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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended September 30, 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 September 30, 2014

Common Stock, $0.01 par value per share   79,704,950

 

 

 


Table of Contents

BANK OF THE OZARKS, INC.

FORM 10-Q

September  30, 2014

INDEX

 

PART I.

  Financial Information   

Item 1.

  Financial Statements   
 

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

     1   
 

Consolidated Statements of Income for the Three Months Ended September 30, 2014 and 2013 and the Nine Months Ended September 30, 2014 and 2013

     2   
 

Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2014 and 2013 and the Nine Months Ended September 30, 2014 and 2013

     3   
 

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2014 and 2013

     4   
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 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      38   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      84   

Item 4.

  Controls and Procedures      85   

PART II.

  Other Information   

Item 1.

  Legal Proceedings      86   

Item 1A.

  Risk Factors      87   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      87   

Item 3.

  Defaults Upon Senior Securities      87   

Item 4.

  Mine Safety Disclosures      87   

Item 5.

  Other Information      87   

Item 6.

  Exhibits      87   

Signature

     88   

Exhibit Index

     89   


Table of Contents

PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

 

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

Cash and due from banks

   $ 109,877      $ 123,291      $ 195,094   

Interest earning deposits

     2,207        1,167        881   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     112,084        124,458        195,975   

Investment securities - available for sale (“AFS”)

     859,876        671,393        669,384   

Non-purchased loans and leases

     3,639,142        2,522,589        2,632,565   

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

     1,030,988        399,058        372,723   

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

     248,802        409,319        351,791   

Allowance for loan and lease losses

     (49,606     (41,660     (42,945
  

 

 

   

 

 

   

 

 

 

Net loans and leases

     4,869,326        3,289,306        3,314,134   

FDIC loss share receivable

     36,583        89,642        71,854   

Premises and equipment, net

     267,888        245,055        245,472   

Foreclosed assets not covered by FDIC loss share agreements

     14,781        11,647        11,851   

Foreclosed assets covered by FDIC loss share agreements

     27,882        40,452        37,960   

Accrued interest receivable

     20,966        15,227        14,359   

Bank owned life insurance (“BOLI”)

     180,667        142,311        143,473   

Intangible assets, net

     107,108        20,039        19,158   

Other, net

     83,199        61,037        67,550   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,580,360      $ 4,710,567      $ 4,791,170   
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY       

Deposits:

      

Demand non-interest bearing

   $ 1,089,415      $ 724,413      $ 746,320   

Savings and interest bearing transaction

     2,787,958        1,952,617        2,073,497   

Time

     1,262,332        977,656        897,210   
  

 

 

   

 

 

   

 

 

 

Total deposits

     5,139,705        3,654,686        3,717,027   

Repurchase agreements with customers

     73,942        50,254        53,103   

Other borrowings

     352,616        280,905        280,895   

Subordinated debentures

     64,950        64,950        64,950   

FDIC clawback payable

     26,676        25,705        25,897   

Accrued interest payable and other liabilities

     43,452        18,251        16,768   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     5,701,341        4,094,751        4,158,640   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ equity:

      

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

     0        0        0   

Common stock; $0.01 par value; 125,000,000 shares authorized; 79,704,950, 73,403,418 and 73,711,704 shares issued and outstanding at September 30, 2014, September 30, 2013 and December 31, 2013, respectively

     797        735        737   

Additional paid-in capital

     317,390        139,768        143,017   

Retained earnings

     546,667        472,288        488,978   

Accumulated other comprehensive income (loss)

     10,724        (453     (3,672
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity before noncontrolling interest

     875,578        612,338        629,060   

Noncontrolling interest

     3,441        3,478        3,470   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     879,019        615,816        632,530   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 6,580,360      $ 4,710,567      $ 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     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (Dollars in thousands, except per share amounts)  

Interest income:

        

Non-purchased loans and leases

   $ 43,153      $ 33,183      $ 113,400      $ 93,782   

Purchased non-covered loans

     18,056        5,653        39,534        7,366   

Covered loans

     10,630        10,501        31,166        34,845   

Investment securities:

        

Taxable

     2,986        1,988        8,135        4,456   

Tax-exempt

     5,247        4,006        14,617        11,599   

Deposits with banks and federal funds sold

     11        11        50        21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     80,083        55,342        206,902        152,069   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     2,285        1,537        5,693        4,457   

Repurchase agreements with customers

     15        7        40        21   

Other borrowings

     2,736        2,732        8,083        8,064   

Subordinated debentures

     426        433        1,267        1,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     5,462        4,709        15,083        13,832   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     74,621        50,633        191,819        138,237   

Provision for loan and lease losses

     (3,687     (3,818     (10,574     (9,212
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     70,934        46,815        181,245        129,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges on deposit accounts

     7,356        5,817        19,601        15,613   

Mortgage lending income

     1,728        1,276        3,807        4,660   

Trust income

     1,419        1,060        4,099        2,808   

BOLI income

     1,390        1,179        3,799        3,365   

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

     (562     1,396        (611     6,269   

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

     3,369        2,484        10,309        8,328   

Net gains on investment securities

     43        0        67        156   

Gains on sales of other assets

     1,688        2,501        4,111        7,586   

Gain on merger and acquisition transactions

     0        5,163        4,667        5,163   

Other

     2,817        1,226        7,147        3,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     19,248        22,102        56,996        57,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     20,876        16,456        57,396        47,445   

Net occupancy and equipment

     6,823        4,786        17,574        13,670   

Other operating expenses

     14,824        10,966        42,886        30,226   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     42,523        32,208        117,856        91,341   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     47,659        36,709        120,385        95,130   

Provision for income taxes

     15,579        10,224        36,559        28,255   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     32,080        26,485        83,826        66,875   

Earnings attributable to noncontrolling interest

     13        (33     29        (36
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 32,093      $ 26,452      $ 83,855      $ 66,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.40      $ 0.36      $ 1.09      $ 0.94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.40      $ 0.36      $ 1.08      $ 0.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.12      $ 0.095      $ 0.345      $ 0.255   
  

 

 

   

 

 

   

 

 

   

 

 

 

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     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (Dollars in thousands)  

Net income

   $ 32,080      $ 26,485      $ 83,826      $ 66,875   

Other comprehensive income (loss):

        

Unrealized gains and losses on investment securities AFS

     1,223        732        23,754        (18,333

Tax effect of unrealized gains and losses on investment securities AFS

     (479     (287     (9,317     7,191   

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

     (43     0        (67     (156

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

     17        0        26        62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     718        445        14,396        (11,236
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 32,798      $ 26,930      $ 98,222      $ 55,639   
  

 

 

   

 

 

   

 

 

   

 

 

 

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         66,875        0        0        66,875   

Earnings attributable to noncontrolling interest

     0         0         (36     0        36        0   

Total other comprehensive loss

     0         0         0        (11,236     0        (11,236

Common stock dividends

     0         0         (18,036     0        0        (18,036

Issuance of 356,800 split-adjusted shares of common stock for exercise of stock options

     4         2,613         0        0        0        2,617   

Excess tax benefit on exercise and forfeiture of stock options

     0         1,458         0        0        0        1,458   

Issuance of 2,514,770 split-adjusted shares of common stock for acquisition of The First National Bank of Shelby, net of issuance costs of $285,000

     25         59,769         0        0        0        59,794   

Stock-based compensation expense

     0         3,238         0        0        0        3,238   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – September 30, 2013, as recast

   $ 735       $ 139,768       $ 472,288      $ (453   $ 3,478      $ 615,816   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – January 1, 2014, as recast

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

Net income

     0         0         83,826        0        0        83,826   

Earnings attributable to noncontrolling interest

     0         0         29        0        (29     0   

Total other comprehensive income

     0         0         0        14,396        0        14,396   

Common stock dividends

     0         0         (26,166     0        0        (26,166

Issuance of 228,600 split-adjusted shares of common stock for exercise of stock options

     2         2,065         0        0        0        2,067   

Forfeiture of 1,200 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         1,649         0        0        0        1,649   

Stock-based compensation expense

     0         4,402         0        0        0        4,402   

Issuance of 5,765,846 split-adjusted shares of common stock for acquisition of Summit Bancorp, Inc., net of issuance costs of $87,000

     58         166,257         0        0        0        166,315   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – September 30, 2014

   $ 797       $ 317,390       $ 546,667      $ 10,724      $ 3,441      $ 879,019   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

4


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

     Nine Months Ended  
     September 30,  
     2014     2013  
     (Dollars in thousands)  

Cash flows from operating activities:

    

Net income

   $ 83,826      $ 66,875   

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

    

Depreciation

     5,968        5,317   

Amortization

     3,464        1,924   

Earnings attributable to noncontrolling interest

     29        (36

Provision for loan and lease losses

     10,574        9,212   

Provision for losses on foreclosed assets

     862        1,072   

Net amortization of investment securities AFS

     431        450   

Net gains on investment securities AFS

     (67     (156

Originations of mortgage loans held for sale

     (152,767     (172,210

Proceeds from sales of mortgage loans held for sale

     154,409        191,570   

Accretion of covered loans

     (31,166     (34,845

Accretion of purchased non-covered loans

     (39,534     (7,366

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

     611        (6,269

Gains on sales of other assets

     (4,111     (7,586

Gain on merger and acquisition transactions

     (4,667     (5,163

Deferred income tax benefit

     (6,625     (2,070

Increase in cash surrender value of BOLI

     (3,799     (3,365

Excess tax benefit on exercise and forfeiture of stock options

     (1,649     (1,458

Stock-based compensation expense

     4,402        3,238   

Changes in assets and liabilities:

    

Accrued interest receivable

     (1,872     (900

Other assets, net

     5,496        2,473   

Accrued interest payable and other liabilities

     24,396        2,137   
  

 

 

   

 

 

 

Net cash provided by operating activities

     48,211        42,844   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales of investment securities AFS

     54,957        999   

Proceeds from maturities/calls/paydowns of investment securities AFS

     68,349        71,860   

Purchases of investment securities AFS

     (46,618     (124,193

Net advances on non-purchased loans and leases

     (1,017,513     (428,273

Payments received on purchased non-covered loans

     253,347        37,666   

Payments received on covered loans

     97,915        177,094   

Payments received from FDIC under loss share agreements

     24,810        66,993   

Other net decreases in covered assets and FDIC loss share receivable

     15,267        21,634   

Purchases of premises and equipment

     (10,352     (7,815

Proceeds from sales of other assets

     54,350        47,975   

Cash received from (invested) in unconsolidated investments

     1,320        (571

Net cash received in merger and acquisition transactions

     121,918        56,786   
  

 

 

   

 

 

 

Net cash used by investing activities

     (382,250     (79,845
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     196,998        (46,987

Net proceeds from other borrowings

     71,276        142   

Net increase in repurchase agreements with customers

     4,324        14,298   

Proceeds from exercise of stock options

     2,067        2,617   

Excess tax benefit on exercise and forfeiture of stock options

     1,649        1,458   

Cash dividends paid on common stock

     (26,166     (18,036
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     250,148        (46,508
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (83,891     (83,509

Cash and cash equivalents – beginning of period

     195,975        207,967   
  

 

 

   

 

 

 

Cash and cash equivalents – end of period

   $ 112,084      $ 124,458   
  

 

 

   

 

 

 

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 September 30, 2014, the Company had 165 offices, including 88 in Arkansas, 28 in Georgia, 21 in Texas, 17 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 nine months ended September 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

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. At September 30, 2014, INB reported approximately $1.51 billion in total assets, approximately $1.18 billion in loans, approximately $0.31 million in investment securities and approximately $1.21 billion in deposits.

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

 

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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 Intervest’s stockholders.

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 $10.9 million of net interest income and $5.0 million of net income to the Company’s results of operations for the three months ended September 30, 2014, and contributed $16.6 million of net interest income and $7.4 million of net income to the Company’s results of operations for the nine months ended September 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.

 

     Nine Months Ended
September 30,
 
     2014      2013  
    

(Dollars in thousands,

except per share amounts)

 

Net interest income – pro forma (unaudited)

   $ 208,758       $ 171,824   

Net income – pro forma (unaudited)

   $ 91,402       $ 81,787   

Diluted earnings per common share – pro forma (unaudited)

   $ 1.14       $ 1.05   

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.

 

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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 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 September 30, 2014, Bancshares’ operating results contributed $2.1 million of net interest income and $1.1 million of net income to the Company’s results of operations. For the nine months ended September 30, 2014, Bancshares’ operating results contributed $5.5 million of net interest income and $7.5 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.

 

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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 were 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 was 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.

 

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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)  

September 30, 2013:

    

Deferred income tax asset valuation allowance

   $ (4,102   $ 4,102       $ 0   

Total stockholders’ equity before noncontrolling interest

     608,236        4,102         612,338   

Gain on merger and acquisition transaction

     1,061        4,102         5,163   

Net income available to common stockholders

     62,737        4,102         66,839   

Diluted earnings per common share, split adjusted

   $ 0.87      $ 0.06       $ 0.93   

 

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 and nine months ended September 30, 2014 and the three months ended September 30, 2013 were excluded from the diluted EPS calculations as all options were dilutive. For the nine months ended September 30, 2013, options to purchase 4,000 split-adjusted shares of the Company’s common stock were excluded from the diluted EPS calculations as inclusion of these options would have been anti-dilutive.

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  
     (In thousands, except per share amounts)  

Numerator:

     

Distributed earnings allocated to common stock

   $ 9,560       $ 6,732       $ 26,166       $ 18,036   

Undistributed earnings allocated to common stock

     22,533         19,720         57,689         48,803   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common stock

   $ 32,093       $ 26,452       $ 83,855       $ 66,839   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

     

Denominator for basic EPS – weighted-average common shares

     79,678         72,544         76,763         71,338   

Effect of dilutive securities – stock options

     767         752         706         650   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     80,445         73,296         77,469         71,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 0.40       $ 0.36       $ 1.09       $ 0.94   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 0.40       $ 0.36       $ 1.08       $ 0.93   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

5. Investment Securities

At September 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).

 

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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)  

September 30, 2014:

    

Obligations of state and political subdivisions

   $ 572,070       $ 16,610       $ (1,101   $ 587,579   

U.S. Government agency securities

     251,926         4,427         (2,291     254,062   

Corporate obligations

     655         0         0        655   

Other equity securities

     17,580         0         0        17,580   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 842,231       $ 21,037       $ (3,392   $ 859,876   
  

 

 

    

 

 

    

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2013:

          

Obligations of state and political subdivisions

   $ 432,362       $ 7,423       $ (8,217   $ 431,568   

U.S. Government agency securities

     225,263         4,077         (4,029     225,311   

Corporate obligations

     717         0         0        717   

Other equity securities

     13,797         0         0        13,797   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 672,139       $ 11,500       $ (12,246   $ 671,393   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

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

September 30, 2014:

                 

Obligations of state and political subdivisions

   $ 40,386       $ 146       $ 53,628       $ 955       $ 94,014       $ 1,101   

U.S. Government agency securities

     44,958         226         57,610         2,065         102,568         2,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 85,344       $ 372       $ 111,238       $ 3,020       $ 196,582       $ 3,392   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013:

                 

Obligations of state and political subdivisions

   $ 122,614       $ 7,523       $ 8,020       $ 694       $ 130,634       $ 8,217   

U.S. Government agency securities

     60,861         4,029         0         0         60,861         4,029   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 183,475       $ 11,552       $ 8,020       $ 694       $ 191,495       $ 12,246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


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 September 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.

