired for future development, progress or delays encountered on ongoing and new construction projects, delays in or inability to obtain required approvals, potential premises and equipment expenditures associated with acquisitions, if any, and other factors.

 

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On March 5, 2014, the Company completed its acquisition of Bancshares and its wholly-owned bank subsidiary OMNIBANK, N.A. The acquisition of Bancshares expanded the Company’s service area in south Texas by adding offices in Houston (3), San Antonio, Austin, Cedar Park and Lockhart.

On May 16, 2014, the Company completed its acquisition of Summit and its wholly-owned bank subsidiary, Summit Bank. The acquisition of Summit expanded the Company’s service area by adding 23 retail banking offices in central, western and southwestern Arkansas, and a loan production office in Ft. Smith, Arkansas. On May 19, 2014, the Company closed the loan production office in Ft. Smith, and on June 20, 2014, the Company closed one of the retail banking offices in Conway, Arkansas. The Company continues to evaluate its retail banking offices in Arkansas, including the offices acquired in the Summit acquisition, and expects to close up to an additional eight Arkansas offices in the remainder of 2014 or in the first half of 2015.

On July 31, 2014, the Company entered into a definitive agreement and plan of merger (the “Intervest Agreement”) with Intervest Bancshares Corporation (“Intervest”), and its wholly-owned bank subsidiary Intervest National Bank (“INB”), headquartered in New York, New York, whereby the Company will acquire all of the outstanding common stock of Intervest in a transaction valued at approximately $228.5 million. INB operates seven full service banking offices including one in New York City, five in Clearwater, Florida and one in Pasadena, Florida.

Under the terms of the Intervest Agreement, each outstanding share of common stock of Intervest will be converted into the right to receive shares of the Company’s common stock, plus cash in lieu of any fractional share, all subject to certain conditions and potential adjustments. The number of Company shares to be issued will be determined based on the Company’s 10-day average closing stock price as of the fifth business day prior to the closing date, subject to a minimum price of $23.95 per share and a maximum price of $39.91 per share. Upon the closing of the transaction, Intervest will merge into the Company and INB will merge into the Bank. Completion of the transaction is subject to certain closing conditions, including receipt of customary regulatory approvals and the approval of the shareholders of Intervest.

The Company expects to continue growing through both its de novo branching strategy and traditional acquisitions. With respect to its de novo branching strategy, future de novo branches are expected to be focused in the seven states in which the Company has retail banking offices, including Arkansas, Georgia, Texas, North Carolina, Florida, Alabama and South Carolina. With respect to traditional acquisitions, the Company is focusing primarily on opportunities in the seven states in which it operates retail banking offices, although the Company may consider opportunities outside this seven state area. The Company is seeking acquisitions that are either immediately accretive to book value, tangible book value, net income and diluted earnings per common share, or strategic in location, or both.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 14 to the Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.

 

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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 ALCO, which reports to the board of directors.

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, 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, (7) the timing and amount of cash flows expected to be received on covered loans, purchased non-covered loans, and the FDIC loss share receivable and (8) 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, up 300 bps, up 400 bps, down 100 bps, down 200 bps, down 300 bps and down 400 bps. Based on current conditions, the Company believes that modeling its change in net interest income assuming interest rates go down 100 bps, down 200 bps, down 300 bps and down 400 bps is not meaningful. 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 July 1, 2014. 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 or the impact of any possible future acquisitions.

 

Shift in Interest Rates (in bps)

   % Change in
Projected Baseline
Net Interest Income
 

+400

     8.0

+300

     5.6   

+200

     3.1   

+100

     1.2   

-100

     Not meaningful   

-200

     Not meaningful   

-300

     Not meaningful   

-400

     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 or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective.

(b) 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, Case No. CV-2011-777. In addition, on December 21, 2012, the Bank was served with a summons and complaint filed on December 20, 2012, in the Circuit Court of Pulaski County, Arkansas, Ninth Division, styled Audrey Muzingo v. Bank of the Ozarks, Case No. 60 CV 12-6043. The complaint in each case alleges that the Company and/or Bank have harmed the plaintiffs, current or former customers of the Bank, by improper, unfair and unconscionable assessment and collection of excessive overdraft fees from the plaintiffs. According to the complaints, plaintiffs claim that the Bank employs sophisticated software to automate its overdraft system, and that this system unfairly and inequitably manipulates and alters customers’ transaction records in order to maximize overdraft penalties, particularly utilizing a practice of posting of items in “high-to-low” order, despite the actual sequence in which such items are presented for payment. Plaintiffs claim that the Bank’s deposit agreements with customers do not adequately disclose the Bank’s overdraft assessment policies and are ambiguous, deceptive, unfair and misleading. The complaint in each case alleges that these actions and omissions constitute breach of contract, breach of the implied covenant of good faith and fair dealing, unconscionable conduct, conversion, unjust enrichment and violation of the Arkansas Deceptive Trade Practices Act. The complaint in the Walker case also includes a count for conversion. Each of the complaints seeks to have the cases certified by the court as a class action for all Bank account holders similarly situated, and seeks a declaratory judgment as to the wrongful nature of the Bank’s overdraft fee policies, restitution of overdraft fees paid by the plaintiffs and the putative class (defined as all Bank customers residing in Arkansas) as a result of the actions cited in the complaints, disgorgement of profits as a result of the alleged wrongful actions, and unspecified compensatory and statutory or punitive damages, together with pre-judgment interest, costs and plaintiffs’ attorneys’ fees.