 

     September 30, 2014  

Maturity or

Estimated Repayment

   Amortized
Cost
     Estimated
Fair Value
 
     (Dollars in thousands)  

One year or less

   $ 37,664       $ 38,291   

After one year to five years

     138,870         140,563   

After five years to ten years

     194,325         196,655   

After ten years

     471,372         484,367   
  

 

 

    

 

 

 

Total

   $ 842,231       $ 859,876   
  

 

 

    

 

 

 

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

September 30,
     Nine Months Ended
September 30,
 
     2014     2013      2014     2013  
     (Dollars in thousands)  

Sales proceeds

   $ 6,563      $ 0       $ 54,957      $ 999   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross realized gains

   $ 58      $ 0       $ 82      $ 156   

Gross realized losses

     (15     0         (15     0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net gains on investment securities

   $ 43      $ 0       $ 67      $ 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
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
     (Dollars in thousands)  

Beginning balance

   $ 46,958      $ 39,372      $ 42,945      $ 38,738   

Non-purchased loans and leases charged off

     (737     (754     (3,306     (3,203

Recoveries of non-purchased loans and leases previously charged off

     185        142        1,167        925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net non-purchased loans and leases charged off

     (552     (612     (2,139     (2,278

Covered loans charged off

     (205     (918     (925     (4,012

Purchased non-covered loans charged off

     (282     0        (849     0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs – total loans and leases

     (1,039     (1,530     (3,913     (6,290

Provision for loan and lease losses:

        

Non-purchased loans and leases

     3,200        2,900        8,800        5,200   

Covered loans

     205        918        925        4,012   

Purchased non-covered loans

     282        0        849        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision

     3,687        3,818        10,574        9,212   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 49,606      $ 41,660      $ 49,606      $ 41,660   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

At September 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 $0.2 million for such loans during the third quarter of 2014 and $0.9 million for such loans during the first nine months of 2014 compared to $0.9 million for such loans during the third quarter of 2013 and $4.0 million for such loans during the first nine months of 2013. The Company also recorded provision for loan and lease losses of $0.2 million during the third quarter of 2014 and $0.9 million during the first nine months of 2014 compared to $0.9 million for such loans during the third quarter of 2013 and $4.0 million for such loans during the first nine months of 2013 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 $13.6 million and $52.6 million, respectively, of impaired covered loans at September 30, 2014 and 2013.

As of September 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 $0.3 million during the third quarter and $0.9 million during the first nine months of 2014 compared to none for the comparable periods in 2013. The Company also recorded provision for loan and lease losses of $0.3 million during the third quarter and $0.9 million during the first nine months of 2014 to cover such charge-offs compared to none during the third quarter and first nine months of 2013. At September 30, 2014, the Company had $1.7 million of impaired purchased non-covered loans compared to none at both September 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 September 30, 2014:

            

Real estate:

            

Residential 1-4 family

   $ 4,760       $ (115   $ 47       $ 610      $ 5,302   

Non-farm/non-residential

     14,836         (90     15         3,267        18,028   

Construction/land development

     15,464         0        4         (950     14,518   

Agricultural

     2,908         (198     2         (98     2,614   

Multifamily residential

     1,772         0        0         (161     1,611   

Commercial and industrial

     2,848         (55     38         108        2,939   

Consumer

     926         (29     14         (89     822   

Direct financing leases

     2,572         (151     29         371        2,821   

Other

     872         (99     36         142        951   

Covered loans

     0         (205     0         205        0   

Purchased non-covered loans

     0         (282     0         282        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 46,958       $ (1,224   $ 185       $ 3,687      $ 49,606   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Nine months ended September 30, 2014:

            

Real estate:

            

Residential 1-4 family

   $ 4,701       $ (456   $ 118       $ 939      $ 5,302   

Non-farm/non-residential

     13,633         (1,344     19         5,720        18,028   

Construction/land development

     12,306         (14     12         2,214        14,518   

Agricultural

     3,000         (213     13         (186     2,614   

Multifamily residential

     2,504         0        0         (893     1,611   

Commercial and industrial

     2,855         (477     801         (240     2,939   

Consumer

     917         (126     50         (19     822   

Direct financing leases

     2,266         (418     43         930        2,821   

Other

     763         (258     111         335        951   

Covered loans

     0         (925     0         925        0   

Purchased non-covered loans

     0         (849     0         849        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 42,945       $ (5,080   $ 1,167       $ 10,574      $ 49,606   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

15


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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Three months ended September 30, 2013:

            

Real estate:

            

Residential 1-4 family

   $ 4,653       $ (111   $ 11       $ 294      $ 4,847   

Non-farm/non-residential

     12,464         (19     0         304        12,749   

Construction/land development

     11,290         (7     13         1,434        12,730   

Agricultural

     2,595         (260     5         182        2,522   

Multifamily residential

     1,854         0        0         203        2,057   

Commercial and industrial

     2,929         (55     56         (172     2,758   

Consumer

     993         (57     19         (13     942   

Direct financing leases

     2,041         (152     9         262        2,160   

Other

     553         (93     29         406        895   

Covered loans

     0         (918     0         918        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 39,372       $ (1,672   $ 142       $ 3,818      $ 41,660   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Nine months ended September 30, 2013:

            

Real estate:

            

Residential 1-4 family

   $ 4,820       $ (528   $ 113       $ 442      $ 4,847   

Non-farm/non-residential

     10,107         (612     118         3,136        12,749   

Construction/land development

     12,000         (136     21         845        12,730   

Agricultural

     2,878         (260     9         (105     2,522   

Multifamily residential

     2,030         0        0         27        2,057   

Commercial and industrial

     3,655         (887     431         (441     2,758   

Consumer

     1,015         (176     90         13        942   

Direct financing leases

     2,050         (338     29         419        2,160   

Other

     183         (266     114         864        895   

Covered loans

     0         (4,012     0         4,012        0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 38,738       $ (7,215   $ 925       $ 9,212      $ 41,660   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

16


Table of Contents

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

 

     Allowance for 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)  

September 30, 2014:

                 

Real estate:

                 

Residential 1-4 family

   $ 345       $ 4,957       $ 5,302       $ 2,360       $ 275,981       $ 278,341   

Non-farm/non-residential

     24         18,004         18,028         2,300         1,370,994         1,373,294   

Construction/land development

     2         14,516         14,518         10,191         1,223,062         1,233,253   

Agricultural

     30         2,584         2,614         376         46,345         46,721   

Multifamily residential

     0         1,611         1,611         0         155,940         155,940   

Commercial and industrial

     606         2,333         2,939         578         312,714         313,292   

Consumer

     3         819         822         32         25,367         25,399   

Direct financing leases

     0         2,821         2,821         0         109,059         109,059   

Other

     0         951         951         8         103,835         103,843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,010       $ 48,596       $ 49,606       $ 15,845       $ 3,623,297       $ 3,639,142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013:

                 

Real estate:

                 

Residential 1-4 family

   $ 490       $ 4,357       $ 4,847       $ 3,535       $ 247,491       $ 251,026   

Non-farm/non-residential

     6         12,743         12,749         3,572         1,032,046         1,035,618   

Construction/land development

     2         12,728         12,730         217         713,981         714,198   

Agricultural

     187         2,335         2,522         951         47,002         47,953   

Multifamily residential

     0         2,057         2,057         310         163,606         163,916   

Commercial and industrial

     613         2,145         2,758         739         121,424         122,163   

Consumer

     4         938         942         33         27,265         27,298   

Direct financing leases

     0         2,160         2,160         0         81,984         81,984   

Other

     1         894         895         20         78,413         78,433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,303       $ 40,357       $ 41,660       $ 9,377       $ 2,513,212       $ 2,522,589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

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

 

     Principal
Balance
     Net
Charge-offs
to Date
    Principal
Balance,

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

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

                

Real estate:

                

Residential 1-4 family

   $ 2,984       $ (1,654   $ 1,330       $ 345       $ 1,452       $ 1,564   

Non-farm/non-residential

     415         (216     199         24         121         87   

Construction/land development

     36         (22     14         2         16         16   

Agricultural

     116         (12     104         30         214         311   

Commercial and industrial

     1,314         (764     550         606         555         571   

Consumer

     101         (84     17         3         20         22   

Other

     0         (0     0         0         0         4   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with a related ALLL

     4,966         (2,752     2,214         1,010         2,378         2,575   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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

                

Real estate:

                

Residential 1-4 family

     1,343         (313     1,030         0         1,352         1,802   

Non-farm/non-residential

     2,826         (725     2,101         0         2,210         2,025   

Construction/land development

     10,258         (81     10,177         0         9,949         5,107   

Agricultural

     474         (202     272         0         397         419   

Multifamily residential

     133         (133     0         0         246         123   

Commercial and industrial

     187         (159     28         0         79         73   

Consumer

     20         (5     15         0         17         21   

Other

     8         (0     8         0         8         9   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without a related ALLL

     15,249         (1,618     13,631         0         14,258         9,579   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 20,215       $ (4,370   $ 15,845       $ 1,010       $ 16,636       $ 12,154   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

18


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   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     Principal
Balance
     Net
Charge-offs
to Date
    Principal
Balance,

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

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

                

Real estate:

                

Residential 1-4 family

   $ 3,601       $ (1,662   $ 1,939       $ 490       $ 1,624       $ 1,569   

Non-farm/non-residential

     37         0        37         6         24         105   

Construction/land development

     129         (112     17         2         8         17   

Agricultural

     459         (42     417         187         421         525   

Commercial and industrial

     2,270         (1,713     557         613         558         570   

Consumer

     39         (13     26         4         13         7   

Other

     145         (137     8         1         8         9   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with a related ALLL

     6,680         (3,679     3,001         1,303         2,656         2,802   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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

                

Real estate:

                

Residential 1-4 family

     2,244         (648     1,596         0         1,507         1,394   

Non-farm/non-residential

     4,645         (1,110     3,535         0         6,957         4,902   

Construction/land development

     281         (81     200         0         236         324   

Agricultural

     801         (267     534         0         386         401   

Multifamily residential

     443         (133     310         0         311         155   

Commercial and industrial

     397         (215     182         0         166         196   

Consumer

     19         (12     7         0         7         23   

Other

     32         (20     12         0         8         8   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without a related ALLL

     8,862         (2,486     6,376         0         9,578         7,403   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 15,542       $ (6,165   $ 9,377       $ 1,303       $ 12,234       $ 10,205   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Management has determined that certain of the Company’s impaired non-purchased loans and leases do not require any specific allowance at September 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 nine months ended September 30, 2014 and 2013 and for the year ended December 31, 2013 was not material.

 

20


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)  

September 30, 2014:

              

Real estate:

              

Residential 1-4 family (1)

   $ 268,707       $ 0       $ 3,797       $ 5,837       $ 278,341   

Non-farm/non-residential

     1,170,334         141,395         54,078         7,487         1,373,294   

Construction/land development

     1,016,496         186,496         16,979         13,282         1,233,253   

Agricultural

     24,335         10,202         10,062         2,122         46,721   

Multifamily residential

     119,765         35,039         382         754         155,940   

Commercial and industrial

     267,178         43,286         1,347         1,481         313,292   

Consumer (1)

     24,879         0         263         257         25,399   

Direct financing leases

     108,126         829         32         72         109,059   

Other (1)

     99,786         3,853         180         24         103,843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,099,606       $ 421,100       $ 87,120       $ 31,316       $ 3,639,142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013:

              

Real estate:

              

Residential 1-4 family(1)

   $ 242,202       $ 0       $ 1,438       $ 7,386       $ 251,026   

Non-farm/non-residential

     839,345         134,754         51,589         9,930         1,035,618   

Construction/land development

     544,324         136,270         29,122         4,482         714,198   

Agricultural

     23,926         11,688         9,317         3,022         47,953   

Multifamily residential

     132,722         29,716         394         1,084         163,916   

Commercial and industrial

     91,913         26,843         1,210         2,197         122,163   

Consumer(1)

     26,763         0         172         363         27,298   

Direct financing leases

     80,967         992         0         25         81,984   

Other(1)

     74,221         4,005         132         75         78,433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,056,383       $ 344,268       $ 93,374       $ 28,564       $ 2,522,589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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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)  

September 30, 2014:

              

Real estate:

              

Residential 1-4 family

   $ 4,203       $ 1,230       $ 5,433       $ 272,908       $ 278,341   

Non-farm/non-residential

     879         1,432         2,311         1,370,983         1,373,294   

Construction/land development

     1,854         10,017         11,871         1,221,382         1,233,253   

Agricultural

     1,574         192         1,766         44,955         46,721   

Multifamily residential

     0         0         0         155,940         155,940   

Commercial and industrial

     813         28         841         312,451         313,292   

Consumer

     295         35         330         25,069         25,399   

Direct financing leases

     0         0         0         109,059         109,059   

Other

     12         0         12         103,831         103,843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,630       $ 12,934       $ 22,564       $ 3,616,578       $ 3,639,142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 1,661       $ 2,376       $ 4,037       $ 246,989       $ 251,026   

Non-farm/non-residential

     2,321         3,312         5,633         1,029,985         1,035,618   

Construction/land development

     1,662         136         1,798         712,400         714,198   

Agricultural

     322         571         893         47,060         47,953   

Multifamily residential

     0         310         310         163,606         163,916   

Commercial and industrial

     349         131         480         121,683         122,163   

Consumer

     177         66         243         27,055         27,298   

Direct financing leases

     111         25         136         81,848         81,984   

Other

     17         0         17         78,416         78,433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,620       $ 6,927       $ 13,547       $ 2,509,042       $ 2,522,589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $0.9 million, $0.8 million and $0.4 million of loans and leases on nonaccrual status at September 30, 2014, December 31, 2013 and September 30, 2013, respectively.
(2) All loans and leases greater than 90 days past due were on nonaccrual status at September 30, 2014 and 2013 and December 31, 2013.
(3) Includes $3.9 million, $3.2 million and $3.1 million of loans and leases on nonaccrual status at September 30, 2014, December 31, 2013 and September 30, 2013, respectively.

 

22


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)  

September 30, 2014:

        

Real estate:

        

Residential 1-4 family

   $ 86,067       $ 2,208       $ 88,275   

Non-farm/non-residential

     107,046         6,587         113,633   

Construction/land development

     23,970         3,648         27,618   

Agricultural

     9,539         338         9,877   

Multifamily residential

     3,513         315         3,828   

Commercial and industrial

     4,819         535         5,354   

Consumer

     61         3         64   

Other

     153         0         153   
  

 

 

    

 

 

    

 

 

 

Total

   $ 235,168       $ 13,634       $ 248,802   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

 

September 30, 2013:

        

Real estate:

        

Residential 1-4 family

   $ 114,163       $ 6,378       $ 120,541   

Non-farm/non-residential

     171,886         25,566         197,452   

Construction/land development

     40,172         19,215         59,387   

Agricultural

     11,203         1,138         12,341   

Multifamily residential

     9,153         215         9,368   

Commercial and industrial

     9,877         57         9,934   

Consumer

     132         6         138   

Other

     158         0         158   
  

 

 

    

 

 

    

 

 

 

Total

   $ 356,744       $ 52,575       $ 409,319   
  

 

 

    

 

 

    

 

 

 

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 September 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.

 

23


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)  

September 30, 2014:

              

Real estate:

              

Residential 1-4 family

   $ 3,075       $ 7,298       $ 10,373       $ 77,902       $ 88,275   

Non-farm/non-residential

     3,481         8,112         11,593         102,040         113,633   

Construction/land development

     922         5,008         5,930         21,688         27,618   

Agricultural

     0         1,652         1,652         8,225         9,877   

Multifamily residential

     0         0         0         3,828         3,828   

Commercial and industrial

     9         603         612         4,742         5,354   

Consumer

     10         0         10         54         64   

Other

     0         0         0         153         153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,497       $ 22,673       $ 30,170       $ 218,632       $ 248,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 6,260       $ 13,658       $ 19,918       $ 100,623       $ 120,541   

Non-farm/non-residential

     8,557         39,841         48,398         149,054         197,452   

Construction/land development

     848         27,584         28,432         30,955         59,387   

Agricultural

     1,234         1,250         2,484         9,857         12,341   

Multifamily residential

     195         3,689         3,884         5,484         9,368   

Commercial and industrial

     27         2,961         2,988         6,946         9,934   

Consumer

     0         2         2         136         138   

Other

     0         0         0         158         158   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,121       $ 88,985       $ 106,106       $ 303,213       $ 409,319   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 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.

 

24


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)  

September 30, 2014:

                       

Real estate:

                       

Residential 1-4 family

   $ 74,617       $ 81,344       $ 30,058       $ 75,815       $ 143       $ 17,236       $ 60       $ 279,273   

Non-farm/non-residential

     200,653         194,295         32,819         3,283         505         30,742         87         462,384   

Construction/land development

     28,857         33,070         9,607         13,783         9         9,011         0         94,337   

Agricultural

     12,510         26,723         3,053         1,933         0         189         0         44,408   

Multifamily residential

     9,877         13,019         7,226         940         72         2,764         781         34,679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     326,514         348,451         82,763         95,754         729         59,942         928         915,081   

Commercial and industrial

     23,424         27,645         7,282         13,284         0         5,066         0         76,701   

Consumer

     2,498         884         627         16,023         0         429         0         20,461   

Other

     5,105         8,369         735         3,776         0         760         0         18,745   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 357,541       $ 385,349       $ 91,407       $ 128,837       $ 729       $ 66,197       $ 928       $ 1,030,988   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013:

                       

Real estate:

                       

Residential 1-4 family

   $ 28,486       $ 34,113       $ 21,592       $ 36,221       $ 0       $ 16,311       $ 0       $ 136,723   

Non-farm/non-residential

     46,201         71,637         25,591         3,509         0         16,786         0         163,724   

Construction/land development

     5,973         8,578         2,495         4,680         0         5,052         0         26,778   

Agricultural

     2,109         6,705         851         173         0         242         0         10,080   

Multifamily residential

     3,621         5,662         5,322         978         0         2,419         0         18,002   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     86,390         126,695         55,851         45,561         0         40,810         0         355,307   

Commercial and industrial

     10,684         10,793         3,150         4,004         0         1,598         0         30,229   

Consumer

     1,980         147         181         5,990         0         878         0         9,176   

Other

     1,333         2,323         163         329         0         198         0         4,346   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 100,387       $ 139,958       $ 59,345       $ 55,884       $ 0       $ 43,484       $ 0       $ 399,058   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 September 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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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)  

September 30, 2014:

              

Real estate:

              

Residential 1-4 family

   $ 6,026       $ 6,220       $ 12,246       $ 267,027       $ 279,273   

Non-farm/non-residential

     1,706         9,449         11,155         451,229         462,384   

Construction/land development

     855         1,476         2,331         92,006         94,337   

Agriculture

     211         146         357         44,051         44,408   

Multifamily residential

     0         1,228         1,228         33,451         34,679   

Commercial and industrial

     791         269         1,060         75,641         76,701   

Consumer

     196         159         355         20,106         20,461   

Other

     73         31         104         18,641         18,745   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,858       $ 18,978       $ 28,836       $ 1,002,152       $ 1,030,988   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013:

              

Real estate:

              

Residential 1-4 family

   $ 4,026       $ 3,647       $ 7,673       $ 129,050       $ 136,723   

Non-farm/non-residential

     3,319         4,136         7,455         156,269         163,724   

Construction/land development

     4,601         7,367         11,968         14,810         26,778   

Agriculture

     0         101         101         9,979         10,080   

Multifamily residential

     177         1,326         1,503         16,499         18,002   

Commercial and industrial

     357         535         892         29,337         30,229   

Consumer

     310         223         533         8,643         9,176   

Other

     38         182         220         4,126         4,346   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,828       $ 17,517       $ 30,345       $ 368,713       $ 399,058   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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.

 

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

Deferred tax assets:

       

Allowance for loan and lease losses

   $ 19,052      $ 16,080       $ 16,576   

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

     24,769        19,563         17,167   

Stock-based compensation

     3,811        2,724         2,400   

Deferred compensation

     1,962        1,792         1,775   

Foreclosed assets

     5,195        3,318         3,165   

Investment securities AFS

     0        3,116         5,056   

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

     8,708        607         3,424   

Acquired net operating losses

     13,976        7,905         7,509   

Other, net

     7,310        1,950         3,858   
  

 

 

   

 

 

    

 

 

 

Total gross deferred tax assets

     84,783        57,055         60,930   

Less valuation allowance

     (474     0         0   
  

 

 

   

 

 

    

 

 

 

Net deferred tax asset

     84,309        57,055         60,930   
  

 

 

   

 

 

    

 

 

 

Deferred tax liabilities:

       

Accelerated depreciation on premises and equipment

     17,933        16,952         17,459   

Investment securities AFS

     5,499        0         0   

Acquired intangible assets

     10,466        4,390         4,227   
  

 

 

   

 

 

    

 

 

 

Total gross deferred tax liabilities

     33,898        21,342         21,686   
  

 

 

   

 

 

    

 

 

 

Net deferred tax assets (liabilities)

   $ 50,411      $ 35,713       $ 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 will expire in 2032 and $7.5 million will expire 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 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).

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

 

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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.

 

     Nine Months Ended  
     September 30,  
     2014      2013  
     (Dollars in thousands)  

Cash paid during the period for:

     

Interest

   $ 15,450       $ 14,038   

Taxes

     30,834         35,515   

Supplemental schedule of non-cash investing and financing activities:

     

Net change in unrealized gains/losses on investment securities AFS

     23,687         (18,488

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

     9,112         4,497   

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

     258         2,942   

Covered loans transferred to covered foreclosed assets

     30,754         24,306   

Unsettled AFS investment security purchases

     0         730   

Common stock issued in merger and acquisition transactions

     166,402         60,079   

 

9. Guarantees and Commitments

Outstanding standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer in third party arrangements. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2014 was $9.3 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at September 30, 2014 totaled $9.1 million.

 

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Table of Contents

At September 30, 2014 the Company had outstanding commitments to extend credit, excluding mortgage interest rate lock commitments, totaling $2.58 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 September 30, 2014

 

Maturity

   Amount  
(Dollars in thousands)  

2014

   $ 89,808   

2015

     209,595   

2016

     492,517   

2017

     1,259,690   

2018

     485,222   

Thereafter

     47,613   
  

 

 

 

Total

   $ 2,584,445   
  

 

 

 

 

10. Stock-Based Compensation

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

Nine Months Ended September 30, 2014:

          

Outstanding – January 1, 2014

     1,766,600      $ 15.84         

Granted

     52,000        29.05         

Exercised

     (228,600     9.05         

Forfeited

     (48,800     18.36         
  

 

 

         

Outstanding – September 30, 2014

     1,541,200        17.21         5.2       $ 22,058 (1) 
  

 

 

   

 

 

    

 

 

    

 

 

 

Fully vested and exercisable – September 30, 2014

     305,600        13.65         5.2       $ 5,460 (1) 
    

 

 

    

 

 

    

 

 

 

Expected to vest in future periods

     989,280           
  

 

 

         

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

     1,294,880        17.04         5.2       $ 18,744 (1) 
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Based on closing price of $31.52 per share on September 30, 2014.
(2) At September 30, 2014 the Company estimated that outstanding options to purchase 246,320 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 nine months ended September 30, 2014 and 2013 was $5.0 million and $4.7 million, respectively.

 

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Table of Contents

Options to purchase 52,000 split-adjusted shares and 48,000 split-adjusted shares of the Company’s stock were issued during the nine months ended September 30, 2014 and 2013, respectively. Stock-based compensation expense for stock options included in non-interest expense was $0.4 million for both of the quarters ended September 30, 2014 and 2013 and $1.6 million and $1.3 million for the nine months ended September 30, 2014 and 2013, respectively. Total unrecognized compensation cost related to non-vested stock option grants was $2.2 million at September 30, 2014 and is expected to be recognized over a weighted-average period of 1.8 years.

The Company has a restricted stock plan that permits issuance of up to 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 or shares held in treasury that have been reacquired by the Company. All restricted stock awards outstanding at September 30, 2014 were issued with a vesting date of three years after issuance.

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

 

     Nine Months Ended  
     September 30, 2014  

Outstanding – January 1, 2014

     616,100   

Granted

     0   

Forfeited

     (1,200

Vested

     0   
  

 

 

 

Outstanding – September 30, 2014

     614,900   
  

 

 

 

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 September 30, 2014 and 2013, respectively, and $2.8 million and $1.9 million for the nine months ended September 30, 2014 and 2013, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $5.1 million at September 30, 2014 and is expected to be recognized over a weighted-average period of 1.8 years.

 

11. Fair Value Measurements

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

The Company applies the following fair value hierarchy.

 

Level 1

    Quoted prices for identical instruments in active markets.

Level 2

    Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.

Level 3

    Instruments whose inputs are unobservable.

 

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

 

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

September 30, 2014:

  

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ 0       $ 568,021       $ 19,558       $ 587,579   

U.S. Government agency securities

     0         254,062         0         254,062   

Corporate obligations

     0         655         0         655   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     0         822,738         19,558       $ 842,296   

Impaired non-purchased loans and leases

     0         0         14,835         14,835   

Impaired covered loans

     0         0         13,634         13,634   

Impaired purchased non-covered loans

     0         0         1,657         1,657   

Foreclosed assets not covered by FDIC loss share agreements

     0         0         14,781         14,781   

Foreclosed assets covered by FDIC loss share agreements

     0         0         27,882         27,882   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0       $ 822,738       $ 92,347       $ 915,085   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ 0       $ 412,770       $ 18,798       $ 431,568   

U.S. Government agency securities

     0         225,311         0         225,311   

Corporate obligations

     0         717         0         717   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     0         638,798         18,798         657,596   

Impaired non-purchased loans and leases

     0         0         8,074         8,074   

Impaired covered loans

     0         0         52,575         52,575   

Foreclosed assets not covered by FDIC loss share agreements

     0         0         11,647         11,647   

Foreclosed assets covered by FDIC loss share agreements

     0         0         40,452         40,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0       $ 638,798       $ 131,546       $ 770,344   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not include $17.6 million at September 30, 2014; $13.8 million at December 31, 2013 and $13.8 million at September 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

September 30, 2014

  

Technique

  

Unobservable Inputs

(Dollars in thousands)

Impaired non-purchased loans and leases

   $14,835    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    $13,634    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

   $1,657    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

   $14,781    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

   $27,882    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 September 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 $19.6 million at September 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 September 30, 2014, the

 

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third parties’ pricing matrices valued the Company’s portfolio of private placement bonds at $19.6 million which was equal to the aggregate par value of the private placement bonds. Accordingly, at September 30, 2014, the Company reported the private placement bonds at $19.6 million.

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 September 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 $14.8 million. The $5.4 million adjustment to reduce the carrying value of impaired non-purchased loans and leases to estimated fair value consisted of $4.4 million of partial charge-offs and $1.0 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 September 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 $0.2 million during the third quarter and $0.9 million during the first nine months of 2014 for such loans. The Company also recorded provision for loan and lease losses of $0.2 million during the third quarter and $0.9 million during the first nine months of 2014 to cover such charge-offs. At September 30, 2014, the Company had $13.6 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 September 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 $0.3 million during the third quarter and $0.9 million during the first nine months of 2014. The Company also recorded provision for loan and lease losses of $0.3 million during the third quarter and $0.9 million during the first nine months of 2014 to cover such charge-offs. At September 30, 2014, the Company had $1.7 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

 

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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 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

     497   

Acquired

     1,907   

Paydowns and maturities

     (672

Sales

     (856

Transfers in and/or out of Level 3

     0   
  

 

 

 

Balance – September 30, 2014

   $ 19,558   
  

 

 

 

Balance – January 1, 2013

   $ 104,172   

Total realized gains (losses) included in earnings

     0   

Total unrealized gains (losses) included in comprehensive income

     (1,940

Paydowns and maturities

     (32,647

Sales

     0   

Transfers in and/or out of Level 3

     (50,787
  

 

 

 

Balance –September 30, 2013

   $ 18,798   
  

 

 

 

 

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 $17.6 million at September 30, 2014, $13.8 million at December 31, 2013 and $13.8 million at September 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 September 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.

 

          September 30,         
          2014      2013      December 31, 2013  
     Fair
Value
Hierarchy
   Carrying
Amount
     Estimated
Fair

Value
     Carrying
Amount
     Estimated
Fair

Value
     Carrying
Amount
     Estimated
Fair

Value
 
          (Dollars in thousands)  

Financial assets:

                    

Cash and cash equivalents

   Level 1    $ 112,084       $ 112,084       $ 124,458       $ 124,458       $ 195,975       $ 195,975   

Investment securities AFS

   Levels 2 and 3      859,876         859,876         671,393         671,393         669,384         669,384   

Loans and leases, net of ALLL

   Level 3      4,869,329         4,822,383         3,289,306         3,263,428         3,314,134         3,286,600   

FDIC loss share receivable

   Level 3      36,583         36,130         89,642         89,617         71,854         71,770   

Financial liabilities:

                    

Demand, savings and interest bearing transaction deposits

   Level 1    $ 3,877,373       $ 3,877,373       $ 2,677,030       $ 2,677,030       $ 2,819,817       $ 2,819,817   

Time deposits

   Level 2      1,262,332         1,263,635         977,656         978,202         897,210         897,708   

Repurchase agreements with customers

   Level 1      73,942         73,942         50,254         50,254         53,103         53,103   

Other borrowings

   Level 2      352,616         373,696         280,905         322,171         280,895         319,650   

FDIC clawback payable

   Level 3      26,676         26,676         25,705         25,705         25,897         25,897   

Subordinated debentures

   Level 2      64,950         33,452         64,950         30,815         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     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (Dollars in thousands)  

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

   $ 10,006      $ (898   $ (3,672   $ 10,783   

Other comprehensive income (loss):

        

Other comprehensive income (loss) before reclassifications

     744        445        14,437        (11,142

Amounts reclassified from AOCI

     (26     0        (41     (94
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     718        445        14,396        (11,236
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 10,724      $ (453   $ 10,724      $ (453
  

 

 

   

 

 

   

 

 

   

 

 

 

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 September 30, 2014, amounts reclassified for net gains on investment securities were $43,000, with related tax effects of $17,000. For the three months ended September 30, 2013, there were no amounts reclassified from AOCI. For the nine months ended September 30, 2014 and 2013 amounts reclassified for net gains on investment securities were $67,000 and $156,000, respectively, with tax related tax effects of $26,000 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 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.