The Company and Bank filed a motion to dismiss and to compel arbitration in the Walker case. The trial court denied the motion and found that the arbitration provision contained in the controlling Consumer Deposit Account Agreement was unconscionable and thus unenforceable on the grounds that the provision was the result of unequal bargaining power. The Company and Bank appealed the trial court’s ruling to the Arkansas Court of Appeals on an interlocutory basis. On September 18, 2013, a three-judge panel of the Arkansas Court of Appeals reversed the trial court’s ruling and remanded the case to the trial court for the purpose of entering an order compelling arbitration. On October 7, 2013, the plaintiffs filed petitions for reconsideration and review before the Arkansas Court of Appeals and Arkansas Supreme Court, respectively. On October 30, 2013, the Arkansas Court of Appeals denied the plaintiffs’ petition for reconsideration. In January 2014, the Arkansas Supreme Court granted the plaintiff’s petition for review. Oral arguments were presented to the Arkansas Supreme Court on May 1, 2014. On May 15, 2014, the Arkansas Supreme Court vacated the Arkansas Court of Appeals’ decision, reversing and remanding the case to the trial court to determine, in the first instance, whether there is a valid agreement to arbitrate disputes between the named plaintiffs and the Bank.

At this stage, the trial court must determine (i) whether there is a valid and binding agreement to arbitrate between the named plaintiffs and the Bank, (ii) whether the dispute at issue in the Walker case falls within the scope of the agreement to arbitrate, and, then, (iii) whether the named plaintiffs have a defense, such as unconscionability, to invalidate the agreement to arbitrate. The parties are in the process of conducting discovery related to the issue of arbitration in preparation for an evidentiary hearing to be conducted by the trial court on this issue. To date, an evidentiary hearing has not been scheduled, but one is expected to be conducted in the third quarter of 2014.

The Plaintiff in the Muzingo case has agreed to stay the proceedings in that case pending the outcome of the hearing in the Walker case. The Company and the Bank believe the Plaintiffs’ claims in each of these cases are unfounded and subject to meritorious defenses and intend to vigorously defend against these claims.

The Company is party to various other legal proceedings, as both plaintiff and defendant, arising in the ordinary course of business, including claims of lender liability, predatory lending, broken promises and other similar lending-related claims. While the ultimate resolution of these various claims and proceedings cannot be determined at this time, management of the Company believes that such claims and proceedings, individually or in the aggregate, will not have a material adverse effect on the future results of operations, financial condition or liquidity of the Company.

 

Item 1A. Risk Factors

The discussion of the Company’s business and operations should be read together with the risk below and the risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2013, which describes various risks and uncertainties to which the Company is or may be subject. These risks and uncertainties have the potential to affect the Company’s business, financial condition, results of operations, and prospects in a material adverse manner.

 

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The Company May Be Subject to Claims and Litigation Pertaining to Fiduciary Responsibility.

From time to time as part of the Company’s normal course of business, customers may make claims and take legal action against the Company based on its actions or inactions related to the Bank’s fiduciary responsibilities of its Trust and Wealth Management Division. If such claims and legal actions are not resolved in a manner favorable to the Company, they may result in financial liability and/or adversely affect the market perception of the Company and its products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.

 

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: August 7, 2014   

/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

    
    2.1    Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks and The First National Bank of Shelby, dated as of January 24, 2013 (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, as amended, filed with the Commission on January 25, 2013, and incorporated herein by this reference).
    2.2    Amendment No. 1 to the Agreement and Plan of Merger among Bank of the Ozarks, Inc. Bank of the Ozarks and The First National Bank of Shelby, dated as of February 5, 2013 (previously filed as Exhibit 2(b) to the Company’s Annual Report on Form 10-K filed with the Commission on February 28, 2013, and incorporated herein by this reference).
    2.3    Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks, Summit Bancorp, Inc. and Summit Bank, dated as of January 30, 2014 (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 30, 2014, and incorporated herein by this reference).
    2.4    Agreement and Plan of Merger among Bank of the Ozarks, Inc., Bank of the Ozarks, Intervest Bancshares Corporation and Intervest National Bank, dated as of July 31, 2014 (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 31, 2014, and incorporated herein by this reference).
    3.1    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).
    3.2    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).
    3.3    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).
    3.4    Articles of Amendment to the Amended and Restated Articles of Incorporation of Registrant dated May 19, 2014 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 20, 2014).
    3.5    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).
    3.6    Amendment No. 1 to the Amended and Restated Bylaws of Registrant dated May 19, 2014 (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 20, 2014).
  10.1    Bank of the Ozarks, Inc. 2009 Restricted Stock and Incentive Plan, as amended and restated effective May 19, 2014 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 20, 2014).
  10.2    Amendment to the Bank of the Ozarks, Inc. Stock Option Plan adopted May 19, 2014 (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 20, 2014).
  10.3    Bank of the Ozarks, Inc. 2014 Stock-Based Performance Award Plan (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2014).
  10.4    Bank of the Ozarks, Inc. 2014 Executive Cash Bonus Plan (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 25, 2014).

 

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  11.1    Earnings Per Share Computation (included in Note 4 to the Consolidated Financial Statements).
  31.1    Certification of Chairman and Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith.
  31.2    Certification of Chief Financial Officer and Chief Accounting Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith.
  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, furnished herewith.
  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, furnished herewith.
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

 

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