 

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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 the time. 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; 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.

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, or additional expenses relating to, integrating or managing acquisitions; the ability to attract new or retain existing or acquired deposits; the ability to achieve growth in 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 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; an increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting the Bank and its customers; 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 or as detailed from time to time in other Company reports filed with the SEC, including those factors included in the disclosures under the heading “Forward-Looking Information” and “Item 1A. Risk Factors” in the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2013. 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. 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.

 

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SELECTED AND SUPPLEMENTAL FINANCIAL DATA

The following tables set forth selected consolidated financial data of the Company for the three months and nine months ended September 30, 2014 and 2013 and supplemental quarterly financial data of the Company for each of the most recent eight quarters beginning with the fourth quarter of 2012 through the third 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     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (Dollars in thousands, except per share amounts)  

Income statement data:

        

Interest income

   $ 80,083      $ 55,342      $ 206,902      $ 152,069   

Interest expense

     5,462        4,709        15,083        13,832   

Net interest income

     74,621        50,633        191,819        138,237   

Provision for loan and lease losses

     3,687        3,818        10,574        9,212   

Non-interest income

     19,248        22,102        56,996        57,446   

Non-interest expense

     42,523        32,208        117,856        91,341   

Net income available to common stockholders

     32,093        26,452        83,855        66,839   

Common share and per common share data*:

        

Earnings – diluted

   $ 0.40      $ 0.36      $ 1.08      $ 0.93   

Book value

     10.99        8.34        10.99        8.34   

Dividends

     0.12        0.095        0.345        0.255   

Weighted-average diluted shares outstanding (thousands)

     80,445        73,296        77,469        71,988   

End of period shares outstanding (thousands)

     79,705        73,404        79,705        73,404   

Balance sheet data at period end:

        

Total assets

   $ 6,580,360      $ 4,710,567      $ 6,580,360      $ 4,710,567   

Non-purchased loans and leases

     3,639,142        2,522,589        3,639,142        2,522,589   

Purchased non-covered loans

     1,030,988        399,058        1,030,988        399,058   

Covered loans

     248,802        409,319        248,802        409,319   

Allowance for loan and lease losses

     49,606        41,660        49,606        41,660   

FDIC loss share receivable

     36,583        89,642        36,583        89,642   

Investment securities AFS

     859,876        671,393        859,876        671,393   

Covered foreclosed assets

     27,882        40,452        27,882        40,452   

Total deposits

     5,139,705        3,654,686        5,139,705        3,654,686   

Repurchase agreements with customers

     73,942        50,254        73,942        50,254   

Other borrowings

     352,616        280,905        352,616        280,905   

Subordinated debentures

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

Total common stockholders’ equity

     875,578        612,338        875,578        612,338   

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

     95.70     91.14     95.70     91.14

Average balance sheet data:

        

Total average assets

   $ 6,435,697      $ 4,450,763      $ 5,650,230      $ 4,098,903   

Total average common stockholders’ equity

     860,240        578,382        751,602        540,382   

Average common equity to average assets

     13.37     13.00     13.30     13.18

Performance ratios:

        

Return on average assets**

     1.98     2.36     1.98     2.18

Return on average common stockholders’ equity**

     14.80        18.14        14.92        16.54   

Return on average tangible common stockholders’ equity**

     16.93        18.70        16.27        16.95   

Net interest margin – FTE**

     5.49        5.55        5.52        5.63   

Efficiency ratio

     43.95        43.00        45.88        45.23   

Common stock dividend payout ratio

     29.79        30.12        31.20        28.75   

Asset quality ratios:

        

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

     0.07     0.09     0.11     0.13

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

     0.49        0.41        0.49        0.41   

Nonperforming assets to total assets(2)

     0.50        0.47        0.50        0.47   

Allowance for loan and lease losses as a percentage of:

        

Total loans and leases(2)

     1.36     1.65     1.36     1.65

Nonperforming loans and leases(2)

     276     400     276     400

Capital ratios at period end:

        

Tier 1 leverage

     12.97     14.72     12.97     14.72

Tier 1 risk-based capital

     12.28        15.94        12.28        15.94   

Total risk-based capital

     13.03        16.96        13.03        16.96   

 

* Adjusted to give effect to 2-for-1 stock split on June 23, 2014.**Ratios annualized based on actual days.
(1) Excludes 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

 

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

Earnings Summary:

                

Net interest income

   $ 43,771      $ 44,139      $ 43,465      $ 50,633      $ 55,282      $ 52,396      $ 64,801      $ 74,621   

Federal tax (FTE) adjustment

     2,009        2,020        2,076        2,161        2,372        2,424        2,737        2,892   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (FTE)

     45,780        46,159        45,541        52,794        57,654        54,820        67,538        77,513   

Provision for loan and lease losses

     (2,533     (2,728     (2,666     (3,818     (2,863     (1,304     (5,582     (3,687

Non-interest income

     18,848        16,357        18,987        22,102        18,592        20,360        17,388        19,248   

Non-interest expense

     (29,891     (29,231     (29,901     (32,208     (34,728     (37,454     (37,878     (45,523
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pretax income (FTE)

     32,204        30,557        31,961        38,870        38,655        36,422        41,466        50,551   

FTE adjustment

     (2,009     (2,020     (2,076     (2,161     (2,372     (2,424     (2,737     (2,892

Provision for income taxes

     (9,519     (8,526     (9,506     (10,224     (11,893     (8,730     (12,251     (15,579

Noncontrolling interest

     (9     (11     8        (33     8        8        8        13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 20,667      $ 20,000      $ 20,387      $ 26,452      $ 24,398      $ 25,276      $ 26,486      $ 32,093   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share – diluted*

   $ 0.29      $ 0.28      $ 0.29      $ 0.36      $ 0.33      $ 0.34      $ 0.34      $ 0.40   

Non-interest Income:

                

Service charges on deposit accounts

   $ 4,799      $ 4,722      $ 5,074      $ 5,817      $ 6,031      $ 5,639      $ 6,605      $ 7,356   

Mortgage lending income

     1,483        1,741        1,643        1,276        967        954        1,126        1,728   

Trust income

     928        883        865        1,060        1,289        1,316        1,364        1,419   

BOLI income

     1,027        1,083        1,104        1,179        1,164        1,130        1,278        1,390   

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

     1,336        2,392        2,481        1,396        901        692        (741     (562

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

     3,194        2,155        3,689        2,484        4,825        3,311        3,629        3,369   

Gains on investment securities

     55        156        —          —          4        5        18        43   

Gains on sales of other assets

     2,431        1,974        3,110        2,501        1,801        974        1,448        1,688   

Gains on merger and acquisition transactions

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

Other

     1,192        1,251        1,021        1,226        1,610        1,672        2,661        2,817   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

   $ 18,848      $ 16,357      $ 18,987      $ 22,102      $ 18,592      $ 20,360      $ 17,388      $ 19,248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense:

                

Salaries and employee benefits

   $ 15,362      $ 15,694      $ 15,294      $ 16,456      $ 17,381      $ 17,689      $ 18,831      $ 20,876   

Net occupancy expense

     4,160        4,514        4,370        4,786        5,039        5,044        5,707        6,823   

Other operating expenses

     9,860        8,455        9,669        10,178        11,427        13,908        12,221        13,292   

Amortization of intangibles

     509        568        568        788        881        813        1,119        1,532   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

   $ 29,891      $ 29,231      $ 29,901      $ 32,208      $ 34,728      $ 37,454      $ 37,878      $ 42,523   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan and Lease Losses:

                

Balance at beginning of period

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

Net charge-offs

     (2,467     (3,044     (1,716     (1,530     (1,578     (388     (2,485     (1,039

Provision for loan and lease losses

     2,533        2,728        2,666        3,818        2,863        1,304        5,582        3,687   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 38,738      $ 38,422      $ 39,372      $ 41,660      $ 42,945      $ 43,861      $ 46,958      $ 49,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Ratios:

                

Net interest margin - FTE**

     5.84     5.83     5.56     5.55     5.63     5.46     5.62     5.49

Efficiency ratio

     46.25        46.76        46.34        43.00        45.55        49.82        44.60        43.95   

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

     0.28        0.19        0.11        0.09        0.12        0.02        0.21        0.07   

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

     0.43        0.40        0.66        0.41        0.33        0.42        0.58        0.49   

Nonperforming assets to total assets(2)

     0.57        0.50        0.66        0.47        0.43        0.57        0.62        0.50   

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

     1.83        1.78        1.61        1.65        1.63        1.58        1.48        1.36   

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

     0.73        0.56        0.74        0.54        0.45        0.75        0.63        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 nine months ended September 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 non-purchased loans or leases deemed to be uncollectible are charged against the ALLL when management believes that collectability of all or some portion of outstanding principal is unlikely. Subsequent recoveries, if any, of non-purchased 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 over various periods 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 September 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 nine months ended September 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 large individual credits. This ALLL allocation is applied to every large risk-rated loan that exceeds $10 million, and is based on the greater of the loan-to-value or loan-to-cost ratio for each large individual risk-rated loan.

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 September 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 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.

 

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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.

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’ 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

 

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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 all loans acquired in other acquisitions. Purchased non-covered loans 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.

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

 

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value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of a substantial portion 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 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

 

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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

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 (“MD&A”) has been adjusted to give effect to this stock split.

Net income available to common stockholders for the Company was $32.1 million for the third quarter of 2014, a 21.3% increase from $26.5 million for the third quarter of 2013. Diluted earnings per common share were $0.40 for the third quarter of 2014, an 11.1% increase from $0.36, on a split-adjusted basis, for the third quarter of 2013. For the first nine months of 2014, net income available to common stockholders totaled $83.9 million, a 25.5% increase from $66.8 million the first nine months of 2013. Diluted earnings per common share for the first nine months of 2014 were $1.08, a 16.1% increase from $0.93, on a split-adjusted basis, for the first nine months of 2013.

The Company’s annualized return on average assets was 1.98% for the third quarter of 2014 compared to 2.36% for the third quarter of 2013. Its annualized return on average common stockholders’ equity was 14.80% for the third quarter of 2014 compared to 18.14% for the third quarter of 2013. The Company’s annualized return on average tangible common stockholders’ equity was 16.93% for the third quarter of 2014 compared to 18.70% for the third quarter of 2013. The Company’s annualized return on average assets was 1.98% for the first nine months of 2014 compared to 2.18% for the first nine months of 2013. Its annualized return on average common stockholders’ equity was 14.92% for the first nine months of 2014 compared to 16.54% for the first nine months of 2013. The Company’s annualized return on average tangible common stockholders’ equity was 16.27% for the first nine months of 2014 compared to 16.95% for the first nine months of 2013. The calculation of the Company’s return on average tangible common stockholders’ equity and the reconciliation to GAAP is included elsewhere in this MD&A.

Total assets were $6.58 billion at September 30, 2014 compared to $4.79 billion at December 31, 2013. Non-purchased loans and leases were $3.64 billion at September 30, 2014 compared to $2.63 billion at December 31, 2013. Total loans and leases were $4.92 billion at September 30, 2014 compared to $3.36 billion at December 31, 2013. Deposits were $5.14 billion at September 30, 2014 compared to $3.72 billion at December 31, 2013.

Common stockholders’ equity was $876 million at September 30, 2014 compared to $629 million at December 31, 2013. Tangible common stockholders’ equity was $768 million at September 30, 2014 compared to $610 million at December 31, 2013. Book value per common share was $10.99 at September 30, 2014 compared to $8.53, on a split-adjusted basis, at December 31, 2013. Tangible book value per common share was $9.64 at September 30, 2014 compared to $8.27, on a split-adjusted basis, at December 31, 2013. The calculation of the Company’s tangible common stockholders’ equity and tangible book value per common share and the reconciliation to GAAP is included elsewhere in this MD&A. 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 The First National Bank of Shelby (“First National Bank”). Because the acquisition was effective on July 31, 2013, the Company’s consolidated results of operations for the three months ended September 30, 2013 include only two months of the acquired operations of First National Bank.

On March 5, 2014, the Company completed its acquisition of Bancshares, Inc. (“Bancshares”). Because the acquisition was effective March 5, 2014, the Company’s consolidated results of operations for the three months and nine months ended September 30, 2013 do not include the acquired operations of Bancshares. The Company’s consolidated results of operations for the three months and nine months ended September 30, 2014 include the acquired operations of Bancshares beginning March 6, 2014.

 

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On May 16, 2014, the Company completed its acquisition of Summit Bancorp, Inc. (“Summit”). Because the acquisition was effective May 16, 2014, the Company’s consolidated results of operations for the three months and nine months ended September 30, 2013 do not include the acquired operations of Summit. The Company’s consolidated results of operations for the three months and nine months ended September 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.

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.

Net Interest Income

Net interest income is a significant source of the Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect 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 $2.9 million and $2.2 million for the quarters ended September 30, 2014 and 2013, respectively, and $8.1 million and $6.3 million for the nine months ended September 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 third quarter of 2014 increased 46.8% to $77.5 million compared to $52.8 million for the third quarter of 2013. Net interest income for the nine months ended September 30, 2014 increased 38.3% to $199.9 million compared to $144.5 million for the nine months ended September 30, 2013. The increase in net interest income for the third quarter and first nine months of 2014 compared to the same periods in 2013 was primarily due to the increase in average earning assets, which increased 48.5% to $5.61 billion for the third quarter and 41.0% to $4.84 billion for the first nine months of 2014, compared to $3.78 billion for the third quarter and $3.43 billion for the first nine months of 2013, partially offset by decreases in the Company’s net interest margin.

The Company’s net interest margin for the third quarter of 2014 decreased six basis points (“bps”) to 5.49% compared to 5.55% for the third quarter in 2013. This decrease was primarily due to a 17 bps decrease in yields on average earning assets, partially offset by a 10 bps reduction in rates paid on interest bearing liabilities. The Company’s net interest margin for the first nine months of 2014 decreased 11 bps to 5.52% compared to 5.63% for the first nine months of 2013. This decrease was primarily due to a 23 bps decrease in the yield on average earning assets, partially offset by an 11 bps reduction in the rates paid on interest bearing liabilities.

Yields on earning assets decreased to 5.87% for the third quarter and 5.94% for the first nine months of 2014 compared to 6.04% for the third quarter and 6.17% for the first nine months of 2013. The yield on the Company’s portfolio of non-purchased loans and leases decreased 31 bps for the third quarter and 44 bps for the first nine 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 43 bps for the third quarter and 44 bps for the first nine months of 2014 compared to the same periods in 2013. This decrease in the yield on the Company’s aggregate investment securities portfolio is primarily the result of the low interest rate environment which has resulted in many issuers of investment securities, particularly tax-exempt municipal bonds, calling higher-rate investment securities and refinancing such securities at lower interest rates. Assuming this low interest rate environment continues, the Company expects additional tax-exempt investment securities to be called by their issuers and be refinanced at lower interest rates, likely resulting in continued decreases on the yield of the Company’s tax-exempt investment securities portfolio. Additionally, the yield on the Company’s purchased non-covered loan portfolio decreased 124 bps for the third quarter and 129 bps for the first nine 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 679 bps increase in the yield on covered loans for the third quarter and 511 bps increase for the first nine months of 2014 compared to the same periods in 2013. The increase in yields on covered loans was

 

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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.

The overall decrease in rates on average interest bearing liabilities was primarily due to a shift in the composition of the Company’s interest bearing liabilities. For the three months and nine months ended September 30, 2014, the average balance of interest bearing deposits, which are generally one of the cheapest interest bearing funding sources for the Company, increased to 90.4% and 89.4 %, respectively, of total average interest bearing liabilities, compared to 86.8% and 86.5%, respectively, for the three months and nine months ended September 30, 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 has future growth in loans and leases, the Company expects to continue to increase deposit pricing in additional markets to fund such growth. Any such increase in 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 two bps for the third quarter of 2014 and one bps for the first nine months of 2014 compared to the same periods of 2013. The rate on the Company’s other borrowings increased 12 bps in the third quarter and seven bps for the first nine 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 four bps in both the third quarter and the first nine months of 2014 compared to the same periods of 2013.

The increase in average earning assets for the third quarter and first nine 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 $940 million for the third quarter and $716 million for the first nine months of 2014 compared to the same periods in 2013. Additionally, the average balance of purchased non-covered loans increased $789 million for the third quarter and $646 million for the first nine 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 $279 million for the third quarter and $257 million for the first nine 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 $180 million for the third quarter and $216 million for the first nine 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 September 30,     Nine Months Ended September 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

  $ 2,165      $ 11        2.08   $ 1,223      $ 11        3.63   $ 5,218      $ 50        1.27   $ 1,135      $ 21        2.47

Investment securities:

                       

Taxable

    352,281        2,986        3.36        235,216        1,988        3.35        316,658        8,135        3.43        176,793        4,456        3.37   

Tax-exempt – FTE

    519,546        8,072        6.16        357,438        6,163        6.84        465,059        22,488        6.47        348,054        17,844        6.85   

Non-purchased loans and leases – FTE

    3,399,681        43,220        5.04        2,459,427        33,187        5.35        2,992,573        113,577        5.07        2,276,801        93,794        5.51   

Purchased non-covered loans

    1,072,675        18,056        6.68        283,364        5,653        7.92        766,701        39,534        6.89        120,339        7,366        8.18   

Covered loans

    259,022        10,630        16.28        438,913        10,501        9.49        291,644        31,166        14.29        507,708        34,845        9.18   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total earning assets – FTE

    5,605,370        82,975        5.87        3,775,581        57,503        6.04        4,837,853        214,950        5.94        3,430,830        158,326        6.17   

Non-interest earning assets

    830,327            675,182            812,377            668,073       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total assets

  $ 6,435,697          $ 4,450,763          $ 5,650,230          $ 4,098,903       
 

 

 

       

 

 

       

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

                       

Interest bearing liabilities:

                       

Deposits:

                       

Savings and interest bearing transaction

  $ 2,821,987      $ 1,508        0.21   $ 1,843,060      $ 913        0.20   $ 2,470,211      $ 3,845        0.21   $ 1,721,794      $ 2,583        0.20

Time deposits of $100,00 or more

    626,785        412        0.26        430,586        296        0.27        500,194        928        0.25        365,846        828        0.30   

Other time deposits

    564,445        365        0.26        465,759        328        0.28        509,709        920        0.24        432,436        1,046        0.32   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing deposits

    4,013,217        2,285        0.23        2,739,405        1,537        0.22        3,480,114        5,693        0.22        2,520,076        4,457        0.24   

Repurchase agreements with customers

    62,430        15        0.09        41,879        7        0.07        62,018        40        0.09        35,244        21        0.08   

Other borrowings

    299,436        2,736        3.63        308,875        2,732        3.51        287,191        8,083        3.76        292,221        8,064        3.69   

Subordinated debentures

    64,950        426        2.60        64,950        433        2.64        64,950        1,267        2.61        64,950        1,290        2.65   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing liabilities

    4,440,033        5,462        0.49        3,155,109        4,709        0.59        3,894,273        15,083        0.52        2,912,491        13,832        0.63   

Non-interest bearing liabilities:

                       

Non-interest bearing deposits

    1,064,142            673,215            943,445            601,146       

Other non-interest bearing liabilities

    67,698            40,589            57,410            41,431       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total liabilities

    5,571,873            3,868,913            4,895,128            3,555,068       

Common stockholders’ equity

    860,240            578,382            751,602            540,382       

Noncontrolling interest

    3,584            3,468            3,500            3,453       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 6,435,697          $ 4,450,763          $ 5,650,230          $ 4,098,903       
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income – FTE

    $ 77,513          $ 52,794          $ 199,867          $ 144,494     
   

 

 

       

 

 

       

 

 

       

 

 

   

Net interest margin – FTE

        5.49         5.55         5.52         5.63
     

 

 

       

 

 

       

 

 

       

 

 

 

 

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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
September 30, 2014
Over
Three Months Ended
September 30, 2013
    Nine Months Ended
September 30, 2014
Over
Nine Months Ended
September 30, 2013
 
           Yield/     Net           Yield/     Net  
     Volume     Rate     Change     Volume     Rate     Change  
     (Dollars in thousands)  

Increase (decrease) in:

            

Interest income – FTE:

            

Interest earning deposits and federal funds sold

   $ 5      $ (5   $ —        $ 38      $ (9   $ 29   

Investment securities:

            

Taxable

     992        6        998        3,593        86        3,679   

Tax-exempt – FTE

     2,519        (610     1,909        5,658        (1,014     4,644   

Non-purchased loans and leases – FTE

     11,953        (1,920     10,033        27,166        (7,383     19,783   

Purchased non-covered loans

     13,286        (883     12,403        33,329        (1,161     32,168   

Covered loans

     (7,383     7,512        129        (23,089     19,410        (3,679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income – FTE

     21,372        4,100        25,472        46,695        9,929        56,624   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Savings and interest bearing transaction

     523        72        595        1,165        97        1,262   

Time deposits of $100,000 or more

     129        (13     116        249        (149     100   

Other time deposits

     64        (27     37        139        (265     (126

Repurchase agreements with customers

     5        3        8        17        2        19   

Other borrowings

     (86     90        4        (142     161        19   

Subordinated debentures

     —          (7     (7     —          (23     (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     635        118        753        1,428        (177     1,251   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in net interest income – FTE

   $ 20,737      $ 3,982      $ 24,719      $ 45,267      $ 10,106      $ 55,373   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 third quarter of 2014 decreased 12.9% to $19.2 million compared to $22.1 million for the third quarter of 2013. Non-interest income for the first nine months of 2014 decreased 0.8% to $57.0 million compared to $57.4 million for the first nine months of 2013. The Company’s results for the first nine months of 2014 included $4.6 million of tax-exempt bargain purchase gain from the acquisition of Bancshares. The Company’s results for the third quarter of 2014 included no bargain purchase gain. The Company’s results for the third quarter of 2013 and for the first nine months of 2013 included $5.2 million of tax-exempt bargain purchase gain from the acquisition of First National Bank.

Service charges on deposit accounts increased 26.5% to $7.4 million for the third quarter of 2014 compared to $5.8 million for the third quarter of 2013. Service charges on deposit accounts increased 25.5% to $19.6 million for the first nine months of 2014 compared to $15.6 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 increased 35.0% to $1.7 million for the third quarter of 2014 compared to $1.3 million for the third quarter of 2013. Mortgage lending income decreased 18.3% to $3.8 million for the first nine months of 2014 compared to $4.7 million for the same period in 2013. The volume of originations of mortgage loans available for sale increased 23.5% to $62.7 million for the third quarter of 2014 compared to $50.7 million for the third quarter of 2013. The volume of originations of mortgage loans available for sale decreased 11.3% to $152.8 million for the first nine months of 2014 compared to $172.2 million for the first nine months of 2013. During the third quarter of 2014, approximately 29% of the

 

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Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 71% were related to new home purchases, compared to approximately 40% for refinancings and approximately 60% for new home purchases in the third quarter of 2013. During the first nine months of 2014, approximately 30% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and approximately 70% were related to new home purchases, compared to approximately 51% for refinancings and approximately 49% for new home purchases in the first nine months of 2014.

Trust income was $1.4 million in the third quarter of 2014, an increase of 33.9% from $1.1 million for the third quarter of 2013. Trust income was $4.1 million for the first nine months of 2014, an increase of 46.0% from $2.8 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 $0.6 million of amortization expense of the FDIC loss share receivable, including amortization of the FDIC clawback payable, during the third quarter of 2014 compared to accretion income of $1.4 million during the third quarter of 2013. The Company recognized $0.6 million of amortization expense of the FDIC loss share receivables, including amortization of the FDIC clawback payable, during the first nine months of 2014 compared to accretion income of $6.3 million during the first nine months of 2013. The decrease in income from the accretion of the FDIC loss share receivable for the third quarter and first nine months of 2014 compared to the same periods in 2013 was primarily due to 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. To the extent 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 is expected to 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 $3.4 million in the third quarter of 2014 compared to $2.5 million in the third quarter of 2013. Other income from loss share and purchased non-covered loans was $10.3 million in the first nine months of 2014 compared to $8.3 million in the first nine months of 2013.

Net gains on sales of other assets were $1.7 million in the third quarter of 2014 compared to $2.5 million in the third quarter of 2013. Net gains on sales of other assets were $4.1 million in the first nine months of 2014 compared to $7.6 million in the first nine months of 2013.

 

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

Non-Interest Income

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014     2013      2014     2013  
     (Dollars in thousands)  

Service charges on deposit accounts

   $ 7,356      $ 5,817       $ 19,601      $ 15,613   

Mortgage lending income

     1,728        1,276         3,807        4,660   

Trust income

     1,419        1,060         4,099        2,808   

BOLI income

     1,390        1,179         3,799        3,365   

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

     (562     1,396         (611     6,269   

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

     3,369        2,484         10,309        8,328   

Gains on investment securities

     43        —           67        156   

Gains on sales of other assets

     1,688        2,501         4,111        7,586   

Gain on merger and acquisition transaction

     —          5,163         4,667        5,163   

Other

     2,817        1,226         7,147        3,498   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 19,248      $ 22,102       $ 56,996      $ 57,446   
  

 

 

   

 

 

    

 

 

   

 

 

 

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 32.0% to $42.5 million for the third quarter of 2014 compared to $32.2 million for the third quarter of 2013. Non-interest expense increased 29.0% to $117.9 million for the first nine months of 2014 compared to $91.3 million for the first nine months of 2013. During the third quarter of 2014, the Company incurred $0.5 million of software and other contract termination charges, $2.2 million of acquisition-related and systems conversion expenses and $0.6 million of fraud losses due to a large retailer’s system breach, compared to $1.4 million of acquisition related expenses during the third quarter of 2013. During the first nine months of 2014, the Company incurred $5.6 million of software and other contract termination charges which are included in “Other” non-interest expense, $3.7 million of acquisition-related expenses and $0.6 million of fraud losses as a result of a large retailer’s system breach, compared to $1.4 million of acquisition-related expenses during the first nine months of 2013.

Salaries and employee benefits, the Company’s largest components of non-interest expense, increased 26.9% to $20.9 million in the third quarter of 2014 compared to $16.5 million in the third quarter of 2013. Salaries and employee benefits increased 21.0% to $57.4 million for the first nine months of 2014 compared to $47.4 million for the first nine months of 2013. The Company had 1,513 full-time equivalent employees at September 30, 2014, a 21.4% increase compared to 1,246 full-time equivalent employees at September 30, 2013.

Net occupancy and equipment expense for the third quarter of 2014 increased 42.5% to $6.8 million compared to $4.8 million for the third quarter of 2013. Net occupancy and equipment expenses increased 28.6% to $17.6 million for the first nine months of 2014 compared to $13.7 million for the first nine months of 2013. At September 30, 2014 the Company had 165 offices, a 26.0% increase compared to 131 offices at September 30, 2013.

The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 43.9% for the third quarter and 45.9% for the first nine months of 2014 compared to 43.0% for the third quarter and 45.2% for the first nine months of 2013.

 

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

Non-Interest Expense

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2014      2013      2014      2013  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 20,876       $ 16,456       $ 57,396       $ 47,445   

Net occupancy and equipment

     6,822         4,786         17,574         13,670   

Other operating expenses:

           

Postage and supplies

     1,155         775         2,793         2,396   

Advertising and public relations

     887         559         1,923         1,424   

Telecommunication services

     971         825         3,177         2,529   

Professional and outside services

     3,000         2,212         7,446         4,963   

Software and data processing

     1,643         1,374         4,442         4,106   

Travel and meals

     772         788         1,941         2,159   

FDIC insurance

     600         450         1,658         1,305   

FDIC and state assessments

     234         174         712         521   

ATM expense

     370         282         886         723   

Loan collection and repossession expense

     1,212         861         3,227         2,534   

Writedowns of foreclosed and other assets

     41         502         862         1,072   

Amortization of intangibles

     1,532         788         3,464         1,924   

Other

     2,408         1,376         10,355         4,570   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 42,523       $ 32,208       $ 117,856       $ 91,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Taxes

The provision for income taxes was $15.6 million for the third quarter and $36.6 million for the first nine months of 2014 compared to $10.2 million for the third quarter and $28.3 million for the first nine months of 2013. The effective income tax rate was 32.7% for the third quarter and 30.4% for the first nine months of 2014 compared to 27.9% for the third quarter and 29.7% for the first nine months of 2013. The increase in the effective tax rate for the third quarter and first nine months of 2014 compared to the same periods in 2013 was due primarily to the decrease in tax-exempt income as a percentage of total income. 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 September 30, 2014 the Company’s non-purchased loan and lease portfolio was $3.64 billion, compared to $2.63 billion at December 31, 2013 and $2.52 billion at September 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 $3.09 billion at September 30, 2014, compared to $2.33 billion at December 31, 2013 and $2.21 billion at September 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

 

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

Real estate:

               

Residential 1-4 family

   $ 278,341         7.6   $ 251,026         10.0   $ 249,556         9.5

Non-farm/non-residential

     1,373,294         37.7        1,035,618         41.1        1,104,114         41.9   

Construction/land development

     1,233,253         33.9        714,198         28.3        722,557         27.4   

Agricultural

     46,721         1.3        47,953         1.9        45,196         1.7   

Multifamily residential

     155,940         4.3        163,916         6.5        208,337         8.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate

     3,087,549         84.8        2,212,711         87.8        2,329,760         88.5   

Commercial and industrial

     313,292         8.6        122,163         4.8        124,068         4.7   

Consumer

     25,399         0.7        27,298         1.1        26,182         1.0   

Direct financing leases

     109,059         3.0        81,984         3.2        86,321         3.3   

Other

     103,843         2.9        78,433         3.1        66,234         2.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 3,639,142         100.0   $ 2,522,589         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

   September 30,     December 31,  

Attributable to Offices In

   2014     2013     2013  
     (Dollars in thousands)  

Texas

   $ 1,821,468         50.1   $ 1,260,015         49.9   $ 1,302,061         49.5

Arkansas

     1,142,869         31.4        1,051,047         41.7        1,069,200         40.6   

New York

     276,128         7.6        —           —          30,837         1.2   

North Carolina

     233,043         6.4        138,093         5.5        157,938         6.0   

Georgia

     126,466         3.5        59,450         2.4        57,570         2.1   

Alabama

     16,062         0.4        12,885         0.5        13,073         0.5   

California

     15,656         0.4        —           —          —           —     

South Carolina

     5,325         0.1        864         0.0        1,703         0.1   

Florida

     2,125         0.1        235         0.0        183         0.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,639,142         100.0   $ 2,522,589         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 September 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

   $ 106,725       $ 214,914       $ 121,605       $ 8,234       $ 16,275       $ 467,753   

Northern Arkansas (1)

     39,594         14,068         4,845         13,464         1,255         73,226   

Fort Smith, AR–OK MSA

     28,186         25,215         6,741         2,736         11,877         74,755   

Western Arkansas (2)

     21,114         28,938         5,826         6,404         1,090         63,369   

Fayetteville–Springdale–Rogers, AR–MO MSA

     8,878         25,177         15,866         4,620         3,290         57,831   

Hot Springs, AR MSA

     9,496         27,597         7,819         0         754         45,666   

All other Arkansas (3)

     8,777         7,839         3,058         3,643         1,665         24,982   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Arkansas

     222,770         343,748         165,757         39,101         36,206         807,582   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Texas:

                 

Dallas–Fort Worth–Arlington, TX MSA

     16,013         115,160         268,587         0         9,148         408,908   

Houston–The Woodlands–Sugar Land, TX MSA

     95         34,844         119,794         2,016         0         156,749   

San Antonio–New Braunfels, TX MSA

     1,137         0         20,336         0         0         21,473   

Austin–Round Rock, TX MSA

     1,377         3,899         49,867         1,275         49         56,467   

Texarkana, TX–AR MSA

     7,934         8,681         741         495         975         18,826   

College Station–Bryan, TX MSA

     0         0         0         0         17,704         17,704   

Beaumont–Port Arthur, TX MSA

     0         0         0         0         15,543         15,543   

Midland, TX MSA

     0         7,846         15,508         0         0         23,354   

All other Texas (3)

     510         12,396         2,733         0         234         15,873   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Texas

     27,066         182,826         477,566         3,786         43,653         734,897   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

California:

                 

Los Angeles–Long Beach–Anaheim, CA MSA

     0         163,674         10,748         0         0         174,422   

San Francisco–Oakland–Hayward, CA MSA

     0         58,895         0         0         0         58,895   

Sacramento–Roseville–Arden–Arcade, CA MSA

     0         0         49,495         0         0         49,495   

All other California (3)

     0         9,740         15,585         0         0         25,325   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total California

     0         232,309         75,828         0         0         308,137   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     0         106,029         135,634         0         43,979         285,642   

North Carolina/South Carolina:

                 

Charlotte–Concord–Gastonia, NC–SC MSA

     6,413         68,548         33,913         303         8,231         117,408   

Wilmington, NC MSA

     2,386         16,909         6,174         439         271         26,179   

Raleigh, NC MSA

     503         1,564         23,763         0         0         25,830   

Myrtle Beach-North Myrtle Beach-Conway, SC MSA

     0         0         11,887         0         0         11,887   

Carolina Foothills (4)

     5,471         4,908         3,017         26         0         13,422   

All other N. Carolina (3)

     889         10,450         34,836         0         0         46,175   

All other S. Carolina (3)

     1,545         11,043         22,629         0         0         35,217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total N. Carolina/S. Carolina

     17,207         113,422         136,219         768         8,502         276,118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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)  

Georgia:

                 

Atlanta–Sandy Springs–Roswell, GA MSA

     3,039         102,731         39,528         275         0         145,573   

All other Georgia (3)

     2,320         21,185         1,481         938         212         26,136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Georgia

     5,359         123,916         41,009         1,213         212         171,709   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Florida:

                 

Miami–Fort Lauderdale–West Palm Beach, FL MSA

     0         23,568         54,736         0         0         78,304   

All other Florida (3)

     1,841         19,326         7,971         910         0         30,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Florida

     1,841         42,894         62,707         910         0         108,352   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Phoenix–Mesa–Scottsdale, AZ MSA

     0         67,172         18         0         0         67,190   

Virginia:

                 

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

     0         12,835         32,915         0         0         45,750   

All other Virginia (3)

     0         0         2,557         0         0         2,557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Virginia

     0         12,835         35,472         0         0         48,307   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Missouri/Kansas:

                 

St. Louis, MO–IL MSA

     0         0         801         0         19,395         20,196   

Kansas City, MO–KS MSA

     114         90         21,549         39         0         21,792   

All other Missouri (3)

     497         1,070         172         0         0         1,739   

All other Kansas (3)

     0         0         1,878         0         0         1,878   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Missouri/Kansas

     611         1,160         24,400         39         19,395         45,605   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Tennessee:

                 

Nashville–Davidson–Murfreesboro–Franklin, TN MSA

     180         19,122         0         0         0         19,302   

Memphis, TN–MS–AR MSA

     0         14,241         5,411         0         0         19,652   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Tennessee

     180         33,363         5,411         0         0         38,954   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Oklahoma:

                 

Lawton, OK MSA

     0         0         23,368         0         0         23,368   

All other Oklahoma (3)

     171         8,427         4,696         0         0         13,294   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Oklahoma

     171         8,427         28,064         0         0         36,662   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Colorado:

                 

Denver–Aurora–Lakewood, CO MSA

     15         11,289         1         0         0         11,305   

All other Colorado (3)

     604         6,353         8,760         0         0         15,717   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Colorado

     619         17,642         8,761         0         0         27,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Las Vegas–Henderson–Paradise, NV MSA

     0         0         25,562         0         0         25,562   

Boston–Cambridge–Newton, MA–NH MSA

     0         21,184         0         0         0         21,184   

 

57


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

     111         9,895         80         0         296         10,382   

All other Alabama (3)

     1,939         969         1,187         873         3,697         8,665   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Alabama

     2,050         10,864         1,267         873         3,993         19,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Baltimore–Columbia–Towson, MD MSA

     0         17,310         0         0         0         17,310   

All other states (5)

     467         38,193         9,578         31         0         48,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

   $ 278,341       $ 1,373,294       $ 1,233,253       $ 46,721       $ 155,940       $ 3,087,549   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 Lincoln.
(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

 

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

Retail, including shopping centers and strip centers

   $ 279,273         20.3   $ 308,121         29.8   $ 290,092         26.3

Churches and schools

     55,580         4.0        44,127         4.3        44,740         4.1   

Office, including medical offices

     391,812         28.5        245,698         23.7        263,986         23.9   

Office warehouse, warehouse and mini-storage

     122,109         8.9        45,220         4.4        113,317         10.3   

Gasoline stations and convenience stores

     11,234         0.8        7,498         0.7        8,150         0.7   

Hotels and motels

     247,585         18.0        209,127         20.2        192,527         17.4   

Restaurants and bars

     30,353         2.2        37,327         3.6        33,178         3.0   

Manufacturing and industrial facilities

     57,043         4.2        30,798         3.0        37,288         3.4   

Nursing homes and assisted living centers

     42,478         3.1        29,218         2.8        41,317         3.7   

Hospitals, surgery centers and other medical

     52,128         3.8        51,787         5.0        49,112         4.4   

Golf courses, entertainment and recreational facilities

     6,806         0.6        2,609         0.3        5,261         0.5   

Other non-farm/non residential

     76,893         5.6        24,088         2.2        25,146         2.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,373,294         100.0   $ 1,035,618         100.0   $ 1,104,114         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

58


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,  
     2014     2013     2013  
     (Dollars in thousands)  

Unimproved land

   $ 188,473         15.3   $ 96,210         13.5   $ 105,739         14.6

Land development and lots:

               

1-4 family residential and multifamily

     259,293         21.0        173,554         24.3        176,893         24.5   

Non-residential

     84,953         6.9        70,084         9.8        68,376         9.5   

Construction:

               

1-4 family residential:

               

Owner occupied

     18,959         1.5        14,772         2.1        12,870         1.8   

Non-owner occupied:

               

Pre-sold

     14,742         1.2        6,392         0.9        8,206         1.1   

Speculative

     62,677         5.1        48,237         6.7        50,030         6.9   

Multifamily

     345,599         28.0        171,617         24.0        187,409         26.0   

Industrial, commercial and other

     258,559         21.0        133,332         18.7        113,034         15.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,233,253         100.0   $ 714,198         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 $7.0 million in the third 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 September 30, 2014 was approximately $2.7 billion, of which $1.0 billion was outstanding at September 30, 2014 and $1.7 billion remained to be advanced. The weighted average loan-to-cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 54.0%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 46.0%. 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 45.0%.

 

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Table of Contents

The following table reflects non-purchased loans and leases as of September 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

   $ 290,507      $ 151,709      $ 185,123      $ 468,806      $ 1,096,145   

Floating rate (not at a floor or ceiling rate)

     150,579        188        132        8        150,907   

Floating rate (at floor rate)(1)

     2,385,073        1,363        233        5,421        2,392,090   

Floating rate (at ceiling rate)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,826,159      $ 153,260      $ 185,488      $ 474,235      $ 3,639,142   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     77.7     4.2     5.1     13.0     100.0

Cumulative percentage of total

     77.7        81.9        87.0        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

 

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

Real estate:

        

Residential 1-4 family

   $ 279,273       $ 136,723       $ 131,085   

Non-farm/non-residential

     462,384         163,724         152,948   

Construction/land development

     94,337         26,778         25,633   

Agricultural

     44,408         10,080         9,518   

Multifamily residential

     34,679         18,002         17,210   
  

 

 

    

 

 

    

 

 

 

Total real estate

     915,081         355,307         336,394   

Commercial and industrial

     76,701         30,229         24,934   

Consumer

     20,461         9,176         6,855   

Other

     18,745         4,346         4,540   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,030,988       $ 399,058       $ 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

 

     September 30,     December 31,  
Purchased Non-Covered Loans    2014     2013     2013  

Attributable to Offices In

   Amount      %     Amount      %     Amount      %  
     (Dollars in thousands)  

Arkansas

   $ 634,645         61.6   $ —           0.0   $ —           0.0

North Carolina

     266,941         25.9        371,573         93.1        348,651         93.5   

Texas

     113,950         11.1        —           0.0        —           0.0   

Alabama

     15,028         1.4        26,737         6.7        23,431         6.3   

Georgia

     342         0.0        633         0.2        537         0.1   

Florida

     82         0.0        115         0.0        104         0.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,030,988         100.0   $ 399,058         100.0   $ 372,723         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

60


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

 

     September30,     December 31,  
     2014     2013     2013  
     (Dollars in thousands)  

Loans without evidence of credit deterioration at date of purchase:

      

Unpaid principal balance

   $ 983,946      $ 369,538      $ 344,065   

Valuation discount

     (20,084     (13,962     (11,972
  

 

 

   

 

 

   

 

 

 

Carrying value

     963,862        355,576        332,093   
  

 

 

   

 

 

   

 

 

 

Loans with evidence of credit deterioration at date of purchase:

      

Unpaid principal balance

     104,210        75,936        70,857   

Valuation discount

     (37,084     (32,453     (30,227
  

 

 

   

 

 

   

 

 

 

Carrying value

     67,126        43,483        40,630   
  

 

 

   

 

 

   

 

 

 

Total carrying value

   $ 1,030,988      $ 399,059      $ 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

 

     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.

 

61


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

 

     Nine Months Ended
September 30,
 
     2014     2013  
     (Dollars in thousands)  

Accretable difference at January 1

   $ 5,983      $ 969   

Accretable difference acquired

     6,732        6,932   

Accretion

     (3,453     (857

Other, net

     (1,052     (68
  

 

 

   

 

 

 

Accretable difference at September 30

   $ 8,210      $ 6,976   
  

 

 

   

 

 

 

The following table presents purchased non-covered loans grouped by remaining maturities at September 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     

Over 1

Through

     Over         
     or Less      5 Years      5 Years      Total  
     (Dollars in thousands)  

Real estate:

           

Residential 1-4 family

   $ 45,053       $ 151,138       $ 83,082       $ 279,273   

Non-farm/non-residential

     84,735         298,829         78,820         462,384   

Construction/land development

     46,097         40,646         7,594         94,337   

Agricultural

     7,770         29,674         6,964         44,408   

Multifamily residential

     13,136         20,050         1,493         34,679   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     196,791         540,337         177,953         915,081   

Commercial and industrial

     26,292         46,089         4,320         76,701   

Consumer

     5,099         14,838         524         20,461   

Other

     5,773         9,384         3,588         18,745   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 233,955       $ 610,648       $ 186,385       $ 1,030,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed rate

   $ 147,231       $ 460,324       $ 117,751       $ 725,306   

Floating rate

     86,724         150,324         68,634         305,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 233,955       $ 610,648       $ 186,385       $ 1,030,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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

 

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

Covered loans

   $ 248,802       $ 409,319       $ 351,791   

FDIC loss share receivable

     36,583         89,642         71,854   

Covered foreclosed assets

     27,882         40,452         37,960   
  

 

 

    

 

 

    

 

 

 

Total

   $ 313,267       $ 539,413       $ 461,605   
  

 

 

    

 

 

    

 

 

 

FDIC clawback payable

   $ 26,676       $ 25,705       $ 25,897   
  

 

 

    

 

 

    

 

 

 

The Company is currently in discussion with the FDIC regarding the termination of one or more of its loss share agreements. Should an agreement or agreements be reached regarding such termination, loans and foreclosed assets covered by such loss share agreement(s) would be reclassified, respectively, to “purchased non-covered loans” and “foreclosed assets not covered by FDIC loss share agreements.” Any gain or loss on such termination would be determined by comparison of the net cash proceeds to be received or paid by the Company to the related amount of FDIC loss share receivable and FDIC clawback payable at the time of such transaction. The Company is currently unable to provide assurance as to whether or not it will be successful in negotiating the termination of any or all of its loss share agreements with the FDIC.

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

     4,415        5,756        3,499        3,114        3,153        5,433        9,475        34,845   

Transfers to covered foreclosed assets

     (2,588     (3,965     (2,809     (1,203     (4,774     (1,524     (7,443     (24,306

Payments received

     (18,863     (27,551     (14,960     (21,630     (11,774     (22,277     (60,039     (177,094

Charge-offs

     (2,739     (3,796     (2,713     (1,339     (542     (2,348     (5,443     (18,920

Other activity, net

     (390     (90     (195     (142     9        (188     (449     (1,445
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2013

   $ 52,684      $ 70,088      $ 46,015      $ 35,468      $ 34,165      $ 70,177      $ 100,722      $ 409,319   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2014

   $ 48,968      $ 62,039      $ 41,466      $ 26,076      $ 27,592      $ 61,966      $ 83,684      $ 351,791   

Accretion

     4,635        4,660        2,624        2,098        2,498        6,806        7,845        31,166   

Transfers to covered foreclosed assets

     (6,520     (2,683     (2,029     (1,229     (804     (4,984     (12,505     (30,754

Payments received

     (12,683     (17,851     (11,984     (10,082     (7,157     (10,703     (27,455     (97,915

Charge-offs

     (1,479     (299     (372     0        (90     (1,583     (1,824     (5,647

Other activity, net

     177        34        17        (27     86        (185     59        161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2014

   $ 33,098      $ 45,900      $ 29,722      $ 16,836      $ 22,125      $ 51,317      $ 49,804      $ 248,802   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

 

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

Real estate:

        

Residential 1-4 family

   $ 88,275       $ 120,541       $ 111,053   

Non-farm/non-residential

     113,633         197,453         163,707   

Construction/land development

     27,618         59,386         47,743   

Agricultural

     9,877         12,341         11,150   

Multifamily residential

     3,828         9,368         9,166   
  

 

 

    

 

 

    

 

 

 

Total real estate

     243,231         399,089         342,819   

Commercial and industrial

     5,354         9,934         8,719   

Consumer

     64         138         111   

Other

     153         158         142   
  

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 248,802       $ 409,319       $ 351,791   
  

 

 

    

 

 

    

 

 

 

The following table presents covered loans grouped by remaining maturities and by type at September 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

   $ 25,460       $ 40,550       $ 22,265       $ 88,275   

Non-farm/non-residential

     73,847         27,227         12,559         113,633   

Construction/land development

     24,005         2,677         936         27,618   

Agricultural

     6,584         2,801         492         9,877   

Multifamily residential

     1,984         1,629         215         3,828   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     131,880         74,884         36,467         243,231   

Commercial and industrial

     1,424         905         3,025         5,354   

Consumer

     10         54         0         64   

Other

     153         0         0         153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 133,467       $ 75,843       $ 39,492       $ 248,802   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

Accretable Difference on Covered Loans

 

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

Accretable difference at January 1, 2013

   $ 8,574      $ 17,452      $ 16,524      $ 5,712      $ 11,372      $ 9,919      $ 27,942      $ 97,495   

Accretion

     (4,415     (5,756     (3,499     (3,114     (3,153     (5,433     (9,475     (34,845

Transfers to covered foreclosed assets

     (542     (220     (46     (95     (260     (40     (864     (2,067

Covered loans paid off

     (645     (428     (1,722     (806     (633     (1,028     (3,563     (8,825

Cash flow revisions

     6,127        6,137        4,976        2,376        1,359        7,888        5,478        34,341   

Other, net

     33        170        87        232        119        (24     366        983   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at September 30, 2013

   $ 9,132      $ 17,355      $ 16,320      $ 4,305      $ 8,804      $ 11,282      $ 19,884      $ 87,082   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at January 1, 2014

   $ 8,037      $ 16,216      $ 14,428      $ 4,195      $ 11,311      $ 9,621      $ 13,664      $ 77,472   

Accretion

     (4,635     (4,660     (2,624     (2,098     (2,498     (6,806     (7,845     (31,166

Transfers to covered foreclosed assets

     (229     (97     (28     (13     (53     (168     (456     (1,044

Covered loans paid off

     (653     (2,039     (3,216     (721     (1,776     (1,119     (2,541     (12,065

Cash flow revisions

     3,918        5,668        2,233        1,138        2,705        10,969        14,125        40,756   

Other, net

     27        2        (18     48        72        (23     (51     57   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at September 30, 2014

   $ 6,465      $ 15,090      $ 10,775      $ 2,549      $ 9,761      $ 12,474      $ 16,896      $ 74,010   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

     33        366        163        406        814        1,929        3,486        7,197   

Cash received from FDIC

     (5,942     (7,631     (6,764     (4,260     (7,844     (10,250     (24,302     (66,993

Reductions of FDIC loss share receivable for payments on covered loans in excess of carrying value

     (2,433     (2,896     (3,078     (4,096     (3,607     (2,848     (7,602     (26,560

Increases in FDIC loss share receivable for:

                

Charge-offs of covered loans

     1,511        2,995        2,503        1,072        433        1,993        4,115        14,622   

Writedowns of covered foreclosed assets

     575        243        83        257        16        340        2,236        3,750   

Expenses on covered assets reimbursable by FDIC

     791        1,090        842        299        1,015        773        1,913        6,723   

Other activity, net

     131        (158     (170     (268     (1,507     (200     877        (1,295
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2013

   $ 14,484      $ 16,382      $ 10,438      $ 4,572      $ 13,316      $ 9,655      $ 20,795      $ 89,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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     (162     161        31        172        (251     893        168   

Cash received from FDIC

     (4,481     (6,070     (1,754     (1,078     (1,468     (3,248     (6,711     (24,810

Reductions of FDIC loss share receivable for payments on covered loans in excess of carrying value

     (2,362     (2,492     (1,491     (1,431     (2,801     (1,875     (7,090     (19,542

Increases in FDIC loss share receivable for:

                

Charge-offs of covered loans

     1,168        48        312        0        72        1,212        1,420        4,232   

Writedowns of covered foreclosed assets

     203        634        301        26        51        168        1,918        3,301   

Expenses on covered assets reimbursable by FDIC

     885        705        161        332        427        847        314        3,671   

Other activity, net

     (100     523        (347     28        (415     (1,231     (749     (2,291
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2014

   $ 8,529      $ 7,517      $ 3,074      $ 1,596      $ 6,157      $ 4,958      $ 4,752      $ 36,583   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

     2,588        3,965        2,809        1,203        4,774        1,524        7,443        24,306   

Sales of covered foreclosed assets

     (4,528     (3,895     (2,142     (2,253     (6,497     (2,656     (12,314     (34,285

Writedowns of covered foreclosed assets

     (653     (236     (92     (294     (34     (371     (840     (2,520
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2013

   $ 5,594      $ 7,884      $ 3,113      $ 2,867      $ 5,040      $ 2,081      $ 13,873      $ 40,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     6,520        2,683        2,029        1,229        804        4,984        12,505        30,754   

Sales of covered foreclosed assets

     (2,787     (4,946     (1,958     (1,840     (1,997     (4,740     (19,425     (37,693

Writedowns of covered foreclosed assets

     (230     (684     (340     (21     (59     (162     (1,643     (3,139
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2014

   $ 7,483      $ 3,944      $ 3,533      $ 1,372      $ 2,878      $ 2,711      $ 5,961      $ 27,882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents a summary of the carrying value and type of covered foreclosed assets as of the dates indicated.

Covered Foreclosed Assets

 

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

Real estate:

        

Residential 1-4 family

   $ 6,695       $ 7,929       $ 5,004   

Non-farm/non-residential

     10,406         10,837         14,301   

Construction/land development

     10,549         20,226         17,202   

Agricultural

     238         1,053         1,054   

Multifamily residential

     —           407         399   
  

 

 

    

 

 

    

 

 

 

Total real estate

     27,888         40,452         37,960   

Repossessions

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total covered foreclosed assets

   $ 27,888       $ 40,452       $ 37,960   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

     59        99        54        27         39         33         617        928   

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

     (93     (82     (120     —           —           —           (97     (392
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value at September 30, 2013

   $ 1,610      $ 3,003      $ 1,402      $ 821       $ 1,122       $ 1,001       $ 16,746      $ 25,705   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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     119        76        33         111         67         446        779   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value at September 30, 2014

   $ 1,557      $ 3,155      $ 1,496      $ 784       $ 1,202       $ 1,080       $ 17,402      $ 26,676   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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. Purchased non-covered loans, 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, on the following page, except for their inclusion in total assets. Because purchased non-covered loans, 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

 

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

Nonaccrual non-purchased loans and leases

   $ 17,945      $ 10,405      $ 8,737   

Accruing non-purchased loans and leases 90 days or more past due

     —          —          —     

TDRs

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total nonperforming non-purchased loans and leases

     17,945        10,405        8,737   

Foreclosed assets not covered by FDIC loss share agreements(1)

     14,781        11,647        11,851   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 32,726      $ 22,052      $ 20,588   
  

 

 

   

 

 

   

 

 

 

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

     0.49     0.41     0.33

Nonperforming assets to total assets(2)

     0.50        0.47        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 September 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 $14.8 million. The adjustment to reduce the carrying value of such impaired loans and leases to estimated fair value consisted of $4.4 million of partial charge-offs and $1.0 million of specific loan and lease loss allocations. These amounts do not include the Company’s $1.7 million of impaired purchased non-covered loans or $11.9 million of impaired covered loans at September 30, 2014.

The following table presents information concerning the geographic location of nonperforming assets, excluding purchased non-covered loans and covered assets, at September 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

   $ 16,296       $ 7,603       $ 23,899   

Texas

     299         1,327         1,626   

North Carolina

     1,235         5,193         6,428   

South Carolina

     —           128         128   

Georgia

     9         60         69   

Alabama

     5         445         450   

Florida

     —           —           —     

All other

     101         25         126   
  

 

 

    

 

 

    

 

 

 

Total

   $ 17,945       $ 14,781       $ 32,726   
  

 

 

    

 

 

    

 

 

 

 

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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.

 

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

Real estate:

        

Residential 1-4 family

   $ 1,758       $ 1,059       $ 1,604   

Non-farm/non-residential

     4,557         3,038         4,380   

Construction/land development

     8,227         7,320         5,359   

Agricultural

     200         22         222   

Multifamily residential

     —           —           211   
  

 

 

    

 

 

    

 

 

 

Total real estate

     14,742         11,439         11,776   

Commercial and industrial

     39         190         75   

Consumer

     —           18         —     
  

 

 

    

 

 

    

 

 

 

Total foreclosed assets not covered by FDIC loss share agreements

   $ 14,781       $ 11,647       $ 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

 

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

Nonaccrual purchased non-covered loans

   $ 3,830      $ 1,380      $ 1,696   

Accruing purchased non-covered loans 90 days or more past due

     49        125        —     
  

 

 

   

 

 

   

 

 

 

Total nonperforming purchased non-covered loans

   $ 3,879      $ 1,505      $ 1,696   
  

 

 

   

 

 

   

 

 

 

Nonperforming purchased non-covered loans to total purchased non-covered loans

     0.38     0.38     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 0.47% and 0.41% at September 30, 2014 and 2013, respectively, and 0.35% at December 31, 2013.

As of September 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 $0.3 million during the third quarter and $0.9 million during the first nine months of 2014 compared to none for the comparable periods in 2013. The Company also recorded provision for loan and lease losses of $0.3 million during the third quarter and $0.9 million during the first nine months of 2014 to cover such charge-offs compared to none during the third quarter and first nine months of 2013. At September 30, 2014, the Company had $1.7 million of impaired purchased non-covered loans compared to none at both September 30, 2013 and December 31, 2013.

Covered Loans

As of September 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 $0.2 million for such loans during the third quarter and $0.9 million during the first nine months of 2014 compared to $0.9 million during the third quarter and $4.0 million during the first nine months of 2013. The Company also recorded provision for loan and lease losses of $0.2 million during the third quarter and $0.9 million during the first nine months of 2014 to cover such charge-offs compared to $0.9 million during the third quarter and $4.0 million during the first nine months of 2013. The Company had $13.6 million of impaired covered loans at September 30, 2014 compared to $52.6 million at September 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 $49.6 million, or 1.36% of total non-purchased loans and leases at September 30, 2014, compared to $42.9 million, or 1.63% of total non-purchased loans and leases at December 31, 2013 and $41.7 million, or 1.65% of total non-purchased loans and leases at September 30, 2013. The Company had no ALLL for purchased non-covered loans or for covered loans at September 30, 2014, December 31, 2013 or September 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 276% of its total nonperforming non-purchased loans and leases at September 30, 2014 compared to 492% at December 31, 2013 and 400% at September 30, 2013.

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 MD&A. The provision for loan and lease losses for the third quarter of 2014 was $3.7 million, including $3.2 million for non-purchased loans and leases, $0.3 million for purchased non-covered loans and $0.2 million for covered loans, compared to $3.8 million for the third quarter of 2013, including $2.9 million for non-purchased loans and leases, none for purchased non-covered loans and $0.9 million for covered loans. The provision for loan and lease losses for the first nine months of 2014 was $10.6 million, including $8.8 million for non-purchased loans and leases, $0.9 million for purchased non-covered loans and $0.9 million for covered loans, compared to $9.2 million for the first nine months of 2013, including $5.2 million for non-purchased loans and leases, none for purchased non-covered loans and $4.0 million for covered loans.

The Company’s provision to the ALLL for non-purchased loans and leases for both the quarter and nine months ended September 30, 2014 is primarily the result of provision necessary to cover the growth of the Company’s non-purchased loan and lease portfolio, which increased $468 million during the third quarter and $1.01 billion during the first nine 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. The Company’s ALLL to non-purchased loans and leases has decreased to 1.36% at September 30, 2014, compared to 1.63% at December 31, 2013 and 1.65% at September 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. While the Company believes the ALLL at September 30, 2014, and related provision for both the third quarter and first nine months of 2014 were appropriate, changing economic and other conditions may require future adjustments to the ALLL or the amount of provision thereto.

 

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

Analysis of the Allowance for Loan and Lease Losses

 

     Nine Months Ended
September 30,
   

Year Ended

December 31,

 
     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

     (456     (528     (837

Non-farm/non-residential

     (1,344     (612     (1,111

Construction/land development

     (14     (136     (137

Agricultural

     (213     (260     (261

Multifamily residential

     —          —          (4
  

 

 

   

 

 

   

 

 

 

Total real estate

     (2,027     (1,536     (2,350

Commercial and industrial

     (477     (887     (922

Consumer

     (126     (176     (214

Direct financing leases

     (418     (338     (482

Other

     (258     (266     (359
  

 

 

   

 

 

   

 

 

 

Total non-purchased loans and leases charged off

     (3,306     (3,203     (4,327
  

 

 

   

 

 

   

 

 

 

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

      

Real estate:

      

Residential 1-4 family

     118        113        106   

Non-farm/non-residential

     19        118        122   

Construction/land development

     12        21        174   

Agricultural

     13        9        14   

Multifamily residential

     —          —          4   
  

 

 

   

 

 

   

 

 

 

Total real estate

     162        261        420   

Commercial and industrial

     801        431        433   

Consumer

     50        90        104   

Direct financing leases

     43        29        33   

Other

     111        114        144   
  

 

 

   

 

 

   

 

 

 

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

     1,167        925        1,134   
  

 

 

   

 

 

   

 

 

 

Net non-purchased loans and leases charged off

     (2,139     (2,278     (3,193

Purchased non-covered loans charged off

     (849     —          —     

Covered loans charged off

     (925     (4,012     (4,675
  

 

 

   

 

 

   

 

 

 

Net charge-offs – total loans and leases

     (3,913     (6,290     (7,868

Provision for loan and lease losses:

      

Non-purchased loans and leases

     8,800        5,200        7,400   

Purchased non-covered loans

     849        —          —     

Covered loans

     925        4,012        4,675   
  

 

 

   

 

 

   

 

 

 

Total provision

     10,574        9,212        12,075   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 49,606      $ 41,660      $ 42,945   
  

 

 

   

 

 

   

 

 

 

ALLL to total loans and leases (1)

     1.36     1.65     1.63

ALLL to nonperforming loans and leases (1) (2)

     276     400     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     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  

Non-purchased loans and leases

     0.06     0.09     0.10     0.13

Purchased non-covered loans

     0.10        0.00        0.15        0.00   

Covered loans

     0.31        0.83        0.42        1.06   

Total loans and leases, excluding covered loans

     0.07        0.09        0.11        0.13   

Total loans and leases

     0.09        0.19        0.13        0.29   

Investment Securities

At September 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

 

     September 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

   $ 572,070       $ 587,579       $ 432,362       $ 431,568       $ 438,390       $ 435,989   

U.S. Government agency securities

     251,926         254,062         225,263         225,311         222,510         218,869   

Corporate obligations

     655         655         717         717         716         716   

Other equity securities

     17,580         17,580         13,797         13,797         13,810         13,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 842,231       $ 859,876       $ 672,139       $ 671,393       $ 675,426       $ 669,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $21.0 million and gross unrealized losses of $3.4 million at September 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 $11.5 million and gross unrealized losses of $12.2 million at September 30, 2013. Management believes that all of its unrealized losses on individual investment securities at September 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)  

September 30, 2014:

          

Obligations of states and political subdivisions

   $ 572,070       $ 8,218       $ (8,218   $ 572,070   

U.S. Government agency securities

     251,926         4,231         (4,167     251,990   

Corporate obligations

     655         —           (14     641   

Other equity securities

     17,580         —           —          17,580   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 842,231       $ 12,449       $ (12,399   $ 842,281   
  

 

 

    

 

 

    

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2013:

          

Obligations of states and political subdivisions

   $ 432,362       $ 8,241       $ (3,264   $ 437,339   

U.S. Government agency securities

     225,263         4,956         (4,644     225,575   

Corporate obligations

     717         —           (19     698   

Other equity securities

     13,797         —           —          13,797   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 672,139       $ 13,197       $ (7,927   $ 677,409   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company had net gains of $43,000 from the sale of $6.6 million of investment securities in the third quarter of 2014 compared to no sales of investment securities in the third quarter of 2013. The Company had net gains of $67,000 from the sale of $55.0 million of investment securities in the first nine months of 2014 compared with net gains of $0.2 million from the sale of $0.8 million of investment securities in the first nine months of 2013. During the third quarter of 2014 and 2013, respectively, investment securities totaling $38.6 million and $19.5 million matured, were called or were paid down by the issuer. During the first nine months of 2014 and 2013, respectively, investment securities totaling $68.3 million and $71.9 million matured, were called or paid down by the issuer. The Company purchased $10.0 million and $49.5 million of investment securities during the third quarter of 2014 and 2013, respectively, and purchased $46.6 million and $124.1 million of investment securities during the first nine 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 September 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

   $ 11,129      $ 206,486      $ 81,948      $ 30,630      $ 257,386      $ 587,579   

U.S. Government agency securities

     —          254,011        51        —          —          254,062   

Corporate obligations

     —          —          655        —          —          655   

Other equity securities

     —          —          —          —          17,580        17,580   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 11,129      $ 460,497      $ 82,654      $ 30,630      $ 274,966      $ 859,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     1.2     53.6     9.6     3.6     32.0     100.0

Cumulative percentage of total

     1.2     54.8     64.4     68.0     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

 

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

Non-interest bearing

   $ 1,089,415         21.2   $ 724,413         19.8   $ 746,320         20.0

Interest bearing:

            

Transaction (NOW)

     1,019,089         19.8        798,931         21.8        839,632         22.6   

Savings and money market

     1,768,869         34.4        1,153,686         31.5        1,233,865         33.2   

Time deposits less than $100,000

     591,119         11.5        502,322         13.8        471,052         12.7   

Time deposits of $100,000 or more

     671,213         13.1        475,334         13.1        426,158         11.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 5,139,705         100.0   $ 3,654,686         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

   September 30,     December 31,  

to Offices In

   2014     2013     2013  
     (Dollars in thousands)  

Arkansas

   $ 2,793,040         54.3   $ 1,705,560         46.7   $ 1,671,498         45.0

Texas

     808,535         15.7        395,646         10.8        492,069         13.2   

Georgia

     648,343         12.6        641,454         17.6        634,060         17.1   

North Carolina

     594,726         11.6        626,916         17.1        629,241         16.9   

Alabama

     124,593         2.4        137,141         3.8        137,345         3.7   

Florida

     129,112         2.5        123,591         3.4        124,894         3.4   

South Carolina

     41,356         0.9        24,378         0.6        27,920         0.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 5,139,705         100.0   $ 3,654,686         100.0   $ 3,717,027         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 has future growth in loans and leases, the Company expects to continue to increase deposit pricing in additional markets to fund such growth.

 

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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 September 30,     Nine Months Ended September 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

   $ 62,430         0.09   $ 41,879         0.07   $ 62,018         0.09   $ 35,244         0.08

Other borrowings (1)

     299,436         3.63        308,875         3.51        287,191         3.76        292,221         3.69   

Subordinated debentures

     64,950         2.60        64,950         2.64        64,950         2.61        64,950         2.65   
  

 

 

      

 

 

      

 

 

      

 

 

    

Total other interest bearing liabilities

   $ 426,816         2.95   $ 415,704         3.03   $ 414,159         3.03   $ 392,415         3.19
  

 

 

      

 

 

      

 

 

      

 

 

    

 

(1) Included in other borrowings at September 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 September 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

 

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

Total common stockholders’ equity before noncontrolling interest

   $ 875,578      $ 612,338      $ 629,060   

Less intangible assets:

      

Goodwill

     (78,669     (5,243     (5,243

Core deposit and bank charter intangibles, net of accumulated amortization

     (28,439     (14,796     (13,915
  

 

 

   

 

 

   

 

 

 

Total intangibles

     (107,108     (20,039     (19,158
  

 

 

   

 

 

   

 

 

 

Total tangible common stockholders’ equity

   $ 768,470      $ 592,299      $ 609,902   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,580,360      $ 4,710,567      $ 4,791,170   

Less intangible assets:

      

Goodwill

     (78,669     (5,243     (5,243

Core deposit and bank charter intangibles, net of accumulated amortization

     (28,439     (14,796     (13,915
  

 

 

   

 

 

   

 

 

 

Total intangibles

     (107,108     (20,039     (19,158
  

 

 

   

 

 

   

 

 

 

Total tangible assets

   $ 6,473,252      $ 4,690,528      $ 4,772,012   
  

 

 

   

 

 

   

 

 

 

Ratio of total tangible common stockholders’ equity to total tangible assets

     11.87     12.63     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

 

     September 30,     December 31,  
     2014     2013     2013  
     (In thousands, except per share amounts)  

Total common stockholders’ equity before noncontrolling interest

   $ 875,578      $ 612,338      $ 629,060   

Less intangible assets:

      

Goodwill

     (78,669     (5,243     (5,243

Core deposit and bank charter intangibles, net of accumulated amortization

     (28,439     (14,796     (13,915
  

 

 

   

 

 

   

 

 

 

Total intangibles

     (107,108     (20,039     (19,158
  

 

 

   

 

 

   

 

 

 

Total tangible common stockholders’ equity

   $ 768,470      $ 592,299      $ 609,902   
  

 

 

   

 

 

   

 

 

 

Shares of common stock outstanding(1)

     79,705        73,404        73,712   
  

 

 

   

 

 

   

 

 

 

Tangible book value per common share

   $ 9.64      $ 8.07      $ 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     Nine Months Ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (Dollars in thousands)  

Net income available to common stockholders

   $ 32,093      $ 26,452      $ 83,855      $ 66,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common stockholders’ equity before noncontrolling interest

   $ 860,240      $ 578,382      $ 751,602      $ 540,382   

Less average intangible assets:

        

Goodwill

     (78,669     (5,243     (42,736     (5,243

Core deposit and bank charter intangibles, net of accumulated amortization

     (29,363     (11,985     (19,770     (8,056
  

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible common stockholders’ equity before noncontrolling interest

   $ 752,208      $ 561,154      $ 689,096      $ 527,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible common stockholders’ equity

     16.93     18.70     16.27     16.95
  

 

 

   

 

 

   

 

 

   

 

 

 

Common Stock Dividend Policy. During the quarter ended September 30, 2014, the Company paid a dividend of $0.12 per split-adjusted common share compared to $0.095 per split-adjusted common share in the quarter ended September 30, 2013. On October 1, 2014, the Company’s board of directors approved a dividend of $0.125 per common share that was paid on October 24, 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 September 30, 2014 and December 31, 2013, and are presented in the following tables.

Consolidated Capital Ratios

 

     September 30,     December 31,  
     2014     2013(1)  
     (Dollars in thousands)  

Tier 1 capital:

    

Common stockholders’ equity before noncontrolling interest

   $ 875,578      $ 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

     (10,724     3,672   

Less goodwill and certain intangible assets

     (107,108     (19,158
  

 

 

   

 

 

 

Total tier 1 capital

     820,746        676,574   

Tier 2 capital:

    

Qualifying allowance for loan and lease losses

     49,606        42,945   
  

 

 

   

 

 

 

Total risk-based capital

   $ 870,352      $ 719,519   
  

 

 

   

 

 

 

Risk-weighted assets

   $ 6,681,078      $ 4,189,244   
  

 

 

   

 

 

 

Adjusted quarterly average assets

   $ 6,328,589      $ 4,767,848   
  

 

 

   

 

 

 

Ratios at end of period:

    

Tier 1 leverage

     12.97     14.19

Tier 1 risk-based capital

     12.28        16.15   

Total risk-based capital

     13.03        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

 

     September 30, 2014     December 31, 2013(1)  
     (Dollars in thousands)  

Stockholders’ equity – Tier 1

   $ 784,987      $ 659,895   

Tier 1 leverage ratio

     12.43     13.85

Tier 1 risk-based capital ratio

     11.76        15.77   

Total risk-based capital ratio

     12.50        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. While the Company continues to evaluate the impact of these rules, it does not believe the adoption of these new rules will result in the Company or Bank no longer being considered well-capitalized.

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 September 30, 2014 the Company had substantial unused borrowing availability. This availability was primarily comprised of the following four options: (1) $984 million of available blanket borrowing capacity with the FHLB-Dallas, (2) $167 million of investment securities available to pledge for federal funds or other borrowings, (3) $137 million of available unsecured federal funds borrowing lines and (4) up to $133 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 $48.2 million for the first nine months of 2014 and $42.8 million for the first nine 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 $382.3 million and $79.8 million in the first nine months of 2014 and 2013, respectively. Net activity in the Company’s investment securities portfolio provided $76.7 million and used $51.3 million in the first nine months of 2014 and 2013, respectively. Net non-purchased loans and leases used $1.0 billion and $428.3 million in the first nine months of 2014 and 2013, respectively. Payments received on purchased non-covered loans provided $253.3 million and $37.7 million for the first nine months of 2014 and 2013, respectively. Payments received on covered loans provided $97.9 million and $177.1 million for the first nine months of 2014 and 2013, respectively, and payments received from the FDIC under loss share agreements provided $24.8 million and $67.0 million for the first nine months of 2014 and 2013, respectively. Other loss share activity provided $15.3 million and $21.6 million for the first nine months of 2014 and 2013, respectively. The Company had proceeds from sales of other assets of $54.4 million and $48.0 million in the first nine months of 2014 and 2013, respectively. Purchases of premises and equipment used $10.4 million and $7.8 million in the first nine months of 2014 and 2013, respectively. Net cash invested in unconsolidated investments provided $1.3 million and used $0.6 million in the first nine months of 2014 and 2013, respectively. Net cash received in merger and acquisition transactions totaled $121.9 million and $56.8 million for the first nine months of 2014 and 2013, respectively.

Financing activities provided $250.1 million and used $46.5 million in the first nine months of 2014 and 2013, respectively. Net changes in deposit accounts provided $196.7 million and used $47.1 million in the first nine months of 2014 and 2013, respectively. Net repayments of other borrowings and repurchase agreements with customers provided $75.6 million and $14.4 million in the first nine months of 2014 and 2013, respectively. The Company paid common stock cash dividends of $26.2 million and $18.0 million in the first nine months of 2014 and 2013, respectively. Proceeds from and excess tax benefits on exercise and forfeiture of stock options provided $3.7 million and $4.1 million in the first nine 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 September 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 and on August 26, 2014, the Company opened a loan production office in Asheville, North Carolina. During 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 nine months of 2014, the Company spent $10.3 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 $15 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

 

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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.

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 Intervest’s stockholders.

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 October 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

   8.9%

+300

   6.3

+200

   3.5

+100

   1.4

-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. In the third quarter of 2014, the Company completed the conversion of its core banking system to Fiserv. Except for those changes, there were no changes 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. An evidentiary hearing was conducted by the trial court on the arbitration issue on October 1, 2014, and the trial court has taken the matter under advisement.

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.

On August 7, 2014, a putative class action complaint, captioned Greentech Research LLC v. Callen, et al. (the “Greentech Action”), was filed in the Supreme Court of the State of New York for New York County, by an entity purporting to be a stockholder of Intervest. On August 19, 2014, a putative class action complaint, captioned Sonnenberg v. Intervest Bancshares Corp., et al., was filed in the Supreme Court of the State of New York for New York County, by an individual purporting to be a stockholder of Intervest. Each of the complaints alleges that the directors of Intervest breached their fiduciary duties to Intervest’s stockholders in connection with the proposed merger between Intervest and the Company by approving a transaction pursuant to an allegedly inadequate process that undervalues Intervest and includes preclusive deal protection provisions; and that Intervest and the Company allegedly aided and abetted the Intervest directors in breaching their duties to Intervest’s stockholders. The complaints seek court certification of the respective plaintiffs as class representatives and request that such proceedings proceed as stockholder class actions, and various remedies, including enjoining the merger from being consummated in accordance with its agreed-upon terms, rescission or an award of rescissory damages in the event that the merger is consummated, an accounting by the defendants to the plaintiff class for all damages caused by the defendants, recovery of plaintiffs’ costs and attorneys’ and experts’ fees relating to the lawsuit, and such further relief as the court deems just and proper. As of September 17, 2014, the individual plaintiffs and the defendants stipulated to the court that the two actions, as well

 

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as any further actions brought in the same court, should be consolidated for further proceedings in the same court in order to minimize expense and promote a more efficient proceeding. On October 14, 2014, the plaintiff in the Greentech Action filed an amended complaint alleging, among other things, inadequacy of the disclosures contained in the proxy statement/prospectus included in the Registration Statement on Form S-4 filed by the Company on September 29, 2014. The Company and the Bank deny the allegations in the complaints and intend to vigorously defend against these lawsuits.

The Company and/or the Bank are parties to various other legal proceedings, as both plaintiff and defendant, arising in the ordinary course of business, including claims of lender liability, broken promises and other similar lending-related claims. While the ultimate resolution of 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.

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: November 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).
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.

 

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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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